ACT Energy Technologies Ltd. press release
Cathedral Energy Services Ltd. Reports Results for 2015 Q1 and 2015 Q2 Dividend
TSX - Toronto Stock Exchange · Canada
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/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, May 6, 2015/CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) announces its consolidated financial results for the three months ended March 31, 2015and 2014. 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.
2015 Q1 KEY TAKEAWAYS
Revenue in the quarter was $50,077and EBITDAS was $5,786consistent with management's expectations.
Positive impacts from our cost containment initiatives resulted in us maintaining adjusted gross margin percentage for the quarter compared to the prior year.
Reduction in bank debt by 38% to $35,000at March 31, 2015compared to $56,069as at December 31, 2014.
Positive customer response to our product offering resulted in us maintaining customer work and securing new work in a challenging industry environment.
FINANCIAL HIGHLIGHTS Dollars in 000's except per share amounts
| | | | | | | | | | | | Three months ended March 31 | | | | | | | | 2015 | | 2014 | | | Revenues | | $ | 50,077 | $ | 68,020 | | | Adjusted gross margin % (1) | | | 20.2% | | 20.5% | | | | | | | | | | | Adjusted EBITDAS (1) | | $ | 5,786 | $ | 8,581 | | | | Diluted per share | | $ | 0.16 | $ | 0.24 | | | As % of revenues | | | 12% | | 13% | | | | | | | | | | Funds from continuing operations (1) | | $ | 3,965 | $ | 8,120 | | | | Diluted per share | | $ | 0.11 | $ | 0.22 | | | | | | | | | | Earnings (loss) before income taxes | | $ | (795) | $ | 2,876 | | | | Basic per share | | $ | (0.02) | $ | 0.08 | | | Diluted per share | | $ | (0.02) | $ | 0.08 | | | | | | | | | | Net earnings (loss) | | $ | (724) | $ | 2,449 | | | | Basic per share | | $ | (0.02) | $ | 0.07 | | | Diluted per share | | $ | (0.02) | $ | 0.07 | | | | | | | | | | Dividends declared per share | | $ | 0.0400 | $ | 0.0825 | | | | | | | | | | | Property and equipment additions - cash basis | | $ | 4,303 | $ | 9,917 | | | | | | | | | | | Weighted average shares outstanding | | | | | | | | | Basic (000s) | | | 36,295 | | 36,186 | | | Diluted (000s) | | | 36,295 | | 36,219 | | | | | | | | | | | | | March 31 | | December 31 | | | | | | 2015 | | 2014 | | | Working capital | | $ | 25,304 | $ | 38,135 | | | | | | | | | | | Total assets | | $ | 201,943 | $ | 230,534 | | | | | | | | | | | Loans and borrowings excluding current portion | | $ | 36,091 | $ | 56,142 | | | | | | | | | | | Shareholders' equity | | $ | 130,040 | $ | 128,368 | | | | | | | | | | | (1) Refer to news release see "NON-GAAP MEASUREMENTS" | | | | | | |
OUTLOOK
During the first quarter, the Company experienced the impact of the rapid decline in industry activity levels as a consequence of energy companies reducing their capital spending programs due to low energy prices. Revenues were impacted by a drop in activity days along with pricing pressure from the customers who were still active. An early spring breakup in Canadahad a further negative impact on activity levels toward the end of the quarter. Despite the challenging business environment we were pleased with our first quarter results based on business Cathedral was able to secure and maintain and the progress made on our expense reduction initiatives. However, the second quarter has historically been our most challenging due to lower activity levels in Canadaand we are prepared for 2015 Q2 to be further challenging due to low commodity prices.
Although oil prices appear to have stabilized, there continues to be lack of visibility into activity levels in North Americafor the remainder of year. Natural gas prices also continue to be soft. Industry analysts are anticipating oil prices will firm up in the second half of 2015 with the implication there may be corresponding positive impact on energy company drilling and completion activity levels.
Going into this downturn, we focused on three priorities for our business:
1. Adjust our cost structure and financial obligations to reflect the decline in activity levels and protect our balance sheet; 2. Preserve our key employee base so when industry conditions improve we are able to ramp up quickly; and 3. Continue to pursue operational improvements and execute on our strategic objectives to position Cathedral to be a stronger company in the future.
Beginning in January, we significantly reduced our cost structure in order to match anticipated industry activity levels and manage our financial obligations. Our workforce has been reduced by over 25% since December. We have implemented salary and wage rollbacks at all levels in the company ranging from 5% to over 20%. Our suppliers have supported us by providing cost reductions and we continue to review all expense categories looking for savings opportunities both short and long-term. These expense reductions were partly reflected in our Q1 results as some savings were not fully realized until March. We were pleased with our performance in the quarter from an expense management perspective and we are on track to achieve our targeted reduction in SG&A of 20% from 2014 levels.
Given the uncertain industry outlook, we continue to monitor and optimize our capital expenditure program. Going into the year we had a backlog of capital commitments which we were able to reduce. We believe we currently have sufficient equipment capacity to meet customer needs in the short term. However, we are continuing to upgrade our fleet in anticipation of an eventual industry upturn to be able to exploit our competitive advantages. In the quarter, we completed the sale and leaseback of our Oklahoma Cityfacility and benefited from the lower Canadian dollar when repatriating the funds. These actions along with lower working capital requirements and a focus on accounts receivable collections allowed us to reduce our bank debt from $56,069at December 31, 2014to $35,000at March 31, 2015.
In the quarter we commenced discussions with our banking syndicate on getting additional room on our banking covenants should industry conditions deteriorate further or the current industry downturn is prolonged. The banking syndicate has indicated they will work with us to allow financial covenant relaxation for an appropriate time period, if required. As explained later in this news release, we have received a proposal letter from Canada Revenue Agency ("CRA") which challenges the tax pools we obtained as part of the conversion from an income trust to a corporation in late 2009. We remain confident in the appropriateness of our tax-filing position and are reviewing our response to the CRA.
On a positive note, we have gained incremental business from customers in the U.S. and Canadaas a result of our performance advantages. We are renting our nDuranceTMseries drilling motors on a stand-alone basis to major energy company customers and are receiving positive market feedback on their performance. In the U.S., our Electro-Magnetic Measurement-While-Drilling ("EM-MWD") system is now being recognized for its performance advantages in difficult formations resulting in us securing new customer opportunities. We are also providing our EM-MWD on a standalone basis. With customers now focused on cost reduction and drilling performance, our capabilities play well in this environment. As a service provider we are in a unique position from a cost impact perspective as our ability to reduce drilling days can result in significant cost savings for our customers. During the quarter, we accomplished a number of records for drilling performance with customers in both Canadaand the U.S. which reinforces our customer value proposition. We continue to push forward and invest in our strategic improvement initiatives to set our company to be in a stronger position coming out of this downturn.
We remain confident that we will come out of this current downturn in a very strong position to deliver increased value to our customers and our shareholders.
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 2015 Q2 dividend in the amount of $0.04per share which will have a date of record of June 30, 2015and a payment date of July 15, 2015.
2015 CAPITAL PROGRAM
During 2015 Q1 the Company invested $4,303(2014 Q1 - $9,917) in property and equipment. The following table details the current period's net property and equipment additions:
| | | | | | | | | | Three months ended | | | | | | March 31, 2015 | | | Property and equipment additions: | | | | | | | Growth capital (1) | | $ | 3,218 | | | Maintenance capital(1) | | | 267 | | | Replacement capital (1) | | | 252 | | | Infrastructure capital(1) | | | 566 | | Total cash additions | | | 4,303 | | | Less: proceeds on disposal of property and equipment | | | (1,672) | | | Less: proceeds on disposal of land and buildings | | | (6,174) | | | | | | | | | Net property and equipment additions (1) | | $ | (3,543) | | | | | | | | | (1) See "Non-GAAP Measurements" | | | | |
The major additions for growth capital were $2,231for additional drilling motors and related equipment for specific job requirements and $987for additional ancillary production testing equipment to reduce future rental costs. Infrastructure capital relates to the construction of an operation facility in Oklahomathat was completed and subject to a sale and leaseback in 2015 Q1. Maintenance capital included $159related to MWD upgrades, $42for production testing units and ancillary equipment and $66related to office and computer equipment additions.
Cathedral's 2015 capital budget remains at $7,000which includes $4,600of growth capital, $1,775of maintenance capital and $625of infrastructure expenditures.
Cathedral intends to finance its 2015 capital budget from cash flow from operations, proceeds of the Oklahoma Cityfacility sale and leaseback, proceeds from redundant asset sales and if necessary, its existing credit facility.
The following is a summary of major equipment owned by the Company:
| | | | | | | March 31 | December 31 | March 31 | | | 2015 | 2014 | 2014 | | Directional drilling - MWD systems | 140 | 140 | 139 | | Production testing units | 66 | 66 | 72 |
RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH 31
| | | | | | | | | | | | | | | | | | Three months ended March 31, 2015 | | Three months ended March 31, 2014 | | | | | | | | | | | | | Directional | | Production | | | | | Directional | | Production | | | | Revenues | | drilling | | testing | | Total | | | drilling | | testing | | Total | | Canada | $ | 15,044 | $ | 4,998 | $ | 20,042 | | $ | 28,790 | $ | 8,578 | $ | 37,368 | | | | | | | | | | | | | | | | | United States | | 21,753 | | 8,282 | | 30,035 | | | 23,672 | | 6,980 | | 30,652 | | | | | | | | | | | | | | | | | Total | $ | 36,797 | $ | 13,280 | $ | 50,077 | | $ | 52,462 | $ | 15,558 | $ | 68,020 |
Revenues2015 Q1 revenues were $50,077which represented a decrease of $17,943or 26% from 2014 Q1 revenues of $68,020. U.S. production testing had higher revenues than 2014 Q1. However, all other areas experienced declines due mainly to overall decline in drilling activity as a result of decline in commodity prices.
Canadian directional drilling revenues decreased to $15,044in 2015 Q1 from $28,790in 2014 Q1; a 48% decrease. This decrease was the result of: i) a 47% decrease in activity days to 1,417 in 2015 Q1 from 2,649 in 2014 Q1; and ii) a 2% decrease in the average day rate to $10,617in 2015 Q1 from $10,868in 2014 Q1. In 2015 Q1 there was an industry wide decline in activity due to declines in commodity prices and day rate declines directly relate to pricing concessions granted to customers due to market conditions. In 2015 Q1, the Western Canada Sedimentary Basin ("WCSB") had a decline in non-vertical wells drilled of 45% compared to 2014 Q1.
U.S. directional drilling revenues decreased to $21,753in 2015 Q1 from $23,672in 2014 Q1; an 8% decrease. This decrease was the result of: i) a 11% decrease in activity days to 1,667 in 2015 Q1 from 1,880 in 2014 Q1; net of ii) a 4% increase in the average day rate to $13,049in 2015 Q1 from $12,591in 2014 Q1 (when converted to Canadian dollars). The decrease in U.S. activity days was primarily due to the decrease in operations in the Rocky Mountain region of the U.S. along with slight declines in the Company's operations in the Texasand Oklahomamarkets. These declines were partially offset by an increase in days in the Northeastern U.S. where the Company had a significant decline in operations in 2014. The U.S. active land rig count was down 21% from 2014 Q1. The U.S. average day rates in Canadian dollars increased due to the stronger U.S. dollar. Rates in USD declined to $10,558 USDin 2015 Q1 from $11,412 USDin 2014 Q1, a 7% decline. As with Canadian directional, there were pressures from clients to reduce pricing.
Canadian production testing revenues decreased to $4,998in 2015 Q1 from $8,578in 2014 Q1; a 42% decrease. In the prior year, 2014 Q1 had benefited from delays in completion jobs which were deferred into that quarter. While day rates in 2015 remained consistent with 2014 Q1, there was a decline in operating days due to the industry downturn. The number of wells completed in the WCSB declined by 36% in 2015 Q1 compared to 2014 Q1.
U.S. production testing revenues increased to $8,282in 2015 Q1 from $6,980in 2014 Q1, a 19% increase. In 2014 Q1 the division was working to rebuild its client base after a significant customer had shifted work to a competitor in 2013 Q4. In 2014 Q1, the division had lowered rates significantly to assist in gaining new customers. In 2015 Q1 the activity levels were down consistent with other divisions, but day rates in USD increased to expected levels and these rates were higher when converted into CAD.
Gross margin and adjusted gross margin Gross margin for 2015 Q1 was 10.0% compared to 13.8% in 2014 Q1. Adjusted gross margin (see Non-GAAP Measurements) for 2015 Q1 was $10,120(20.2%) compared to $13,925(20.5%) for 2014 Q1.
There were multiple reasons for the change in adjusted gross margin in the period. The Company began a thorough review of all expenses in late 2014 that became the major point of emphasis in 2015 and obtained a number of cost reductions for external services and for field, support and office staff, including work force adjustments and wage rollbacks. As a result, even though revenue day rates declined in most divisions, the Company was able to maintain its adjusted gross margin compared to 2014 Q1.
There were a number of factors that individually changed in the composition of cost of sales including a decline in field labour costs as a percentage of revenue year-over-year due to cuts in labor rates and reductions in usage of batteries in the period compared to prior year. These reductions were offset by increase in repairs and fixed costs on a percentage of revenue basis. Overall costs were lower than in 2014 Q1, but higher as a percentage of revenue basis. There was also a lag in certain repairs and costs in 2015 Q1 related to earlier operations.
Depreciation allocated to cost of sales increased to $5,091in 2015 Q1 from $4,464in 2014 Q1. Depreciation included in cost of sales as a percentage of revenue was 10.2% for 2015 Q1 and 6.6% in 2014 Q1.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $5,593in 2015 Q1; a decrease of $585compared with $6,178in 2014 Q1. Excluding non-cash depreciation and share-based compensation, the sequentially SG&A was $5,522in 2015 Q1 a reduction of 13% compared with 2014 Q4 at $6,377and we believe we are on target to reduce the 2014 Q4 amount by a total of 20% in subsequent quarters.
Adjusted SG&A (see Non-GAAP Measurements) was $5,356in 2015 Q1 compared to $5,964in 2014 Q1, a decrease of $608. As a percentage of revenue, adjusted SG&A was 11% in 2015 Q1 and 9% in 2014 Q1. Adjusted SG&A decreased primarily due to wages, benefits and variable compensation due to work force adjustments and wage rollbacks. Staffing costs included in SG&A include executives, sales, accounting, human resources, payroll, safety, research and development and related support staff.
Gain on disposal of property and equipmentIn 2015 Q1 the Company completed the previously discussed sale and leaseback of its Oklahoma Cityoperating facility. This resulted in a gain on sale of land and buildings of $508. The Company has entered into a 15 year lease on the related assets. During 2015 Q1, the Company had a gain on disposal of property and equipment of $1,169compared to $734in 2014 Q1. These 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 loss The Company had foreign exchange loss of $1,426in 2015 Q1 compared to $497in 2014 Q1 due to the fluctuations in 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 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 2015 Q1 foreign currency loss are unrealized losses of $1,276(2014 Q1 - $454) related to intercompany balances.
Finance costs Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $467for 2015 Q1 versus $596for 2014 Q1. The decrease in finance costs relate mainly to a decreased utilization of the Company's credit facility and to a lesser extent decreases in interest rates.
Income taxFor 2015 Q1, the Company had net income tax recovery of $71compared to expense of $427in 2014 Q1. The effective tax rate was 9% for 2015 Q1 and 15% for 2014 Q1. Income tax expense is booked based upon expected annualized effective rates. The current period tax rate is lower than anticipated due to losses in Canadarecorded at effective rate of 23.25% and income in U.S. recorded at effective rate of 42.5%.
LIQUIDITY AND CAPITAL RESOURCES
OverviewOn an annualized basis the Company's principal source of liquidity is cash generated from operations. In addition, the Company has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity. For the period ended March 31, 2015, the Company had funds from continuing operations (see Non-GAAP Measurements) of $3,965(2014 - $8,120). The decrease in funds from continuing operations is due to lower activity levels and reductions in revenue day rates.
Working capitalAt March 31, 2015the Company had working capital of $25,304(December 31, 2014- $38,135) and a working capital ratio of 1.7 to 1 (December 31, 2014– 1.8 to 1). The lower working capital level was directly related to the reduction in activity levels.
Credit facility On August 8, 2014the Company entered into a 3 year committed revolving credit facility in the amount of $85,000. The credit facility includes a $25,000accordion feature which is subject to approval of the syndicate of lenders. The syndicate of lenders consists of The Bank of Nova Scotiaand National Bank of Canada.