ACT Energy Technologies Ltd. press release
Cathedral Energy Services Reports Results for 2016 Q4
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
CALGARY, March 2, 2017
/_NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/_
CALGARY, March 2, 2017/CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) announces its consolidated financial results for the three months and year ended December 31, 2016and 2015. 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.
PRESENTATION
As the Company entered into a definitive agreement to dispose of its Flowback and Production Testing ("F&PT") assets in December 2016, at December 31, 2016, these assets are classified as held for sale and the related operations are presented as discontinued operations. This news release will focus on the results from the continuing directional drilling related operations.
2016 Q4 KEY TAKEAWAYS
2016 Q4 financial results improved significantly year-over-year and sequentially to 2016 Q3 as a result of improved activity levels and continued focus on expense management and sales and marketing initiatives;
Revenues in 2016 Q4 were $28,009, an increase of $6,848or 32% from 2015 Q4;
Adjusted EBITDAS from continuing operations was $4,367in 2016 Q4, an increase of $4,248from 2015 Q4;
Adjusted gross margin increased to 24% in 2016 Q4 from 18% in 2015 Q4 due to increased revenues, a reduction in fixed costs as a percentage of revenue, reduced equipment repairs and lower field labour rates;
In December, the Company executed a definitive agreement to sell its F&PT assets for net proceeds of $17,241. This sale closed in January 2017; and
In February 2017, the Company closed a bought deal public offering and insider private placement financing for total gross proceeds of $14,130. As a consequence of this financing and the sale of the F&PT assets, the Company currently has no bank debt (excluding letters of credit).
FINANCIAL HIGHLIGHTS Dollars in 000's except per share amounts
| | | | | | | | | | | | | Three months ended December 31 | Year ended December 31 | | | | | | | | | | 2016 | 2015 | 2016 | 2015 | | | | | | | Revenues | $ | 28,009 | $ | 21,161 | $ | 80,866 | $ | 106,243 | | | Adjusted gross margin % (1) | 24% | 18% | 22% | 18% | | | | | | | Adjusted EBITDAS from continuing operations (1) | $ | 4,367 | $ | 119 | $ | 7,459 | $ | 5,229 | | | | Diluted per share | $ | 0.12 | $ | - | $ | 0.21 | $ | 0.14 | | | As % of revenues | 16% | 1% | 9% | 5% | | | | | | Total Adjusted EBITDAS (1) | $ | 3,829 | $ | (169) | $ | 5,840 | $ | 7,699 | | | | Diluted per share | $ | 0.11 | $ | - | $ | 0.16 | $ | 0.21 | | Funds from operations (1) | $ | 2,036 | $ | (1,425) | $ | 1,031 | $ | 4,410 | | | | Diluted per share | $ | 0.06 | $ | (0.04) | $ | 0.03 | $ | 0.12 | | Loss before income taxes | $ | (1,093) | $ | (12,947) | $ | (722) | $ | (24,894) | | | | Basic per share | $ | (0.03) | $ | (0.36) | $ | (0.02) | $ | (0.69) | | Provision for settlements | $ | (421) | $ | - | $ | (4,217) | $ | - | | | Gain on disposal of foreign subsidiary | $ | - | $ | - | $ | 10,865 | $ | - | | | Write-down of inventory | $ | (277) | $ | (3,736) | $ | (277) | $ | (3,736) | | | Write-down of equipment | $ | - | $ | (3,189) | $ | - | $ | (3,189) | | | Write-down of goodwill | $ | - | $ | - | $ | - | $ | (1,624) | | | Write-down of deferred taxes related to CRA settlement | $ | - | $ | 422 | $ | - | $ | (10,346) | | | Net loss | $ | (6,420) | $ | (10,501) | $ | (5,779) | $ | (35,342) | | | | Basic per share | $ | (0.18) | $ | (0.29) | $ | (0.16) | $ | (0.97) | | Dividends declared per share | $ | - | $ | - | $ | - | $ | 0.12 | | | Property and equipment additions - cash basis | $ | 415 | $ | 464 | $ | 899 | $ | 6,908 | | | Weighted average shares outstanding | | | | | | | | | | | | Basic (000s) | 36,295 | 36,295 | 36,295 | 36,295 | | | | | | | Diluted (000s) | 36,295 | 36,295 | 36,295 | 36,295 | | | | |
| | | (1) Refer to "NON-GAAP MEASUREMENTS" |
OUTLOOK
Throughout the second half of 2016, we continued to see improvements in the prospects for the energy industry and in particular our activity levels.
After hitting a low of 404 active rigs in May 2016, the U.S. rig count grew to 658 active rigs at the end of December 2016. This improvement in active rigs drilling was largely attributable to improvements in oil and natural gas pricing in the second half of 2016 as a result of anticipation that supply and demand fundamentals were coming into balance. Further confidence in the oil pricing was secured at the end of November with Saudi Arabiaand OPEC finally announcing production cuts. Since then, WTI has maintained a price range in the $50/bbl to $55/bbl range. This is the price level we previously anticipated requiring to see an improvement in our activity levels which would in turn provide the job volume to contribute favorably against our fixed cost burden.
The improvement in Cathedral's business prospects starting in 2016 Q4 has been dramatic. Our active job count has doubled since September 2016and more than tripled since the lows in early 2016. This has presented a completely new set of challenges as we have had to aggressively ramp up our business. Compared to the last two years, these are good challenges to have. The big issue for Cathedral and our industry in this improved environment has been staffing up to meet demand. Attracting workers back to the industry has been a challenge particularly in Canadadue to the industry seasonality factors. After being in contraction mode for the past couple years, there are also challenges managing the impact of increasing activity levels on our administration resources and ensuring our people, systems and processes are continuing to delivering quality services. The industry supply chain is also suffering from the same challenges. Lead times on parts and equipment has increased significantly since mid-2016 and we are experiencing cost pressure from vendors.
In addition to labor supply concerns, we are managing our business cautiously with the expectation we will see continued price volatility going forward. With the increased productivity of North American shale wells, the industry now has the capability to ramp up production and inventories quickly which could put pressure on prices. OPEC's adherence to their proposed production cuts has historically always been a wildcard. On the competitive side, there is still an oversupply of equipment in the market and further rationalization of suppliers is required. Competing based on price alone is not a sustainable strategy for our competitors and we are fortunate that we are in a position to compete based on offering verifiable performance improvements to our customers.
We are fortunate that many of the aspects of our business that we focused on in the face of adversity have set us up favorably to capitalize on an upturn in our industry. Many of the strategic initiatives we have been working on over the last two years have been focused on making sure we can ramp up our business effectively. On the sales side, we have strategies to help us secure higher pricing for our services. On the operations side, we are looking at ways to better manage our labor pool, keep our expenses in line and continue to deliver a high quality service. Our technology group continues to make equipment improvements and explore new products aimed at revenue generation and expense and capital cost reductions.
We will continue to explore and execute ways to grow and manage our business in what we hope is an improved business environment going forward compared to the past two years.
ANNUAL MEETING
Cathedral will be holding its Annual Meeting ("Meeting") at 2:00 pm (MDT)on June 7, 2017at our Head Office 6030 – 3 Street SE, Calgary, Alberta. Business at the meeting will include the election of directors and appointment of auditors.
2016 CAPITAL PROGRAM
During the year ended December 31, 2016Company invested $899(2015 - $6,908) in equipment. The following table details the net equipment additions:
| | | | | | | | | December 31 | December 31 | | | | | | 2016 | 2015 | | | | | Property and equipment additions: | | | | | | | | Growth capital (1) | $ | 324 | $ | 4,571 | | | Maintenance capital(1) | 105 | 1,171 | | | | | Replacement capital (1) | 470 | 510 | | | | | Infrastructure capital(1) | - | 656 | | | | Total cash additions | 899 | 6,908 | | | | | Less: proceeds on disposal of property and equipment | (5,286) | (4,944) | | | | | Less: proceeds on disposal of land and buildings | - | (6,174) | | | | | | | | | | | | Net property and equipment additions (disposals) (1) | $ | (4,387) | $ | (4,210) | |
| | | (1) See "NON-GAAP MEASUREMENTS" |
The growth additions are primarily for Measurement-While-Drilling ("MWD") system enhancements, replacement capital is primarily to replace items, which have been lost-in-hole, and maintenance capital is required to maintain existing capacity levels. Proceeds from disposal of property and equipment are primarily related to equipment lost-in-hole. At December 31, 2016, the Company had 126 MWD systems (2015 – 140).
2017 CAPITAL PROGRAM
Cathedral's 2017 capital budget reviewed by the Board of Directors in December 2016was for expenditures of $3,400with $350for growth capital and $1,500for replacement and $1,550for maintenance capital. The growth additions are primarily for additional MWD systems and motors and the maintenance capital is primarily to replace items that have been lost-in-hole. The 2017 capital budget will be reviewed quarterly and board of directors who have approved capital expenditures for 2017 Q1 of $1,050. The capital program may increase as 2017 progresses based on improving activity levels and improved capital availability achieved through the F&PT sale and the Offering. Cathedral intends to finance its 2017 capital budget from cash flow from operations, proceeds from redundant asset sales or assets lost-in-hole, working capital (cash) and credit facility availability.
RESULTS OF OPERATIONS – THREE MONTHS ENDED DECEMBER 31
| | | | | | | Revenues | 2016 | 2015 | | | | Canada | $ | 7,428 | $ | 7,024 | | United States | 20,581 | 14,137 | | | | | | | | | | Total | $ | 28,009 | $ | 21,161 |
Revenues2016 Q4 revenues were $28,009, which represented an increase of $6,848or 32% from 2015 Q4 revenues of $21,161. Both Canada and U.S. operations had increases due to increase in drilling activity. In late 2016, due to a limited supply of the Company's proprietary CLAW motors, the Company made the decision to reduce the number of rental motors available in both Canadaand the U.S. in favor of redirecting CLAW™ motors on jobs where both equipment and staff are deployed and the total cash flow contribution is typically higher.
Canadian revenues (excluding motor rental revenues) increased to $6,509in 2016 Q4 from $5,086in 2015 Q4; a 28% increase. This increase was the result of: i) a 48% increase in activity days to 995 in 2016 Q4 from 671 in 2015 Q4; net of ii) a 14% decrease in the average day rate to $6,542in 2016 Q4 from $7,580in 2015 Q4. Partially offsetting these increases was a decrease of $1,019on the rental of motors. Motor rental revenues for 2016 Q4 were $919(2015 Q4 - $1,938).
The average active land rig count for Canadawas down 3% in 2016 Q4 compared to 2015 Q4. The increase in the Company's activity days relative to the active rigs drilling was a result of sales and marketing efforts and the Company's performance on client jobs. The decrease in day rates was in part due to type of work performed, but mainly due to decreases in day rates charged to customers, which were a result of competitive pressure, and pricing concessions provided to customers to secure work.
U.S. Directional Drilling revenues (excluding motor rental revenues) increased to $20,032in 2016 Q4 from $12,786in 2015 Q4; a 57% increase. This increase was the result of: i) an 83% increase in activity days to 1,899 in 2016 Q4 from 1,038 in 2015 Q4; net of ii) a 14% decrease in the average day rate to $10,549in 2016 Q4 from $12,318in 2015 Q4 (when converted to Canadian dollars). All operating areas saw increases in activity days. The average active land rig count for the U.S. was down 25% in 2016 Q4 compared to 2015 Q4. Again, due to efforts of sales and marketing staff and performance, the Company was able to increase market share compared to 2015 Q4. Rates in USD fell to $7,907 USDin 2016 Q4 from $9,259 USDin 2015 Q4; a 15% decline. U.S. day rate increases were partially tempered by the U.S. division providing footage drilling services to certain clients, which can result in higher relative day rates. U.S. motor rental revenues for 2016 Q4 were $549compared to $1,351in 2015 Q4.
Gross margin and adjusted gross margin Gross margin for 2016 Q4 was 13% compared to negative 1% in 2015 Q4. Adjusted gross margin (see Non-GAAP Measurements) for 2016 Q4 was $6,634or 24% compared to $3,773or 18% for 2015 Q4.
Even with lower revenue day rates in many districts, the adjusted gross margin improved due to reduced repairs, however, these reductions were offset by increases in field labour and higher equipment rentals on a percentage of revenue basis.
Additionally, there was a reduction in the fixed component of cost of sales of 12% compared with 2015 Q4 amount. These costs were 8% lower on a percentage of revenue basis in 2016 compared to 2015 with the decrease largely attributable to the increase in revenues in the comparable periods.
Depreciation allocated to cost of sales decreased to $3,073in 2016 Q4 from $4,036in 2015 Q4. Depreciation included in cost of sales as a percentage of revenue was 11% for 2016 Q4 and 19% in 2015 Q4.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $3,857in 2016 Q4; a decrease of $784compared with $4,641in 2015 Q4. As a percentage of revenue, SG&A was 14% in 2016 Q4 and 22% in 2015 Q4.
Excluding the non-cash items of depreciation and share-based compensation, SG&A was $3,804in 2016 Q4 compared to $4,550in 2015 Q4, a decrease of $746or 16%. SG&A decreased primarily due to work force reductions, wage rollbacks and reductions in variable compensation. SG&A wage rollbacks were implemented February 1, 2015at a range of 5% to 15% and a further 5% to 9% on January 1, 2016. There were additional reductions to staffing levels in 2016. Staffing costs included in SG&A include executive, sales, accounting, human resources, payroll, safety, technology support and related support staff. As well, there were year-over-year reductions in virtually every other SG&A item due to efforts to reduce expenditures.
Gain on disposal of equipmentDuring 2016 Q4, the Company had a gain on disposal of equipment of $1,010compared to $377in 2015 Q4. 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.
Finance costs Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $679for 2016 Q4 versus $377for 2015 Q4. The increase in finance costs relate to increases in interest rates partially offset by a decreased utilization of the Company's credit facility.
Foreign exchange loss The Company had a foreign exchange loss of $701in 2016 Q4 compared to a loss of $1,103in 2015 Q4 due to the fluctuations of the Canadian dollar relative to the U.S. dollar. 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 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 comprehensive income (loss). Included in the 2016 Q4 foreign currency gains are unrealized loss of $719(2015 Q4 – loss of $1,188) related to intercompany balances.
Provision for settlement During 2016 Q4, the participation rate related to the FLSA matter was finalized. Additionally in 2017 Q1, the Company entered a settlement with one of its U.S. clients related to an alleged down-hole drilling incident, which impacted two of their wells in December 2013. This settlement is payable based on an initial payment in 2017 Q1 and the remainder in quarterly installments concluding in 2021. As a consequence of the above there was an increase the settlement provision of $421. During Q4, there were payments related to the above matters of $281.
Write-down of equipment Due to the reduction in demand for services, in 2015 Q4, the Company carried out a review of equipment and wrote-down those where there was a significant lack of demand by clients. The result of this review was a write-down of equipment of $3,189.
Write-down of inventoryThe Company's inventory is used to construct new tools and maintain existing tools. Due to the decrease in operating activities and the reduction in capital build out programs, there was a reduction in inventory turnover. As the prospect of recovery has been further delayed, in 2015 Q4, the Company conducted a review of inventory items and the projected usage for the various lines of inventory and wrote-down the value of inventory by $3,736. $2,607of this write-down relates to parts for third party, non-Cathedral manufactured motors, which currently have lower utilization and demand from clients.
Net loss from discontinued operations In 2016 Q4, the Company made the decision to sell its F&PT assets and focus its attention and resources fully on the directional drilling business where it believes it has a strong competitive advantage and better future growth prospects. The proceeds from this sale were used to pay down debt. As such, operating results for the years ended December 31, 2016, 2016 Q4 and 2015 Q4 for the F&PT business have been included in the statements of comprehensive income (loss) and retained earnings and statements of cash flows as discontinued operations. For 2016 Q4, the net earnings from discontinued operations was $424compared to $(952)net loss for 2015 Q4.
Write-down of assets held for sale from discontinued operations, net of tax The F&PT assets have been written down by $5,900to their net realizable value of approximately $17,241. This write-down of $5,900was offset by a deferred tax recovery of $1,593.
Income taxFor 2016 Q4, the Company had an income tax expense of $1,444compared to recovery of $3,398in 2015 Q4. Excluding adjustments to prior years' tax provisions, the effective tax rate was 25% for 2016 Q4 and 26% for 2015 Q4. Income tax expense is booked based upon expected annualized effective rates.
RESULTS OF OPERATIONS – YEAR ENDED DECEMBER 31
| | | | | | | Revenues | 2016 | 2015 | | | | Canada | $ | 22,220 | $ | 38,868 | | United States | 58,646 | 67,375 | | | | | | | | | | Total | $ | 80,866 | $ | 106,243 |
Revenues 2016 revenues were $80,866, which represented a decrease of $25,377or 24% from 2015 revenues of $106,243. Both Canadian and U.S. operations experienced decreases due mainly to overall decline in drilling activity because of a reduction in commodity prices. In late 2016, due to a limited supply of motors, the Company made the decision to reduce the number of rental motors available in both Canadaand the U.S. in favor of redirecting CLAW™ motors on jobs where both equipment and staff are deployed and the total cash flow contribution is typically higher.
Canadian revenues (excluding motor rental revenues) decreased to $16,164in 2016 from $33,593in 2015; a 52% decrease. This decrease was the result of: i) a 35% decrease in activity days to 2,440 in 2016 from 3,766 in 2015; and ii) a 26% decrease in the average day rate to $6,625in 2016 from $8,920in 2015. Partially offsetting these declines was an increase of $781on the rental of motors, particularly Cathedral's CLAW™ motor. Motor rental revenues for 2016 were $6,056(2015 - $5,275).