ACT Energy Technologies Ltd. press release

Cathedral Energy Services Reports Results for 2017 Q1

2017-05-12

TSX - Toronto Stock Exchange · Canada

Canada NewsWire

CALGARY, MAY 11, 2017

_/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA_/

CALGARY, MAY 11, 2017/CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) announces its consolidated financial results for the three months ended March 31, 7016and 2016. 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 March 31 | | | | | | | 2017 | 2016 | | | | | Revenues | $ | 38,323 | $ | 18,744 | | | Adjusted gross margin % (1) | 22% | 26% | | | | | Adjusted EBITDAS (1) | $ | 6,796 | $ | 1,476 | | | | Diluted per share | $ | 0.16 | $ | 0.04 | | | As % of revenues | 18% | 8% | | | | Funds from continuing operations (1) | $ | 3,989 | $ | 167 | | | | Diluted per share | $ | 0.09 | $ | - | | Gain on disposal of foreign subsidiary | $ | - | $ | 10,865 | | | Earnings before income taxes | $ | 3,972 | $ | 11,010 | | | | Basic and diluted per share | $ | 0.09 | $ | 0.30 | | | Diluted per share | $ | 0.09 | $ | 0.30 | | Net earnings | $ | 2,581 | $ | 9,683 | | | | Basic and diluted per share | $ | 0.06 | $ | 0.27 | | | Diluted per share | $ | 0.06 | $ | 0.27 | | Equipment additions - cash basis | $ | 1,570 | $ | 268 | | | Weighted average shares outstanding | | | | | | | | Basic (000s) | 42,606 | 36,295 | | | | | Diluted (000s) | 42,761 | 36,295 | | | | | | | | | | | | March 31 | December 31 | | | | | | 2017 | 2016 | | | | | Working capital | $ | 29,710 | $ | 39,324 | | | Total assets | $ | 124,460 | $ | 136,017 | | | Loans and borrowings excluding current portion | $ | 84 | $ | 26,322 | | | Shareholders' equity | $ | 106,186 | $ | 90,772 | | | | | | | | | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | |

2017 Q1 KEY TAKEAWAYS

Revenues increased 105% from $18,744in 2016 Q1 to $38,323in 2017 Q1.

Adjusted EBITDAS increased 360% from $1,476in 2016 Q1 to $6,796in 2017 Q1. Adjusted EBITDAS margin increased to 18% of revenues in 2017 Q1 from 8% in 2016 Q1.

In January, the Company completed the sale of its Flowback and Production testing ("F&PT") assets for net proceeds of $17,241.

On February 15, 2017, the Company closed a bought deal public offering and insider private placement financing for total gross proceeds of $14,130. As a consequence of this financing and the sale of the F&PT assets, the Company had no bank debt at March 31, 2017(excluding letters of credit).

The Company has increased its capital program for 2017 to a committed amount of $6,800and may increase capital spending further based on operating cash flow availability in subsequent quarters in 2017. These funds are focused on increasing the capacity of existing equipment and replacing equipment previously lost down hole.

OUTLOOK

What a difference a year can make! In 2016 Q1 we were suffering from the impact of oil prices that had hit a bottom in the $26 USDbbl range in February. In the first quarter of 2016 we had an average of 10 active jobs running in the United States("U.S.") and five running in Canada. For the first quarter of 2017 our average job count was almost three times 2016 levels. We have had to make a tremendous shift from shrinking our business throughout most of 2016 to a rapid ramp up starting in late 2016 and into 2017. Ramping up our business has also had many challenges including making sure we have equipment and people available and also ensuring we maintain a high service quality with our customers. We were very pleased with revenue growth and margins achieved in 2017 Q1, on a year-over-year basis, and compared to 2016 Q4.

Despite increased activity levels, we are still challenged on pricing in an environment where there is upward pressure on our costs. Although customers concede that their service related costs will increase in 2017, they are trying to defer price increases as long as possible. At the same time, competitive pressure remains intense as there is still a large amount of directional drilling equipment capacity in the market. Some competitors appear willing to work at low margins in order to generate some cash contribution or are pricing aggressively in an effort to gain market share. We expect pricing levels will improve modestly throughout 2017. We have been able to achieve price increases with our some of our longer term clients starting in late Q1 and into Q2. Our customer value proposition is delivering "Better Performance Every Day" which is supported by our proprietary equipment, great people, engineering services and size and scale. This strategy positioned us well during the industry downturn and as activity levels have improved. We are confident our performance matters approach will prevail long term. Competing based on price alone is not a sustainable strategy for our competitors going forward.

Another challenge we are facing, in part due to the competitive dynamics, is that customers are pushing our equipment harder than has been the case in the past to improve drilling times. This has resulted in above average equipment damage and equipment lost-in-hole. In most cases we can recover these costs from customers, however, these loses and damages are impacting our available equipment capacity short-term while the equipment is repaired or replaced. Through our Drilling Engineering Services and Sales teams, we are working with customers to improve drilling practices and are also being more selective with customers we work with. In addition, we are investing capital to improve our equipment capacity and capabilities.

On the expense side we are still focused on cost management and also trying to ensure our expense increases lag price increases. Most of our expenses relate to labour and we are seeing labour cost pressure as the industry ramps up and as a consequence of a tight labour pool resulting from people leaving the industry over the past two years. Our suppliers are in similar positions and also expecting price increases to help them ramp up.

We continue to manage our business cautiously with the expectation we will see continued commodity price volatility going forward. With the increased rig count and productivity of North American shale wells, oil production and inventories are increasing which has put pressure on prices. However, despite the WTI oil price volatility, the rig count in the U.S., our primary market, has been increasing. As goes the outlook on oil prices, so goes the rig count and directional drilling industry activity levels.

An exciting development in 2017 Q1 was the commercial introduction of our downhole generator. The downhole generator uses mud flow to create power for the Measurement-While-Drilling ("MWD") equipment thereby reducing battery use and the associated battery costs. The downhole generator also facilitates improved Electro-Magnetic ("EM") MWD data transmission to improve EM performance and allow it to be used in difficult formations and areas where competitor technologies have limitations.

We are fortunate that the business improvement areas we focused on in the face of adversity over the past two years have set us up favorably to capitalize on an upturn in our industry. Many of the strategic initiatives we have been working on over the last two years have been focused on making sure we can ramp up our business effectively. On the sales side, we have strategies to help us secure higher pricing for our services. On the operations side, we are looking at ways to better manage our labor pool, keep our expenses in line and continue to deliver high quality service. Our technology group continues to make equipment improvements to our existing equipment and explore new products aimed at revenue generation and expense and capital cost reductions.

We remind our shareholders that Q2 is typically a lower revenue quarter for the Canadian oil field services industry, including Cathedral, due to lower activity levels in Canadaas a result of spring break-up.

2017 CAPITAL PROGRAM

During the three months ended March 31, 2017the Company invested $1,036(2016 - $268) in equipment. The following table details the current period's net equipment additions:

| | | | | | | Three months ended | | | | | March 31, 2017 | | | | Equipment additions: | | | | | | Growth capital (1) | $ | 492 | | | Maintenance capital(1) | 38 | | | | Replacement capital (1) | 506 | | | Total cash additions | 1,036 | | | | Less: proceeds on disposal of equipment (excluding capital lease settlements) | (2,250) | | | | Net equipment additions (1) | $ | (1,214) | | | (1)See "NON-GAAP MEASUREMENTS" | | | |

Cathedral's 2017 capital budget ("capex") reviewed by the Board of Directors in December 2016was for expenditures of $3,400with $350for growth capital and $1,500for replacement and $1,550for maintenance capital. Based on improved activity levels and operating cash flow, on May 11, 2017, the Board of Directors approved a revised capex program of $10,000of net equipment additions(1)for the year.

The $10,000capex plan for 2017 is comprised of $5,200of replacement and maintenance capital and $4,800of growth capital. The $5,200amount, is substantially related for investment to replace items that have been lost-in-hole over the past two years and for equipment upgrades and replacements to improve the capacity of Cathedral's existing MWD and motor fleet. Over the past 2 years, Cathedral deferred replacement and maintenance capital expenditures in the face of low equipment utilization and in order to pay down debt. Subject to operating results and industry outlook, on a go forward basis equipment lost-in-hole will be replaced funded from the proceeds received. As such, Cathedral's total capex in any year may exceed the above noted capex. The 2017 capital budget will be reviewed quarterly based on anticipated future activity levels and operating cash flow. Cathedral intends to finance its 2017 capital budget from cash flow from operations, proceeds from assets lost-in-hole, working capital (cash) and credit facility availability.

RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH 31

| | | | | | | Revenues | 2017 | 2016 | | | | Canada | $ | 10,466 | $ | 5,663 | | United States | 27,857 | 13,081 | | | | Total | $ | 38,323 | $ | 18,744 |

Revenues2017 Q1 revenues were $38,323, which represented an increase of $19,579or 105% from 2016 Q1 revenues of $18,744. Both Canada and United States U.S. operations had increases due to increases in drilling activity. In late 2016, due to a limited supply of the Company's proprietary motors, the Company made the decision to reduce the number of rental motors available in both Canadaand the U.S. in favor of redirecting motors on jobs where both equipment and staff are deployed and the total cash flow contribution is typically higher. As a consequence motor rental revenue in both Canadaand the U.S. were less in 2017 Q1 compared to 2016 Q1.

Canadian revenues (excluding motor rental revenues) increased to $9,307in 2017 Q1 from $3,354in 2016 Q1; a 178% increase. This increase was the result of: i) a 184% increase in activity days to 1,423 in 2017 Q1 from 501 in 2016 Q1; net of ii) a 2% decrease in the average day rate to $6,540in 2017 Q1 from $6,695in 2016 Q1. Partially offsetting the revenue increase was a decrease of $1,150in motor rental revenue. Motor rental revenues for 2017 Q1 were $1,159(2016 Q1 - $2,309).

The average active land rig count in Canadawas up 87% in 2017 Q1 compared to 2016 Q1. The increase in the Company's activity days relative to the active rigs drilling was a result of sales and marketing efforts and the Company demonstrating performance on client jobs. The decrease in day rates was in part due to type of work performed, but mainly due to decreases in day rates charged to customers, which were a result of competitive pressure, and pricing concessions provided to customers to secure work. Many of these customer pricing concessions were carried forward from late 2016.

U.S. Directional Drilling revenues (excluding motor rental revenues) increased to $27,578in 2017 Q1 from $11,977in 2016 Q1; a 130% increase. This increase was the result of: i) a 162% increase in activity days to 2,565 in 2017 Q1 from 979 in 2016 Q1; net of ii) a 12% decrease in the average day rate to $10,752in 2017 Q1 from $12,234in 2016 Q1 (when converted to Canadian dollars). All U.S. operating areas saw increases in activity days.

The average active land rig count for the U.S. was up 36% in 2017 Q1 compared to 2016 Q1. Again, due to efforts of sales and marketing staff and performance on client jobs, the Company was able to increase market share compared to 2016 Q1. Day rates in USD fell to $8,117 USDin 2017 Q1 from $8,906 USDin 2016 Q1; a 9% decline. U.S. day rates decreases were partially offset by the U.S. division providing footage drilling services to certain clients, which can result in higher relative day rates. U.S. motor rental revenues for 2017 Q1 were $279compared to $1,104in 2016 Q1.

Gross margin and adjusted gross margin Gross margin for 2017 Q1 was 15% compared to 10% in 2016 Q1. Adjusted gross margin (see Non-GAAP Measurements) for 2017 Q1 was $8,486or 22% compared to $4,949or 26% for 2016 Q1.

Adjusted gross margin, as a percentage of revenue, decreased due to increases in field labour rates, higher equipment rentals and slightly higher equipment repairs on a percentage of revenue basis. These increases were offset by a reduction in the fixed component of cost of sales which were 13% lower on a percentage of revenue basis in 2017 Q1 compared to 2016 Q1. The decrease in the fixed component of cost of sales as a percentage of revenue was mostly attributable to increase in revenues, however there were increases in costs largely related to salaries and other labour related costs.

Depreciation allocated to cost of sales decreased to $2,606in 2017 Q1 from $3,111in 2016 Q1. Depreciation included in cost of sales as a percentage of revenue was 7% for 2017 Q1 and 17% in 2016 Q1.

Selling, general and administrative expenses ("SG&A")SG&A expenses were $3,823in 2017 Q1; a decrease of $448compared with $4,271in 2016 Q1. As a percentage of revenue, SG&A was 10% in 2017 Q1 compared to 23% in 2016 Q1.

Excluding the non-cash items of depreciation and share-based compensation, SG&A was $3,751in 2017 Q1 compared to $4,188in 2016 Q1, a decrease of $437or 10%. SG&A decreased primarily due to work force reductions. Additionally, 2016 Q1 had costs related to severance that were not incurred in 2017 Q1. Staffing costs included in SG&A include executive, sales, accounting, human resources, payroll, safety, technology support and related support staff. As well, there were year-over-year reductions in virtually every SG&A item due to efforts to reduce expenditures in 2016.

Gain on disposal of equipmentDuring 2017 Q1, the Company had a gain on disposal of equipment of $2,014compared to $891in 2016 Q1. These gains mainly relate 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.

Finance costs Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $302for 2017 Q1 versus $379for 2016 Q1. The decrease in finance costs relate to repayments of loans in 2017 Q1 partially offset by increases in the interest rates.

Foreign exchange The Company had a foreign exchange gain of $218in 2017 Q1 compared to a gain of $2,354in 2016 Q1 due to the fluctuations of 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 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 2017 Q1 foreign currency gains are unrealized gain of $192(2016 Q1 - $2,364) related to intercompany balances.

Gain on disposal of foreign subsidiary During 2016 Q1, the Company completed the sale of its wholly-owned Barbadossubsidiary for net proceeds of $nil which resulted in a non-cash gain on sale of $10,865. The subsidiary held the Company's investment in Venezuelaand this sale completed Cathedral's exit from carrying on a business in Venezuela.

Net loss from discontinued operations In 2016 Q4, the Company made the decision to sell its F&PT assets and focus its attention and resources fully on the directional drilling business where it believes it has a strong competitive advantage and better future growth prospects. The proceeds from this sale were used to pay down debt. As such, operating results for the F&PT business have been included in the statements of comprehensive income and statements of cash flows as discontinued operations. For 2017 Q1, the net loss from discontinued operations was $(118)compared to $(1,420)net loss for 2016 Q1.

Income taxFor 2017 Q1, the Company had an income tax expense of $1,273compared to recovery of $93in 2016 Q1. Excluding adjustments to prior years' tax provisions, the effective tax rate was 32% for 2017 Q1. Excluding the non-cash gain on disposal of foreign subsidiary but including the loss from discontinued operations, the effective tax rate was 30% for 2016 Q1. Income tax expense is booked based upon expected annualized effective rates.

LIQUIDITY AND CAPITAL RESOURCES

OverviewOn an annualized basis the Company's principal source of liquidity is cash generated from operations. In addition, the Company has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity. For the three months ended March 31, 2017, the Company had funds from continuing operations (see Non-GAAP Measurements) of $3,989(2016 –$167). The increase in funds related to continuing operations is due to the increase in activity levels.

During 2017 Q1 the Company completed two major transactions that had a material impact on its outstanding debt. In January, the Company completed the sale of its F&PT assets for net proceeds of $17,241. On February 15, 2017, the Company closed a bought deal public offering and insider private placement financing for total gross proceeds of $14,130. As a result of these transactions, in 2017 Q1 the Company reduced its loans and borrowings by $26,315which included a complete repayment of revolving term loan of $26,250. Cash balances as at March 31, 2017were $3,783.

Working capitalAt March 31, 2017the Company had working capital of $29,710(December 31, 2016- $39,324) and a working capital ratio of 2.7 to 1 (December 31, 2016– 3.3 to 1). The decrease in working capital level was primarily due to the sale of F&PT assets held for sale which had been classified as a current asset at December 31in the amount of $17,241. Partially offsetting this was an increase in trade receivables of $8,084from December 31, 2016. Upon closing of the F&PT sale on January 16, 2017, $17,200of the revolving term loan was repaid. The Company continues to retain a good accounts receivable aging profile with 89% of receivables under 60 days at March 31, 2017.

Credit facility The Company has a committed revolving credit facility (the "Facility") that expires in December 2018. The Facility is secured by a general security agreement over all present and future personal property.

The current Facility has been amended seven times. These amendments have certain restrictions, including, but not limited to; paying dividends, utilization of the accordion feature, enhanced lender financial reporting and a cap on any litigation settlement payments without lender approval. As well, effective 2016 Q1, the Company includes lost-in-hole equipment proceeds in the definition of Bank EBITDA (as defined in the credit agreement).