ACT Energy Technologies Ltd. press release
Cathedral Energy Services Ltd. reports record revenues
TSX - Toronto Stock Exchange · Canada
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/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, Aug. 12, 2014/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, 2014and 2013. 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.
2014 Q2 KEY TAKEAWAYS
Record revenues for Q2 period; U.S. directional drilling achieved all-time record quarterly revenues and Canadian directional drilling and production testing divisions achieved record revenues for Q2; Excluding revenues related to International operations which were terminated in early 2014, quarterly revenues increased by 40% and year-to-date revenues increased 32%; Market share gains were realized by Canadian and U.S. directional drilling divisions; Increase in quarterly EBITDAS of 15% and year-to-date EBITDAS increased by 6%; and 54% increase in year-to-date net earnings.
2014 Q2 FINANCIAL SUMMARY
| | | | | | | | | | | | | Three months ended June 30 | Six months ended June 30 | | | | | | | | | | 2014 | 2013 | 2014 | 2013 | | | | | | | Revenues | $ | 56,797 | $ | 45,639 | $ | 124,817 | $ | 99,713 | | | | | | | | | | | | | | Adjusted gross margin % (1) | 19.7% | 22.0% | 20.2% | 23.4% | | | | | | | | | | | | | | | | | | EBITDAS (1) | $ | 6,151 | $ | 5,342 | $ | 14,732 | $ | 13,934 | | | | Diluted per share | $ | 0.17 | $ | 0.15 | $ | 0.41 | $ | 0.38 | | | | | | | | | | | | | EBITDAS (1) as % of revenues | 10.8% | 11.7% | 11.8% | 14.0% | | | | | | | | | | | | | | | | | | Funds from operations (1) | $ | 3,767 | $ | 3,576 | $ | 11,887 | $ | 11,083 | | | | Diluted per share | $ | 0.10 | $ | 0.10 | $ | 0.33 | $ | 0.30 | | | | | | | | | | | | | Net earnings (loss) | $ | 253 | $ | (309) | $ | 2,702 | $ | 1,750 | | | | Basic per share | $ | 0.01 | $ | (0.01) | $ | 0.07 | $ | 0.05 | | | Diluted per share | $ | 0.01 | $ | (0.01) | $ | 0.07 | $ | 0.05 | | | | | | | | | | | | | Dividends declared per share | $ | 0.0825 | $ | 0.0750 | $ | 0.1650 | $ | 0.1500 | | | | | | | | | | | | | | Property and equipment additions (cash) | $ | 7,062 | $ | 6,476 | $ | 16,979 | $ | 13,174 | | | | | | | | | | | | | | Weighted average shares outstanding | | | | | | | | | | | | Basic (000s) | 36,230 | 35,854 | 36,208 | 36,307 | | | | | | | Diluted (000s) | 36,253 | 35,898 | 36,235 | 36,361 | | | | | | | | | | | | | | | | | | | | June 30 | December 31 | | | | | | | | | | 2014 | 2013 | | | | | | | Working capital | | | $ | 29,729 | $ | 26,031 | | | | | | | | | | | | | | | | Total assets | | | $ | 216,873 | $ | 205,375 | | | | | | | | | | | | | | | | Loans and borrowings excluding current portion | | | $ | 51,333 | $ | 38,462 | | | | | | | | | | | | | | | | Total shareholders' equity | | | $ | 122,986 | $ | 126,612 | | | | | | | | | | | | | | | | (1) Refer to MD&A: see "NON-GAAP MEASUREMENTS" | | | | | | | | | |
OUTLOOK
Industry fundamentals that contributed to a strong first half of 2014 in the Canadian market place are expected to continue into the back half of the year. Overall, oil and natural gas producers have been able to increase their capital spending due to improved cash flows from operations and access to capital markets. Upside for the Canadian industry continues to focus around increased take away capacity by rail and new and expanded pipelines as well as further liquefied natural gas related developments.
Based upon performance, Cathedral's Canadian directional drilling division has been able to increase market share by adding new customers and incremental work from existing customers. The key to our performance at the field level is a combination of quality staff and equipment, specifically our EM-MWD system and nDurance™ mud motor line. Cathedral's Canadian directional drilling division started 2014 Q3 slower than expected due to rain and flooding issues in Saskatchewanand Manitobabut is expecting year-over-year growth for the remainder of 2014. Key resource plays in which Cathedral is active includes the Montney, Bakken, Cardium, Viking, Duvernay, Falher, Glaucontic, Ostracod and Wilrich plays.
Our Canadian production testing division completed a very strong first half of 2014 and is expected to complete the balance of the year at high operating levels.
Industry analysts are expecting the U.S. market to experience a year-over-year increase in capital spending with producers directing capital to oil and liquids targets. U.S. producers are expected to continue to expand the use of horizontal, multi-stage fracturing to complete conventional and unconventional oil and natural gas plays both of which align with Cathedral's service offerings.
Our U.S. directional drilling division continues to make strides increasing activity levels at favorable day rates and further growth in activity days is expected in all U.S. operating areas over the balance of 2014. The Company's efforts towards enhancing profitability through managing costs have resulted in improved U.S. margins. Cathedral's current activity is focused in the Permian, Eagle Ford, DJ Basin, Mississippian Lime, San Juan, Uticaand Marcellus plays with additional work in Bakken, Woodford Shale, Granite Wash and Piceance Basin plays.
The U.S. production testing division is making substantive progress with expanding its customer base in the remainder of the year.
Cathedral's "Claw" series of the nDurance™ mud motor line continues to open doors to new and existing customers either as part of our directional drilling service package or on a standalone rental basis. Our build out of the Claw mud motor line continues and at the end of 2014 Q2 had built 58 of a planned fleet of 81. The Claw is designed to operate at higher flow rates and has superior torque output compared to conventional power sections. This motor has significantly increased drilling rate of penetration which leads to reduced drilling time and costs for Cathedral's customers.
Cathedral's focus for 2014 continues to be on: i) increasing revenue and market share in both operating divisions and geographic areas; ii) enhancing profitability through managing costs; and iii) continued investment in research and development of proprietary technologies.
DIVIDENDS
It is the intent of the Company to pay quarterly dividends to shareholders. The Board of Directors will review the amount of dividends on a quarterly basis with due consideration to current performance, historical and future trends in the business, the expected sustainability of those trends and enacted tax legislation which will affect future taxes payable as well as required long-term debt repayments, maintenance capital expenditures required to sustain performance and future growth capital expenditures. The Directors have approved a 2014 Q3 dividend in the amount of $0.0825per share which will have a date of record of September 30, 2014and a payment date of October 15, 2014.
2014 CAPITAL PROGRAM
During the six months ended June 30, 2014the Company invested $16,979(2013 - $13,174) in property and equipment excluding non-cash items. The following table details the current period's net property and equipment additions:
| | | | | | | | | Six months ended | | | | | | June 30, 2014 | | | | Property and equipment additions: | | | | | | | Growth capital (1) | | $ | 8,301 | | | Maintenance capital(1) | | 5,995 | | | | Replacement capital (1) | | 1,032 | | | | Infrastructure capital(1) | | 1,651 | | | Total cash additions | | 16,979 | | | | Less: proceeds on disposal of property and equipment | | (3,200) | | | | Net property and equipment additions (1) | | $ | 13,779 | | | | | | | | | (1) See "NON-GAAP MEASUREMENTS" | | | | |
The major additions for growth capital were $6,116for additional drilling motors and related equipment for specific job requirements and $2,185for additional ancillary production testing equipment which will reduce future rental costs. Infrastructure capital relates to the construction of a new shop in Oklahomawhich is expected to be operational in early 2015 and computer system upgrades.
Cathedral's 2014 capital budget remains at $24,000which includes $12,000of growth capital, $8,000of maintenance capital and $4,000of infrastructure expenditures.
Cathedral intends to finance its 2014 capital budget from cash flow from operations and its existing credit facility.
The following is a summary of major equipment owned by the Company:
| | | | | | | June 30 | December 31 | June 30 | | | 2014 | 2013 | 2013 | | Directional drilling - MWD systems (1) | 140 | 139 | 134 | | Production testing units | 66 | 72 | 72 |
| | | | (1) | The Company has 10 Geolink MWD systems that have been excluded
from the above figures as they are held for sale. |
During 2014 Q2, the Company disposed of 6 production testing units that were low pressure and not suited to Cathedral's customer requirements for proceeds of $550.
RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 30
| | | | | | | | | | | | | | | | | | | | | Three months ended June 30, 2014 | | Three months ended June 30, 2013 | | | | | | | | | | | | | | | | | Directional | Production | Resale | | | Directional | Production | Resale | | | | | | | | | | | Revenues | drilling | testing | and Rental | Total | | drilling | testing | and Rental | Total | | | | | | | | | | Canada | $ | 12,821 | $ | 7,991 | $ | - | $ | 20,812 | | $ | 8,650 | $ | 4,066 | $ | - | $ | 12,716 | | United States | 28,636 | 7,349 | - | 35,985 | | 18,835 | 8,914 | - | 27,749 | | | | | | | | | | International | - | - | - | - | | - | - | 5,174 | 5,174 | | | | | | | | | | Total | $ | 41,457 | $ | 15,340 | $ | - | $ | 56,797 | | $ | 27,485 | $ | 12,980 | $ | 5,174 | $ | 45,639 |
Revenues2014 Q2 revenues were $56,797which represented an increase of $11,158or 24% from 2013 Q2 revenues of $45,639. Both Canadian divisions and U.S. directional drilling division experienced revenue increases. Excluding international operations, 2014 Q2 revenues have increased 40% over 2013 Q2.
Canadian directional drilling revenues increased from $8,650in 2013 Q2 to $12,821in 2014 Q2; a 48% increase. Canadian revenues were at record levels for Q2. This increase was the result of: i) a 45% increase in activity days from 679 in 2013 Q2 to 987 in 2014 Q2; and ii) a 2% increase in the average day rate from $12,739in 2013 Q2 to $12,990in 2014 Q2. In 2013 Q2 there had been an overall industry slow-down, a decline in work for a significant client that carried over from 2013 Q1 and a slow start after spring break-up. In addition to the general improvements in the overall market, there was increased activity in 2014 compared to 2013 due to efficiencies related to pad drilling which is an expanding industry trend, new customers and incremental work for existing customers. This increase was achieved despite the decline in work during the latter half of June 2014due to weather delays and certain clients delaying projects to later dates.
U.S. directional drilling revenues increased from $18,835in 2013 Q2 to $28,636in 2014 Q2; a 52% increase. This increase was the result of: i) a 41% increase in activity days from 1,602 in 2013 Q2 to 2,260 in 2014 Q2; and ii) an 8% increase in the average day rate from $11,757in 2013 Q2 to $12,671in 2014 Q2 (when converted to Canadian dollars). The increase in U.S. activity days were due to further expansion in the Texasand Oklahomamarkets, offset by reduced drilling in the U.S. northeast area within the existing customer base. The increased average day rate was primarily due to a stronger U.S. dollar and somewhat due to higher rates that were achieved on jobs where the pricing was tied to performance. On a sequential basis, U.S. directional drilling revenues for 2014 Q2 are up significantly over 2014 Q1 revenues of $23,672. U.S activity days are up on a sequential basis (2014 Q2 – 2,260 versus 2014 Q1 – 1,880) due to gains in the Rocky Mountain region and further expansion of work in Oklahomaand Texasregions.
Canadian production testing revenues increased from $4,066in 2013 Q2 to $7,991in 2014 Q2; a 97% increase. The Canadian operating days and revenues were up in each month of the quarter compared to 2013 and resulted in record revenues for a Q2. In 2013 Q2 there was downturn in work due to general industry wide decline in wells completed and client specific delays in completion work that has been deferred into future periods. However, in 2014 Q2 there were new customers added and customers were able to work during the traditionally slow spring breakup season due to use of multi-well pad designs.
U.S. production testing revenues decreased from $8,914in 2013 Q2 to $7,349in 2014 Q2; an 18% decrease. The year-over-year decline in revenue is attributable to a significant customer shifting work to a competitor in 2013 Q4. The division was successful with securing work from new customers, but they did not make up for the lost customer.
Gross margin and adjusted gross margin The gross margin for 2014 Q2 was 11.3% compared to 11.5% in 2013 Q2. Adjusted gross margin for 2014 Q2 was $11,176(19.7%) compared to $10,018(22.0%) for 2013 Q2. The decrease in adjusted gross margin of 2.3% was due in part to the impact of international operations. Excluding international operations, adjusted gross margin for 2013 Q2 was 19.8% which is marginally higher than the adjusted gross margin in 2014 Q2 of 19.7%.
The slight decrease in adjusted gross margin excluding 2013 Q2 international operations of 0.1% was primarily due to increased equipment rentals and equipment repairs which were offset by decreased field labour costs. Equipment rentals were 2.7% of revenues in 2014 Q2 compared to 1.9% in 2013 Q2 (excluding international operations). The Company is in the process of reducing equipment rental costs through capital additions.
Depreciation allocated to cost of sales increased marginally from $4,709in 2013 Q2 to $4,733in 2014 Q2. Depreciation included in cost of sales as a percentage of revenue was 8.3% for 2014 Q2 and 10.3% in 2013 Q2.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $6,147in 2014 Q2 which represents a decrease of $4when compared with $6,151in 2013 Q2. As a percentage of revenue, these costs were 11% in 2014 Q2 and 13% in 2013 Q2. Non-cash expenses (depreciation and share-based compensation) totaled $96for 2014 Q2 and $293for 2013 Q2. 2014 Q2 SG&A included non-recurring recovery of prior period SG&A related to international operations and 2013 Q2 SG&A includes expenses related to international operations which were not incurred in 2014 Q2 after the wind down of those operations. Excluding these non-cash and non-recurring items SG&A increased $748("Adjusted SG&A").
Adjusted SG&A increased primarily due to wages, benefits and variable compensation. These increases relate to increased sales commissions, additions to sales staff to accommodate current and future U.S. growth and additions to research and development personnel. Staffing costs included in SG&A relate to executives, sales, accounting, human resources, payroll, safety, research and development and related support staff.
The remaining increase in adjusted SG&A is attributable to increased rent due to the sale and leaseback of Albertaproperties which closed in 2013 Q3.
Gain on disposal of property and equipmentDuring 2014 Q2 the Company had a gain on disposal of property and equipment of $880compared to $1,125in 2013 Q2. The Company's 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 Company and therefore can fluctuate significantly from quarter-to-quarter.
Foreign exchange gain/loss The Company had foreign exchange gain of $478in 2014 Q2 compared to a loss of $273in 2013 Q2 due to the fluctuations in the Canadian dollar compared to U.S. dollars. The Company's foreign operations are denominated in a currency other than the Canadian dollar and therefore, upon consolidation gains and losses due to fluctuations in the foreign currency exchange rates are recorded in other comprehensive income ("OCI") 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 income. Included in the 2014 Q2 foreign currency gain are unrealized gains of $332(2013 Q2 – losses of $330) related to intercompany balances.
Finance costs Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $606for 2014 Q2 versus $648for 2013 Q2.
Income taxFor 2014 Q2, the Company had an income tax expense of $770compared to a recovery of $372in 2013 Q2. The effective tax rate was 75% for 2014 Q2 and 55% for 2013 Q2. Income tax expense is booked based upon expected annualized effective rates. Annually, Q2 typically results in Canadian operations experiencing a loss for the quarter due to "spring breakup" which has significantly reduced activity levels. In both 2013 Q2 and 2014 Q2 such losses were offset by International income which has a nominal effective tax rate and when combined with a U.S. effective tax rate that is higher than in Canada, resulted in the effective 2013 Q2 tax rate of 55% and a 2014 Q2 tax rate of 75%.
RESULTS OF OPERATIONS – SIX MONTHS ENDED JUNE 30
| | | | | | | | | | | | | | | | | | | | | Six months ended June 30, 2014 | | Six months ended June 30, 2013 | | | | | | | | | | | | | | | | | Directional | Production | Resale | | | Directional | Production | Resale | | | | | | | | | | | Revenues | drilling | testing | and Rental | Total | | drilling | testing | and Rental | Total | | | | | | | | | | Canada | $ | 41,611 | $ | 16,569 | $ | - | $ | 58,180 | | $ | 32,244 | $ | 11,832 | $ | - | $ | 44,076 | | United States | 52,308 | 14,329 | - | 66,637 | | 33,344 | 17,119 | - | 50,463 | | | | | | | | | | International | - | - | - | - | | - | - | 5,174 | 5,174 | | | | | | | | | | Total | $ | 93,919 | $ | 30,898 | $ | - | $ | 124,817 | | $ | 65,588 | $ | 28,951 | $ | 5,174 | $ | 99,713 |
Revenues2014 revenues were $124,817which represented an increase of $25,104or 25% from 2013 revenues of $99,713. The increase was attributed to both Canadian divisions and U.S. directional drilling operations which were offset by declines in U.S. production testing and international operations. Excluding international operations, year-to-date revenues have increased 32% over 2013.
Canadian directional drilling revenues increased from $32,244in 2013 to $41,611in 2014; a 29% increase. This increase was the result of: i) an 31% increase in activity days from 2,781 in 2013 to 3,636 in 2014; and ii) a 1% decrease in the average day rate from $11,594in 2013 to $11,444in 2014. Cathedral's was able to increase its activity levels by 31% due to increased industry activity, efficiencies related to pad drilling which is an expanding industry trend and market share gains. Such market share gains were the result of securing work from existing customers and the addition of new customers.
U.S. directional drilling revenues increased from $33,344in 2013 to $52,308in 2014; a 57% increase. This increase was the result of: i) a 41% increase in activity days from 2,931 in 2013 to 4,140 in 2014; and ii) an 11% increase in the average day rate from $11,376in 2013 to $12,635in 2014 (when converted to Canadian dollars). The increase in U.S. activity days were due to further expansion in the Texasand Oklahomamarkets, offset by reduced drilling in the U.S. northeast area within the existing customer base. The increased average day rate was due to the stronger U.S. dollar and higher rates that were achieved in the Rocky Mountain and Texasregions on jobs where the pricing was tied to performance.
Canadian production testing revenues increased from $11,832in 2013 to $16,569in 2014; a 40% increase. In 2013 Q1 and Q2, the Canadian operations were affected by a general industry wide decline in wells completed and client specific delays in completion work. There were no significant delays in 2014 and the Company benefitted from the addition of work for new customers and expanded use of multi-well pad designs that allowed customers to work during the traditionally slow breakup season.