ACT Energy Technologies Ltd. press release
Cathedral Energy Services Reports Results for 2019 Q4
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
CALGARY, March 12, 2020
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, March 12, 2020/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, 2019and 2018. 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 | | | | | | | | | 2019 | 2018 | 2019 | 2018 | | | | | | Revenues | $ | 19,299 | $ | 43,127 | $ | 120,276 | $ | 160,827 | | Adjusted gross margin % (1) | 9% | 15% | 10% | 11% | | | | | | Adjusted EBITDAS (1) | $ | (702) | $ | 3,412 | $ | 3,887 | $ | 12,060 | | Basic and diluted per share | $ | (0.01) | $ | 0.07 | $ | 0.08 | $ | 0.24 | | As % of revenues | -4% | 8% | 3% | 7% | | | | | | Cash flow - operating activities | $ | (102) | $ | 3,405 | $ | 4,785 | $ | 3,732 | | Earnings (loss) before income taxes | $ | (6,332) | $ | (6,106) | $ | (18,717) | $ | (6,139) | | Basic and diluted per share | $ | (0.13) | $ | (0.12) | $ | (0.38) | $ | (0.12) | | De-recognition of deferred tax asset | $ | - | $ | (13,059) | $ | - | $ | (13,059) | | Net earnings | $ | (6,068) | $ | (17,858) | $ | (19,187) | $ | (17,061) | | Basic and diluted per share | $ | (0.12) | $ | (0.36) | $ | (0.39) | $ | (0.35) | | Equipment additions - cash basis | $ | 2,836 | $ | 2,201 | $ | 8,726 | $ | 12,877 | | Weighted average shares outstanding | | | | | | | | | | Basic (000s) | 49,468 | 49,468 | 49,468 | 49,445 | | | | | | Diluted (000s) | 49,468 | 49,469 | 49,522 | 49,547 | | | | | | | | | | | | | | | | | | | December 31 | December 31 | | | | | | | | | 2019 | 2018 | | | | | | Working capital | | | $ | 20,181 | $ | 30,599 | | | | Total assets | | | $ | 106,300 | $ | 121,770 | | | | Loans and borrowings excluding current portion | | | $ | 6,000 | $ | 7,000 | | | | Shareholders' equity | | | $ | 68,092 | $ | 89,143 | | | | | | | | | | | | | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | | | | |
2019 Q4 KEY TAKEAWAYS
Revenues decreased by $23,828or 55% from $43,127in 2018 Q4 to $19,299in 2019 Q4;
Adjusted gross margin decreased from 15% to 9% primarily due to an increase in equipment rentals and the fixed component of cost of sales, offset by a decrease in repairs;
Total Adjusted EBITDAS decreased $4,114, from $3,412to $(702)in 2019 Q4 as a result of reduced adjusted gross margin, and additional SG&A expenses occurring in Q4;
Cathedral commercialized our next generation of our FUSION™ Dual Telemetry Measurement-While-Drilling ("MWD") tool and our Linear Pulse ("LP") tool; and
Cathedral has also commercialized a specialized series of its nDurance™ performance drilling motors which are targeted for Rotary Steerable System ("RSS") applications.
OUTLOOK
Since the start of 2020, oil prices have weakened significantly as a consequence of the softening of global demand associated with COVID 19 virus and by the recent failure to reach a cut in oil supply from OPEC+ which was followed up by Saudi Arabiaannouncement that they intended to significantly increase oil production. These two items have resulted in oil prices and global equity markets being under pressure. For North American producers and oilfield services companies, the issue is now the extent and duration of this collapse in oil prices. Since January 1, 2020, WTI has declined from approximately USD$61to USD$31; a decline of 49%. In response the decline in WTI, many North American producers have already announced materially reductions in their capital budgets for 2020.
Cathedral is focused on rebuilding of our U.S. business which will be guided by the new management team that was put in place in mid to late 2019 and into early 2020. Our focus is on our job execution, use of our proprietary technology and providing such quality services at a fair price – all centered around our strategy of building a business around our mantra of "Better Performance Every Day".
Our strategy in Canadais to maintain the optionality on future industry growth through focusing on serving stronger customers in areas we have advantages in, maintaining a focused and lean cost structure and again leveraging our differentiated technology advantages in the Canadian market.
For 2020, our technology focus will be bringing to the market our RapidFire™ MWD platform which commenced initial successful field trials in December 2019. RapidFire is capable of transmitting data simultaneously via pulse and electro-magnetic ("EM"), allowing for high data rates and higher reliability through redundancy. In addition, 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. The second phase to be released later in 2020 will offer a retrievable downhole generator which will reduce operating costs and allow for high power EM transmission on extended run applications.
Our 2020 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 $2.5 million(depending on level of lost-in-hole proceeds). Focus of 2020 capital plan will be motor power section additions for premium lines, addition of RapidFire MWD tools and mud lube bearing motor upgrades. Our capital plan will be reviewed quarterly and adjusted depending on activity levels.
We will continue to focus on what we can control – costs, improving operational efficiencies, bringing new technologies to the market and strategic sales and marketing of our offerings.
RESULTS OF OPERATIONS – THREE MONTHS ENDED DECEMBER 31
Effective January 1, 2019, the Company adopted IFRS 16 Leases ("IFRS 16") (see discussion under "New Accounting Policies"). As a result of this new accounting policy, which was adopted retrospectively without restatement of comparative results, expenditures which previously were reported as cost of sales ("COS") or selling, general and administrative ("SG&A") expenses are now classified as lease liability obligation repayments and finance costs (interest expense) and the related right of use asset is depreciated against net income on a straight-line basis. As finance costs and depreciation are excluded from Adjusted EBITDAS (refer to Non-GAAP measurements), Adjusted EBITDAS for the three months ended December 31, 2019was higher in comparison to 2018 in the amount of $806as a result of the IFRS 16 changes discussed previously. Previously this amount was classified as rent expense (being $665in COS amounts and $141in SG&A amounts).
| | | | | | | Revenues | 2019 Q4 | 2018 Q4 | | | | Canada | $ | 6,815 | $ | 8,146 | | United States | 12,484 | 34,981 | | | | Total | $ | 19,299 | $ | 43,127 |
Revenues 2019 Q4 revenues were $19,299, which represented a decrease of $23,828or 55% from 2018 Q4 revenues of $43,127.
Canadian revenues (excluding motor rental revenues) decreased to $6,167in 2019 Q4 from $7,705in 2018 Q4; a 20% decrease. This decrease was the result of: i) a 14% decrease in activity days to 782 in 2019 Q4 from 912 in 2018 Q4 and ii) an 7% decrease in the average day rate to $7,886in 2019 Q4 from $8,449in 2018 Q4.
There was a 22% year-over-year decline in the average active land rig count in Canada(source: Baker Hughes) and as Cathedral's activity decline was only 20%, there was a slight increase in market share in Canada.
U.S. revenues (excluding motor rental revenues) decreased 65% to $11,986in 2019 Q4 from $34,573in 2018 Q4. This decrease was the net result of: i) a 66% decrease in activity days to 901 in 2019 Q4 from 2,677 in 2018 Q4; net of ii) a 3% increase in the average day rate to $13,303in 2019 Q4 from $12,915in 2018 Q4 (when converted to Canadian dollars).
The average active land rig count for the U.S. was down 23% in 2019 Q4 compared to 2018 Q4 (source: Baker Hughes). The Company experienced a 66% decline in activity days resulting in a decrease in market share compared to 2018 Q4. This decline was related to reductions in clients' drilling programs to stay within their cash flow, financial restructuring by certain clients that caused them to pause or cancel programs, as well as loss of work related to pricing. Due to Cathedral's client mix, our decline exceeded the general market decline. Day rates in USD increased 3% to $10,079 USDin 2019 Q4 from $9,760 USDin 2018 Q4. The 2019 Q4 rate is up due to an increase in revenues from providing RSS services which are rented from a 3rd party.
Motor rentals increased in both Canadaand U.S. Combined rental revenues increased to $1,146in 2019 Q4 compared to $849in 2018 Q4. The increase is due to the increased availability of motors for rental due to less full service work being performed and the fact that Cathedral's nDurance drilling motors are noted for their reliability and drilling performance.
Gross margin and adjusted gross marginGross margin for 2019 Q4 was -19% compared to -1% in 2018 Q4. Adjusted gross margin (see Non-GAAP Measurements) for 2019 Q4 was $1,761or 9% compared to $6,310or 15% for 2018 Q4.
Adjusted gross margin, as a percentage of revenue, decreased due to increased rentals as a percentage of revenue (actual rental costs were down year-over-year) and increased fixed component of cost of sales as a percentage of revenue (the amount was down, but not as percentage of revenues). The increases were partially offset by lower equipment repair costs.
Depreciation of equipment allocated to cost of sales increased slightly to $5,443in 2019 Q4 from $5,304in 2018 Q4. Depreciation included in cost of sales as a percentage of revenue was 28% for 2019 Q4 and 12% in 2018 Q4.
Write-down of inventory The Company made a provision related to slow moving and obsolete inventory used to service equipment of $1,474in 2018 Q4. There was no write-down in 2019 Q4. For 2018, the impacted inventory was used to service older revisions to tools that are obsolete as well as tools that have had lower demand since the industry down-turn. The tools with lower demand are primarily legacy non-proprietary motors that are being used less and less each year.
Selling, general and administrative ("SG&A") expensesSG&A expenses were $3,817in 2019 Q4; a decrease of $888compared with $4,705in 2018 Q4. As a result of the implementation of IFRS 16, there was a decrease of $141related to amounts previously classified as rent expense, but currently classified as lease liability repayments and finance costs (interest). The Company recognized a bad debt of $562related to a U.S. customer who entered Chapter 11 process. Additionally, there were reductions in SG&A wages and related benefits and burdens due to a reduction in head count. As a percentage of revenue, SG&A was 20% in 2019 Q4 compared to 11% in 2018 Q4.
Technology group expensesTechnology 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. Technology group activities spent on new product development are capitalized as intangible assets. Total technology group costs were $700in 2019 Q4; a decrease of $254compared with $954in 2018 Q4. The portion of total technology group costs related to new product development was $171and this amount has been capitalized as intangible assets (2018 Q4 - $214). Technology group costs not related to new product development were $529in 2019 Q4; a decrease of $211compared with $740in 2018 Q4. Technology group costs decreased primarily due to reduction in staffing.
Gain on disposal of equipmentDuring 2019 Q4, the Company had a gain on disposal of equipment of $1,596compared to $1,789in 2018 Q4. 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 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 2019 Q4, the Company received proceeds on lost-in-hole recoveries from clients of $2,836(2018 Q4 - $2,201).
Finance costs Finance costs consist of interest expenses on operating loans, long-term debt and bank charges of $172for 2019 Q4 versus $181for 2018 Q4.
Finance costs lease liability Increase is related to the adoption of IFRS 16 (see discussion under "New and Future Accounting Policies") effective January 1, 2019.
Foreign exchange The Company had a foreign exchange gain of $534in 2019 Q4 compared to a loss of $(1,745)in 2018 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 2019 Q4 foreign currency loss are unrealized gain of $554(2018 Q4 - loss of $1,814) related to intercompany balances.
Income taxIn 2018 Q4, Cathedral derecognized $13,059of 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 26.5% for Canadaand 23% for the U.S.
RESULTS OF OPERATIONS – YEAR ENDED DECEMBER 31
Adjusted EBITDAS for the year ended December 31, 2019was higher in comparison to 2018 in the amount of $3,080. Previously this amount was classified as rent expense (being $2,562in COS amounts and $518in SG&A amounts).
| Revenues | 2019 | 2018 | | | | Canada | $ | 26,155 | $ | 31,123 | | United States | 94,121 | 129,704 | | | | | | | | | | Total | $ | 120,276 | $ | 160,827 |
Revenues 2019 revenues were $120,276, which represented a $40,551decrease or 25% from 2018 revenues of $160,827.
Canadian revenues (excluding motor rental revenues) decreased to $23,127in 2019 from $28,495in 2018; a 19% decrease. This decrease was the result of: i) a 15% decrease in activity days to 3,004 in 2019 from 3,541 in 2018; and ii) a 4% decrease in the average day rate to $7,699in 2019 from $8,047in 2018.
The average active land rig count in Canadadeclined 27% in 2019 compared to 2018 (source: Baker Hughes). The decrease in the Company activity days of 15% resulted in the Company gaining market share. The decreases in day rates was in part due to market pressures to reduce work as industry activity declined and in part due to the mix of work performed.
U.S. revenues (excluding motor rental revenues) decreased to $92,268in 2019 from $128,206in 2018; a 28% decrease. This decrease was the net result of: i) a 34% decrease in activity days to 6,805 in 2019 from 10,382 in 2018; and ii) a 10% increase in the average day rate to $13,559in 2019 from $12,349in 2018 (when converted to Canadian dollars).
The average active land rig count for the U.S. was down 8% in 2019 compared to 2018 (source: Baker Hughes). The Company experienced a 35% decline in activity days resulting in a decrease in market share compared to 2018. This decline was related to reductions in clients' drilling programs to stay within their cash flow, financial restructuring by certain clients that caused them to pause or cancel programs, as well as loss of work related to pricing. Due to Cathedral's client mix, our decline exceeded the general market decline. Day rates in USD increased 7% to $10,206 USDin 2019 from $9,515 USDin 2018. The 2019 rate is up due to an increase in revenues from providing RSS services which are rented from a 3rd party.
Motor rentals increased in both Canadaand U.S. Combined rental revenues increased to $4,881in 2019 compared to $4,126in 2018, an 18% increase. The increase is due to increased availability of motors for rental due to less full service work being performed and the fact that Cathedral's nDuranceTMdrilling motors are noted for their reliability and drilling performance.
Gross margin and adjusted gross margin Gross margin for 2019 was -6% compared to 2% in 2018. Adjusted gross margin (see Non-GAAP Measurements) for 2019 was $12,234or 10% compared to $18,391or 11% for 2018.
The decrease in adjusted gross margin was due to increases in equipment rental expense and an increase in the fixed component of cost of sales. While management has reduced the total amount of fixed cost component of costs of sales (mainly due to headcount reductions) to take into consideration the decline in activity levels it increased as a percentage of revenue. Partially offsetting these amounts were reductions in equipment repairs. Depreciation of equipment allocated to cost of sales increased to $19,864in 2019 from $12,719in 2018 due to changes in estimated of useful lives made effective October 1, 2018. Depreciation included in cost of sales as a percentage of revenue was 17% for 2019 and 8% in 2018.
Write-down of inventory The Company made a provision related to slow moving and obsolete inventory used to service equipment of $1,474in 2018. There was no write-down in 2019. For 2018, the impacted inventory was used to service older revisions to tools that are obsolete as well as tools that have had lower demand since the industry down-turn. The tools with lower demand are primarily legacy non-proprietary motors that are being used less and less each year.
Selling, general and administrative ("SG&A")expenses SG&A expenses were $13,859in 2019; a decrease of $1,837compared with $15,696in 2018. As a result of the implementation of IFRS 16, there was a decrease of $518related to amounts previously classified as rent, but currently classified as lease liability repayments and finance costs (interest). The Company recognized a bad debt of $562related to a U.S. customer who entered Chapter 11 process. Additionally, there were reductions in SG&A wages and related benefits and burdens. As a percentage of revenue, SG&A was 12% in 2019 compared to 10% in 2018.
Technology group expensesTechnology 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. Technology group activities spent on new product development are capitalized as intangible assets. Total technology group costs were $3,333in 2019; a decrease of $92compared with $3,425in 2018. The portion of total technology group costs related to new product development was $965and this amount has been capitalized as intangible assets (2018 - $944). Technology group costs not related to new product development were $2,368in 2019; a decrease of $113compared with $2,481in 2018.
Gain on disposal of equipmentDuring 2019, the Company had a gain on disposal of equipment of $6,005compared to $10,623in 2018. These gains mainly related 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 and amount of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter. In 2019, the Company received proceeds from clients on lost-in-hole recoveries of $8,726(2018 - $12,877).