ACT Energy Technologies Ltd. press release
Cathedral Energy Services Reports Results for 2017 Q4
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
CALGARY, March 8, 2018
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, March 8, 2018/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, 2017and 2016. 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.
FINANCIAL HIGHLIGHTS Dollars in 000's except per share amounts
| | | | | | | | | | | | | Three months ended December 31 | Year ended December 31 | | | | | | | | | | 2017 | 2016 | 2017 | 2016 | | | | | | | Revenues | $ | 38,402 | $ | 28,009 | $ | 147,095 | $ | 80,866 | | | Adjusted gross margin % (1) | 17% | 24% | 18% | 22% | | | | | | | Adjusted EBITDAS from continuing operations (1) | $ | 5,606 | $ | 4,156 | $ | 18,796 | $ | 7,459 | | | | Diluted per share | $ | 0.11 | $ | 0.11 | $ | 0.40 | $ | 0.21 | | | As % of revenues | 15% | 15% | 13% | 9% | | | | | | Total Adjusted EBITDAS (1) | $ | 5,606 | $ | 3,831 | $ | 18,674 | $ | 5,840 | | | | Diluted per share | $ | 0.11 | $ | 0.11 | $ | 0.39 | $ | 0.16 | | Write-downs of equipment, intangibles and inventory | $ | (8,584) | $ | (277) | $ | (8,584) | $ | (277) | | | Cash flow - operating activities | $ | 1,137 | $ | (479) | $ | 2,952 | $ | 4,140 | | | Gain on disposal of foreign subsidiary | $ | - | $ | - | $ | - | $ | 10,865 | | | Provision for settlements | $ | - | $ | (421) | $ | - | $ | (4,217) | | | Loss before income taxes | $ | (6,398) | $ | (1,093) | $ | (382) | $ | (722) | | | | Basic and diluted per share | $ | (0.13) | $ | (0.03) | $ | (0.01) | $ | (0.02) | | Net earnings (loss) from continuing operations | $ | (4,490) | $ | (1,217) | $ | 229 | $ | 2,617 | | | | Basic and diluted per share | $ | (0.09) | $ | (0.03) | $ | - | $ | 0.07 | | Net earnings (loss) | $ | (4,490) | $ | (6,420) | $ | 87 | $ | (5,779) | | | | Basic and diluted per share | $ | (0.09) | $ | (0.18) | $ | - | $ | (0.16) | | Equipment additions - cash basis | $ | 4,257 | $ | 415 | $ | 11,322 | $ | 899 | | | Weighted average shares outstanding | | | | | | | | | | | | Basic (000s) | 49,013 | 36,295 | 47,381 | 36,295 | | | | | | | Diluted (000s) | 49,509 | 36,295 | 47,577 | 36,295 | | | | | | | | | | | | | | | | | | | | December 31 | December 31 | | | | | | | | | | 2017 | 2016 | | | | | | | Working capital | | | $ | 31,016 | $ | 39,324 | | | | | Total assets | | | $ | 121,630 | $ | 136,017 | | | | | Loans and borrowings excluding current portion | | | $ | 46 | $ | 26,322 | | | | | Shareholders' equity | | | $ | 101,391 | $ | 90,772 | | | | | | | | | | | | | | | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | | | | | |
2017 Q4 KEY TAKEAWAYS
Revenues increased by $10,393or 37% and Total Adjusted EBITDAS increased $1,775, or 46%;
Adjusted gross margin decreased from 24% to 17% due to increase equipment repairs, equipment rentals and field labour rates;
There was a significant decline in the USD/CAD foreign exchange rate year-over-year; for 2017 Q4 the average exchange rate was $1.27compared to $1.33for 2016 Q4; and
In December 2017, the Company signed with a new credit facility with a syndicate comprised of Alberta Treasury Branches and Export Development Canada.
OUTLOOK
The response to oil prices pushing into the WTI $60bbl USD range in late 2017 was a sharp increase in the U.S. rig count from 924 at the beginning of January to 978 at the end of February. As goes the outlook for oil prices, so goes the rig count and directional drilling industry activity levels. The improving rig count in early 2018 could signal a good start to the year other than the 10% drop in WTI that occurred the first week in February.
In 2018, our thesis is that oil prices will continue to be volatile and North American rig counts will show flat to slow growth. One factor supporting moderate rig growth is the improved well productivity. It is now taking less wells to get the same productivity as it has in the past due to longer laterals and better completions technology. On this basis, our strategy is that any market share we gain in 2018 will be at the expense of competitors - a challenge we are well prepared for. Any market growth will be icing on the cake.
The U.S. market will continue to be our primary focus in 2018 and we will continue to favor this market in terms of resource and equipment allocation. We intend to continue to develop our Canadian business where we see good prospects from a financial and strategic point of view. Changing supply and demand market dynamics, politics and innovation can change an oil and gas basin's prospects quickly and dramatically. Our business strategy of maintaining an operating presence in all the North American major basins has served us well for this reason.
2017 was challenging in terms of ramping up our business and underpinning this increased activity with a good sales and operations foundation. As we move forward, 2018 is about Cathedral demonstrating leadership in the directional business. 2018 is Cathedral's 20th year in business. Over the past 20 years we have built our business on being innovative, which will continue to be a key tenet going forward.
Based on the knowledge gained in 2016 and 2017 related to the more demanding post downturn drilling environment our equipment is subject to, Cathedral focused its 2017 technology development efforts on design changes to its existing MWD tools and motors with a view to make them more rugged and improve their reliability and performance. There were successes in many areas in 2017 and design upgrades are currently being implemented in our existing equipment fleet.
In late 2017, we embarked on a technology development program to develop a next generation Dual Telemetry (DT) MWD tool. The proposed tool design will incorporate a number of improvements over Cathedral's existing FUSION DT platform and over competitive products. A byproduct of this technology development program is improvements to Cathedral's standalone electromagnetic (EM) and pulse technology platforms. The launch of the new DT platform is anticipated to occur in 2019. This timeline may be impacted by technical challenges and the ability to test prototypes in wellbores. However, improvements identified under the longer term DT development program will be introduced into the existing MWD fleet as they become available.
In early 2018, we will be introducing a new high performance motor. The motor design improves the mud flow characteristics of the motor along with delivering more energy to the drill bit. As drilling penetration rates have increased there are more cuttings that need to be conveyed out of the wellbore in less time. The high mud flow capability of this motor will facilitate wellbore solids cleaning during the drilling operation and allow for faster rate of penetration. Cathedral successfully tested variations of this new motor in early 2018 and intends to manufacture additional motors as part of its 2018 capital expenditure program.
In 2017 Cathedral also developed a drilling motor for use with rotary steerable systems (RSS). Rotary steerable technology is an alternative to the bent motor steering technique used by Cathedral and the majority of our directional drilling competitors. RSS is more applicable in certain drilling environments particularly with extended reach wellbores (horizontal wellbores exceeding 2 times vertical depth). Based on field testing in 2017, Cathedral's RSS motor design was shown to provide reliability and performance advantages over competitive products. Cathedral intends to invest in developing further drilling motor capabilities for the RSS market in 2018. Cathedral is also working on a strategy to allow it to participate more fully in the extended reach wellbore market. Part of this strategy will be leveraging our existing MWD telemetry capabilities.
In 2018, Cathedral will also be further supplementing its MWD fleet with additional downhole generators. This technology enables Cathedral to offer a high power telemetry system to support longer runs and higher signal strength compared to conventional battery systems.
We are both optimistic and confident about our prospects going into 2018.
RESULTS OF OPERATIONS – THREE MONTHS ENDED DECEMBER 31
| | | | | | | Revenues | 2017 | 2016 | | | | Canada | $ | 7,748 | $ | 7,428 | | United States | 30,654 | 20,581 | | | | | | | | | | Total | $ | 38,402 | $ | 28,009 |
Revenues2017 Q4 revenues were $38,402, which represented an increase of $10,393or 37% from 2016 Q4 revenues of $28,009. Both Canada and U.S. operations had increases due to increase in drilling activity.
Canadian revenues (excluding motor rental revenues) decreased to $6,216in 2017 Q4 from $6,509in 2016 Q4; a reduction of 5%. This decrease was the net result of: i) an 18% decrease in activity days to 814 in 2017 Q4 from 995 in 2016 Q4; net of ii) a 17% increase in the average day rate to $7,636in 2017 Q4 from $6,542in 2016 Q4. Offsetting this decline was an increase of $613on the rental of motors. Motor rental revenues for 2017 Q4 were $1,532(2016 Q4 - $919).
The average active land rig count for Canadawas up 11% in 2017 Q4 compared to 2016 Q4. The reduction in days for Cathedral relative to the overall market was the result of clients who temporarily reduced their drilling programs in the quarter. In addition, throughout 2017, the Company made the decision to deploy equipment to the U.S. market where day rates are higher and there is more consistent client demand.
U.S. Directional Drilling revenues (excluding motor rental revenues) increased to $30,561in 2017 Q4 from $20,032in 2016 Q4; a 53% increase. This increase was the result of: i) an 29% increase in activity days to 2,453 in 2017 Q4 from 1,899 in 2016 Q4; and ii) an 18% increase in the average day rate to $12,459in 2017 Q4 from $10,549in 2016 Q4 (when converted to Canadian dollars). The average active land rig count for the U.S. was up 63% in 2017 Q4 compared to 2016 Q4. In the quarter, there were issues with having sufficient equipment available to service additional jobs and as such the Company's increase was not as great as the industry increase. Rates in USD increased to $9,798in 2017 Q4 from $7,907in 2016 Q4; a 24% increase. U.S. day rates were up due to price increases from clients and the mix of work performed by the U.S. division, including providing footage drilling services to certain clients, which can result in higher relative day rates. U.S. motor rental revenues for 2017 Q4 were $93compared to $549in 2016 Q4.
Gross margin and adjusted gross margin Gross margin for 2017 Q4 was 10% compared 13% in 2016 Q4. Adjusted gross margin (see Non-GAAP Measurements) for 2017 Q4 was $6,602or 17% compared to $6,634or 24% for 2016 Q4.
Adjusted gross margin percentage decreased due to increases in equipment repairs offset by lower field labour costs. This net increase was offset by a reduction in the fixed component of cost of sales that were 2% lower on a percentage of revenue basis in 2017 compared to 2016. The decrease in the fixed component of cost of sales as a percentage of revenue was mostly attributable to increase in revenues.
Depreciation allocated to cost of sales decreased to $2,915in 2017 Q4 from $3,073in 2016 Q4. Depreciation included in cost of sales as a percentage of revenue was 8% for 2017 Q4 and 11% in 2016 Q4.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $3,163in 2017 Q4; a decrease of $694compared with $3,857in 2016 Q4. As a percentage of revenue, SG&A was 8% in 2017 Q4 and 14% in 2016 Q4. The SG&A decrease was primarily due to decrease in U.S. sales tax charges on intercompany equipment rentals and reduction in insurance, net of increases in SG&A due to increases in staffing costs. Staffing costs included in SG&A include executive, sales, accounting, human resources, payroll, safety, technology support and related support staff.
Gain on disposal of equipment During 2017 Q4, the Company had a gain on disposal of equipment of $2,038compared to $1,010in 2016 Q4. These gains mainly relate to equipment lost-in-hole. Proceeds from clients on lost-in-hole equipment are based on amounts specified in client service agreements and generally consider the replacement cost of the equipment. In most cases, the lost-in-hole 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 $157for 2017 Q4 compared to $679for 2016 Q4. The decrease in finance costs relate to the reduction of loans within the Company's credit facility.
Foreign exchange loss The Company had a foreign exchange loss of $193in 2017 Q4 compared to a loss of $701in 2016 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 2017 Q4 foreign currency gains are unrealized loss of $113(2016 Q4 – loss of $719) related to intercompany balances.
Provision for settlement During 2016 Q4, the participation rate related to the FLSA matter was finalized and during 2017 the majority of the payments under the Settlement Agreement were made. Additionally in 2017 Q1, the Company entered a settlement with one of its U.S. clients related to an alleged down-hole drilling incident in December 2013. This settlement was payable based on an initial payment in 2017 Q1 and the remainder in quarterly installments concluding in 2021.
In 2016 Q4, there was a net increase to the settlement provision of $421(2017 Q4 - $nil).
Write-down of equipment and intangibles The Company determined an impairment test for the directional drilling CGU was not required as at December 31, 2017. However, the Company chose to write-off certain assets where utilization was very low due to low market demand in the amount of $8,287. The assets written down included non-proprietary drilling motors and certain non-proprietary MWD systems. The non-proprietary MWD systems had been purchased related to the disposed of international operations and were retained by the Company after the sale of DPI in 2016 Q1. This equipment was not used extensively in the Company's North American operations and was fully written-off. The Company has experienced lower demand for non-proprietary mud motors in the current drilling environment as their performance capabilities are lower than the Company's proprietary mud motors. The Company conducted a review and wrote-off the remaining net book value for any non-proprietary mud motors that were no longer expected to be utilized. There was also an impairment of $146related to an intangible project.
Write-down of inventory The Company made a provision related to inventory used to service the non-proprietary mud motors of $151(2016 - $nil).
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. For 2017 Q4, the net loss from discontinued operations was $nil compared to $896for 2016 Q4.
Write-down of assets held for sale from discontinued operations, net of tax In 2016 Q4 the F&PT assets were 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 2017 Q4, the Company had an income tax recovery of $1,908compared to $124in 2016 Q4. Excluding adjustments to prior years' tax provisions, the effective tax rate was 24% for 2017 Q4 and 28% for 2016 Q4. The 2017 provision includes reduction to U.S. deferred income tax asset due to reduction in U.S. rates from recent tax reform. The impact of the U.S. tax reform was not material to the 2017 tax provision or deferred tax asset. The impact of the U.S. tax reform was not material to the 2017 tax provision or deferred tax asset. Excluding this amount the effective rate for 2017 was 18% Income tax expense is booked based upon expected annualized effective rates.
RESULTS OF OPERATIONS – YEAR ENDED DECEMBER 31
| | | | | | | Revenues | 2017 | 2016 | | | | Canada | $ | 32,315 | $ | 22,220 | | United States | 114,780 | 58,646 | | | | | | | | | | Total | $ | 147,095 | $ | 80,866 |
Revenues 2017 revenues were $147,095, which represented a $66,229increase or 82% from 2016 revenues of $80,866. Both Canada and U.S. operations had increases due to an improvement in overall drilling activity. In late 2016, due to a limited supply of the Company's proprietary motors, the Company made the decision to reduce the number of rental motors available in both Canadaand the U.S. in favor of redirecting motors on jobs where both equipment and staff are deployed and the cash flow contribution is higher. As a consequence motor rental revenue in both Canadaand the U.S. were less in 2017 compared to 2016.
Canadian revenues (excluding motor rental revenues) increased to $27,644in 2017 from $16,164in 2016; a 71% increase. This increase was the result of: i) a 59% increase in activity days to 3,890 in 2017 from 2,440 in 2016; and ii) a 7% increase in the average day rate to $7,106in 2017 from $6,625in 2016. Partially offsetting these increases was a decrease on the rental of motors to $4,671from 2016 at $6,056.
The average active land rig count in Canadawas up 59% in 2017 compared to 2016 (source: Baker Hughes). The increase in the Company's activity days of 59% was in line with the industry increase. The slight increases in day rates was due to the mix of work performed.
U.S. Directional Drilling revenues (excluding motor rental revenues) increase to $114,012in 2017 from $55,452in 2016; a 106% increase. This increase was the result of: i) a 90% increase in activity days to 9,782 in 2017 from 5,145 in 2016; and ii) a 8% increase in the average day rate to $11,655in 2017 from $10,778 in 2016 (when converted to Canadian dollars). All U.S. operating areas saw increases in activity days. U.S. motor rental revenues for 2017 were $768compared to $3,194in 2016.
The average active land rig count for the U.S. was up 78% in 2017 compared to 2016 (source: Baker Hughes). The increase of U.S. activity days of 90% relative to the active rigs drilling was due to efforts of sales and marketing staff and performance on client jobs. The Company was able to increase its U.S. market share compared to 2016. Day rates in USD increased to $8,981in 2017 from $8,124in 2016; an 11% increase. U.S. day rates were up due to client price increases, the mix of work performed by the U.S. division, including providing footage drilling services to certain clients, which can result in higher relative day rates.
Gross margin and adjusted gross margin Gross margin for 2017 was 11% compared to 7% in 2016. Adjusted gross margin (see Non-GAAP Measurements) for 2017 was $26,677or 18% compared to $17,875or 22% for 2016.
Adjusted gross margin percentage decreased due to increases in field labour rates, equipment repairs and higher equipment rentals on a percentage of revenue basis. These increases were offset by a reduction in the fixed component of cost of sales that were 7% lower on a percentage of revenue basis in 2017 compared to 2016. The decrease in the fixed component of cost of sales as a percentage of revenue was mostly attributable to increase in revenues, however there were increases in costs largely related to salaries and other labour related costs.