ACT Energy Technologies Ltd. press release
Cathedral Energy Services Reports Results for 2019 Q3
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
CALGARY, Nov. 7, 2019
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, Nov. 7, 2019/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, 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 September 30 | Nine months ended September 30 | | | | | | | | | 2019 | 2018 | 2019 | 2018 | | | | | | Revenues | $ | 31,185 | $ | 42,570 | $ | 100,977 | $ | 117,700 | | Adjusted gross margin % (1) | 15% | 16% | 10% | 10% | | | | | | Adjusted EBITDAS (1) | $ | 2,236 | $ | 6,190 | $ | 4,589 | $ | 8,648 | | Basic and diluted per share | $ | 0.05 | $ | 0.13 | $ | 0.09 | $ | 0.17 | | As % of revenues | 7% | 15% | 5% | 7% | | | | | | Cash flow - operating activities | $ | 6,003 | $ | 1,926 | $ | 4,887 | $ | 327 | | Earnings (loss) before income taxes | $ | (3,851) | $ | 3,846 | $ | (12,385) | $ | (33) | | Basic and diluted per share | $ | (0.08) | $ | 0.08 | $ | (0.25) | $ | - | | Net earnings (loss) | $ | (4,153) | $ | 3,001 | $ | (13,119) | $ | 797 | | Basic and diluted per share | $ | (0.08) | $ | 0.06 | $ | (0.27) | $ | 0.02 | | Equipment additions - cash basis | $ | (1,794) | $ | (4,140) | $ | (5,321) | $ | (12,920) | | Weighted average shares outstanding | | | | | | | | | | Basic (000s) | 49,468 | 49,468 | 49,468 | 49,437 | | | | | | Diluted (000s) | 49,468 | 49,474 | 49,505 | 49,459 | | | | | | | | | | | | | | | | | | | September 30 | December 31 | | | | | | | | | 2019 | 2018 | | | | | | Working capital | | | $ | 24,067 | $ | 30,599 | | | | Total assets | | | $ | 122,604 | $ | 121,770 | | | | Loans and borrowings excluding current portion | | | $ | 7,000 | $ | 7,000 | | | | Shareholders' equity | | | $ | 74,948 | $ | 89,143 | | | | | | | | | | | | | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | | | | |
2019 Q3 KEY TAKEAWAYS
Cathedral commercialized our next generation of our FUSION™ Dual Telemetry Measurement-While-Drilling tool and our Linear Pulse tool.
Cathedral has also commercialized a specialized series of its nDurance™ performance drilling motors which are targeted for rotary steerable system applications.
Adjusted EBITDAS decreased from $6,190in 2018 Q3 to $2,236in 2019 Q3 primarily due to lower activity levels.
2019 Q3 continues the trend of sequential improvements in Adjusted gross margin – from 7% in 2019 Q1 to 15% in 2019 Q3.
Revenues decreased 27% from $42,570in 2018 Q3 to $31,185in 2019 Q3.
Despite 2019 Q3 having the lowest quarterly revenue for 2019, Q3 had the highest Adjusted EBITDAS for the year. This was achieved due to improvements in Adjusted gross margin.
OUTLOOK
On a sequential basis, U.S. land average drilling rig count declined 8% from 2019 Q2 to 2019 Q3 and a further decline in 2019 Q4 is expected as oil and natural gas producers exercise increased capital discipline. Cathedral's U.S. activity levels for 2019 Q3 declined in excess of the industry decline due to our client mix which resulted in a higher proportion of our clients cutting back in drilling activities. In addition, work was lost due to competitive pricing pressures which tend to be more prevalent in a lower drilling activity environment.
In 2019 Q3, we continued with personnel changes within our U.S. operations with the goal to improve operating and overall financial results and early benefits are being realized as demonstrated by a sequential improvement in our adjusted gross margin contribution from U.S. operations. This is despite a decline in activity levels and revenue. We believe this restructuring will set the U.S. operation up well as activity levels increase which industry experts expected to occur as we progress through 2020. The U.S. operations continues to be the focus area for the Company's executives and senior management.
In 2019 Q3, we commercialized two tools within our FUSION Measurement-While-Drilling ("MWD") platform. Firstly, our next generation of our FUSION Dual Telemetry ("DT") MWD tool. This tool is based upon our industry leading electro-magnetic ("EM") technology with significant enhancement to the tool's mechanical backbone, connectors and decoding software as well as adding a high torque pulser. Overall, these enhancements have improved the tools durability, reliability and pulse telemetry capabilities. This tool is typically used in areas where clients want the benefits of EM technology but they are operating in formations that are not considered EM friendly (difficult to get EM signal through formations) and therefore backup pulse technology is required. Due to the strength of our EM technology we do not require the use of dual telemetry tools on a broad basis. Secondly, we have brought to the market our Linear Pulse ("LP"). The LP has the ability to handle significant quantities of loss control materials ("LCM") and has data speeds that exceed industry standards. We continue on working to improve data speeds and it is believed we will be able to reach ¼ second pulse width (2 bits per second).
Cathedral has commercialized a specialized series of its nDurance performance drilling motors intended primarily for use with Rotary Steerable Systems ("RSS"). In these applications, the RSS tool is run below the drilling motor, which results in higher mechanical loading on the motor and significant financial risk to the client. Wells using RSS are typically longer, and more complex than others and have significantly higher daily drilling costs. The downtime, and potential lost or damaged equipment costs associated with failures justifies use of a premium product. The RSS series of motors utilize ultra-high strength materials coupled with engineering enhancements that allow the motor to function at high pressure drops required for RSS operation. YTD in 2019, Cathedral has expanded its specialized fleet to 20 5-5/8" tools, and are currently building initial production volumes in both 5" and 7" sizes. These three configurations address the needs for virtually all North American RSS applications. This series of our nDurance drilling motor was recently used by Shell Canada in drilling the longest well in Canadaat 8,510 meters (being 8.5 kilometers or 5.3 miles).
Despite a challenging 2019, we are both optimistic and confident about our future prospects. We will continue to focus on what we can control – costs, improving operational efficiencies and strategic sales and marketing of our offerings.
2019 CAPITAL PROGRAM
During the nine months ended September 30, 2019, the Company invested $5,321(2018 - $12,920) in equipment. The following table details the current period's net equipment additions:
| | | | | | Nine months ended | | | | September 30, 2019 | | | Equipment additions: | | | | Motors | $ | 2,344 | | MWD | 2,451 | | | Other | 526 | | | Total cash additions | 5,321 | | | Less: proceeds on disposal of equipment (excluding capital lease settlements) | (5,890) | | | | | | | Net equipment additions (1) | $ | (569) | | (1)See "NON-GAAP MEASUREMENTS" | | |
For fiscal 2019, it is expected that the net equipment additions will be $nil or a net recovery (proceeds on disposals of equipment greater than additions). Subject to operating results and industry outlook, equipment lost-in-hole will be replaced and funded from the proceeds received.
RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30
Effective January 1, 2019, the Company adopted IFRS 16 Leases ("IFRS 16") (see discussion under "New and Future 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 September 30, 2019was higher in comparison to 2018 in the amount of $650. Previously this amount was classified as rent expense (being $552in COS amounts and $98in SG&A amounts).
| Revenues | | | | | | | 2019 | 2018 | | | | Canada | | | | | | | $ | 8,325 | $ | 7,876 | | United States | | | | | | | 22,860 | 34,694 | | | | Total | | | | | | | $ | 31,185 | $ | 42,570 |
Revenues2019 Q3 revenues were $31,185, which represented a decrease of $11,385or 27% from 2018 Q3 revenues of $42,570.
Canadian revenues (excluding motor rental revenues) decreased slightly to $7,603in 2019 Q3 from $7,697in 2018 Q3; a 1% decrease. This decrease was the net result of: i) a 2% increase in activity days to 973 in 2019 Q3 from 953 in 2018 Q3 and ii) an 3% decrease in the average day rate to $7,813in 2019 Q3 from $8,076in 2018 Q3.
Despite a 35% year-over-year decline in the average active land rig count in Canada(source: Baker Hughes), Cathedral was able to increase its market share in that same time period and recorded a 2% increase in activity days.
U.S. revenues (excluding motor rental revenues) decreased 36% to $22,312in 2019 Q3 from $34,669in 2018 Q3. This decrease was the net result of: i) a 38% decrease in activity days to 1,622 in 2019 Q3 from 2,634 in 2018 Q3; net of ii) a 5% increase in the average day rate to $13,756in 2019 Q3 from $13,162in 2018 Q3 (when converted to Canadian dollars).
The average active land rig count for the U.S. was down 12% in 2019 Q3 compared to 2018 Q3 (source: Baker Hughes). The Company experienced a 38% decline in activity days resulting in a decrease in market share compared to 2018 Q3. 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 program, as well as loss of work related to pricing. Day rates in USD increased 4% to $10,422 USDin 2019 Q3 from $10,069 USDin 2018 Q3. The 2019 Q3 rate is up due to an increase in revenues from providing Rotary Steerable System ("RSS") services which are rented from a 3rd party.
Motor rentals increased in both Canadaand U.S. Combined rental revenues increased to $1,270in 2019 Q3 compared to $205in 2018 Q3. The increase is due to increased availability of motors for rental due to less full service work being performed and the fact Cathedral's nDurance drilling motors are noted for their reliability and drilling performance.
Gross margin and adjusted gross marginGross margin for 2019 Q3 was -1% compared to 9% in 2018 Q3. Adjusted gross margin (see Non-GAAP Measurements) for 2019 Q3 was $4,628or 15% compared to $6,688or 16% for 2018 Q3.
Adjusted gross margin, as a percentage of revenue, decreased due increased rentals as percentage of revenue (actual rental costs were down year-over-year) and increased use of 3rd party insurance coverage. The increases were partially offset by lower equipment repair costs. In addition, management has reduced fixed cost component of costs of sales (mainly due to headcount reductions) to take into consideration the decline in activity levels within Cathedral and the industry as a whole.
Depreciation of equipment allocated to cost of sales increased to $5,000in 2019 Q3 from $2,627in 2018 Q3 due to changes in estimate of useful life made effective October 1, 2018. Depreciation included in cost of sales as a percentage of revenue was 16% for 2019 Q3 and 6% in 2018 Q3.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $3,156in 2019 Q3; a decrease of $301compared with $3,457in 2018 Q3. As a result of the implementation of IFRS 16 there was a decrease of $98related to amounts previously classified as rent expense, but currently classified as lease liability repayments and finance costs (interest). 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 10% in 2019 Q3 compared to 8% in 2018 Q3.
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 $743in 2019 Q3; a decrease of $38compared with $781in 2018 Q3. The portion of total technology group costs related to new product development was $295and this amount has been capitalized as intangible assets (2018 Q3 - $268). Technology group costs not related to new product development were $448in 2019 Q3; a decrease of $65compared with $513in 2018 Q3. Technology group costs decreased primarily due to reduction in staffing.
Gain on disposal of equipmentDuring 2019 Q3, the Company had a gain on disposal of equipment of $859compared to $3,250in 2018 Q3. 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. In 2019 Q3, the Company received proceeds on lost-in-hole recoveries from clients of $1,267(2018 Q3 - $3,827).
Finance costs Finance costs consist of interest expenses on operating loans, long-term debt and bank charges of $139for 2019 Q3 versus $118for 2018 Q3. The change was due to increase in average debt levels outstanding in 2019 Q3.
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 loss of $(279)in 2019 Q3 compared to a gain of $674in 2018 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 2019 Q3 foreign currency loss are unrealized loss of $(250)(2018 Q3 - gain of $624) 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 – NINE MONTHS ENDED SEPTEMBER 30
Adjusted EBITDAS for the nine months ended September 30, 2019was higher in comparison to 2018 in the amount of $2,275as a result of IFRS 16 changes discussed previously. Previously this amount was classified as rent expense (being $1,897in COS amounts and $378in SG&A amounts).
| Revenues | | | | 2019 | 2018 | | | | Canada | | | | $ | 19,340 | $ | 22,977 | | United States | | | | 81,637 | 94,723 | | | | Total | | | | $ | 100,977 | $ | 117,700 |
Revenues2019 revenues were $100,977, which represented a decrease of $16,723or 14% from 2018 revenues of $117,700.
Canadian revenues (excluding motor rental revenues) decreased to $16,960in 2019 from $20,790in 2018; an 18% decrease. This decrease was the result of: i) a 15% decrease in activity days to 2,222 in 2019 from 2,629 in 2018 and ii) an 3% decrease in the average day rate to $7,633in 2019 from $7,908in 2018.
The average active land rig count in Canadawas down 15% in 2019 compared to 2018 (source: Baker Hughes) which equals the decline in activity days experienced by Cathedral.
U.S. revenues (excluding motor rental revenues) decreased 14% to $80,282in 2019 from $93,632in 2018. This decrease was the net result of: i) a 23% decrease in activity days to 5,904 in 2019 from 7,705 in 2018; net of ii) a 12% increase in the average day rate to $13,598in 2019 from $12,152in 2018 (when converted to Canadian dollars).
The average active land rig count for the U.S. decreased 3% in 2019 compared to 2018 (source: Baker Hughes). The Company experienced a 23% 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 program, as well as loss of work related to pricing. Day rates in USD increased 8% to $10,225 USDin 2019 from $9,430 USDin 2018. In addition to the customer credits discussed above that reduced the 2018 rate, the 2019 rate is up due to premiums on certain high performance motors and increase in revenues from providing RSS services which are rented from a 3rd party.
Motor rentals increased slightly in both Canadaand U.S. Combined rental revenues increased to $3,735in 2019 compared to $3,277, a 13% increase. The increase is due to increased availability of motors for rental due to less full service work being performed and the fact Cathedral's nDurance drilling motors are noted for their reliability and drilling performance.
Gross margin and adjusted gross marginGross margin for 2019 was -4% compared to 4% in 2018. Adjusted gross margin (see Non-GAAP Measurements) for 2019 was $10,473or 10% compared to $12,081or 10% for 2018.
While overall adjusted gross margin, as a percentage of revenue, was unchanged, the components changed as rentals and 3rd party insurance increased as percentage of revenue, while repairs decreased. In addition, management has reduced fixed cost component of costs of sales (mainly due to headcount reductions) to take into consideration the decline in activity levels within Cathedral and the industry as a whole. Depreciation of equipment allocated to cost of sales increased to $14,421in 2019 from $7,415in 2018 due to changes in estimate of useful life made effective October 1, 2018. Depreciation included in cost of sales as a percentage of revenue was 14% for 2019 and 6% in 2018.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $10,042in 2019; a decrease of $949compared with $10,991in 2018. As a result of the implementation of IFRS 16 there was a decrease of $378related to amounts previously classified as rent, but currently classified as lease liability repayments and finance costs (interest). Additionally, there were reductions in SG&A wages and related benefits and burdens. As a percentage of revenue, SG&A was 10% in 2019 compared to 9% 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 $2,633in 2019; an increase of $162compared with $2,471in 2018. The portion of total technology group costs related to new product development was $794and this amount has been capitalized as intangible assets (2018 - $730). Technology group costs not related to new product development were $1,839in 2019; an increase of $98compared with $1,741in 2018.