ACT Energy Technologies Ltd. press release
CATHEDRAL ENERGY SERVICES REPORTS RESULTS FOR 2022 Q1
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA /
CALGARY, AB , May 12, 2022 /CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral") (TSX: CET) announces its consolidated financial results for the three months ended March 31, 2022 and 2021.
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.
FINANCIAL HIGHLIGHTS
Dollars in 000's except per share amounts
| | | | Three months ended March 31 | | | | | | 2022 | 2021 | | Revenues | | | $ 34,385 | $ 11,365 | | Adjusted gross margin % (1) | | | 29% | 21% | | Adjusted EBITDAS (1) | | | $ 6,913 | $ 825 | | Cash flow - operating activities | | | $ (1,758) | $ (408) | | Income (loss) from operating activities | | | $ 2,351 | $ (2,240) | | Basic and diluted per share | | | $ 0.03 | $ (0.05) | | Net income (loss) | | | $ 2,243 | $ (2,086) | | Basic and diluted per share | | | $ 0.02 | $ (0.04) | | Equipment additions - cash basis | | | $ 3,304 | $ 591 | | Weighted average shares outstanding | | | | | | Basic (000s) | | | 91,297 | 50,133 | | Diluted (000s) | | | 93,515 | 49,468 | | | | | March 31 | December 31 | | | | | 2022 | 2021 | | Working capital | | | $ 15,029 | $ 14,117 | | Total assets | | | $ 107,051 | $ 75,423 | | Loans and borrowings, excluding current portion | | | $ 15,310 | $ 5,035 | | Shareholders' equity | | | $ 53,732 | $ 42,504 | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | |
2022 Q1 KEY TAKEAWAYS
Continued execution of the Company's consolidation strategy with the accretive acquisition of Discovery Downhole Services, a US-based mud motor technology company, for $22,471 Revenues increased by $23,020 or 203% from $11,365 in 2021 Q1 to $34,385 in 2022 Q1, representing the highest quarterly revenues since 2019 Q1; Adjusted EBITDAS increased from $825 in 2021 Q1 to $6,913 in 2022 Q1, representing the highest quarterly Adjusted EBITDAS since 2014 Q4; Net income was $2,243 compared to a loss of ($2,240) in 2021 Q1, representing the highest quarterly Net income since 2018 Q3; Canadian market share reached 19.9%, its highest level on Company record; and Subsequent to 2022 Q1, the Company raised $26,451 gross proceeds through a bought deal equity financing, one of the first to be completed in the Canadian energy services sector in the past four years.
PRESIDENT'S MESSAGE
Comments from President & CEO Tom Connors :
In the first quarter of 2022, the benefit of our strategy began to show results with more than triple the revenue from the same quarter last year, our highest adjusted quarterly EBITDAS in eight years and increase in our Canadian market share to 19.9%, our highest level on Company record.
Higher commodity prices and improved cash flow projections for oil and gas producers led to expanded drilling programs and increased demand for our services in the first quarter of 2022. Cathedral recorded higher activity levels and day rates in our Canadian operations over both the first quarter of last year, and the fourth quarter of 2021. Our improved operating performance drove solid financial results with revenue up $23 ,020 and Adjusted EBITDAS growing more than 700% to $6 ,913 from the same quarter last year. Adjusted gross margin also improved, increasing by 740 basis points compared to the same quarter last year due to lower repair costs that were partially offset by increased labour costs.
During the quarter, Cathedral reaffirmed its position as the leading consolidator in the industry with the successful acquisition of Discovery Downhole Services, which provided us with strategic growth in the U.S. motor technology rental business. To date, integration of this business is going well, and results have been in line with our expectations. We continue to believe that consolidation in the directional drilling industry is needed to create a sustainable, efficient sector that can thrive in the future. We see additional opportunities to add value for customers and shareholders in both Canada and the U.S., and we are carefully evaluating prospects, selectively looking for ways to grow strategically while not placing undo pressure on our capital structure.
The industry is emerging from a prolonged period of reduced investment in global energy infrastructure meaning tightened supply and demand fundamentals and higher commodity prices projected for some time into the future. Recent geopolitical events have further impacted commodity prices and raised concerns around energy security. This backdrop is fueling a sustained increase in drilling and development activity in both Canada and the U.S., and stronger demand for oilfield services. We expect industry conditions to remain strong in the near-to-medium term and anticipate increased demand for our services. With our expanded operations base, well-skilled team and high-quality equipment, we are well positioned to take full advantage of these strong industry conditions.
At Cathedral, we understand the importance of maintaining our position as an industry-leader and are continuing to reinvest in our business. For 2022, our capital expenditure plan remains approximately $14,900 , focused largely on adding new mud motors, and the completion of the 18 RapidFireTM Measurement-While-Drilling ("MWD") systems from our 2021 build program.
Our conservative balance sheet, high-quality assets and strong customer relationships position us to leverage these robust industry conditions. Subsequent to the first quarter, Cathedral raised $26,400 through a bought deal equity financing, one of the first to be completed in the Canadian energy services sector in the past four years and a clear sign of improving sentiment towards our industry. Due to strong interest in this financing, Cathedral increased the size of its initial offering and fully exercised its overallotment option. The funds will be used to take advantage of ongoing industry strength by lowering debt, funding our capital expenditure program and improving liquidity.
As we move into the second half of 2022, we are carrying positive momentum, and broadening our customer base thanks to strong demand, our state-of-the-art technology and industry-leading customer service. This, coupled with new customers added through our recent acquisitions, gives us confidence in the continued expansion of our market share in 2022 in Canada and the U.S. Furthermore, our strengthened financial position, following our equity financing, adds additional flexibility and agility to our balance sheet, allowing us to capitalize on future opportunities as they emerge.
2022 ACQUISITIONS
On February 10, 2022 , the Company announced the closing of Cathedral's acquisition of the operating assets of Discovery Downhole Services ("Discovery"). The Transaction includes the operating assets and non-executive personnel of Discovery's U.S.-based, high-performance mud motor technology rental business with operations in North Dakota , Texas , and Wyoming. The transaction will materially increase the Company's U.S. revenues and add a high-quality customer base of oil and gas producers and directional drilling companies active in all the major U.S. land basins.
Cathedral paid $18,160 in cash funded by a new term loan from its existing bank along with funds raised in a common share private placement and issued 5,254,112 common shares (the "Consideration Shares"). The shares were valued at $0.52 for accounting purposes (total of $2,732 ). In addition to a 4-month statutory hold period on the Consideration Shares, the parties have agreed to contractual restrictions on resale as follows: 25% are restricted until February 10, 2023 ; a further 25% of are restricted until August 10, 2023 ; and a further 50% are restricted until February 10, 2024 , subject to certain exceptions. Additionally, Cathedral assumed the leases at the three operating locations for lease liabilities of $1,579 . Total consideration paid was $22,471 .
While the purchase and sale agreement was structured as an asset sale, the Company will account for this transaction as a business combination. The Company has allocated the purchase price as:
Right of use asset $1,579 ; and Equipment $20,892 .
To date, the Company has expensed $31 in costs related to the Transaction.
RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH 31
| Revenues | | 2022 | 2021 | | Canada | | $ 25,399 | $ 8,100 | | United States | | 8,986 | 3,265 | | Total | | $ 34,385 | $ 11,365 |
Revenues 2022 Q1 revenues were $34,385 , which represented an increase of $23,020 or 203% from 2021 Q1 revenues of $11,365 .
Canadian revenues (excluding motor rental revenues) increased to $24,467 in 2022 Q1 from $7,440 in 2021 Q1; a 229% increase. This increase was the result of: i) a 163% increase in activity days to 3,053 in 2022 Q1 from 1,163 in 2021 Q1 and ii) a 25% increase in the average day rate to $8,014 in 2022 Q1 from $6,397 in 2021 Q1.
Based on publicly disclosed Canadian drilling and directional drilling days, Cathedral's market share for 2022 Q1 was 19.9% compared to 10.4% in 2021 Q1. Day rates increased due to certain ancillary revenues along with overall increases in day rates.
U.S. revenues (excluding motor rental revenues) increased 50% to $4,067 in 2022 Q1 from $2,706 in 2021 Q1. This increase was the result of: i) a 53% increase in activity days to 426 in 2022 Q1 from 279 in 2021 Q1; net of ii) a 2% decrease in the average day rate to $9,546 in 2022 Q1 from $9,699 in 2021 Q1 (when converted to Canadian dollars).
The average active land rig count for the U.S. was up 65% in 2022 Q1 compared to 2021 Q1 (source: Baker Hughes). The Company experienced a 31% increase in rigs followed resulting in a decrease in market share compared to 2021 Q1. Day rates in USD decreased 2% to $7,536 USD in 2022 Q1 from $7,659 USD in 2021 Q1. Revenue day rates decreased due to a 2022 Q1 decrease in revenues from providing RSS services which are rented from a 3rd party. The RSS services command a higher day rate than our regular drilling services.
Motor rentals increased in both Canada and the U.S. Combined rental revenues increased to $5,852 in 2022 Q1 compared to $1,219 in 2021 Q1. Rentals were up due to the Discovery acquisition and the overall industry increase in drilling activity.
Gross margin and adjusted gross margin Gross margin for 2022 Q1 was 16% compared to (4%) in 2021 Q1. Adjusted gross margin (see Non-GAAP Measurements) for 2022 Q1 was $9,861 or 29% compared to $2,420 or 21% for 2021 Q1.
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 rentals.
Depreciation of equipment allocated to cost of sales increased to $4,289 in 2022 Q1 from $2,887 in 2021 Q1 due to the asset acquisitions in 2021 and 2022. Depreciation included in cost of sales as a percentage of revenue was 12% for 2022 Q1 and 25% in 2021 Q1.
Selling, general and administrative ("SG&A") expenses SG&A expenses were $3,781 in 2022 Q1; an increase of $2,016 compared with $1,765 in 2021 Q1. There were increases in SG&A wages, commissions and reduced CEWS grants. As a percentage of revenue, SG&A was 11% in 2022 Q1 compared to 16% in 2021 Q1.
Technology group expenses Technology group expenses were $219 in 2022 Q1; an increase of $31 compared with $188 in 2021 Q1. 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 2022 Q1, the Company had a gain on disposal of equipment of $822 compared to $188 in 2021 Q1. 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 2022 Q1, the Company received proceeds on disposal of equipment of $1,233 (2021 Q1 - $221 ).
Finance costs Finance costs consisting of interest expenses on loans and borrowings and bank charges were $229 for 2022 Q1 compared $83 for 2021 Q1 due to the increase in debt level and increases in interest rates.
Finance costs lease liability The lease liability interest decreased slightly to $189 from $209 .
Foreign exchange The Company had a foreign exchange gain of $310 in 2022 Q1 compared to $446 in 2021 Q1 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 2022 Q1 foreign currency gain is an unrealized gain of $295 (2021 Q1 –$444) related to intercompany balances.
Income tax 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. The provision for current taxes has been fully offset by the benefit of tax attributes not previously recognized.
LIQUIDITY AND CAPITAL RESOURCES
Overview On an annualized basis, the Company's principal source of liquidity is cash generated from operations and proceeds from equipment lost-in-hole. In addition, the Company has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity. Cash flow - operations in 2022 was a use of cash of ($1,758) compared to ($408) in 2021. The decrease in cash for 2022 was primarily to fund the increase in accounts receivable since December 31 of $11,506 resulting from the improvement in North American oilfield service activity, partially offset by increases in cash flow from improved drilling activity in 2022 and Cathedral's increase in Canadian market share.
Working capital At March 31, 2022 the Company had working capital of $15,029 ( December 31, 2021 - $14,117 ).
Credit facility In February 2022 , the Company entered into an Amended and Restated Credit Agreement with its current lender (the "Facility"). The Company's Facility consists of a $12,000 operating facility and a term facility in the amount of the Canadian equivalent of $14,250 USD both with a single lender, ATB Financial ("ATB"), which expire June 30 , 2023. The Facility is secured by a general security agreement over all present and future personal property. The Facility provides a definition of EBITDA ("Credit Agreement EBITDA") to be used in calculation of financial covenants.
The Facility bears interest at the financial institution's prime rate plus 1.75% to 3.25% or bankers' acceptance rate plus 3.00% to 4.25% with interest payable monthly. Interest rate spreads for the Facility depend on the level of funded debt compared to the 12-month trailing Credit Agreement EBITDA. The Facility provides a means to lock in a portion of the debt at interest rates through bankers' acceptances ("BA") based on the interest rate spread on the date the BA was entered into.
While the term facility will be amortized over five years it has a maturity of June 2023 as with the existing Facility. The amortization will be based on a variable interest rate consistent with the Company's existing operating facility interest rates with required monthly payments of $303 for principal plus prevailing interest.
The Facility provided an alternative definition of Credit Agreement EBITDA to allow pro-rating Credit Agreement EBITDA to a 12-month equivalent ("Consolidated EBITDA Annualization Period") which was to end March 31 , 2022. During reporting periods in which the alternative definition of Credit Agreement EBITDAS was in effect, the Company's loans bore interest at the highest marginal rate. However, the agreement allowed Cathedral to opt out of the alternative calculation and the Company exercised this option prior to March 31, 2022 .
The financial covenants associated with the Facility that will be tested commencing 2022 Q1 are:
Consolidated Funded Debt to Consolidated Credit Agreement EBITDA ratio shall not exceed 3.0:1; and Consolidated Fixed Charge Coverage ratio shall not be less than 1.25:1.
Compliance with Facility covenants
At March 31, 2022 , the Company had drawn $1,395 of its operating facility, $17,554 on the term facility and had $41 in cash. The Company was in compliance with all covenants at March 31 , 2022.
Current facility - Highly Affected Sectors Credit Availability Program ("HASCAP")
In June 2021 , the Company applied for and received a further $1,000 of liquidity from HASCAP. The incremental $1,000 non-revolving loan is fully drawn and is in addition to the Company's Facility. The demand loan has an interest rate of 4% and is amortized over a ten-year period. Repayment terms are interest only for the first year, and principal plus interest for the remaining nine years, payable on a monthly basis. The HASCAP Loan is secured by a general security interest over all present and after acquired personal property of the Company granted in favour of ATB.
Contractual obligations In the normal course of business, the Company incurs contractual obligations and those obligations are disclosed in the Company's annual financial statements for the year ended December 31 , 2021.
As at March 31, 2022 , the Company's has a commitment to purchase equipment of $1,477 which is expected to be incurred in 2022 Q2 and Q3.
The Company has issued the following six letters of credit ("LOC"):
three securing rent payments on property leases and renew annually with the landlords. Two LOCs total $700 CAD for the first ten years of the lease and then reduce to $500 for the last five years of the leases. The third LOC is currently for $630 USD and increases annually based upon annual changes in rent; two securing the Company's corporate credit cards in the amounts of $75 CAD and $175 USD ; and one in lieu of cash deposit for utilities in the amounts of $55 CAD.
Subsequent events On April 5, 2022 , the Company announced and subsequently closed on April 25, 2022 a bought deal financing of 37,786,700 Units at a price of $0.70 per Unit, for aggregate gross proceeds of $26,451 . Net of issue costs, the Company received $25,018 Each Unit is comprised of one common share in the capital of the Company (a "Common Share") and one-half of one Common Share purchase warrant (each whole Common Share purchase warrant, a "Warrant"). Each Warrant will be exercisable to acquire one additional Common Share (a "Warrant Share") for a period of 12 months following the closing of the Offering at an exercise price of $0.85 per Warrant Share, subject to adjustment in certain events. The Warrants will began trading on April 25, 2022 on the Toronto Stock Exchange (the "TSX") under the symbol "CET.WT".
Pursuant to the financing agreement, $8,777 of the bought deal financing proceeds were used to reduce the term loan.