ACT Energy Technologies Ltd. press release

Cathedral Energy Services reports results for 2015 Q4

2016-03-03

TSX - Toronto Stock Exchange · Canada

Canada NewsWire

CALGARY, March 2, 2016

/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

CALGARY, March 2, 2016/CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) announces its consolidated financial results for the three and nine months ended December 31, 2015and 2014. 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.

2015 Q4 KEY TAKEAWAYS

Revenues and profitability were significantly affected by reduced industry activity and pricing pressures resulting from continued decline in commodity prices through 2015;

Revenues of $24,949in 2015 Q4 compared to $73,242in 2014 Q4, a 66% decline and adjusted EBITDAS of $(169)in 2015 Q4 compared to $9,408in 2014;

Cathedral's proprietary directional technology and customer service focus continues to be a key factor in retaining and securing work in a challenging industry environment. Cathedral remains committed to investing in technology support and development as a key future success factor;

Delivered numerous drilling records in 2015 as a result of our proprietary nDurance® motor and FUSION™ Measurement-While-Drilling (MWD) system technologies;

Due to the strong performance of Cathedral's proprietary motors, motor rental revenues continued to increase on a year-over-year and sequential basis for each quarter of 2015;

Cathedral's presence in all key North American basins facilitated operational efficiencies through the movement of equipment and people between operating areas; and

Management continues to focus on initiatives to reduce costs, improve margins and improve revenue through enhanced focus on our sales and marketing capabilities.

FINANCIAL HIGHLIGHTS Dollars in 000's except per share amounts

| | | | | | | | | | | | | | Three months ended December 31 | | Year ended December 31 | | | | | | | | | 2015 | | 2014 | | 2015 | | 2014 | | | Revenues | $ | 24,949 | $ | 73,242 | $ | 136,079 | $ | 275,435 | | | Adjusted gross margin % (1) | | 17.2% | | 20.5% | | 17.4% | | 21.6% | | | Adjusted EBITDAS (1) | $ | (169) | $ | 9,408 | $ | 7,393 | $ | 38,487 | | | | Diluted per share | $ | - | $ | 0.26 | $ | 0.20 | $ | 1.06 | | | As % of revenues | | -1% | | 13% | | 5% | | 14% | | Funds from operations (1) | $ | (1,425) | $ | 8,395 | $ | 4,410 | $ | 32,114 | | | | Diluted per share | $ | (0.04) | $ | 0.23 | $ | 0.12 | $ | 0.89 | | Earnings (loss) before income taxes | $ | (14,262) | $ | 3,063 | $ | (32,087) | $ | 14,970 | | | | Basic per share | $ | (0.39) | $ | 0.08 | $ | (0.88) | $ | 0.41 | | | Diluted per share | $ | (0.39) | $ | 0.08 | $ | (0.88) | $ | 0.41 | | Write-down of deferred taxes related to CRA settlement | $ | 422 | $ | - | $ | (10,346) | $ | - | | | Write-down of goodwill | $ | - | $ | - | $ | (5,848) | $ | - | | | Write-down of property and equipment | $ | (3,189) | $ | - | $ | (3,189) | $ | - | | | Write-down of inventory | $ | (3,736) | $ | - | $ | (3,736) | $ | - | | | Net earnings (loss) | $ | (10,500) | $ | 1,776 | $ | (35,342) | $ | 10,283 | | | | Basic per share | $ | (0.29) | $ | 0.05 | $ | (0.97) | $ | 0.28 | | | Diluted per share | $ | (0.29) | $ | 0.05 | $ | (0.97) | $ | 0.28 | | Dividends declared per share | $ | - | $ | 0.0825 | $ | 0.12 | $ | 0.3300 | | | Property and equipment additions - cash basis | $ | 464 | $ | 3,826 | $ | 6,908 | $ | 30,763 | | | Weighted average shares outstanding | | | | | | | | | | | | Basic (000s) | | 36,295 | | 36,295 | | 36,295 | | 36,244 | | | Diluted (000s) | | 36,295 | | 36,295 | | 36,295 | | 36,255 | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | | | | | |

OUTLOOK

At the beginning of 2015, industry experts and analysts were prognosticating a rebound in oil prices toward the end of the year. In fact the opposite occurred with oil prices declining into the $40 to $50bbl range in the second half of the year from to $60bbl range in May and June. Beginning in November prices dropped precipitously into the $35bbl range by year end. The New Year brought oil prices sliding into the $30bbl range and hitting recent lows of $26bbl. These price declines were all largely related to a persistent oversupply situation in the market. Although there is optimism about Russian and OPEC production stabilizing or potentially reducing and North American production and storage level increases abating, the words "Lower for Longer" are now regularly used in the industry lexicon.

The recent oil and gas price declines have had a dramatic impact on oilfield service activity levels as exploration and production companies continue to cut their drilling and completions budgets. Both the U.S. and Canadian rig counts have declined significantly since the beginning of the year. The U.S. rig count has declined 28% since January 1, 2016to 502 active rigs (as at February 26, 2016) – down from an average rig count of 807 for the second half of 2015. Until WTI prices move above $50 USDbbl. or producers raise additional capital, as some have accomplished in recent weeks, we expect activity levels to be mediocre with the potential for further customer activity reductions in the short-term.

Cathedral is expecting very challenging activity levels in Canadafor the first half of the year. Drilling activity is currently very low as a result of energy company budget cuts compounded by warm weather. Expectations are that activity levels will not improve until the second half of 2016 even if commodity prices improve earlier. This is in part a result of the traditional spring-breakup period in Canadaimpacting the first half of the year. In the Canadian Flowback and Production Testing division our business is benefiting from clients who remain busy however, pricing pressure remains a challenge.

Prospects in the U.S. for the next quarters are better than in Canada, however, visibility is still challenged and there is a high potential for project delays and a lower active rig count in the short-term. In late 2015 we shifted our Directional Drilling sales strategy in the U.S. which has opened up prospects with new customers and confirmed drilling prospects with existing customers. Our success in the U.S. is also a result of our differentiated technology in this market and having an active presence and growing reputation in the key U.S. basins such as the Permian. Activity levels in the U.S. Flowback and Production Testing business have been very challenging as many of our customers have suspended their well completion programs. We are focused on generating sales opportunities in the short-term and further ensuring this division is positioned to participate in the large backlog of wells that will need to be completed or re-frac'd once commodity prices improve.

Our strategic themes for 2016 expand on the objectives we set out in 2015 to get through this downturn and position ourselves favorably for the eventual rebound in activity levels:

1. Fiscal Management - Continuing to balance our cost structure and short term revenue prospects to ensure we meet our financial obligations and not impact the long-term viability of the business. 2. Retaining Key Employees - Preserve our key employee base so when industry conditions improve we are able to ramp up our business quickly. 3. Operational Excellence - Continue to pursue operational and technology improvements to mitigate the impact of reduced activity levels and pricing pressure and ensure we offer high operational performance levels to attract and retain customer work. 4. Enhance Sales Effectiveness – focus on short and long-term revenue generation and market share growth opportunities.

We are making good progress in all the above areas. At the beginning of January 2016additional wage rollbacks were implemented in the U.S. and Canada. Unfortunately due to expected very low activity levels in Canadafor the first half of 2016, additional layoffs were required at the end of February to further contain costs. Our banking covenants were relaxed in early 2016 to reflect decreased activity levels in 2016 and 2017. Our lending syndicate continues to be supportive of Cathedral based on our cost cutting initiatives and strategy to manage through the downturn.

In late 2015 we implemented an organization change to ensure Cathedral's in-house technology and high level of operating standards are better leveraged across all locations in which we operate. Through introducing corporate product line manager functions, we expect to achieve better managerial control over capital asset allocation, equipment repair and parts procurement, training, policies, procedures and standards.

We are also in the process of further refining our marketing and sales efforts. Our sales and marketing initiatives are aimed at strategically targeting customer in basins where we can provide a significant improvement in well costs by reducing days drilled in our Directional Drilling area or offer customer efficiencies in our Flowback and Production Testing area. We are actively pursuing, or engaged in, alliances with industry partners and suppliers to facilitate this approach. We are also implementing new processes and sales performance management systems to improve sales effectiveness.

We remain highly focused on managing through this current industry downturn and continuing to build a business that will prosper once activity levels improve.

DIVIDENDS

Based on the current reductions in commodity prices and uncertainties around expected drilling and completion activity in 2015 Q4 and into 2016, the Board of Directors have made the decision to suspend the payment of its quarterly dividend until industry conditions improve. This decision was made in order 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.

ANNUAL MEETING

Cathedral will be holding its Annual Meeting ("Meeting") at 2:00 pm (MDT)on May 12, 2016at our Head Office 6030 - 3 Street SE, Calgary, Alberta. Business at the meeting will include the election of directors and appointment of auditors.

2015 CAPITAL PROGRAM

During the year ended December 31, 2015Company invested $6,908(2014 - $30,763) in property and equipment. The following table details the net property and equipment additions:

2015 | December 31

2014 | | | | | | | | | | | | Property and equipment additions: | | | | | | | | Growth capital (1) | $ | 4,571 | $ | 15,543 | | | Maintenance capital(1) | 1,171 | 1,257 | | | | | Replacement capital (1) | 510 | 4,324 | | | | | Infrastructure capital(1) | 656 | 9,639 | | | | Total cash additions | 6,908 | 30,763 | | | | | Less: proceeds on disposal of property and equipment | (4,944) | (5,550) | | | | | Less: proceeds on disposal of land and buildings | (6,174) | - | | | | | | | | | | | | Net property and equipment additions (1) | $ | (4,210) | $ | 25,213 | | | (1)See "NON-GAAP MEASUREMENTS" | | | | | |

The major additions for growth capital were $3,161for additional drilling motors and related equipment for specific job requirements, $107for MWD equipment and $1,303for additional ancillary Flowback and Production Testing equipment to reduce future rental costs. Infrastructure capital relates to the construction of an operations facility in Oklahomathat was completed and subject to a sale and leaseback in 2015 Q1. Maintenance capital included $607related to MWD upgrades, $32for ancillary motor components, $52for Flowback and Production Testing units and ancillary equipment, $181for automobiles and $299related to shop, office and computer equipment additions. Replacement capital included $401for MWD equipment and $109for motor equipment.

The following is a summary of major equipment owned by the Company:

| | | | | | December 31 | December 31 | | | 2015 | 2014 | | Directional drilling - MWD systems | 140 | 140 | | Production testing units | 66 | 66 |

2016 CAPITAL PROGRAM

Cathedral's 2016 capital budget is $1,000with $200for growth capital and $800for replacement or maintenance capital. The growth additions are primarily for additional MWD systems and the maintenance capital is primarily to replace items which have been lost-in-hole. The capital budget will be reviewed quarterly.

Cathedral intends to finance its 2016 capital budget from cash flow from operations and proceeds from redundant asset sales or assets lost-in-hole.

RESULTS OF OPERATIONS – THREE MONTHS ENDED DECEMBER 31

Production

Testing | | | | Flowback and

Directional

Drilling | | | Production | | | | | | | | | | | Revenues | Total | | Testing | Total | | | | | | | | | | | Canada | $ | 7,024 | $ | 2,377 | $ | 9,401 | | $ | 22,582 | $ | 7,656 | $ | 30,238 | | United States | 14,137 | 1,411 | 15,548 | | 32,408 | 10,596 | 43,004 | | | | | | | | | | | | | | | | | | | | | | | Total | $ | 21,161 | $ | 3,788 | $ | 24,949 | | $ | 54,990 | $ | 18,252 | $ | 73,242 |

Revenues2015 Q4 revenues were $24,949which represented a decrease of $48,293or 66% from 2014 Q4 revenues of $73,242. All divisions experienced decreases compared to 2014 Q4. In 2015 there were continued industry wide activity declines due to reductions in commodity prices and day rate decreases directly related to pricing concessions requested by customers due to market conditions. In comparison, 2014 Q4 set a record for quarterly revenue. The active land rig count for Canadaand U.S. was down 56% and 58% respectively in 2015 Q4 compared to 2014 Q4. Canadian wells completed fell approximately 71% in 2015 Q4 compared to 2014 Q4.

Canadian Directional Drilling revenues decreased to $7,024in 2015 Q4 from $22,582in 2014 Q4; a 69% decrease. This decrease was the result of: i) a 66% decrease in activity days to 671 in 2015 Q4 from 1,951 in 2014 Q4; and ii) a 34% decrease in the average day rate to $7,580in 2015 Q4 from $11,442in 2014 Q4. Offsetting these declines was an increase of $1,680on the rental of mud motors, particularly the Cathedral's CLAW™ motor. Motor rental revenues for 2015 Q4 were $1,938.

U.S. Directional Drilling revenues decreased to $14,137in 2015 Q4 from $32,408in 2014 Q4; a 56% decrease. This decrease was the net result of: i) a 61% decrease in activity days to 1,038 in 2015 Q4 from 2,673 in 2014 Q4; and ii) a 3% increase in the average day rate to $12,318in 2015 Q4 from $12,020in 2014 Q4 (when converted to Canadian dollars). All U.S. districts experienced a decrease in activity levels. The U.S. average day rates in Canadian dollars increased due to the stronger U.S. dollar. Rates in USD fell to $9,259 USDin 2015 Q4 from $10,588 USDin 2014 Q4, a 13% decline. U.S. day rate decreases were partially tempered by the U.S. division providing footage drilling services to certain clients which can result in higher relative day rates. Motor rental revenues for 2015 Q4 were $1,351compared to $278in 2014 Q4.

Canadian Flowback and Production Testing revenues decreased to $2,377in 2015 Q4 from $7,656in 2014 Q4; a 69% decrease. The decrease was due to the reduction in activity levels due to the industry downturn as well as a 18% decline in pricing.

U.S. Flowback and Production Testing revenues decreased to $1,411in 2015 Q4 from $10,596in 2014 Q4, an 87% decrease. The decrease was due to the reduction in activity levels due to the industry downturn. Pricing when converted to CAD was down slightly, but there was a 16% decline in pricing in USD.

Gross margin and adjusted gross margin Gross margin for 2015 Q4 was negative 4.4% compared to 13.3% in 2014 Q4. Adjusted gross margin (see Non-GAAP Measurements) for 2015 Q4 was $4,283or 17.2% compared to $14,983or 20.5% for 2014 Q4, a decline of $10,700or 3.3%.

The Company initiated a number of cost reductions throughout 2015 including; reducing wages for field, support and office staff, implementing work force adjustments and reducing other direct cost items. These cost reductions continued as the year progressed. Despite these measures, these cost reductions could not offset lower revenue day rates in the Directional Drilling divisions, especially Canadian operations, resulting in lower gross margins.

Although there was a reduction in the fixed component of direct cost of sales of 35.4% compared with 2014 Q4, the percentage of revenue for these costs was greater in 2015 Q4 due to the reduction in revenues. On a percentage of revenue basis, the fixed costs increased 10.9% from 2014 Q4. As stated above, the 2015 Q4 adjusted gross margin had decreased by 3.3%. The remaining 7.6% increase in adjusted gross margin relates to reductions in field labour, rentals, chargeback expenditures and accommodations offset by higher repair costs as percentage of revenue.

Depreciation allocated to cost of sales increased to $5,357in 2015 Q4 from $5,231in 2014 Q4. Depreciation included in cost of sales as a percentage of revenue was 21.0% for 2015 Q4 and 7.1% in 2014 Q4.

Selling, general and administrative expenses ("SG&A")SG&A expenses were $5,178in 2015 Q4; a decrease of $1,027compared with $6,205in 2014 Q4. As a percentage of revenue, SG&A was 21% in 2015 Q4 and 8% in 2014 Q4. Included in 2015 Q4 amounts are $233of bad debts.

Excluding the non-cash items of depreciation and share-based compensation and bad debts, SG&A was $4,853in 2015 Q4 compared to $6,084in 2014 Q4, a decrease of $1,231or 20%. 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%. There have been additional reductions to staffing levels in 2015. Staffing costs included in SG&A include executives, sales, accounting, human resources, payroll, safety, research and development and related support staff.

Gain on disposal of property and equipmentDuring 2015 Q4, the Company had a gain on disposal of property and equipment of $421compared to $392in 2014 Q4. These gains are mainly due to recoveries of lost-in-hole equipment costs including previously expensed depreciation on the related assets. The timing of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter.

Write-down of property and equipment Due to the reduction in demand for services, in 2015 Q4 the Company carried out a review of equipment and wrote-down those where there was a significant lack of demand by clients. The result of this review was a write-down of property and equipment of $3,189.

Write-down of inventoryThe Company's inventory is used to construct new tools and maintain existing tools. Due to the decrease in operating activities and the reduction in capital build out programs, there was a reduction in inventory turn-over. As the prospect of recovery has been further delayed, in 2015 Q4 the company conducted a review of inventory items and the projected usage for the various lines of inventory and wrote-down the value of inventory by $3,736. $2,607of this write-down relates to parts for third party, non-Cathedral manufactured motors, which currently have lower utilization and demand from clients.

Foreign exchange loss The Company had foreign exchange loss of $1,103in 2015 Q4 compared to a loss of $335in 2014 Q4 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 2015 Q4 foreign currency gains are unrealized losses of $1,188(2014 Q4 - $452) related to intercompany balances.