ACT Energy Technologies Ltd. press release
Cathedral Energy Services Reports Results for 2017 Q3
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
CALGARY, Nov. 9, 2017
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, Nov. 9, 2017/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, 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 September 30 | Nine months ended September 30 | | | | | | | | | | | 2017 | 2016 | 2017 | 2016 | | | | | | | Revenues | | $ | 36,015 | $ | 19,489 | $ | 108,693 | $ | 52,857 | | | Adjusted gross margin % (1) | | 18% | 21% | 18% | 21% | | | | | | | Adjusted EBITDAS (1) | | $ | 3,909 | $ | 2,171 | $ | 13,068 | $ | 2,009 | | | | Diluted per share | | $ | 0.08 | $ | 0.06 | $ | 0.28 | $ | 0.06 | | | As % of revenues | | 11% | 11% | 12% | 4% | | | | | | Funds from (used in) continuing operations (1) | | $ | 1,898 | $ | 628 | $ | 7,553 | $ | (1,004) | | | | Diluted per share | | $ | 0.04 | $ | 0.02 | $ | 0.16 | $ | (0.03) | | Gain on disposal of foreign subsidiary | | $ | - | $ | - | $ | - | $ | 10,865 | | | Earnings (loss) before income taxes | | $ | 1,990 | $ | (2,058) | $ | 6,016 | $ | 371 | | | | Basic and diluted per share | | $ | 0.04 | $ | (0.06) | $ | 0.13 | $ | 0.01 | | Net earnings (loss) | | $ | 1,810 | $ | (2,126) | $ | 4,577 | $ | 641 | | | | Basic and diluted per share | | $ | 0.04 | $ | (0.06) | $ | 0.10 | $ | 0.02 | | Equipment additions - cash basis | | $ | 3,518 | $ | 146 | $ | 7,065 | $ | 484 | | | Weighted average shares outstanding | | | | | | | | | | | | | Basic (000s) | | 48,916 | 36,295 | 46,836 | 36,295 | | | | | | | Diluted (000s) | | 49,035 | 36,297 | 46,947 | 36,295 | | | | | | | | | | | | | | | | | | | | | | September 30 | December 31 | | | | | | | | | | | 2017 | 2016 | | | | | | | Working capital | | | | $ | 29,618 | $ | 39,324 | | | | | Total assets | | | | $ | 120,960 | $ | 136,017 | | | | | Loans and borrowings excluding current portion | | | | $ | 53 | $ | 26,322 | | | | | Shareholders' equity | | | | $ | 105,085 | $ | 90,772 | | | |
| (1) Refer to "NON-GAAP MEASUREMENTS" |
2017 Q3 KEY TAKEAWAYS
Q3 revenues increased 85% from $19,489in 2016 Q3 to $36,015in 2017 Q3 and year-to-date revenues increased 106% from $52,857in 2016 to $108,693in 2017.
Q3 adjusted EBITDAS increased from $2,171in 2016 Q3 to $3,909in 2017 Q3, an increase of 80%. Year-to-date adjusted EBITDAS increased from $2,009in 2016 to $13,068in 2017, an increase of 550%.
Q3 net earnings increased from a loss of $(2,126)to net earnings of $1,810. Year-to-date net earnings increased from $641in 2016 to $4,577.
As a result of the improved profitability, the Company was able to make equipment additions of $3,518in 2017 Q3 (2016 - $146) and $7,065year-to-date (2016 - $484).
OUTLOOK
Key business pressures for Cathedral in 2017 have been continued pricing pressure, escalating input costs, increased equipment repair and maintenance costs and reduced equipment availability due to damages to and loss of equipment. The latter two issues have been largely due to client drilling practices where directional drilling equipment is getting pushed harder than in the past. Despite these pressures we are pleased that we have been able to remain firmly cash flow positive, generating positive earnings, maintain a strong balance sheet and continue to commit capital and resources to improve and grow our Company.
As foreshadowed in our 2017 Q2 news release Outlook, we anticipated that our U.S. activity levels would likely remain flat in Q3 compared to Q2 due to equipment capacity constraints. From the end of Q2 to the end of Q3, the U.S. rig count remained flat at an average 946 rigs (source: Baker Hughes). However, our U.S. sequential quarter activity days dropped 12% from Q2 to Q3. This was in part due to the mix in work in the quarter but also due to certain clients using specialized equipment that we were unable to provide. This was isolated to certain clients and was in part a result of larger oilfield services companies offering specialized equipment to operators at attractive prices. We started implementing strategies to deal with this in late Q3 and along with new equipment being deployed starting in Q4, we expect our ability to increase market share will improve into 2018. Anticipated capital expenditures to be realized for 2017 are $13,400plus any replacement of equipment lost down hole in Q4. Our capital expenditure pacing has been more backend loaded due to our confidence increasing throughout the year and issues with timing on receiving equipment, components and parts.
Offsetting lower sequential quarter activity day decreases in the U.S. was that we were able to achieve modest price increases. Our day rates increased 11% from Q2 to Q3. This was a result of demonstrating our performance capabilities to clients and also from improved recoveries on damaged equipment. Our footage based pricing model in the U.S. also provides higher margins than day-rate work, however, the mix of footage versus day-rate pricing varies from quarter to quarter.
In the second half of 2017 we more aggressively further expand our Drilling Engineering Services offering in the U.S. in an effort to assist our clients with improving drilling practices and to improve and better demonstrate our performance advantages.
In Canada, in 2017 Q3 we experienced significantly improved activity levels following the seasonal Q2 spring break-up in Canadawhere activity levels are low. The Canadian industry continues to be challenging from a pricing perspective and we have consciously avoided taking low margin or no margin work. Margins in the U.S. are significantly better resulting in a bias to deploying equipment in the U.S. rather than Canada. Pricing in Canadahas shown improvement since 2017 Q1. Similar to the U.S., part of this improvement has also been our ability to recover costs associated with damaged equipment from clients. We are implementing a number of strategies to improve Canadian market share as we continue to see Canadaas a key long-term market for the Company.
Looking forward, since the end of September the U.S. rig count has declined 3% from 940 active rigs at the end of June to 909 active rigs at the end of October. However, over this same period there has been a significant improvement in WTI compared to the first half of 2017 with prices firming up over $50 USD/bbl. We believe that this improvement in WTI pricing could result in the North American rig count improving into 2018, however, our expectation is still for flat to moderate industry growth. For 2017 Q4, activity days available are also typically challenged by downtime resulting from U.S. Thanksgivingand Christmas related slowdowns in the U.S. and Canada. In Canada, Q4 activity levels may be further impacted by a number of our Clients taking a short break in their drilling programs in October.
In an overall flat to moderate growth drilling activity environment, our growth will be dependent on gaining market share. With our equipment capacity now increasing due to our 2017 capital expenditures, our focus on providing our clients Better Performance Every Day and continued improvements in operations, sales and technology - we are positive about our prospects going into 2018.
2017 CAPITAL PROGRAM
During the nine months ended September 30, 2017the Company invested $7,065(2016 - $484) in equipment. The following table details the current period's net equipment additions:
| | | | | | | | | Nine months ended | | | | | | September 30, 2017 | | | | Equipment additions: | | | | | | | Growth capital (1) | | $ | 3,062 | | | Maintenance capital(1) | | 2,999 | | | | Replacement capital (1) | | 1,004 | | | Total cash additions | | 7,065 | | | | Less: proceeds on disposal of equipment (excluding capital lease settlements) | | (6,417) | | | | Net equipment additions (1) | | $ | 648 | |
| (1) See "NON-GAAP MEASUREMENTS" |
Cathedral's 2017 capital budget ("capex") was originally approved at $10,000of net equipment additions(1)("net additions") for the year. The $10,000net capex plan for 2017 was comprised of $4,900of replacement and maintenance capital and $5,100of growth capital. While the approved capex remains at $10,000for net additions, due to delivery lead times some amounts will not be realized until after year-end. The Company currently estimates its total capital expenditures to the end of December 31, 2017will be $13,400plus a portion of additional equipment lost-in-hole replacement occurring in 2017 Q4. Based on proceeds from disposal of equipment to the end of 2017 Q3, this will result in approximately $7,000in net additions to December 31, 2017. On the originally approved capital expenditures, the Company anticipates to having a carry-over of $3,000in capital expenditures into 2018 Q1 and Q2.
The replacement and maintenance capital amounts noted above, is expenditures 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, equipment lost-in-hole will be replaced and funded from the proceeds received. As such, Cathedral's total capex in any year may exceed the budgeted net additions. 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 SEPTEMBER 30
| | | | | | | | | | | | Revenues | | | | | | | 2 017 | | 2016 | | Canada | | | | | | $ | 9,187 | $ | 5,843 | | United States | | | | | | | 26,828 | | 13,646 | | Total | | | | | | $ | 36,015 | $ | 19,489 |
Revenues2017 Q3 revenues were $36,015, which represented an increase of $16,526or 85% from 2016 Q3 revenues of $19,489. 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 cash flow contribution is typically higher. As a consequence motor rental revenue in both Canadaand the U.S. were less in 2017 Q3 compared to 2016 Q3.
Canadian revenues (excluding motor rental revenues) increased to $7,978in 2017 Q3 from $4,502in 2016 Q3; a 77% increase. This increase was the result of: i) a 66% increase in activity days to 1,120 in 2017 Q3 from 673 in 2016 Q3; and ii) a 6% increase in the average day rate to $7,123in 2017 Q3 from $6,689in 2016 Q3. Partially offsetting the revenue increase was a decrease in motor rental revenue to $1,209in 2017 Q3 from $1,341in 2016 Q3.
The average active land rig count in Canadawas up 68% in 2017 Q3 compared to 2016 Q3 (source: Baker Hughes). This is in line with the 66% increase in activity days the Company had on a year-over-year basis. The increases in day rates was primarily due to increased tool damage and repair recoveries from customers.
U.S. revenues (excluding motor rental revenues) increased to $26,630in 2017 Q3 from $13,012in 2016 Q3; a 105% increase. This increase was the result of: i) a 74% increase in activity days to 2,233 in 2017 Q3 from 1,283 in 2016 Q3; and ii) a 18% increase in the average day rate to $11,926in 2017 Q3 from $10,141in 2016 Q3 (when converted to Canadian dollars). All U.S. operating areas saw increases in activity days. U.S. motor rental revenues for 2017 Q3 were $198compared to $634in 2016 Q3.
The average active land rig count for the U.S. was up 110% in 2017 Q3 compared to 2016 Q3 (source: Baker Hughes). The Company experienced a 74% increase in activity days which resulted in a decrease in market share over this period. The reason for the decreased market share was that the Company was equipment constrained during 2017 Q3 and was not able to add work for certain clients. In addition, in 2017 Q3 the company was not able to meet client specific equipment requirements on certain jobs resulting in its activity levels on those jobs being decreased. Day rates in USD increased to $9,520 USDin 2017 Q3 from $7,768 USDin 2016 Q3; a 23% 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.
Gross margin and adjusted gross marginGross margin for 2017 Q3 was 10% compared to 5% in 2016 Q3. Adjusted gross margin (see Non-GAAP Measurements) for 2017 Q3 was $6,516or 18% compared to $4,151or 21% for 2016 Q3. The adjusted gross margin percentage decrease was primarily due to increases in equipment repairs in order to bring the equipment fleet back to operating condition and increased labour costs. Additionally, there were higher equipment rentals to service the increased work levels. These cost 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 Q3 compared to 2016 Q3. 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 $2,748in 2017 Q3 from $3,077in 2016 Q3. Depreciation included in cost of sales as a percentage of revenue was 8% for 2017 Q3 and 16% in 2016 Q3.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $4,602in 2017 Q3; an increase of $1,061or 30% compared with $3,541in 2016 Q3. As a percentage of revenue, SG&A was 13% in 2017 Q3 compared to 18% in 2016 Q3. SG&A increased primarily due to U.S. state sales taxes on intercompany equipment rentals. Cathedral's Canadian entity owns all Cathedral's downhole drilling equipment and rents it to the U.S. entity and is subject to state sales tax on these amounts.
Gain on disposal of equipmentDuring 2017 Q3, the Company had a gain on disposal of equipment of $1,907compared to $1,170in 2016 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 costsFinance costs, which consist of interest expenses on operating loans, loans and borrowings and bank charges, were $129for 2017 Q3 versus $596for 2016 Q3. The decrease in finance costs relate to repayments of loans in 2017 Q1 and decrease in the interest rates.
Foreign exchangeThe Company had a foreign exchange gain of $1,059in 2017 Q3 compared to a loss of $(159)in 2016 Q3 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 Q3 foreign currency gains are unrealized gain of $1,142(2016 Q3 – loss of $(166)) related to intercompany balances.
Provision for settlementIn 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 ("accelerated FLSA settlement payments") 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.
During 2017 Q3, payments on both settlements of $249(2016 - $570) were made.
Income taxFor 2017 Q3, the Company had an income tax expense of $173compared to recovery of $710in 2016 Q3. Excluding adjustments to prior years' tax provisions, the effective tax rate was 19% for 2017. Excluding the non-cash gain on disposal of foreign subsidiary but including the loss from discontinued operations, the effective tax rate was 31% for 2016. Income tax expense is booked based upon expected annualized effective rates.
Net loss from discontinued operationsIn 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 Q3, the net loss from discontinued operations was $(7)compared to $(778)net loss for 2016 Q3.
RESULTS OF OPERATIONS – NINE MONTHS ENDED SEPTEMBER 30
| | | | | | | | | | | | Revenues | | | | | | | 2017 | | 2016 | | Canada | | | | | | $ | 24,567 | $ | 14,792 | | United States | | | | | | | 84,126 | | 38,065 | | Total | | | | | | $ | 108,693 | $ | 52,857 |
Revenues2017 revenues were $108,693, which represented an increase of $55,836or 106% from 2016 revenues of $52,857. Both Canada and U.S. operations had increases due to an improvement 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 cash flow contribution is typically higher. As a consequence motor rental revenue in both Canadaand the U.S. were less in 2017 compared to 2016.