ACT Energy Technologies Ltd. press release

Cathedral Energy Services Reports Results for 2021 Q3

2021-11-10

TSX - Toronto Stock Exchange · Canada · Corporate Finance

Canada NewsWire

/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA /

CALGARY, AB , Nov. 9, 2021 /CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral") (TSX: CET) announces its consolidated financial results for the three and nine months ended September 30, 2021 and 2020.

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.

2021 Q3 KEY TAKEAWAYS

The Company completed the acquisition of Precision Drilling Corporation's directional drilling business and the assets of Valiant Energy Services Ltd. and these acquisitions along with internally generated growth increased the Company's Canadian market share to average 17.7% in 2021 Q3; As part of the Precision Drilling acquisition, the Company completed a marketing alliance with Precision; The capital program increased from $6,000 to $9,000 in part due to the investment of $3,000 from the Precision acquisition; The Company executed on its plan to deliver RapidFire TM Measurement-While-Drilling ("MWD") systems in both Canada and U.S.; Revenues increased by $15,137 or 303% from $4,990 in 2020 Q3 to $20,127 in 2021 Q3; Adjusted gross margin increased from 20% to 27%; Adjusted EBITDAS increased from $84 to $5,170 . This was the highest quarterly Adjusted EBITDAS since 2018 Q3; Cathedral posted positive net income of $403 , which was the first quarterly net income since 2018 Q3; These were the first results of the Company's plan to increase size and scale and a change in trajectory and strategic direction with a new leadership team in place.

PRESIDENT'S MESSAGE

Comments from President & CEO Tom Connors :

2021 Q3 was a pivotal inflection point for Cathedral, marking the shift to a much more positive trajectory going forward, both operationally and financially. Our Company generated Adjusted EBITDAS of approximately $5,200 for the period, our highest quarterly figure since the third quarter of 2018. This was accompanied by positive net income and was all driven by the core directional drilling and motor rental businesses, not one-time adjustments or significant lost-in-hole revenues.

We believe the existing market fundamentals will provide for a sustained period of increased demand for our services and higher levels of activity and utilization. Strong oil and natural gas prices, robust cash flows and balance sheets for E&P companies combined with an improved market structure in Canada and declining inventories of drilled but uncompleted wells in the US, indicate improving market conditions in both of our key markets. Further, as we continue to progress through the early stages of a market recovery we anticipate a more constructive pricing environment for the supply of our services due to constraints imposed by tight local labour markets and bottlenecks created by global supply chains.

In Canada , the combination and integration of two key acquisitions in the quarter firmly established Cathedral as a top three directional drilling contractor in the market. We grew our market share substantially in the quarter with up to 29 jobs running at certain times and an overall average market share of 17.7%, representing a 590% increase over the same quarter in the prior year. The growth in activity also led to improved margins and higher levels of Adjusted EBITDAS in the quarter. With a further increase in drilling days anticipated in 2022, we expect a continued expansion in our job count as we maintain or grow our portion of the market.

Our acquisition of Precision Drilling Corporation's ("PD") directional assets in the quarter enabled the addition of a complementary customer base and increased access to an expanded client list through our joint marketing alliance with a credible, reputable partner for North America. Cathedral was also able to purchase the assets of Valiant Energy Services Ltd. and secure the key leadership of this top tier private directional driller. This transaction has delivered immediate value to our business as they continue to deliver reliable performance and high levels of utilization.

We believe accretive acquisitions are a key cornerstone of our strategy to expand our size and scale and provide much needed consolidation in a fragmented marketplace. These first two acquisitions demonstrate the transformative nature of the right transactions and the evolution of our company will continue as we explore more opportunities that enhance our value proposition.

The USA operations are steadily improving under the new leadership and sales teams, who are focused on leveraging our premium motor and MWD technologies, differentiating through superior performance and service, and identifying further opportunities for expansion through smart, accretive acquisitions. The marketing alliance is already demonstrating value in our US market with immediate incremental work provided by two PD turnkey opportunities.

Technology is a cornerstone of our competitive advantage as we continue to invest meaningfully in our business with a capital budget of $9,000 for 2021. We are on schedule to execute on our plan to deliver 18 RapidFire TM Measurement-While-Drilling ("MWD") systems by year end and have already deployed several systems successfully in both of our core markets. In response to customer demand for technology that places the sensor readings closer to the drill bit, we expect to build out 25 REACT drilling motors in the coming weeks and months. This motor will reduce gamma and survey points by 5-6 meters and is ideal for thin target zones like those found in the Clearwater and Viking formations. Finally, over the longer term our marketing alliance with PD will also focus on areas where we can jointly utilize or develop technology to differentiate our service offering in the marketplace.

Financial flexibility is a key element for our ongoing technology build-out, as well as executing these previous acquisitions and contemplating potential targets in the future. To that end, the Company renewed its bank facility in late 2021 Q2 on traditional market terms and has access to its full capacity going forward. This will ensure the Company can continue to explore and execute on organic growth and accretive consolidation opportunities.

This quarter is clear evidence of Cathedral's ability to deliver on our ongoing strategy of achieving size and scale via technology expansion, organic growth and mergers & acquisitions. And provided these positive macroeconomic factors persist, I am confident we have the people, the operations, and the financing to maintain this momentum into Q4 and beyond.

2021 ACQUISITIONS

On July 23, 2021 , the Company announced the closing of Cathedral's acquisition of Precision Drilling Corporation's ("Precision") directional drilling business (the "Transaction") for a purchase price of $6,350 . The Transaction includes the operating assets and personnel of Precision's directional drilling business (including its operations facility in Nisku, Alberta ), and a $3,000 cash investment by Precision to support growth and expansion of Cathedral, including continuing the buildout of RapidFire TM measurement-while-drilling guidance systems and nDurance TM drilling motors. Additionally, the Transaction is expected to enhance margins as expenses related to rental equipment used by Precision are replaced with proprietary Cathedral tools.

Cathedral issued 13,400,000 common shares (the "Consideration Shares") along with warrants to purchase an additional 2,000,000 common shares of Cathedral at a price of $0.60 per common share within a two-year period after closing. 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% of the Consideration Shares are restricted until January 22, 2022 ; a further 25% of the Consideration Shares are restricted until July 22, 2022 ; and a further 50% of the Consideration Shares are restricted until July 22, 2023 , subject to certain exceptions.

The Company has allocated the $6,350 purchase as follows:

Cash $3,000 Land and building $1,500 ; and Equipment $$1,850.

The Company has expensed $139 in costs related to the Transaction. As the acquired assets were integrated into Cathedral's existing directional drilling operations it is impracticable to break-out the revenue and profit or loss of the acquired assets since the acquisition.

As part of the Transaction, Cathedral and Precision have entered into a strategic marketing alliance (the "Alliance"), which is expected to produce new U.S. and Canadian customer opportunities for Cathedral as well as potential integrated service offerings for customers. The Alliance is expected to support both parties' technology initiatives and lead the future of directional drilling. Precision's market leading Alpha TM digital technologies (AlphaApps, AlphaAutomation and AlphaAnalytics) are focused on automation and drilling performance and pair well with Cathedral's premium proprietary downhole equipment and directional drilling expertise.

In addition, on September 7, 2021 the Company completed the acquisition of the operating assets of Valiant Energy Services Ltd. ("Valiant"), an Alberta -based directional drilling company, for a purchase price of $1,500,000 . The purchase price was satisfied through the issuance of 3,464,204 common shares of Cathedral to Valiant. These shares will be subject to a 4-month statutory hold period. The Company has expensed $41 in costs related to this acquisition. The principal owner of Valiant, Mr. Vaugn Spengler , has entered into a long-term performance-based agreement to remain with Cathedral and will continue to focus on opportunities to support and expand the existing customer base.

FINANCIAL HIGHLIGHTS

| | Three months ended September 30 | Nine months ended September 30 | | | | | | | | | 2021 | 2020 | 2021 | 2020 | | | | | | Revenues | $ | 20,127 | $ | 4,990 | $ | 38,814 | $ | 33,126 | | Adjusted gross margin % (1) | 27% | 20% | 18% | 11% | | | | | | Adjusted EBITDAS (1) | $ | 5,170 | $ | 84 | $ | 3,305 | $ | 319 | | Basic and diluted per share | $ | 0.07 | $ | - | $ | 0.05 | $ | 0.01 | | As % of revenues | 26% | 2% | 9% | 1% | | | | | | Cash flow - operating activities | $ | (1,800) | $ | 3,544 | $ | (4,100) | $ | 960 | | Income (loss) from operating activities | $ | 1,377 | $ | (4,448) | $ | (6,874) | $ | (13,594) | | Basic and diluted per share | $ | 0.02 | $ | (0.09) | $ | (0.11) | $ | (0.27) | | Imapairments and direct write-downs | $ | - | $ | - | $ | - | $ | (6,994) | | Net income (loss) | $ | 403 | $ | (5,014) | $ | (7,529) | $ | (21,419) | | Basic and diluted per share | $ | 0.01 | $ | (0.10) | $ | (0.13) | $ | (0.43) | | Equipment additions | $ | (1,471) | $ | (556) | $ | (2,799) | $ | (1,325) | | Weighted average shares outstanding | | | | | | | | | | Basic (000s) | 74,425 | 49,468 | 59,920 | 49,468 | | | | | | Diluted (000s) | 75,359 | 49,468 | 60,420 | 49,468 | | | | | | | | | | | | | | | | | | | September 30 | December 31 | | | | | | | | | 2021 | 2020 | | | | | | Working capital | | | $ | 13,757 | $ | 7,680 | | | | Total assets | | | $ | 73,783 | $ | 64,280 | | | | Loans and borrowings excluding current portion | | | $ | 3,430 | $ | 1,560 | | | | Shareholders' equity | | | $ | 43,648 | $ | 39,974 | | | | | | | | | | | | | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | | | | |

RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30

| Revenues | 2021 | 2020 | | | | Canada | $ | 16,118 | $ | 1,328 | | United States | 4,009 | 3,662 | | | | Total | $ | 20,127 | $ | 4,990 |

Revenues 2021 Q3 revenues were $20,127 , which represented an increase of $15,137 or 303% from 2020 Q3 revenues of $4,990 .

Canadian revenues (excluding motor rental revenues) increased to 15,210 in 2021 Q3 from $848 in 2020 Q3; a 1,694% increase. This increase was the result of: i) a 1,682% increase in activity days to 2,067 in 2021 Q3 from 116 in 2020 Q3 and ii) a 1% increase in the average day rate to $7,359 in 2021 Q3 from $7,309 in 2020 Q3.

Based on publicly disclosed Canadian drilling and directional drilling days, Cathedral's market share for 2021 Q3 was 17.7% compared to 3.0% in 2020 Q3.

U.S. revenues (excluding motor rental revenues) decreased 1% to $3,269 in 2021 Q3 from $3,301 in 2020 Q3. This decrease was the result of: i) a 6% increase in activity days to 367 in 2021 Q3 from 346 in 2020 Q3; net of ii) a 7% decrease in the average day rate to $8,906 in 2021 Q3 from $9,541 in 2020 Q3 (when converted to Canadian dollars).

The average active land rig count for the U.S. was up 100% in 2021 Q3 compared to 2020 Q3 (source: Baker Hughes). The Company experienced a 5% decline in activity resulting in a decrease in market share compared to 2020 Q3. Day rates in USD decreased 1% to $7,072 USD in 2021 Q3 from $7,159 USD in 2020 Q3.

Motor rentals increased in both Canada and the U.S. Combined rental revenues increased to $1,648 in 2021 Q3 compared to $841 in 2020 Q3. Rentals were up due to the industry increase in drilling activity.

Government grants The Company recognized the benefit from the Canada Emergency Wage Subsidy ("CEWS") program of $259 (2020 - $741 ) and in 2020 Q3 $992 from the U.S. Paycheck Protection Program ("PPP") (2021 Q3 - $nil) which reduced salary expenses as follows:

Cost of sales $154 (2020 - $1,271 ); Selling, general and administrative expenses $84 (2020 - $394 ); and Technology group expenses $21 (2020 - $122 ).

Additionally, the Company received $133 (2020 - $nil) from the Canadian Emergency Rent Subsidy ("CERS"), which reduced cost of sales $110 (2020 - $nil) and selling, general and administrative $23 (2020 - $nil).

The 2021 Q3 CEWS and CERS claims were at reduced levels due to the increase in revenues in 2021 Q3.

Gross margin and adjusted gross margin Gross margin for 2021 Q3 was 10% compared to -50% in 2020 Q3. Adjusted gross margin (see Non-GAAP Measurements) for 2021 Q3 was $5,365 or 27% compared to $1,021 or 20% for 2020 Q3.

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 field labour expenses and rentals. During 2021 Q3, the Company revised its repair process and this resulted in lower repair costs.

Depreciation of equipment allocated to cost of sales decreased to $3,337 in 2021 Q3 from $3,520 in 2020 Q3. Depreciation included in cost of sales as a percentage of revenue was 17% for 2021 Q3 and 71% in 2020 Q3.

Selling, general and administrative ("SG&A") expenses SG&A expenses were $2,209 in 2021 Q3; an increase of $10 compared with $2,199 in 2020 Q3. There were increases in SG&A wages, commissions and reduced CEWS grants partially offset by reduction in bad debts. As a percentage of revenue, SG&A was 11% in 2021 Q3 compared to 44% in 2020 Q3.

Technology group expenses Technology group expenses were $183 in 2021 Q3; an increase of $106 compared with $77 in 2020 Q3. 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 on disposal of equipment During 2021 Q3, the Company had a gain on disposal of equipment of $1,773 compared to $344 in 2020 Q3. 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 2021 Q3, the Company received proceeds on disposal of equipment of $1,980 (2020 Q3 - $633 ).

Finance costs Finance costs consisting of interest expenses on loans and borrowings and bank charges were $60 for 2021 Q3 versus $113 for 2020 Q3.

Finance costs lease liability The lease liability interest decreased slightly to $195 from $223 .

Foreign exchange The Company had a foreign exchange loss of ($719) in 2021 Q3 compared to a gain of $614 in 2020 Q3 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 2021 Q3 foreign currency loss are unrealized loss of $692 (2020 Q3 – gain of $611 ) related to intercompany balances.

Income tax Previously, Cathedral derecognized deferred tax assets due to a recent history of tax losses within both of Cathedral's legal entities. 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 SEPTEMBER 30

| Revenues | 2021 | 2020 | | | | Canada | $ | 27,426 | $ | 9,794 | | United States | 11,388 | 23,332 | | | | Total | $ | 38,814 | $ | 33,126 |

Revenues 2021 revenues were $38,841 , which represented an increase of $5,688 or 17% from 2020 revenues of $33,126 .

Canadian revenues (excluding motor rental revenues) increased to $25,633 in 2021 from $7,363 in 2020; a 249% increase. This increase was the net result of: i) a 267% increase in activity days to 3,683 in 2021 from 1,005 in 2020 and ii) an 5% decrease in the average day rate to $6,968 in 2021 from $7,327 in 2020.

Based on publicly disclosed Canadian drilling and directional drilling days, Cathedral's market share for 2021 was 12.7% compared to 5.5% in 2020. The decrease in day rates was due to a reduction in certain ancillary revenues.

U.S. revenues (excluding motor rental revenues) decreased 58% to $9,446 in 2021 from $22,461 in 2020. This decrease was the result of: i) a 42% decrease in activity days to 1,067 in 2021 from 1,838 in 2020; and ii) a 28% decrease in the average day rate to $8,853 in 2021 from $12,221 in 2020 (when converted to Canadian dollars).

The average active land rig count for the U.S. was down 1% in 2021 compared to 2020 (source: Baker Hughes). The Company experienced a 44% decline in activity resulting in a decrease in market share compared to 2020. Day rates in USD decreased 21% to $7,087 USD in 2021 from $9,008 USD in 2020. The 2021 rate is down due to a decrease in revenues from providing rotary steerable system (RSS) services which are rented from a 3rd party and a reduction in certain ancillary revenues.

Motor rentals decreased in Canada but this was offset by increases in the U.S. Combined rental revenues increased to $3,705 in 2021 compared to $3,301 in 2020. The Canadian decrease is related to delays in customer drilling programs. U.S. rental revenues have increased due to a focus on expanding rental revenues.

Government grants The Company recognized the benefit from the CEWS program of $916 (2020 - $1,378 ) and $nil (2020 - $992 ) from PPP which reduced salary expenses as follows:

Cost of sales $544 (2020 - $1,478 ); Selling, general and administrative expenses $298 (2020 - $659 ); and Technology group expenses $74 (2020 - $233 ).

Additionally, the Company received $518 (2020 - $nil) from CERS, which reduced cost of sales $424 (2020 - $nil) and selling, general and administrative $94 (2020 - $nil).

The 2021 CEWS claims were at reduced levels due to the increase in revenues in 2021.

Gross margin and adjusted gross margin Gross margin for 2021 was -5% compared to -24% in 2020. Adjusted gross margin (see Non-GAAP Measurements) for 2021 was $7,012 or 18% compared to $3,670 or 11% for 2020.