ACT Energy Technologies Ltd. press release
Cathedral Energy Services Reports Results for 2016 Q3
TSX - Toronto Stock Exchange · Canada
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Canada NewsWire
CALGARY, Nov. 10, 2016
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, Nov. 10, 2016/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, 2016and 2015. 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 | | | | | | | | | | 2016 | 2015 | 2016 | 2015 | | | | | | | Revenues | $ | 21,101 | $ | 31,374 | $ | 57,783 | $ | 111,130 | | | Adjusted gross margin % (1) | 21% | 19% | 19% | 17% | | | | | | | Adjusted EBITDAS (1) | $ | 2,171 | $ | 3,013 | $ | 2,009 | $ | 7,562 | | | | Diluted per share | $ | 0.06 | $ | 0.08 | $ | 0.06 | $ | 0.21 | | | As % of revenues | 10% | 10% | 3% | 7% | | | | | | Funds from (used for) operations (1) | $ | 626 | $ | 2,723 | $ | (1,005) | $ | 5,835 | | | | Diluted per share | $ | 0.02 | $ | 0.08 | $ | (0.03) | $ | 0.16 | | Loss before income taxes | $ | (3,188) | $ | (10,688) | $ | (4,239) | $ | (17,825) | | | | Basic per share | $ | (0.09) | $ | (0.29) | $ | (0.12) | $ | (0.49) | | | Diluted per share | $ | (0.09) | $ | (0.29) | $ | (0.12) | $ | (0.49) | | Gain on disposal of foreign subsidiary | $ | - | $ | - | $ | 10,865 | $ | - | | | Provision for settlement | $ | - | $ | - | $ | (3,796) | $ | - | | | Write-down of deferred taxes related to CRA settlement | $ | - | $ | - | $ | - | $ | (10,768) | | | Impairment of goodwill | $ | - | $ | (5,848) | $ | - | $ | (5,848) | | | Net earnings (loss) | $ | (2,126) | $ | (8,852) | $ | 641 | $ | (24,842) | | | | Basic per share | $ | (0.06) | $ | (0.24) | $ | 0.02 | $ | (0.68) | | | Diluted per share | $ | (0.06) | $ | (0.24) | $ | 0.02 | $ | (0.68) | | Dividends declared per share | $ | - | $ | 0.04 | $ | - | $ | 0.12 | | | Property and equipment additions - cash basis | $ | 146 | $ | 296 | $ | 484 | $ | 6,444 | | | Weighted average shares outstanding | | | | | | | | | | | | Basic (000s) | 36,295 | 36,295 | 36,295 | 36,295 | | | | | | | Diluted (000s) | 36,297 | 36,295 | 36,295 | 36,295 | | | | | | | | | | | | | | | | | | | | September 30
2016 | December 31
2015 | | | | | | | Working capital | | | $ | 18,974 | $ | 13,550 | | | | | Total assets | | | $ | 133,888 | $ | 155,610 | | | | | Loans and borrowings excluding current portion | | | $ | 25,212 | $ | 30,477 | | | | | Shareholders' equity | | | $ | 96,025 | $ | 96,607 | | | | | | | | | | | | | | | | (1)Refer to "NON-GAAP MEASUREMENTS" | | | | | | | | | |
2016 Q3 KEY TAKEAWAYS
Adjusted gross margin improved to 21% in 2016 Q3 from 19% in 2015 Q3. The adjusted gross margin was achieved based on cost management and efficiency initiatives despite a significant decrease in revenue day rates in the period;
Export Development Canada (EDC) joined Cathedral's lending syndicate resulting in an increase in Cathedral's credit facility through to March 31, 2017;
Revenues of $21,101in 2016 Q3 compared to $31,374in 2015 Q3, a 33% decline and Adjusted EBITDAS of $2,171in 2016 Q3 compared to $3,013in 2015 Q3. Adjusted EBITDAS margin remained at 10% for both quarters even with drop in revenues;
Revenues and profitability were significantly affected by reduced industry activity and pricing pressures resulting from continued decline in commodity prices in early 2016; and
With an improved industry outlook, management continues to focus on initiatives to manage costs, improve margins, improve revenue through enhanced focus on our sales and marketing capabilities and manage Cathedral's financial obligations and liquidity.
OUTLOOK
With WTI oil pricing seemingly moving more firmly toward the $50per barrel ("bbl") U.S. dollars ("USD") range through October, improved natural gas pricing and indications of producers expanding 2017 capital budgets, we are seeing an improved outlook for industry activity levels going into Q4 and 2017. Although we continue to expect volatility in energy commodity prices, we believe prices settling more firmly into the $50bbl range and an improved natural gas pricing will translate into improved activity levels for our business.
Our funds from operations for the third quarter was positive. However, like most oilfield services companies we also experienced a tough quarter due to lower year-over-year activity levels and continued pricing pressure from our customers. The results of the quarter were buoyed with gain on equipment sales resulting from equipment lost downhole. When our equipment cannot be retrieved from a wellbore due to the drilling environment, customers reimburse us for its value. During the quarter we also continued to experience an increase in our U.S. directional drilling market share and continued strengthening of this business division.
Throughout the downturn we have remained cash flow positive on a rolling 12 month basis which has been achieved through managing our costs and continuing to work on our strategic initiatives to improve our business.
The challenge with our more positive industry outlook is our ability to fund future growth in our business. As the market improves, we will need additional funds to hire staff, ensure our equipment fleet is sufficient to meet demand and to fund the working capital needs associated with accounts receivable growth. Although we have significantly reduced our debt since December 2014and remained cash flow positive, our lenders continue to put pressure on our credit availability. Our credit facility availability is currently $33,000, but will be reduced to $28,000by March 31, 2017. As at September 30, we had positive working capital of approximately $19,000and our total drawn facility was $27,000(including outstanding Letters of Credit) with a cash balance of $570so we are currently already within the lenders future requirements. To assist with securing additional liquidity, in August, the Company invited Export Development Canada ("EDC") to join our lending syndicate. EDC has a mandate to support the energy industry and in particular companies with growing international operations like Cathedral. EDC allowed our existing lending syndicate to reduce their exposure while at the same time also allowing Cathedral to increase our available credit by $3,000.
The above credit availability situation, in part, led us to consider a strategic alternatives process. In August, Cathedral's board analyzed the various alternatives available to the Company to provide its stakeholders with the best solution to achieve the growth prospects the Company believes are available as industry conditions improve. The result of this was a proactive decision to retain the services of an investment banking firm to assist in the process of determining the best available options for the Company. Our primary objective with this undertaking is to secure financial capacity to augment and accelerate Cathedral's growth capabilities. In addition to seeking growth capital, finding a way for Cathedral to gain future size and scale is also a key objective in order to maximize our potential for our shareholders. The strategic alternatives process is well underway, however, there are no guarantees that this process will result in an outcome that fully achieves our objectives.
Based on the current commodity prices and associated positive outlook we are optimistic about our business prospects. We have very good platform for growth in the Canadian and U.S. market, industry leading technology and a team of experienced and motivated employees. We have also made great progress over the past 20 months with improving our business operations in a very tough industry environment. We will continue to explore ways to grow and manage our business to ensure we create long-term value for our shareholders.
DIVIDENDS
In 2015 Q4, the Board of Directors made the decision to suspend the payment of Cathedral's quarterly dividend until industry conditions improve. This decision was based on the reductions in commodity prices and uncertainties around expected drilling and completion activity. This allows the Company 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.
2016 CAPITAL PROGRAM
During the nine months ended September 30, 2016the Company invested $484(2015 - $6,444) in property and equipment. The following table details the current period's net property and equipment additions:
| | | | | | | | | Nine months ended | | | | | | September 30, 2016 | | | | Property and equipment additions: | | | | | | | Growth capital (1) | | $ | 117 | | | Maintenance capital(1) | | 153 | | | | Replacement capital (1) | | 214 | | | Total cash additions | | 484 | | | | Less: proceeds on disposal of property and equipment | | (3,750) | | | | Net property and equipment additions (1) | | $ | (3,266) | | | (1)See "NON-GAAP MEASUREMENTS" | | | | |
Cathedral's 2016 capital budget remains at $1,000with $200for growth capital and $800for replacement or maintenance capital. The growth additions are primarily for MWD system enhancements, replacement capital is primarily to replace items which have been lost-in-hole and maintenance capital is required to maintain existing capacity levels. Proceeds from disposal of property and equipment are primarily related to equipment lost-in-hole. The capital budget will be reviewed quarterly.
The following is a summary of major equipment owned by the Company:
| | | | | | | September 30 | December 31 | September 30 | | | 2016 | 2015 | 2015 | | Directional Drilling - MWD systems | 128 | 140 | 140 | | Flowback and Production Testing ("F&PT") units | 64 | 66 | 66 |
The stated number of MWD systems represent current equipment availability. Although some MWD equipment has been lost-in-hole, the Company has also made the decision not to refurbish certain equipment due to having sufficient equipment availability to meet current job requirements. In 2016 Q3 two production testing units were sold as they were deemed to be redundant assets in our fleet.
RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30
| | | | | | | | | | | | | | | | | Three months ended September 30, 2016 | | Three months ended September 30, 2015 | | | | | | | | | | | | | | Flowback and | | | | Flowback and | | | | | | | | | | Directional | production | | | Directional | production | | | | | | | | | Revenues | drilling | testing | Total | | drilling | testing | Total | | | | | | | | Canada | $ | 5,844 | $ | 1,536 | $ | 7,380 | | $ | 10,171 | $ | 2,158 | $ | 12,329 | | United States | 13,644 | 77 | 13,721 | | 16,194 | 2,851 | 19,045 | | | | | | | | | | | | | | | | | | | | | | | Total | $ | 19,488 | $ | 1,613 | $ | 21,101 | | $ | 26,365 | $ | 5,009 | $ | 31,374 |
Revenues2016 Q3 revenues were $21,101representing a decrease of $10,273or 33% from 2015 Q3 revenues of $31,374. All divisions experienced revenue decreases compared to 2015 Q3 due to reduced activity levels resulting from customer reactions to decreases in commodity prices and day rate decreases primarily related to competitive pressure and pricing concessions requested by customers due to market conditions.
Canadian Directional Drilling revenues (excluding motor rental revenues) decreased to $4,502in 2016 Q3 from $8,302in 2015 Q3; a 46% decrease. This decrease was the result of: i) a 35% decrease in activity days to 673 in 2016 Q3 from 1.036 in 2015 Q3; and ii) a 17% decrease in the average day rate to $6,689in 2016 Q3 from $8,014in 2015 Q3. Motor rental revenues for 2016 Q3 were $1,342(2015 Q3 - $1,869); a decrease of $527. Motor rentals declined in Q3 as a result of lower activity levels with customer jobs the motors were deployed on and changes in specific job equipment requirements. Due to a limited supply of drilling motors, Cathedral is also shifting the use of these motors to Cathedral full service directional drilling jobs which have higher revenue associated with them than would a motor rental only.
The decrease in activity days was mainly due to overall reductions in activity levels in Canadaas well as certain Cathedral customers reducing their drilling programs and others who ceased drilling during the period. The average active land rig count for Canadawas down 38% in 2016 Q3 compared to 2015 Q3. 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.
U.S. Directional Drilling revenues (excluding motor rental revenues) decreased to $13,011in 2016 Q3 from $15,707in 2015 Q3; a 17% decrease. This decrease was the result of: i) small increase in activity days to 1,283 in 2016 Q3 from 1,278 in 2015 Q3; and ii) a 17% decrease in the average day rate to $10,141in 2016 Q3 from $12,290in 2015 Q3 (when converted to Canadian dollars). The activity days for the Rocky Mountain and Northeast regions were down, but these were offset by increases in the Texasand Oklahomaoperating areas. The average active land rig count for the U.S. was down 44% in 2016 Q3 compared to 2015 Q3. Rates in USD fell to $7,768 USDin 2016 Q3 from $9,383 USDin 2015 Q3. U.S. day rate 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 2016 Q3 were $633compared to $487in 2015 Q3.
Canadian F&PT revenues decreased to $1,536in 2016 Q3 from $2,158in 2015 Q3; a 29% decrease. The decrease resulted from a reduction in activity levels due to the industry downturn as well as a 14% decline in pricing. Wells completed in Canadafell approximately 41% in 2016 Q3 compared to 2015 Q3.
U.S. F&PT revenues decreased to $77in 2016 Q3 from $2,851in 2015 Q3; a 98% decrease. In Q1 2016, the Company made the decision to scale down the operations of its U.S. F&PT division to reflect current industry activity levels and mitigate losses. Business development activities have continued in order to enable the business to secure work where it makes economic sense. Sales activities have been supported by the U.S. Directional Drilling sales team and in addition the division currently has 2 dedicated sales staff. As industry activity levels improve, management's intention is to further ramp up operations commensurately.
Gross margin and adjusted gross margin Gross margin for 2016 Q3 was 1% compared to 3% in 2015 Q3. Adjusted gross margin (see Non-GAAP Measurements) for 2016 Q3 was $4,375or 21% compared to 5,881 or 19% for 2015 Q3.
The Company implemented a number of cost reductions throughout 2015 and 2016 including reducing wages for field, support and office staff, implementing work force reductions and reducing other direct cost items. Even with lower revenue day rates in many divisions the adjusted gross margin improved due to reduced field labour costs and repairs, however, these reductions were offset by higher battery and equipment rentals on a percentage of revenue basis.
Additionally, there was a reduction in the fixed component of cost of sales of 28% compared with 2015 Q3 amount. However, on a percentage of revenue basis, these costs were greater in 2016 Q3 increasing 1% over 2015 Q3.
Depreciation allocated to cost of sales decreased to $4,153in 2016 Q3 from $4,984in 2015 Q3. Depreciation included in cost of sales as a percentage of revenue was 20% for 2016 Q3 and 16% in 2015 Q3.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $3,884in 2016 Q3; a decrease of $730compared with $4,614in 2015 Q3. As a percentage of revenue, SG&A was 18% in 2016 Q3 and 15% in 2015 Q3.
Excluding the non-cash items of depreciation and share-based compensation, SG&A was $3,818in 2016 Q3 compared to $4,533in 2015 Q3; a decrease of $715or 16%. 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% and a further 5% to 9% on January 1, 2016. There were additional reductions to staffing levels in 2015 and 2016. 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 other SG&A item due to efforts to reduce expenditures.
Gain on disposal of equipmentDuring 2016 Q3, the Company had a gain on disposal of equipment of $1,239compared to $1,638in 2015 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.
Finance costs Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $599for 2016 Q3 versus $365for 2015 Q3. The increase in finance costs relate to increases in interest rates partially offset by a decreased utilization of the Company's credit facility.
Foreign exchange loss The Company had a foreign exchange loss of $(160)in 2016 Q3 compared to $(2,388)in 2015 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 2016 Q3 foreign currency gains are unrealized losses of $166(2015 Q3 –$2,374) related to intercompany balances.
Impairment of goodwill In 2015 Q3 the Company recorded an impairment of goodwill of $5,848. 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's expectations for future 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.
Income taxFor 2016 Q3, the Company had an income tax recovery of $1,062compared to $1,836in 2015 Q3. Excluding adjustment to prior years' tax provisions, the effective tax rate was 27% for 2016 Q3 and 38% for 2015 Q3. Income tax expense is booked based upon expected annualized effective rates.
RESULTS OF OPERATIONS – NINE MONTHS ENDED SEPTEMBER 30
| | | | | | | | | | | | | | | | | Nine months ended September 30, 2016 | | Nine months ended September 30, 2015 | | | | | | | | | | | | | | Flowback and | | | | Flowback and | | | | | | | | | | Directional | production | | | Directional | production | | | | | | | | | Revenues | drilling | testing | Total | | drilling | testing | Total | | | | | | | | Canada | $ | 14,794 | $ | 4,313 | $ | 19,107 | | $ | 31,844 | $ | 10,092 | $ | 41,936 | | United States | 38,064 | 612 | 38,676 | | 53,237 | 15,957 | 69,194 | | | | | | | | | | | | | | | | | | | | | | | Total | $ | 52,858 | $ | 4,925 | $ | 57,783 | | $ | 85,081 | $ | 26,049 | $ | 111,130 |