ACT Energy Technologies Ltd. press release
Cathedral Energy Services Reports Results for 2020 Q4
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA /
CALGARY, AB , March 11, 2021 /CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral") (TSX: CET) announces its consolidated financial results for the three and nine months ended December 31, 2020 and 2019. Dollar amounts are in '000's except for WTI, day rates and 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 | | | | | | | | | 2020 | 2019 | 2020 | 2019 | | | | | | Revenues | $ | 7,448 | $ | 19,299 | $ | 40,574 | $ | 120,276 | | Adjusted gross margin % (1) | 16% | 9% | 12% | 10% | | | | | | Adjusted EBITDAS (1) | $ | (435) | $ | (702) | $ | (116) | $ | 3,887 | | Basic and diluted per share | $ | (0.01) | $ | (0.01) | $ | - | $ | 0.08 | | Cash flow - operating activities | $ | 231 | $ | (102) | $ | 1,191 | $ | 4,785 | | Loss before income taxes | $ | (3,183) | $ | (6,332) | $ | (25,417) | $ | (18,717) | | Basic per share | $ | (0.06) | $ | (0.13) | $ | (0.51) | $ | (0.38) | | Impairments and direct write-downs | $ | 172 | $ | - | $ | (6,822) | $ | - | | De-recognition of deferred tax asset | $ | (2,647) | $ | - | $ | (2,647) | $ | - | | Loss | $ | (6,312) | $ | (6,802) | $ | (27,731) | $ | (18,372) | | Basic per share | $ | (0.13) | $ | (0.14) | $ | (0.56) | $ | (0.37) | | Equipment additions | $ | 184 | $ | 2,836 | $ | 2,603 | $ | 8,726 | | Weighted average shares outstanding | | | | | | | | | | Basic (000s) | 49,468 | 49,468 | 49,468 | 49,468 | | | | | | Diluted (000s) | 49,468 | 49,468 | 49,468 | 49,522 | | | | | | | | | | | | | | | | | | | December 31 | December 31 | | | | | | | | | 2020 | 2019 | | | | | | Working capital | | | $ | 7,680 | $ | 20,181 | | | | Total assets | | | $ | 64,280 | $ | 106,300 | | | | Loans and borrowings excluding current portion | | | $ | 1,560 | $ | 6,000 | | | | Shareholders' equity | | | $ | 39,974 | $ | 68,092 | | | | | | | | | | | | | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | | | | |
2020 Q4 KEY TAKEAWAYS
Revenues decreased by $11,851 or 61% from $19,299 in 2019 Q4 to $7,448 in 2020 Q4;
Adjusted gross margin increased from 9% in 2019 Q4 to 16% in 2020 Q4 due to COVID-19 related to government assistance received and lower equipment rentals offset by increases in repairs;
Adjusted EBITDAS increased from a loss of $(702) in 2019 Q4 to $(435) in 2020 Q4; and
Net debt (drawn credit facility less cash on hand) at end of 2020 was $526 compared to net cash of $1,223 at the end of 2019.
COVID-19
In March 2020 , the World Health Organization declared a global pandemic due to COVID-19. In response to the COVID-19 outbreak, governments around the world implemented measures to control the spread of the virus including closure of non-essential businesses and implementing travel bans and stay-at-home restrictions. These actions contributed to the material deterioration in global economy including a dramatic decline in demand for oil, which resulted in a material decrease in the price for oil. This decline in oil prices negatively affected drilling activities in Cathedral's operating areas of U.S. and Canada. The Company has made significant changes to its cost structure including laying off staff, reducing compensation, implementing reduced work weeks, closing facilities, eliminating discretionary expenses, deferring tool repairs and reducing capital expenditures, to better match our cost structure to expected operating levels. The collapse in oil prices negatively affected our client's cash flows and, as a result, in certain situations resulted in slower collection of accounts receivable and increased provisions for non-payment of accounts receivable.
In the second half of 2020 oil prices improved from the lows of the first half of the year and industry drilling activity started to improve during 2020 Q3. Volatility is expected in oil prices due to continuing developments related to COVID-19 (i.e. vaccinations rates, spread new variants and related government responses) and ongoing uncertainty related to output restrictions among OPEC and OPEC+.
All of these developments have had, and could in the future have, a material adverse effect on Cathedral's business, financial condition, results of operations, cash flows, ability to collect on accounts receivable and future impairments of Company assets. As a result of the decline in financial results for 2020, management has entered into discussions with its lender to amend and/or extend the revised covenants under its credit agreement to the end of 2021.
OUTLOOK
As we moved into 2021, the improving industry fundamentals that we saw at the tail end of 2020 Q4 continued. WTI has climbed to approximately USD $65 /bbl after sinking to historic depths last year, in response to the COVID-19 pandemic. Similarly, North American natural gas prices have strengthened. Despite the significant improvement in commodity prices, in the near term, we believe E&P companies will follow through with the financial discipline directing a significant portion of their higher cash flow to strengthening balance sheets through reduction of debt. With sustained higher commodity prices combined with increasing energy demand, as global activity returns to post COVID normal, we anticipate continued strong producer cash flows leading to increased demand for the energy services industry.
Within the Canada market, the improving activity levels that started in 2020 Q3 have continued into 2021 Q1. For 2020 Q1, we are expecting higher activity levels compared to the prior year and on a quarterly sequential basis - this has resulted in an increase in market share. Cathedral continues to build its presence in the dynamic Clearwater / Marten Hill play. We have been able to expand our motor rentals, in particular, as it relates to our rotary steerable system specific nDurance TM drilling motors which are demonstrating strong performance achievements.
We continue to shift our market focus towards more active areas of the US such as the Permian basin where we can leverage the versatility of our RapidFire TM Measurement-While-Drilling ("MWD") system. As we continue to build on our efforts, expertise, personnel and technology, we expect to see continued improvement in results in this key market as we progress through 2021.
RapidFire™ is Cathedral's latest generation MWD system which is capable of transmitting data simultaneously via pulse and electro-magnetic ("EM"), allowing for high data rates and higher reliability through redundancy, resulting in faster drilling and cost savings for our customers. The system can be configured in either a hard mount or retrievable configuration and is rated to operating temperatures that meet or exceed most competitive MWD systems.We currently have 1 RapidFire™ MWD system and are expecting to deploy 4 additional RapidFire™ systems early in 2021 Q2 In addition, in 2021 Q3, Cathedral expects to commence trial runs with a retrievable downhole generator which reduces operating costs and allows for high EM transmission on extended run applications.
2020 CAPITAL PROGRAM
During the year ended December 31, 2020 the Company invested $2,474 (2019 - $6,018 ) in equipment and $251 (2019 - $1,077 ) of intangibles for new technology development primarily related to MWD systems which were completed in 2020 Q1.
The following table details the current period's net equipment additions:
| | | | | | Year ended | | | | December 31, 2020 | | | Equipment additions: | | | | Motors and related equipment | $ | 1,825 | | MWD and related equipment | 610 | | | Other | 39 | | | Total cash additions | 2,474 | | | Less: proceeds on disposal of equipment | (2,603) | | | | | | | Net equipment additions (1) | $ | (129) | | (1)See "NON-GAAP MEASUREMENTS" | | |
2021 CAPITAL PROGRAM
Our 2021 capital plan will be modest and we expect our "net equipment additions" (equipment additions less proceeds on equipment lost downhole) to be in the range of $nil to $1,500 (depending on level of lost-in-hole proceeds). Focus of 2021 capital plan will be motor power section additions for premium lines and addition of RapidFire™ Measurement-While-Drilling dual telemetry systems tools.
RESULTS OF OPERATIONS – THREE MONTHS ENDED DECEMBER 31
| | | | | | | Revenues | 2020 | 2019 | | | | Canada | $ | 4,042 | $ | 6,815 | | United States | 3,406 | 12,484 | | | | Total | $ | 7,448 | $ | 19,299 |
Revenues 2020 Q4 revenues were $7,448 , which represented a decrease of $11,851 or 61% from 2019 Q4 revenues of $19,299 .
Canadian revenues (excluding motor rental revenues) decreased to $3,740 in 2020 Q4 from $6,167 in 2019 Q4; a 39% decrease. This decrease was the result of: i) a 29% decrease in activity days to 553 in 2020 Q4 from 782 in 2019 Q4 and ii) a 14% decrease in the average day rate to $6,764 in 2020 Q4 from $7,886 in 2019 Q4.
There was a 36% year-over-year decline in the average active land rig count in Canada (source: Baker Hughes) which compares to Cathedral's activity decline of 29%. Due to Cathedral's client mix, our decline was lower than the general market decline. The decrease in day rates was due to a reduction in base rates due to the mix of clients in 2020 Q4.
U.S. revenues (excluding motor rental revenues) decreased 73% to $3,201 in 2020 Q4 from $11,986 in 2019 Q4. This decrease was the result of: i) a 60% decrease in activity days to 359 in 2020 Q4 from 901 in 2019 Q4; and ii) a 33% decrease in the average day rate to $8,915 in 2020 Q4 from $13,303 in 2019 Q4 (when converted to Canadian dollars).
The average active land rig count for the U.S. was down 62% in 2020 Q4 compared to 2019 Q4 (source: Baker Hughes). The Company experienced a 60% decline in activity days resulting in a decrease in market share compared to 2019 Q4. Day rates in USD decreased 32% to $6,843 USD in 2020 Q4 from $10,079 USD in 2019 Q4. The 2020 Q4 rate is down due to a decrease in revenues from providing RSS services which are rented from a 3rd party, reduction in base rates due to the limited mix of clients in 2020 Q4 and a reduction in certain ancillary revenues.
Motor rentals decreased in both Canada and the U.S. Combined rental revenues decreased to $507 in 2020 Q4 compared to $1,1146 in 2019 Q4. The decrease is due to the decrease in drilling activity in 2020 Q4.
Government grants The Company recognized the benefit from the CEWS program of $399 (2019 - $nil) which reduced salary expenses as follows:
Cost of sales $187 ; Selling, general and administrative expenses $154 ; and Technology group expenses $58 .
Additionally, the Company received $280 (2019 - $nil) from the Canadian Emergency Rent Subsidy ("CERS"), which reduced cost of sales $221 (2019 - $nil) and selling, general and administrative $59 (2019 - $nil).
Gross margin and adjusted gross margin Gross margin for 2020 Q4 was -32% compared to -19% in 2019 Q4. Adjusted gross margin (see Non-GAAP Measurements) for 2020 Q4 was $1,199 or 16% compared to $1,761 or 9% for 2019 Q4.
Adjusted gross margin, as a percentage of revenue, increased due to the government assistance received and lower equipment rentals offset by increases in repairs.
Depreciation of equipment allocated to cost of sales decreased to $3,560 in 2020 Q4 from $5,443 in 2019 Q4. Depreciation included in cost of sales as a percentage of revenue was 48% for 2020 Q4 and 28% in 2019 Q4.
Selling, general and administrative ("SG&A") expenses SG&A expenses were $2,072 in 2020 Q4; a decrease of $1,745 compared with $3,817 in 2019 Q4. There were reductions in SG&A wages and related benefits and burdens due to a reduction in head count and wage rollbacks and the government assistance received as well as decreases in almost all categories of expenses due to efforts to reduce spending. These savings were partially offset by an increase in the provision for trade receivables that are slow paying of $630 (2019 Q4 - $549 ). As a percentage of revenue, SG&A was 28% in 2020 Q4 compared to 20% in 2019 Q4.
Technology group expenses Technology group expenditures are related to supporting and upgrading existing technology as well as new product development. Technology group expenses consist of salaries and related benefits and burdens as well as shop supplies. Technology group activities spent on new product development are capitalized as intangible assets.
Technology group expenses were $140 in 2020 Q4, a decrease of $389 , compared with $529 in 2019 Q4. The portion of total technology group costs related to new product development in 2019 Q4 was $171 and this amount was capitalized as intangible assets (2020 Q4 - $nil). In light of the current market, Cathedral has consolidated its MWD repairs and, as part of this realignment, combined our Technology Group and MWD repair department. This has resulted in a reduction in overall head count of the combined group and will result in limited new product development in the near term.
Gain/loss on disposal of equipment During 2020 Q4, the Company had a loss on disposal of equipment of $183 compared to a gain of $1,596 in 2019 Q4. These amounts mainly related 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. In 2020 Q4, the Company received proceeds on disposal of equipment of $184 (2019 Q4 - $2,836 ).
Finance costs Finance costs consist of interest expenses on operating loans, long-term debt and bank charges of $60 for 2020 Q4 versus $172 for 2019 Q4.
Finance costs lease liability The lease liability interest decreased slightly to $218 from $243 .
Foreign exchange The Company had a foreign exchange gain of $1,686 in 2020 Q4 compared to $534 in 2019 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 2020 Q4 foreign currency loss are unrealized gain of $1,678 (2019 Q4 - $554 ) related to intercompany balances.
Impairment and direct write-downs 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 .
Income tax In 2020 Q4, Cathedral derecognized $2,647 of deferred tax assets due to a recent history of tax losses within Cathedral's U.S. entity. The underlying tax attributes remain available for Cathedral to utilize.
Previously, Cathedral derecognized Canadian deferred tax assets due to a recent history of tax losses within Cathedral's Canadian entity. As a result of this, where there are losses in the Canadian entity that are not recognized as deferred taxes the effective tax rate is not meaningful.
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 – NINE MONTHS ENDED DECEMBER 31
| | | | | | | Revenues | 2020 | 2019 | | | | Canada | $ | 13,837 | $ | 26,155 | | United States | 26,737 | 94,121 | | | | Total | $ | 40,574 | $ | 120,276 |
Revenues 2020 revenues were $40,574 , which represented a decrease of $79,702 or 66% from 2019 revenues of $120,276 .
Canadian revenues (excluding motor rental revenues) decreased to $11,104 in 2020 from $23,127 in 2019; a 52% decrease. This decrease was the result of: i) a 48% decrease in activity days to 1,558 in 2020 from 3,004 in 2019 and ii) a 7% decrease in the average day rate to $7,127 in 2020 from $7,699 in 2019.
There was a 33% year-over-year decline in the average active land rig count in Canada (source: Baker Hughes) which compares to Cathedral's activity decline of 48%. Due to Cathedral's client mix, our decline was greater than the general market decline and there was very limited drilling by the Company's clients in the period from mid-March to mid-September. The decrease in day rates was due to a reduction in certain ancillary revenues.
U.S. revenues (excluding motor rental revenues) decreased 72% to $25,662 in 2020 from $92,268 in 2019. This decrease was the result of: i) a 68% decrease in activity days to 2,197 in 2020 from 6,805 in 2019; and ii) a 14% decrease in the average day rate to $11,680 in 2020 from $13,559 in 2019 (when converted to Canadian dollars).
The average active land rig count for the U.S. was down 54% in 2020 compared to 2019 (source: Baker Hughes). The Company experienced a 68% decline in activity days resulting in a decrease in market share compared to 2019. Day rates in USD decreased 15% to $8,654 USD in 2020 from $10,206 USD in 2019. The 2020 rate is down due to a decrease in revenues from change in client mix and to a lesser extent reductions in providing rotary steerable system (RSS) services which are rented from a 3rd party and a reduction in certain ancillary revenues.
Motor rentals decreased in both Canada and the U.S. Combined rental revenues decreased to $3,808 in 2020 compared to $4,882 in 2019 or 22%. The combined decrease was due to lower industry activity.
Government grants The Company recognized the benefit from the Canadian Emergency Wage Subsidy ("CEWS") program of $1,776 (2019 - $nil) and $992 (2019 - $nil) from the U.S. Paycheck Protection Program ("PPP") which reduced salary expenses as follows:
Cost of sales $1,665 ; Selling, general and administrative expenses $812 ; and Technology group expenses $291 .
Additionally, the Company received $280 (2019 - $nil) from the Canadian Emergency Rent Subsidy ("CERS"), which reduced cost of sales $221 (2019 - $nil) and selling, general and administrative $59 (2019 - $nil).
Gross margin and adjusted gross margin Gross margin for 2020 was -25% compared to -6% in 2019. Adjusted gross margin (see Non-GAAP Measurements) for 2020 was $4,869 or 12% compared to $12,234 or 10% for 2019.
Adjusted gross margin, as a percentage of revenue, increased due to decrease in rentals, repairs, field labour and inspection expenses offset by the increase in the fixed component of cost of sales as a percentage of revenue (these costs decreased $10,843 , but the total increased as percentage of revenues).
Depreciation of equipment allocated to cost of sales decreased to $14,996 in 2020 from $19,864 in 2019. Depreciation included in cost of sales as a percentage of revenue was 37% for 2020 and 17% in 2019.
Selling, general and administrative ("SG&A") expenses SG&A expenses were $8,895 in 2020; a decrease of $5,120 or 37% compared with $14,015 in 2019. There were reductions in SG&A wages and related benefits and burdens due to a reduction in head count and wage rollbacks and the government assistance received as well as decreases in almost all categories of expenses due to efforts to reduce spending. These savings were partially offset by an increase in the provision for trade receivables that are slow paying of $1,425 (2019 - $555 ). As a percentage of revenue, SG&A was 22% in 2020 compared to 12% in 2019.
Technology group expenses Technology group expenditures are related to supporting and upgrading existing technology as well as new product development. Technology group expenses consist of salaries and related benefits and burdens as well as shop supplies. Technology group activities spent on new product development are capitalized as intangible assets.