ACT Energy Technologies Ltd. press release
Cathedral Energy Services Ltd. Reports Results for 2015 Q2 and 2015 Q3 Dividend
TSX - Toronto Stock Exchange · Canada
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/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, Aug. 13, 2015/CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) announces its consolidated financial results for the three and six months ended June 30, 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 Q2 KEY TAKEAWAYS Revenues and profitability significantly affected by reduced industry activity and pricing pressures due to the decline in commodity prices;
Q2 revenues of $29,679in 2015 compared to $56,797in 2014, a 48% decline;
Year-to-date revenues of $79,756for 2015 and 2014 year-to-date revenues of $124,817, a decline of 36%;
Adjusted EBITDAS was a loss of $(1,237)in 2015 Q2 compared to $6,151in 2014 Q2 and year-to-date EBITDAS of $4,549in 2015 compared to $14,732in 2014;
Net loss of ($15,266)for the period includes $10,768write-down of tax attributes as result of settlement agreement with Canada Revenue Agency;
An amendment to our credit facility was negotiated with our lenders in the quarter to reduce overall facility size and obtain relaxation of financial covenants through to 2016 Q3;
Management continued to focus on initiatives; to reduce costs, improve margins and to better position our product offering in the market through improving our sales and marketing capabilities; and
Cathedral's proprietary directional technology and customer service focus continues to be a key factor in retaining and securing work in a challenging industry environment.
FINANCIAL HIGHLIGHTS Dollars in 000's except per share amounts
| | | | | | | | | | | | | Three months ended June 30 | Six months ended June 30 | | | | | | | | | | | 2015 | | 2014 | | 2015 | | 2014 | | | Revenues | $ | 29,679 | $ | 56,797 | $ | 79,756 | $ | 124,817 | | | Adjusted gross margin % (1) | | 11.3% | | 19.8% | | 16.9% | | 20.1% | | | | | | | | | | | | | | Adjusted EBITDAS (1) | $ | (1,237) | $ | 6,151 | $ | 4,549 | $ | 14,732 | | | | Diluted per share | $ | (0.03) | $ | 0.17 | $ | 0.13 | $ | 0.41 | | | As % of revenues | | -4% | | 11% | | 6% | | 12% | | | | | | | | | | | | | Funds from operations (1) | $ | (853) | $ | 3,767 | $ | 3,112 | $ | 11,887 | | | | Diluted per share | $ | (0.02) | $ | 0.10 | $ | 0.09 | $ | 0.33 | | | | | | | | | | | | | Earnings (loss) before income taxes | $ | (6,342) | $ | 1,023 | $ | (7,137) | $ | 3,899 | | | | Basic per share | $ | (0.17) | $ | 0.03 | $ | (0.20) | $ | 0.11 | | | Diluted per share | $ | (0.17) | $ | 0.03 | $ | (0.20) | $ | 0.11 | | | | | | | | | | | | | Write-down of deferred taxes related to CRA settlement | $ | (10,768) | $ | - | $ | (10,768) | $ | - | | | Net earnings (loss) | $ | (15,266) | $ | 253 | $ | (15,990) | $ | 2,702 | | | | Basic per share | $ | (0.42) | $ | 0.01 | $ | (0.44) | $ | 0.07 | | | Diluted per share | $ | (0.42) | $ | 0.01 | $ | (0.44) | $ | 0.07 | | | | | | | | | | | | | Dividends declared per share | $ | 0.04 | $ | 0.0825 | $ | 0.08 | $ | 0.1650 | | | | | | | | | | | | | | Property and equipment additions - cash basis | $ | 1,845 | $ | 7,062 | $ | 6,148 | $ | 16,979 | | | | | | | | | | | | | | Weighted average shares outstanding | | | | | | | | | | | | Basic (000s) | | 36,295 | | 36,230 | | 36,295 | | 36,208 | | | Diluted (000s) | | 36,295 | | 36,253 | | 36,295 | | 36,235 | | | | | | | | | | | | | | | | | | | June 30 | | December 31 | | | | | | | | | 2015 | | 2014 | | | Working capital | | | | | $ | 17,820 | $ | 38,135 | | | | | | | | | | | | | | Total assets | | | | | $ | 176,071 | $ | 230,534 | | | | | | | | | | | | | | Loans and borrowings excluding current portion | | | | | $ | 32,793 | $ | 56,142 | | | | | | | | | | | | | | Shareholders' equity | | | | | $ | 112,639 | $ | 128,368 | |
OUTLOOK
As we anticipated, 2015 Q2 was a challenging quarter for the Company from a financial performance perspective. Soft crude oil prices in the first half of the year resulted in oil and gas producers adopting a very cautious approach to their capital spending. As a consequence, North American drilling and completions activity dropped dramatically which are the key drivers of the Company's business. In Canada, an early and lengthy spring break-up compared to previous years negatively impacted Canadian operations. In the U.S. directional business we were successful in gaining new opportunities based on showing customers how our technology and services could reduce their drilling times. These new opportunities helped offset work with customers who significantly reduced their capital spending, however, we still experienced activity reductions consistent with the overall industry declines. Throughout the quarter, we continued to experience pricing pressure on our services which we were partly able to accommodate through reducing our variable costs to preserve margins, however, the impact was still muted by overall lower activity levels.
Sustained WTI pricing in the $60bbl. range through May and June, accompanied by customer indications they would be increasing their drilling and completions programs, originally supported our earlier outlook that the second half of 2015 would have higher activity levels than experienced in the first half. This outlook changed dramatically in July when oil prices rapidly declined again into the sub-$50bbl. range and into the $45bbl. range in early August. This recent drop in oil prices was driven by the Saudi strategy to maintain market share, the potential removal of sanctions against Iran, economic instability in Chinaand Greeceand indications that U.S. storage levels and production was not decreasing at the rates previously expected with lower drilling activity. The current oil price volatility and continued oil pricing in the current sub-$50bbl. range will likely delay a rebound in activity levels with the result that the outlook for the Company for the second half of the year is very uncertain at this time.
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.
In Q2 we continued our focus on cost reductions. Adjusted SG&A in 2015 Q2 was reduced a further 14% over 2015 Q1 and was reduced 23% from 2014 Q4 levels. These reductions have exceeded our initially targeted reduction in SG&A of 20%. Unfortunately the bulk of our cost reductions have had to come from workforce and compensation reductions. At the end of July, our employee count has been reduced 39% since December. Salary and wage rollbacks ranging from 5% to over 20% have been implemented at all levels in the Company. We have been able to maintain our core employee base throughout this downturn which will position us well for an eventual industry recovery. We continue to look for short and long-term efficiency and cost savings opportunities.
Our bank debt was further reduced in Q2 to $32,881from $35,000at the end of Q1 2015. We also amended our credit facility to reduce standby fees and obtained relaxation on our covenants to provide us with more financial flexibility. The amended credit facility should also support revenue growth when industry activity levels increase.
Our original capital expenditure program for 2015 was targeted at $7,000and has subsequently increased to $7,200. Our current capital expenditure focus is on upgrading our FUSION™ Measurement-While-Drilling (MWD) technology platform to incorporate next generation features and increasing the capacity of our nDURANCE® motor fleet.
Our proprietary MWD platform and motors provide our customers superior reliability and performance compared to other systems and have been a significant contributor to new sales and client retention in 2015. In 2015 we began renting our proprietary motors and Electro-Magnetic Measurement-While-Drilling ("EM-MWD") systems on a stand-alone basis. Incremental motor rental revenue in 2015 Q2 affirmed our business plan in this area. In the U.S. our EM-MWD continues to be recognized for its performance advantages in difficult formations resulting in us securing new customer opportunities with both stand-alone and packaged solutions. We are also seeing opportunities for increased application for our proprietary dual telemetry MWD system in the U.S. Our dual telemetry system allows data to be transmitted via mud pulse, electro-magnetic or both simultaneously which offers clients reduced drilling times in formation areas and situations where EM transmission signal can be temporarily disrupted.
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. Our marketing and sales efforts are much better focused on articulating our advantages to customers which has allowed us to gain work and offset pricing pressure. 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 continued to achieve records for drilling performance with customers in both Canadaand the U.S. which reinforces our customer value proposition.
As we go into the second half of 2015 we will continue to focus on the things in our business we can control, deploying our technology and expertise to assist our customers reduce their costs and continuing to demonstrate our quality, safety and integrity with our employees and customers. 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 Q3 dividend in the amount of $0.04per share which will have a date of record of September 30, 2015and a payment date of October 15, 2015.
2015 CAPITAL PROGRAM
During the six months ended June 30, 2015Company invested $6,148(2014 - $16,979) in property and equipment. The following table details the current period's net property and equipment additions:
| | | | | | | | | | Six months ended | | | | | | June 30, 2015 | | | Property and equipment additions: | | | | | | | Growth capital (1) | | $ | 4,109 | | | Maintenance capital(1) | | | 837 | | | Replacement capital (1) | | | 497 | | | Infrastructure capital(1) | | | 705 | | Total cash additions | | | 6,148 | | | Less: proceeds on disposal of property and equipment | | | (2,151) | | | Less: proceeds on disposal of land and buildings | | | (6,174) | | | Net property and equipment additions (1) | | $ | (2,177) | | | (1)See "NON-GAAP MEASUREMENTS" | | | | |
The major additions for growth capital were $2,728for additional drilling motors and related equipment for specific job requirements, $78for MWD equipment and $1,303for 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 $416related to MWD upgrades, $29for ancillary motor components, $42for production testing units and ancillary equipment, $181for automobiles and $169related to shop, office and computer equipment additions.
Cathedral's 2015 capital budget has increased slightly from $7,000to $7,200which includes $4,700of growth capital, $1,700of maintenance and replacement capital and $800of infrastructure expenditures.
Cathedral intends to finance its 2015 capital budget from proceeds from the Oklahoma Cityfacility sale and leaseback, proceeds from redundant asset sales and recoveries from tools lost-in-hole and if necessary, its existing credit facility.
The following is a summary of major equipment owned by the Company:
| | | | | | | June 30 | December 31 | June 30 | | | 2015 | 2014 | 2014 | | Directional drilling - MWD systems | 140 | 140 | 140 | | Production testing units | 66 | 66 | 66 |
RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 30
| | | | | | | | | | | | | | | | | Three months ended June 30, 2015 | | Three months ended June 30, 2014 | | | | | | | | | | | | | | Directional | | Production | | | | | Directional | | Production | | | | Revenues | | drilling | | testing | | Total | | | drilling | | testing | | Total | | Canada | $ | 6,629 | $ | 2,936 | $ | 9,565 | | $ | 12,821 | $ | 7,991 | $ | 20,812 | | United States | | 15,290 | | 4,824 | | 20,114 | | | 28,636 | | 7,349 | | 35,985 | | Total | $ | 21,919 | $ | 7,760 | $ | 29,679 | | $ | 41,457 | $ | 15,340 | $ | 56,797 |
Revenues2015 Q2 revenues were $29,679which represented a decrease of $27,118or 48% from 2014 Q2 revenues of $56,797. All divisions experienced decreases compared to 2014 Q2. In 2015 Q1 there was an industry wide activity decline due to reductions in commodity prices and day rate decreases directly related to pricing concessions granted to customers due to market conditions. These declines continued into 2015 Q2, which also had the impact of an early spring break-up for Canadian operations. 2014 Q2 saw several divisions achieve record revenues. U.S. directional drilling achieved an all-time quarterly record for revenues and Canadian directional drilling and Canadian production testing had records for Q2 revenues. The active land rig count for both Canadaand U.S. was down approximately 51% in 2015 Q2. Canadian wells completed fell approximately 62% in 2015 Q2 compared to 2014 Q2. Land rig count is a key driver of activity levels in the directional drilling industry and wells completed is a key driver for production testing industry.
Canadian directional drilling revenues decreased to $6,629in 2015 Q2 from $12,821in 2014 Q2; a 48% decrease. This decrease was the result of: i) a 47% decrease in activity days to 522 in 2015 Q2 from 987 in 2014 Q2; and ii) a 20% decrease in the average day rate to $10,370in 2015 Q2 from $12,941in 2014 Q2. Offsetting these declines was an increase of $1,168on the rental of Cathedral's CLAW mud motor for 2015 Q2 revenues of $1,216.
U.S. directional drilling revenues decreased to $15,290in 2015 Q2 from $28,636in 2014 Q2; a 47% decrease. This decrease was the result of: i) a 45% decrease in activity days to 1,254 in 2015 Q2 from 2,264 in 2014 Q2; and ii) a 4% decrease in the average day rate to $12,022in 2015 Q2 from $12,517in 2014 Q2 (when converted to Canadian dollars). All U.S. districts experienced a decrease in activity levels except the Northeast district which added a significant customer in the last year. The U.S. average day rates in Canadian dollars decreased slightly due to the stronger U.S. dollar. Rates in USD fell to $9,784 USDin 2015 Q2 from $11,480 USDin 2014 Q2, a 15% decline.
Canadian production testing revenues decreased to $2,936in 2015 Q2 from $7,991in 2014 Q2; a 63% decrease. The decrease was due to the reduction in operating days due to the industry downturn.
U.S. production testing revenues decreased to $4,824in 2015 Q2 from $7,349in 2014 Q2, a 34% decrease. The decrease was due to the reduction in operating days due to the industry downturn.
Gross margin and adjusted gross margin Gross margin for 2015 Q2 was (6.1%) compared to 11.4% in 2014 Q2. Adjusted gross margin (see Non-GAAP Measurements) for 2015 Q2 was $3,355or 11.3% compared to $11,220or 19.8% for 2014 Q2, a decline of 8.5%.
The Company implemented a number of cost reductions in 2015 Q1 which included reductions for external services and for field, support and office staff, including work force adjustments and wage rollbacks. Overall costs were lower than in 2014 Q2, but higher as a percentage of revenue basis. The revenue day rate declines for directional drilling divisions, especially Canadian operations, resulted in lower gross margin despite the cost reductions.
Although there was a reduction in the fixed component of direct cost of sales of 23% compared with 2014 Q2, the overall impact of these costs on margins was greater in 2015 Q2 due to the reduction in revenues. On a percentage of revenue basis the fixed costs increased 7.1% from 2014 Q2. As stated above, the 2015 Q2 adjusted gross margin had decreased by 8.5%, the remaining 1.1% reduction in adjusted gross margin relates to increases in repairs offset by reductions in field labour.
Depreciation allocated to cost of sales increased to $5,134in 2015 Q2 from $4,733in 2014 Q2. Depreciation included in cost of sales as a percentage of revenue was 17.3% for 2015 Q2 and 8.3% in 2014 Q2.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $4,724in 2015 Q2; a decrease of $1,467compared with $6,191in 2014 Q2.
Adjusted SG&A (see Non-GAAP Measurements) was $4,621in 2015 Q2 compared to $6,255in 2014 Q2, a decrease of $1,634or 26%. As a percentage of revenue, adjusted SG&A was 16% in 2015 Q2 and 11% in 2014 Q2. Adjusted SG&A decreased primarily due to work force reductions, wage rollbacks and reduction in variable compensation. SG&A wage rollbacks were implemented February 1, 2015at a range of 5% to 15% with an average reduction of 10%. 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 equipmentDuring 2015 Q2, the Company had a gain on disposal of property and equipment of $135compared to $880in 2014 Q2. 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 gain of $543in 2015 Q2 compared to $478in 2014 Q2 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 Q2 foreign currency gains are unrealized gains of $647(2014 Q2 - $332) related to intercompany balances.
Finance costs Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $446for 2015 Q2 versus $606for 2014 Q2. 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 Q2, the Company had net income tax expense of $8,924compared to $770in 2014 Q2. Included in the 2015 Q2 amount is a charge to earnings of $10,768related to a write-off of a portion of the tax attributes obtained as part of the December 18, 2009conversion from an income trust to a corporation ("Conversion"). On April 21, 2015, the Company received a proposal letter from the Canada Revenue Agency ("CRA") which disclosed its intention to challenge all of the tax attributes obtained as part of the Conversion under the general anti-avoidance rules of the Income Tax Act (Canada). Subsequently, Cathedral elected to enter into the agreement with CRA as a highly satisfactory solution to avoid potential costly and time consuming legal proceedings and allow management to focus its efforts on business operations and enhancing shareholder value. The CRA agreement will not give rise to any cash outlay by Cathedral for prior taxation years. Cathedral continues to have access to a portion of the tax attributes obtained as part of the Conversion to offset federal and provincial taxes in subsequent taxation years.