ACT Energy Technologies Ltd. press release
Cathedral Energy Services Reports Results for 2017 Q2
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
CALGARY, Aug. 10, 2017
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, Aug. 10, 2017/CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) announces its consolidated financial results for the three and six months ended June 30, 2017and 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 June 30 | Six months ended June 30 | | | | | | | | | | 2017 | 2016 | 2017 | 2016 | | | | | | | Revenues | $ | 34,355 | $ | 14,624 | $ | 72,678 | $ | 33,368 | | | Adjusted gross margin % (1) | 15.0% | 15.0% | 19% | 21% | | | | | | | Adjusted EBITDAS (1) | $ | 2,363 | $ | (1,638) | $ | 9,159 | $ | (162) | | | | Diluted per share | $ | 0.05 | $ | (0.05) | $ | 0.20 | $ | - | | | As % of revenues | 7% | -11% | 13% | 0% | | | | | | Funds from continuing operations (1) | $ | 1,664 | $ | (1,799) | $ | 5,653 | $ | (1,632) | | | | Diluted per share | $ | 0.03 | $ | (0.05) | $ | 0.12 | $ | (0.04) | | Gain on disposal of foreign subsidiary | $ | - | $ | - | $ | - | $ | 10,865 | | | Earnings before income taxes | $ | 54 | $ | (8,581) | $ | 4,026 | $ | 2,429 | | | | Basic and diluted per share | $ | - | $ | (0.24) | $ | 0.09 | $ | 0.07 | | Net earnings | $ | 186 | $ | (6,916) | $ | 2,767 | $ | 2,767 | | | | Basic and diluted per share | $ | - | $ | (0.19) | $ | 0.06 | $ | 0.08 | | Equipment additions - cash basis | $ | 2,511 | $ | 70 | $ | 3,547 | $ | 338 | | | Weighted average shares outstanding | | | | | | | | | | | | Basic (000s) | 48,916 | 36,295 | 45,779 | 36,295 | | | | | | | Diluted (000s) | 49,023 | 36,295 | 45,917 | 36,295 | | | | | | | | | | | | | | | | | | | | | | June 30 | December 31 | | | | | | | | | | 2017 | 2016 | | | | | Working capital | | | | | $ | 29,692 | $ | 39,324 | | | Total assets | | | | | $ | 122,175 | $ | 136,017 | | | Loans and borrowings excluding current portion | | | | | $ | 71 | $ | 26,322 | | | Shareholders' equity | | | | | $ | 105,151 | $ | 90,772 | | | | | | | | | | | | | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | | | | | |
2017 Q2 KEY TAKEAWAYS
Q2 revenues increased 135% from $14,624in 2016 Q2 to $34,355in 2017 Q2 and year-to-date revenues increased 118% from $33,368in 2016 to $72,678in 2017.
Q2 adjusted EBITDAS increased from negative $(1,638)in 2016 Q2 to positive $2,363in 2017 Q2. Year-to-date adjusted EBITDAS increased from negative $(162)in 2016 to $9,159in 2017.
OUTLOOK
The second quarter for oilfield services companies with Canadian operations is generally challenging due to very low activity levels resulting from the seasonal spring break-up in Canada. Relative to second quarter results from continuing operations in 2015 and 2016 we were pleased with our performance in 2017 Q2. Revenues were up significantly compared to the prior year's comparative quarters and our Adjusted EBITDAS were firmly positive as compared to negative amounts in the prior years. These improvements are due to significantly increased activity levels in 2017 particularly in the United States("U.S.") along with our continued focus on operational efficiencies and business improvements across the entire company.
Of note in 2017 Q2 was that our U.S. drilling activity days was similar to 2017 Q1 despite the fact that the average U.S. rig count increased 20% from Q1 to Q2. This resulted in our U.S. market share dropping in the quarter. There are a number of reasons for this. The primary reason was equipment capacity constraints in the quarter which were a result of our ability to repair, replace and invest in new equipment quickly enough to meet increased industry demand. Much of this is related to us, and our supply chain, needing to ramp up our businesses quickly in the face of a U.S. rig count that more than doubled from 421 active rigs at the end of June 2016to 940 active rigs at the end of June 2017(source: Baker Hughes).
A contributing factor impacting our equipment capacity has been damaged equipment and equipment lost-in-hole. Directional drilling equipment is getting pushed harder and faster than in the past as a result of customers drilling faster with longer laterals. With the higher rates of wellbore penetration being demanded, equipment is being subjected to a more severe drilling environment. These increased equipment demands are necessitating more frequent repairs and upgrades than in the past and in part is contributing to higher equipment lost-in-hole frequency. This is certainly not an issue that is isolated only to Cathedral. However, the good news is that based on Cathedral having our own equipment and doing our own repairs we are able to react to these demands faster. Our Drilling Engineering Services and Sales teams have also been working with customers to improve drilling practices to help us better help them. In addition, we have also aggressively ramped up our capital spending program to alleviate the equipment constraints and expect our available capacity to start improving in late Q3. The lag time involved with deploying new equipment is a consequence of the lead times required to procure and manufacture equipment. Again we are fortunate that we have control over much of this process compared to competitors that procure their equipment from third party providers.
Another issue that impacted U.S. activity days in Q2 was us being more selective in the work we were undertaking. We chose to turn down opportunities where we could not achieve an adequate return on a fully costed basis (which includes consideration of an imputed capital charge on the equipment deployed). Customers have generally been very reluctant to give price increases or reimburse fully for equipment damages. Although U.S. day rates improved in the quarter, this was largely due to the mix of work involved. The ability to push through price increases was very tough in the quarter based on the negative outlook on oil prices that started in April, however, we have made progress with some customers who recognize our value.
The competitive environment in North Americafor directional drilling services remains fierce. From our perspective, 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 without fully considering the cost implications related to equipment repairs, upgrades and replacement. We fully believe that sticking to our drilling performance based strategy and our strong financial position will eventually carry the day. Our customer value proposition is delivering "Better Performance Every Day", supported by our proprietary equipment, great people, drilling engineering services and size and scale.
As noted in our 2017 Q1 Outlook, our expectation was for continued commodity price volatility going forward and we certainly saw this in Q2. Through the second quarter, WTI pricing ranged from a high of $53to a low of $42 USD/bbl. With pricing dipping into the low $40 USD/bbl range we started to see customers indicating they would pare back their capital spending or defer drilling programs. The result was a slowing in U.S. rig count growth starting in June. For Canadian clients the increase in the Canadian Dollar coupled with WTI price decrease further impairs their cash flow and ultimately their funds available for drilling. The consequence has been a challenged outlook for the oilfield services sector in general with most analysts reducing expectation for 2017 H2 and into 2018. Having said this, WTI prices have recently rebounded into the $50bbl range. As goes the outlook on oil prices, so goes the rig count and directional drilling industry activity levels.
In the face of the current industry uncertainty, we continue to focus on managing our costs, securing profitable work and continuing to improve our business operations. On the sales side, we have strategies to help us achieve higher pricing for our services and we are deliberately focused on developing long-term relationships with key customers where our performance matters approach resonates. 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. Our investment in new and replacement equipment will improve our equipment capacity starting in 2017 H2 and into 2018.
2017 CAPITAL PROGRAM
During the six months ended June 30, 2017the Company invested $3,547(2016 - $338) in equipment. The following table details the current period's net equipment additions:
| | | | | | | Six months ended | | | | | June 30, 2017 | | | | Equipment additions: | | | | | | Growth capital (1) | $ | 1,369 | | | Maintenance capital(1) | 1,538 | | | | Replacement capital(1) | 640 | | | Total cash additions | 3,547 | | | | Less: proceeds on disposal of equipment (excluding capital lease settlements) | (4,103) | | | | Net equipment additions(1) | $ | (556) | | | (1)See "NON-GAAP MEASUREMENTS" | | | |
Cathedral's 2017 capital budget ("capex") remains at $10,000of net equipment additions(1)for the year. The $10,000net capex plan for 2017 is comprised of $4,900of replacement and maintenance capital and $5,100of growth capital. The $4,900amount, 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 Measurement-While-Drilling ("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 JUNE 30
| | | | | | | Revenues | 2017 | 2016 | | | | Canada | $ | 4,914 | $ | 3,286 | | United States | 29,441 | 11,338 | | | | Total | $ | 34,355 | $ | 14,624 |
Revenues2017 Q2 revenues were $34,355, which represented an increase of $19,731or 135% from 2016 Q2 revenues of $14,624. Both Canada and U.S. operations had increases due to improvements in overall 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 Q2 compared to 2016 Q2.
Canadian revenues (excluding motor rental revenues) increased to $4,143in 2017 Q2 from $1,799in 2016 Q2; a 130% increase. This increase was the result of: i) a 97% increase in activity days to 533 in 2017 Q2 from 271 in 2016 Q2; and ii) a 17% increase in the average day rate to $7,773in 2017 Q2 from $6,638in 2016 Q2. Partially offsetting the revenue increase was a decrease of $716in motor rental revenue. Motor rental revenues for 2017 Q2 were $771(2016 Q2 - $1,487).
The average active land rig count in Canadawas up 141% in 2017 Q2 compared to 2016 Q2. During the spring break-up that occurs in Canadaevery Q2, it is challenging to correlate the Company's activity levels and the land rig count due to the smaller group of producers who are drilling and types of drilling activity. The increases in day rates was in part due to the type of work performed in addition to $581 related to expense recoveries with certain customers that are not expected to recur. Due to the limited activity levels in Q2, day rates are not comparable to other quarters as the fewer number of jobs can impact the day rate more significantly than in other quarters.
U.S. Directional Drilling revenues (excluding motor rental revenues) increased to $29,243in 2017 Q2 from $10,431in 2016 Q2; a 180% increase. This increase was the result of: i) a 157% increase in activity days to 2,531 in 2017 Q2 from 984 in 2016 Q2; and ii) a 9% increase in the average day rate to $11,554in 2017 Q2 from $10,601in 2016 Q2 (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 121% in 2017 Q2 compared to 2016 Q2. Due to efforts of sales and marketing staff and performance on client jobs, the Company was able to increase market share compared to 2016 Q2. Day rates in USD increased to $8,588 USDin 2017 Q2 from $8,228 USDin 2016 Q2; a 4% increase. U.S. day rates were up due to the mix of work performed by the U.S. division, including providing footage drilling services to certain clients, which can result in higher relative day rates. U.S. motor rental revenues for 2017 Q2 were $198compared to $907in 2016 Q2.
Gross margin and adjusted gross margin Gross margin for 2017 Q2 was 7% compared to negative (6)% in 2016 Q2. Adjusted gross margin (see Non-GAAP Measurements) for 2017 Q2 was $5,073or 15% compared to $2,141or 15% for 2016 Q2.
Adjusted gross margin, as a percentage of revenue, remained unchanged, but the composition of cost of sales changed. Contrasted with the comparable quarter in 2016 there were increases in field labour rates and higher equipment rentals. These increases were offset by a reduction in the fixed component of cost of sales which were 11% lower on a percentage of revenue basis in 2017 Q2 compared to 2016 Q2. 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 $2,774in 2017 Q2 from $3,097in 2016 Q2. Depreciation included in cost of sales as a percentage of revenue was 8% for 2017 Q2 and 21% in 2016 Q2.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $4,110in 2017 Q2; an increase of $594compared with $3,516in 2016 Q2. As a percentage of revenue, SG&A was 12% in 2017 Q2 compared to 24% in 2016 Q2.
Excluding the non-cash items of depreciation and share-based compensation, SG&A was $4,036in 2017 Q2 compared to $3,453in 2016 Q2, an increase of $583or 17%. SG&A increased primarily due to increases to staff costs commensurate with increased activity levels and U.S. sales taxes on intercompany charges. Staff costs included in SG&A include executive, sales, accounting, human resources, payroll, safety, technology support and related support staff.
Gain on disposal of equipmentDuring 2017 Q2, the Company had a gain on disposal of equipment of $1,277compared to $141in 2016 Q2. 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 which consist of interest expenses on operating loans, loans and borrowings and bank charges were $96for 2017 Q2 versus $407for 2016 Q2. The decrease in finance costs relate to repayments of loans in 2017 Q1 and decrease in the interest rates.
Foreign exchange The Company had a foreign exchange gain of $699in 2017 Q2 compared to a loss of $(56)in 2016 Q2 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 Q2 foreign currency gains are unrealized gain of $682(2016 Q2 – loss of $(24)) related to intercompany balances.
Provision for settlement In 2016 Q2, the Company entered into a Settlement Agreement and Release (the "Settlement Agreement") in respect of two wage and hour lawsuits (the "Collective Actions") that were filed against the Company's wholly owned U.S. subsidiary ("INC"). The Collective Actions alleged that INC employed or contracted MWD and Directional Drilling ("DD") operators were entitled to recover unpaid or incorrectly calculated overtime wages under the Fair Labor Standards Act ("FLSA").
The Settlement Agreement resolved all claims from INC employed and contracted MWD and DD operators. Under the terms of the Settlement Agreement, the parties established an initial settlement fund of up to $3,400 USD. The final determination of the settlement fund amount was based on the number of claimants that participated in the settlement at the end of December 2016, which under the terms of the Settlement Agreement is confidential. The settlement fund payments will be paid quarterly by the Company over a three-year period with the final payment due on or before September 2019. The quarterly payments may be accelerated in the event Cathedral meets certain financial targets over the payment period and can be deferred if a scheduled payment would put Cathedral in violation of its credit facility covenants subject to not more than three payments being deferred. Any FLSA settlement fund payments made by Cathedral exceeding $200 USDare subject to the approval of Cathedral's banking syndicate.
In 2017 Q1, the Company entered into a confidential settlement agreement with one of its U.S. clients related to a down-hole drilling incident, which impacted two of their wells in December 2013. The settlement is payable based on an initial payment in 2017 Q1 and the remainder in quarterly installments concluding in 2021.
Any settlement fund payments made by Cathedral are subject to the approval of Cathedral's banking syndicate. During 2017 Q2, payments on both settlements of $1,156were made. This amount includes accelerated FLSA settlement payments described previously.
Income taxFor 2017 Q2, the Company had an income tax recovery of $149compared to recovery of $2,660in 2016 Q2. As the provision is calculated on year-to-date basis the current consolidated effective tax rate is not meaningful as there is a loss before tax in one country and income before tax in another. Income tax expense is booked based upon expected annualized effective rates.
Net loss from discontinued operations In 2016 Q4, the Company made the decision to sell its Flowback and Production Testing ("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 Q2, the net loss from discontinued operations was $(17)compared to $(995)net loss for 2016 Q2.