ACT Energy Technologies Ltd. press release
Cathedral Energy Services Ltd. reports results for 2015 Q3 and suspension of dividend
TSX - Toronto Stock Exchange · Canada
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Canada NewsWire
CALGARY, Nov. 10, 2015
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, Nov. 10, 2015/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, 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 Q3 KEY TAKEAWAYS Revenues and profitability were significantly affected by reduced industry activity and pricing pressures due to a further decline in commodity prices;
Revenues of $31,374in 2015 Q3 compared to $77,376in 2014, a 59% decline and adjusted EBITDAS of $3,013in 2015 Q3 compared to $14,347in 2014 Q3, a 79% decline;
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. Cathedral remains committed to investing in technology development as a key future success factor;
Delivered drilling records derived from our proprietary nDurance® motor and FUSION™ Measurement-While-Drilling (MWD) system technologies;
Due to the strong performance of Cathedral's proprietary motors, motor rental revenues continued to increase on a year-over-year and sequential basis;
Bank debt net of cash balances remained consistent with June 30, 2015level;
Cathedral's presence in all key North American basins has facilitated operational efficiencies through the movement of equipment and people between operating areas; and
Management continues to focus on initiatives to reduce costs, improve margins and improve our sales and marketing capabilities.
FINANCIAL HIGHLIGHTS Dollars in 000's except per share amounts
| | | | | | | | | | | | | Three months ended September 30 | Nine months ended September 30 | | | | | | | | | | | 2015 | | 2014 | | 2015 | | 2014 | | | Revenues | $ | 31,374 | $ | 77,376 | $ | 111,130 | $ | 202,193 | | | | | | | | | | | | | | Adjusted gross margin % (1) | | 18.7% | | 25.1% | | 17.4% | | 22.1% | | | | | | | | | | | | | | Adjusted EBITDAS (1) | $ | 3,013 | $ | 14,347 | $ | 7,562 | $ | 29,079 | | | | Diluted per share | $ | 0.08 | $ | 0.40 | $ | 0.21 | $ | 0.80 | | | As % of revenues | | 10% | | 19% | | 7% | | 14% | | | | | | | | | | | | | Funds from operations (1) | $ | 2,723 | $ | 11,832 | $ | 5,835 | $ | 23,719 | | | | Diluted per share | $ | 0.08 | $ | 0.33 | $ | 0.16 | $ | 0.65 | | | | | | | | | | | | | Earnings (loss) before income taxes | $ | (10,688) | $ | 8,008 | $ | (17,825) | $ | 11,907 | | | | Basic per share | $ | (0.29) | $ | 0.22 | $ | (0.49) | $ | 0.33 | | | Diluted per share | $ | (0.29) | $ | 0.22 | $ | (0.49) | $ | 0.33 | | | | | | | | | | | | | Write-down of deferred taxes related to CRA settlement | $ | - | $ | - | $ | (10,768) | $ | - | | | | | | | | | | | | | | Impairment of goodwill | $ | (5,848) | $ | - | $ | (5,848) | $ | - | | | | | | | | | | | | | | Net earnings (loss) | $ | (8,852) | $ | 5,805 | $ | (24,842) | $ | 8,507 | | | | Basic per share | $ | (0.24) | $ | 0.16 | $ | (0.68) | $ | 0.23 | | | Diluted per share | $ | (0.24) | $ | 0.16 | $ | (0.68) | $ | 0.23 | | | | | | | | | | | | | Dividends declared per share | $ | 0.04 | $ | 0.0825 | $ | 0.12 | $ | 0.2475 | | | | | | | | | | | | | | Property and equipment additions - cash basis | $ | 296 | $ | 9,958 | $ | 6,444 | $ | 26,937 | | | | | | | | | | | | | | Weighted average shares outstanding | | | | | | | | | | | | Basic (000s) | | 36,295 | | 36,264 | | 36,295 | | 36,227 | | | Diluted (000s) | | 36,295 | | 36,280 | | 36,295 | | 36,250 | | | | | | | | | | | | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | | | | | |
OUTLOOK
The third quarter of 2015 was impacted significantly by a rapid drop in WTI from the $60United States Dollar ("USD") bbl. range in May and June to below $40 USDbbl. at the end of August. Lower commodity prices in the quarter resulted in customers curtailing their drilling and completions programs with indications they would be looking at lower activity levels for the remainder of the year. In addition to reducing activity levels, customers also requested further reductions in pricing.
Although WTI prices have settled into the $45 USDbbl. range, this price level is too low to allow for any significant increase in industry activity levels. Until WTI prices move above $50 USDbbl. or producers raise additional capital, we expect activity levels to be mediocre with the potential for further customer activity reductions in the short-term. We continue to take steps to deal with this current situation and look for revenue generation opportunities and expense reductions to maintain positive cash flow. At the same time we are mindful of retaining as many of our key employees as possible to be in a position to react favorably when industry conditions rebound. We have reduced our field labour rates and other variable expenses significantly to offset pricing pressure and maintain individual job profitability. Field labour rates in directional drilling are up to 40% less than they were in 2014. Our employee head count has been reduced from 725 at the end of December 2014to 370 at the end of October 2015- a 49% reduction. We also have reduced the number of field sub-contractors in 2015 which has traditionally been a significant component of our workforce. Quarterly SG&A has been reduced 26% from the beginning of the year resulting from employee attrition, wage and benefit rollbacks and other cost cutting measures. These reductions have exceeded our initially targeted reduction in SG&A of 20%.
In October we entered into discussions with our lending syndicate about obtaining further covenant relief for 2015 Q4 and into 2017. This request reflected the further deterioration of industry activity levels and our earlier amendments to our banking covenants in June 2015anticipating a return to more robust activity levels in the second half of 2015 and into 2016. A significant change that has been negotiated on a go forward basis is the inclusion of lost-in-hole proceeds in the definition of EBITDA under the lending agreement. The lending syndicate has been very supportive of the steps we have taken to manage through this downturn and we expect to continue to work proactively with them. To protect our balance sheet we have had to make the hard decision to suspend our dividend for 2015 Q4 and anticipate that we will not reinstate dividend payments until industry conditions and ongoing operating cash flow improves to a level that can sustain the quarterly dividend.
Our Capital Expenditure program continues to be $7,200for 2015 with the remaining expenditures of $756in the fourth quarter focused on improving utilization of our equipment fleet.
Despite the overall industry malaise, we have made significant progress on our strategic initiatives to increase sales and marketing effectiveness and improve operational efficiencies and effectiveness. In October we refreshed our website and we continue to update our sales and marketing materials with a focus on better articulating our value proposition. We have put in place sales processes to actively target customers and regions where our equipment and services can result in a material change in well costs by reducing days drilled or offer customer efficiencies in our flowback and production testing area. Of note was the opening of a new facility in Eunice, New Mexicofor our U.S. flowback and production testing group but also to support our directional drilling activity in this area.
In the quarter we continued to deliver achievements and drilling records derived from our nDurance® motor and FUSION™ Measurement-While-Drilling (MWD) system performance. These achievements have resulted in increased customer interest in our capabilities and have assisted us in securing new work in this challenging environment. We are particularly pleased with business development results in the U.S. Our EM-MWD continues to be recognized for its performance advantages in difficult formations resulting in new customer additions with both stand-alone and packaged solutions.
On the operations side we have introduced a Drilling Optimization offering aimed at working closer with customers on the technical aspects of their drilling programs. Drilling Optimization will assist us with client retention, securing new business, incremental revenue generation and exploiting operational efficiencies to improve job margins and return on assets employed.
As we conclude 2015 and look ahead to 2016, we will continue to focus on managing our costs, right-sizing our structure for industry activity levels, deploy our proprietary technology and expertise to assist our customers reduce their drilling and completion costs, while at the same time continuing to demonstrate our value proposition, quality, safety and integrity with our customers and employees. We remain confident that global oil and gas production is moving toward supply/demand balance that will eventually result in stronger commodity prices, and increased activity levels. We are confident we will come out of this current downturn well positioned to deliver increased value to our customers and our shareholders.
DIVIDENDS
Based on the current reductions in commodity prices and uncertainties around expected drilling and completion activity in 2015 Q4 and into 2016, the Board of Directors have made the decision to suspend the payment of its quarterly dividend until industry conditions improve. This decision was made in order to preserve cash, to manage liquidity, invest selectively in capital asset additions and pursue operational initiatives to better position the Company for economic turn-around. The Board of Directors will review dividend distributions on a quarterly basis giving consideration to current performance, historical and future trends in the business, the expected sustainability of those trends as well as required long-term debt repayments, maintenance capital expenditures required to sustain performance. It is the long-term intent of the Company to pay quarterly dividends to shareholders.
2015 CAPITAL PROGRAM
During the nine months ended September 30, 2015Company invested $6,444(2014 - $26,937) in property and equipment. The following table details the current period's net property and equipment additions:
| | | | | | | | | | | Nine months ended | | | | | | September 30, 2015 | | Property and equipment additions: | | | | | | | Growth capital (1) | | $ | 4,347 | | | Maintenance capital(1) | | | 877 | | | Replacement capital (1) | | | 504 | | | Infrastructure capital(1) | | | 716 | | Total cash additions | | | 6,444 | | | Less: proceeds on disposal of property and equipment | | | (4,153) | | | Less: proceeds on disposal of land and buildings | | | (6,174) | | | | | | | | | Net property and equipment additions (1) | | $ | (3,883) | | | (1)See "NON-GAAP MEASUREMENTS" | | | | |
The major additions for growth capital were $2,958for additional drilling motors and related equipment for specific job requirements, $86for MWD equipment and $1,303for additional ancillary flowback and production testing equipment to reduce future rental costs. Infrastructure capital relates to the construction of an operations facility in Oklahomathat was completed and subject to a sale and leaseback in 2015 Q1. Maintenance capital included $423related to MWD upgrades, $32for ancillary motor components, $42for flowback and production testing units and ancillary equipment, $181for automobiles and $199related to shop, office and computer equipment additions. Replacement capital included $395for MWD equipment and $109for motor equipment.
Cathedral's 2015 capital budget remains at $7,200which includes $4,700of growth capital, $1,725of maintenance and replacement capital and $775of infrastructure expenditures.
Cathedral intends to finance its 2015 capital budget from proceeds from the Oklahoma Cityfacility sale and leaseback 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:
| | | | | | | September 30 | December 31 | September 30 | | | 2015 | 2014 | 2014 | | Directional drilling - MWD systems | 140 | 140 | 140 | | Production testing units | 66 | 66 | 66 |
RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30
| | | | | | | | | | | | | | | | | Three months ended September 30, 2015 | | Three months ended September 30, 2014 | | | | | | | | | | | | | | Flow back and | | | | Flow back and | | | | | | | | | | Directional | production | | | Directional | production | | | | | | | | | Revenues | drilling | testing | Total | | drilling | testing | Total | | | | | | | | | | | | | | | | | | | | | | | Canada | $ | 10,171 | $ | 2,158 | $ | 12,329 | | $ | 28,765 | $ | 7,889 | $ | 36,654 | | | | | | | | | | | | | | | | | United States | 16,194 | | 2,851 | | 19,045 | | | 30,991 | | 9,731 | | 40,722 | | | | | | | | | | | | | | | | | | Total | $ | 26,365 | $ | 5,009 | $ | 31,374 | | $ | 59,756 | $ | 17,620 | $ | 77,376 |
Revenues2015 Q3 revenues were $31,374which represented a decrease of $46,002or 59% from 2014 Q3 revenues of $77,376. All divisions experienced decreases compared to 2014 Q3. 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 requested by customers due to market conditions. These declines continued into the remainder of 2015. In comparison, 2014 Q3 set a record for highest quarterly revenue. The active land rig count for Canadaand U.S. was down 51% and 55% respectively in 2015 Q3 compared to 2014 Q3. Canadian wells completed fell approximately 48% in 2015 Q3 compared to 2014 Q3. Land rig count is a key driver of activity levels in the directional drilling industry and wells completed is a key driver for flowback and production testing industry.
Canadian directional drilling revenues decreased to $10,171in 2015 Q3 from $28,765in 2014 Q3; a 65% decrease. This decrease was the result of: i) a 60% decrease in activity days to 965 in 2015 Q3 from 2,423 in 2014 Q3; and ii) a 27% decrease in the average day rate to $8,603in 2015 Q3 from $11,797in 2014 Q3. Offsetting these declines was an increase of $1,688on the rental of mud motors, particularly the Cathedral's CLAW motor. Rental revenues for 2015 Q3 were $1,869.
U.S. directional drilling revenues decreased to $16,194in 2015 Q3 from $30,991in 2014 Q3; a 48% decrease. This decrease was the result of: i) a 52% decrease in activity days to 1,188 in 2015 Q3 from 2,454 in 2014 Q3; and ii) a 5% increase in the average day rate to $13,221in 2015 Q3 from $12,569in 2014 Q3 (when converted to Canadian dollars). All U.S. districts experienced a decrease in activity levels. The U.S. average day rates in Canadian dollars increased due to the stronger U.S. dollar. Rates in USD fell to $10,094 USDin 2015 Q3 from $11,540 USDin 2014 Q3, a 13% decline. U.S. day rate decreases were partially tempered by the U.S. division providing footage drilling services to certain clients which can result in higher relative day rates.
Canadian flowback and production testing revenues decreased to $2,158in 2015 Q3 from $7,889in 2014 Q3; a 73% decrease. The decrease was due to the reduction in activity levels due to the industry downturn as well as a 23% decline in pricing.
U.S. flowback and production testing revenues decreased to $2,851in 2015 Q3 from $9,731in 2014 Q3, a 71% decrease. The decrease was due to the reduction in activity levels due to the industry downturn. Pricing when converted to CAD were unchanged, but there was a 16% decline in pricing in USD.
Gross margin and adjusted gross margin Gross margin for 2015 Q3 was 2.8% compared to 18.7% in 2014 Q3. Adjusted gross margin (see Non-GAAP Measurements) for 2015 Q3 was $5,881or 18.7% compared to $19,442or 25.1% for 2014 Q3, a decline of 6.4%.
The Company initiated a number of cost reductions throughout 2015 including; reducing wages for field, support and office staff, implementing work force adjustments and reducing other direct cost items. These cost reductions have continued as the year has progressed. Despite these measures, these cost reductions could not offset lower revenue day rates in the directional drilling divisions, especially Canadian operations, resulting in lower gross margins.
Although there was a reduction in the fixed component of direct cost of sales of 29% compared with 2014 Q3, the overall impact of these costs on margins was greater in 2015 Q3 due to the reduction in revenues. On a percentage of revenue basis, the fixed costs increased 8.4% from 2014 Q3. As stated above, the 2015 Q3 adjusted gross margin had decreased by 6.4%, the remaining 2.0% reduction in adjusted gross margin relates to reductions in field labour offset by higher repair costs as percentage of revenue.
Depreciation allocated to cost of sales increased to $4,984in 2015 Q3 from $4,945in 2014 Q3. Depreciation included in cost of sales as a percentage of revenue was 15.9% for 2015 Q3 and 6.4% in 2014 Q3.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $4,614in 2015 Q3; a decrease of $1,762compared with $6,376in 2014 Q3. As a percentage of revenue, SG&A was 15% in 2015 Q3 and 8% in 2014 Q3.
Excluding the non-cash items of depreciation and share-based compensation SG&A was $4,533in 2015 Q3 compared to $6,256in 2014 Q3, a decrease of $1,723or 28%. SG&A decreased primarily due to work force reductions, wage rollbacks and reductions in variable compensation. SG&A wage rollbacks were implemented February 1, 2015at a range of 5% to 15%. There have been additional reductions to staffing levels in 2015 Q2 and Q3. 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 Q3, the Company had a gain on disposal of property and equipment of $1,638compared to $1,096in 2014 Q3. 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.
Impairment of goodwill Due to the further decline in commodity prices and the impact on drilling and completion activity levels the Company recorded an impairment of goodwill of $5,848in 2015 Q3. The recoverable amount of each cash generating unit ("CGU") was determined using a value in use calculation based on cash flow projections over the expected life of the assets. The cash flow projections were based on expected outcomes taking into account past experience and management expectation of market conditions. $1,624of the impairment related to the directional drilling CGU and $4,224related to the flowback and production testing CGU. This impairment represented the total amount of goodwill allocated to each CGU.
Foreign exchange loss The Company had foreign exchange loss of $2,388in 2015 Q3 compared to a loss of $527in 2014 Q3 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 Q3 foreign currency gains are unrealized losses of $2,374(2014 Q3 - $592) related to intercompany balances.