ACT Energy Technologies Ltd. press release
CATHEDRAL ENERGY SERVICES REPORTS RESULTS FOR 2021 Q4
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA /
CALGARY, AB , March 10, 2022 /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, 2021 and 2020.
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. This news release contains references to Adjusted gross margin (gross margin plus non-cash items of depreciation and share-based compensation), Adjusted gross margin % (adjusted gross margin divided by revenues) and Adjusted EBITDA (earnings before finance costs, unrealized foreign exchange on intercompany balances, taxes, depreciation, non-recurring costs (including severance and non-cash provision for bad debts), write-down of equipment, write-down of inventory and share-based compensation). These terms do not have standardized meanings prescribed under International Financial Reporting Standards (IFRS) and may not be comparable to similar measures used by other companies, see "Non-GAAP Measures" later in this news release.
2021 Q4 KEY TAKEAWAYS
Grew Canadian market share in 2021 to 1;8.1% from 8.5% at the end of 2020; Completed a transformation of the executive leadership and US sales group in the second half of the year; Executed two acquisitions in Q3 as part of Cathedral's fundamental strategy of Consolidation o In July 2021 the Company completed the acquisition of Precision's Canadian-based directional drilling business for a purchase price of $6,350 which included a $3,000 cash investment by Precision to further grow Cathedral technology These numerous initiatives translated into material financial results for H2-2021 vs H1-2021 as revenues were 135% higher, Adjusted Gross Margin was 471% higher, and Adjusted Gross Margin % improved to 21% from 9% Cathedral remained committed to another core strategy of technology deployment through the introduction of the REACT motor and ongoing build-out of the Company's RapidFire Measurement-While-Drilling systems which will see 18 systems deployed by 2022 Q2; Strengthened the Company's financial flexibility and security via: February 11, 2022 acquired Discovery Downhole Services for $20.8 million . Discovery is a U.S.-based, high-performance mud motor technology rental business with operations in North Dakota , Texas , and Wyoming. Discovery represents our initial step in expanding the US operations
PRESIDENT'S MESSAGE
Comments from President & CEO Tom Connors :
2021 has been a year of significant transformation for both our industry and Cathedral. While industry activity increased versus the prior year due to rising commodity prices, improving cash flow projections, and expanded capital expenditure programs for many oil and gas producers, Cathedral's new management team and the completion of two key acquisitions in the last half of the year helped the Company outpace the overall sector recovery.
During 2021, our commitment to high-quality, reliable service with industry-leading technology paid off as customers increasingly turned to Cathedral for their directional drilling needs. Our market share grew significantly with Cathedral exiting 2021 among the highest performers in the industry at 18.1% of the Canadian market, up from 8.5% at the end of 2020.
Conditions were constructive in the fourth quarter of 2021, with Cathedral recording increased activity levels and day rates in our Canadian and the US operations over both the fourth quarter last year, and the third quarter of 2021.Our improved operating performance drove solid financial results in the quarter, with revenue more than tripling, and Adjusted EBITDAS growing almost 400% to $1.2 million , from the same quarter last year. Gross margins were lower in quarter versus 2021 Q3 due to differences in revenue mix related to the timing of our customers' winter drilling programs and a supply related delay in replacing short-term rental items and expenses related to our recent acquisitions. We anticipate gross margins will return to higher levels in 2022 Q1 as we replace the backlog of third-party rental equipment with Cathedral technology in the quarter.
During the fourth quarter, our integration of the recent acquisitions continued smoothly, both of which significantly contributed to a strong expansion of our market share, complementary technology offerings, and additional experienced personnel in a tight labour market. We believe that further consolidation in the directional drilling industry is needed to create a sustainable, efficient sector that can thrive in the future, and we see numerous opportunities to add value for customers and shareholders in both Canada and the US. Already in 2022, we have successfully completed the acquisition of Discovery Downhole Services, providing us with strategic growth in the US motor technology rental business. We will continue to carefully evaluate prospects as they arise, selectively looking for ways to add value through accretive acquisitions that help us grow strategically while not placing undo pressure on our capital structure.
The combination of low levels of industry investment, an economic resurgence from the COVID-19 pandemic, further exacerbated by geopolitical events in Europe certainly appear to support a sustained period of higher commodity prices than we have witnessed for several years. While E&P Companies remain disciplined and spend smaller portions of their capital budgets on drilling programs versus historical norms, the higher levels of cash flow for the industry should ultimately translate to improved levels of oilfield service activity and pricing. While we expect industry conditions to remain strong in the near-to-medium term and anticipate increased demand for our services, Cathedral will continue to proceed with conservative price assumptions and a disciplined approach to spending. To meet the increased needs of our customers, we are re-investing in our business with a capital expenditure plan for 2022 of approximately $14.9 million , focused largely on adding new mud motors, and the completion of the 18 RapidFire TM Measurement-While-Drilling ("MWD") systems from our 2021 build program. We are pleased with the initial response from our Canadian customers to the introduction of our new REACT motor, which places the sensor readings closer the drill bit, and anticipate strong demand for the technology in specific areas such as the Clearwater and Viking formations as we go forward.
Cathedral remains well positioned to take advantage of robust industry conditions with a conservative balance sheet, high-quality assets and strong customer relationships, we look forward to the continued expansion of our market share in 2022 in Canada and the US through both organic growth and acquisitions. We are executing on our strategic plan of increasing size and scale through organic growth and accretive acquisitions focused on shareholder returns and increasing earnings per share.
FINANCIAL HIGHLIGHTS
| | | | | | | | | | | | Three months ended December 31 | Year ended December 31 | | | | | | | | | 2021 | 2020 | 2021 | 2020 | | | | | | Revenues | $ | 23,710 | $ | 7,448 | $ | 62,524 | $ | 40,574 | | Adjusted gross margin % (1) | 17% | 16% | 18% | 12% | | | | | | Adjusted EBITDAS (1) | $ | 1,273 | $ | (435) | $ | 4,520 | $ | (116) | | Cash flow - operating activities | $ | 601 | $ | 231 | $ | (3,499) | $ | 1,191 | | Reversals of Impairments (Impairments and direct write-offs) | $ | 614 | $ | 172 | $ | 614 | $ | (6,822) | | Loss | $ | (1,097) | $ | (6,684) | $ | (8,626) | $ | (27,731) | | Basic per share | $ | (0.01) | $ | (0.14) | $ | (0.13) | $ | (0.56) | | Equipment additions - cash basis | $ | 1,275 | $ | 184 | $ | 3,553 | $ | 2,603 | | Weighted average shares outstanding | | | | | | | | | | Basic (000s) | 80,197 | 49,468 | 65,031 | 49,468 | | | | | | Diluted (000s) | 81,425 | 49,468 | 65,740 | 49,468 | | | | | | | | | | | | | | | | | | | December 31
2021 | December 31
2020 | | | | | | | | | | | | | | | | Working capital | | | $ | 14,117 | $ | 7,680 | | | | Total assets | | | $ | 75,423 | $ | 64,280 | | | | Loans and borrowings excluding current portion | | | $ | 5,035 | $ | 1,560 | | | | Shareholders' equity | | | $ | 42,504 | $ | 39,974 | | | | | | | | | | | | | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | | | | |
RESULTS OF OPERATIONS – THREE MONTHS ENDED DECEMBER 31
| Revenues | 2021 Q4 | 2020 Q4 | | | | Canada | $ | 18,535 | $ | 4,042 | | United States | 5,175 | 3,406 | | | | Total | $ | 23,710 | $ | 7,448 | | | | | | |
Revenues 2021 Q4 revenues were $23,710 , which represented an increase of $16,262 or 218% from 2020 Q4 revenues of $7,448 .
Canadian revenues (excluding motor rental revenues) increased to $17,637 in 2021 Q4 from $3,740 in 2020 Q4; a 372% increase. This increase was the result of: i) a 310% increase in activity days to 2,269 in 2021 Q4 from 553 in 2020 Q4 and ii) a 15% increase in the average day rate to $7,773 in 2021 Q4 from $6,764 in 2020 Q4.
Based on publicly disclosed Canadian drilling and directional drilling days, Cathedral's market share for 2021 Q4 was 18.1% compared to 7.7% in 2020 Q4. Day rates increased due to certain ancillary revenues along with overall change in client mix.
U.S. revenues (excluding motor rental revenues) increased 49% to $4,765 in 2021 Q4 from $3,201 in 2020 Q4. This increase was the result of: i) a 28% increase in activity days to 459 in 2021 Q4 from 359 in 2020 Q4; and ii) a 16% increase in the average day rate to $10,381 in 2021 Q4 from $8,915 in 2020 Q4 (when converted to Canadian dollars).
The average active land rig count for the U.S. was up 84% in 2021 Q4 compared to 2020 Q4 (source: Baker Hughes). The Company experienced a 28% increase in activity resulting in a decrease in market share compared to 2020 Q4. Day rates in USD increased 21% to $8,256 USD in 2021 Q4 from $6,843 USD in 2020 Q4. Revenue day rates increased due to an increase in revenues from providing RSS services which are rented from a 3rd party.
Motor rentals increased in both Canada and the U.S. Combined rental revenues increased to $1,308 in 2021 Q4 compared to $507 in 2020 Q4. Rentals were up due to the industry increase in drilling activity.
Government grants The Company did not qualify for CEWS and CERS claims in Q4 of 2021 due to the increase in revenues for the quarter.
In Q4 of 2020 the Company recognized $399 of CEWS benefits which reduced salary expenses as follows:
Cost of sales $187 ; Selling, general and administrative expenses $154 ; and Technology group expenses $58 .
In Q4 of 2020 , the Company recognized the benefit from the CERS program of $280 which reduced cost of sales $221 and selling, general and administrative $59 .
Gross margin and adjusted gross margin Gross margin for 2021 Q4 was 3% compared to -32% in 2020 Q4. Adjusted gross margin (see Non-GAAP Measurements) for 2021 Q4 was $4,047 or 17% compared to $1,199 or 16% for 2020 Q4.
Adjusted gross margin, as a percentage of revenue, increased due to lower repairs and a reduction in fixed costs as percentage of revenue, partially offset by increases in field labour expenses and rentals.
Depreciation of equipment allocated to cost of sales decreased to $3,323 in 2021 Q4 from $3,560 in 2020 Q4 due to the aging of the assets as the Company uses a declining-balance depreciation for most items. Depreciation included in cost of sales as a percentage of revenue was 14% for 2021 Q4 and 48% in 2020 Q4.
Selling, general and administrative ("SG&A") expenses SG&A expenses were $2,804 in 2021 Q4; an increase of $732 compared with $2,072 in 2020 Q4. There were increases in SG&A wages, commissions and reduced CEWS grants partially offset by recovery of bad debts in 2021 Q4 compared to expense in 2020 Q4. As a percentage of revenue, SG&A was 12% in 2021 Q4 compared to 28% in 2020 Q4.
Technology group expenses Technology group expenses were $214 in 2021 Q4; an increase of $74 compared with $140 in 2020 Q4. Technology group expenses are related to new product development and supporting and upgrading existing technology. Technology group expenses consist of salaries and related benefits and burdens as well as shop supplies.
Gain (loss) on disposal of equipment During 2021 Q4, the Company had a gain on disposal of equipment of $664 compared to a loss of ($183) in 2020 Q4. These gains are mainly related to equipment lost-in-hole. Proceeds from clients on lost-in-hole equipment are based on amounts specified in service agreements. 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 2021 Q4, the Company received proceeds on disposal of equipment of $1,275 (2020 Q4 - $184 ).
Finance costs Finance costs consisting of interest expenses on loans and borrowings and bank charges net of interest charged on past due accounts receivable were a net revenue of ($53) for 2021 Q4 versus expense of $60 for 2020 Q4. Included in 2021 Q4 amount was interest revenue of $172 (2020 Q4 - $nil).
Finance costs lease liability The lease liability interest decreased slightly to $189 from $218 .
Foreign exchange The Company had a foreign exchange gain of $78 in 2021 Q4 compared to $1,686 in 2020 Q4 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 2021 Q4 foreign currency loss are unrealized gain of $136 (2020 Q4 –$1,678) related to intercompany balances.
Impairment and direct write-downs In 2021 there was a reversal on a U.S. right of use asset that was subleased in the amount of $768 which was partially offset by write-down of inventory of $154 for a net reversal of $664 . The inventory write-down relates to parts that are unlikely to be used to repair the Company's tools.
In 2020 Q4, the Company entered into a sub-lease for one of the properties previously written down and reversed $549 equal to the sublease asset. Additionally, in 2020 Q4 there was a write-down on slow moving inventory of $377 for a net reversal of $172 .
Income tax Previously, Cathedral derecognized deferred tax assets due to a recent history of tax losses within both of Cathedral's legal entities.
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 – YEAR ENDED DECEMBER 31
| Revenues | 2021 | 2020 | | | | Canada | $ | 45,961 | $ | 13,837 | | United States | 16,563 | 26,737 | | | | Total | $ | 62,524 | $ | 40,574 |
Revenues 2021 revenues were $62,524 , which represented an increase of $21,950 or 54% from 2020 revenues of $40,574 .
Canadian revenues (excluding motor rental revenues) increased to $43,300 in 2021 from $11,104 in 2020; a 290% increase. This increase was the result of: i) a 282% increase in activity days to 5,952 in 2021 from 1,558 in 2020 and ii) a 2% increase in the average day rate to $7,275 in 2021 from $7,127 in 2020.
Based on publicly disclosed Canadian drilling and directional drilling days, Cathedral's market share for 2021 was 14.3% compared to 5.5% in 2020. The increase in day rates was due to an increase in day rates to compensate for escalating operating costs, including field labour rates.
U.S. revenues (excluding motor rental revenues) decreased 45% to $14,211 in 2021 from $25,662 in 2020. This decrease was the result of: i) 31% decrease in activity days to 1,526 in 2021 from 2,197 in 2020; and ii) a 20% decrease in the average day rate to $9,312 in 2021 from $11,680 in 2020 (when converted to Canadian dollars).
Cathedral's U.S. business pre-COIVID was primarily concentrated in Oklahoma in the Anadarko basin and this region experienced a disproportionately severe down-turn due the COVID-19 pandemic. In response, the Company made the strategic decision to reposition its business in Houston to focus on Texas and the Permian basin. This required a new management and sales team which was in place by 2021 Q3. While Cathedral U.S. recovery has lagged the industry as a result of these significant changes, 2021 second half revenues increased by 30% over the first six month of the year.
The average active land rig count for the U.S. was up 10% in 2021 compared to 2020 (source: Baker Hughes). The Company experienced a 34% decline in activity resulting in a decrease in market share compared to 2020. Day rates in USD decreased 14% to $7,439 USD in 2021 from $8,654 USD in 2020. The 2021 rate is down due to a decrease in revenues from providing rotary steerable system (RSS) services which are rented from a 3rd party and a reduction in certain ancillary revenues.
Motor rentals for Canada were roughly at the same level as 2020, but this was augmented by increases in the U.S. Combined rental revenues increased to $5,014 in 2021 compared to $3,808 in 2020. U.S. rental revenues have increased due to a focus on increasing sales for this business line.
Government grants The Company recognized the benefit from the Canadian Emergency Wage Subsidy ("CEWS") program of $916 (2020 - $1,776 ) and $nil (2020 - $992 ) from U.S. Paycheck Protection Program ("PPP") which reduced salary expenses as follows:
Cost of sales $544 (2020 - $1,665 ); Selling, general and administrative expenses $298 (2020 - $812 ); and Technology group expenses $74 (2020 - $291 ).
Additionally, the Company received $518 (2020 - $280 ) from Canadian Emergency Rent Subsidy ("CERS"), which reduced cost of sales $424 (2020 - $221 ) and selling, general and administrative $94 (2020 - $59 ).
The 2021 CEWS claims were at reduced levels due to the increase in revenues in 2021.
Gross margin and adjusted gross margin Gross margin for 2021 was -2% compared to -25% in 2020. Adjusted gross margin (see Non-GAAP Measurements) for 2021 was $11,059 or 18% compared to $4,869 or 12% for 2020.
Adjusted gross margin improved due to a decrease in the fixed portion of cost of sales as a percentage of revenue partially offset by increases repairs and field labour expenses.
Depreciation of equipment allocated to cost of sales decreased to $12,372 in 2021 from $14,996 in 2020 due to the aging of the assets as the Company uses a declining-balance depreciation for most items. Depreciation included in cost of sales as a percentage of revenue was 20% for 2021 and 37% in 2020.
Selling, general and administrative ("SG&A") expenses SG&A expenses were $9,059 in 2021; an increase of $164 compared with $8,895 in 2020. This increase was primarily due to a reduction/recovery of bad debts in 2021 offset by increased wages and lower wage assistance received in 2021. As a percentage of revenue, SG&A was 14% in 2021 compared to 22% in 2020.
Technology group expenses Technology group expenses were $747 in 2021; a decrease of $205 compared with $952 in 2020. Technology group expenses are related to new product development and supporting and upgrading existing technology. Technology group expenses consist of salaries and related benefits and burdens as well as shop supplies.
Gain on disposal of equipment During 2021, the Company had a gain on disposal of equipment of $2,681 compared to $1,680 in 2020. 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. 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 2021, the Company received proceeds on disposal of equipment of $3,553 (2020 - $2,603 ).