ACT Energy Technologies Ltd. press release
Cathedral Energy Services Reports Results for 2020 Q1
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
CALGARY, AB, June 24, 2020
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, AB, June 24, 2020/CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral") (TSX: CET) announces its consolidated financial results for the three months ended March 31, 2020and 2019. 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 March 31 | | | | | | | | 2020 | | 2019 | | Revenues | | | $ | 19,295 | $ | 37,242 | | Adjusted gross margin % (1) | | | | 12% | | 7% | | Adjusted EBITDAS (1) | | | $ | 1,012 | $ | 1,874 | | Diluted per share | | | $ | 0.02 | $ | 0.04 | | As % of revenues | | | | 5% | | 5% | | Cash flow - operating activities | | | $ | (1,943) | $ | (854) | | Loss from operating activities | | | $ | (4,426) | $ | (3,705) | | Basic per share | | | $ | (0.09) | $ | (0.07) | | Impairments and direct write-downs | | | $ | (6,994) | $ | - | | Loss before income taxes | | | $ | (14,123) | $ | (3,568) | | Basic per share | | | $ | (0.29) | $ | (0.07) | | Loss | | | $ | (12,590) | $ | (3,624) | | Basic per share | | | $ | (0.25) | $ | (0.07) | | Equipment additions - cash basis | | | $ | 855 | $ | 1,963 | | Weighted average shares outstanding | | | | | | | | Basic (000s) | | | | 49,468 | | 49,468 | | Diluted (000s) | | | | 49,468 | | 49,469 | | | | | | | | | | | | | | March 31 | | December 31 | | | | | | 2020 | | 2019 | | Working capital | | | $ | 20,435 | $ | 20,181 | | Total assets | | | $ | 94,883 | $ | 106,300 | | Loans and borrowings excluding current portion | | | $ | 6,000 | $ | 6,000 | | Shareholders' equity | | | $ | 59,069 | $ | 68,092 | | | | | | | | | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | | |
2020 Q1 KEY TAKEAWAYS
Revenues decreased by $17,947or 48% from $37,242in 2019 Q1 to $19,295in 2020 Q1;
Adjusted gross margin increased from 7% to 12% primarily due to a decrease in repairs and field labour offset by an increase in the fixed component of cost of sales on a percentage of revenue basis;
Despite the 48% drop in revenue, loss from operating activities per share decreased to only $0.09compared to $0.07in 2019 Q1 due to cost control measures the Company has implemented since the end of 2019 Q1;
Total Adjusted EBITDAS decreased $862, from $1,874to $1,012in 2020 Q1 as a result of reduced revenues offset by increase in adjusted gross margin;
Net debt (drawn credit facility less cash on hand) at end of 2020 Q1 was $1,155;
During 2020 Q1, the Company recorded a non-cash impairment and direct write-down charge related to right of use and intangible assets of $6,994; and
The Company is in the process of finalizing an amendment to its credit facility to provide temporary covenant relief commencing 2020 Q2 and ending 2021 Q1. The changes have been approved by the Company and its Lender and the final agreement is expected to be completed and signed prior to June 30, 2020.
COVID-19
In March 2020, the World Health Organization declared a global pandemic due to COVID-19. In response to the COVID-19 outbreak, governments around the world implemented measures to control the spread of the virus including closure of non-essential businesses and implementing travel bans and stay-at-home restrictions. These actions contributed to the material deterioration in global economy including a dramatic decline in demand for oil, which resulted in a material decrease in the price for oil. The decline in oil prices has negatively affected current and forecasted drilling activities in Cathedral's operating areas of U.S. and Canada. In response to the decline in oil prices, OPEC+ agreed to production reductions in April 2020and recently extended reductions to the end of July. In addition, North American oil and natural gas producers have shut-in production due to low oil prices. Recently governmental bodies have started to remove restrictions related to COVID-19 and gradually re-opening businesses. This has resulted in an increase in demand for crude oil and resulted in an improvement in world oil prices. Oil prices have improved significantly since the drop in early March 2020but the sustainability of such price improvement is subject to significant uncertainty.
The Company has made significant changes to its cost structure including laying off staff, reducing compensation, closing facilities, eliminating discretionary expenses, deferring tool repairs and reducing capital expenditures, to better match our cost structure to expected operating levels. The collapse in oil prices has negatively affected our client's cash flows and, as a result, in certain situations resulted in slower collection of accounts receivable and increased risk related to potential non-payment.
All of these developments could have a material adverse effect on Cathedral's business, financial condition, results of operations, cash flows, ability to collect on accounts receivable and future impairments of Company assets. The duration and extent of business interruption and the financial impact cannot be reasonably determined and if it continues for an extended period, it could negatively impact Cathedral's ability to continue ongoing operations.
OUTLOOK
In both U.S. and Canada, Cathedral's service offerings are considered an essential service and therefore we are operating throughout the COVID-19 pandemic. The health and safety of our workplace, employees, clients, vendors and the public at large is a top priority for Cathedral and part of our guiding principles. With the onset of the COVID-19 pandemic, Cathedral implemented our multi-stage response plan to protect our stakeholders and our staff have adapted accordingly to this new way of operating our business.
The COVID-19 pandemic and its macroeconomic effects have contributed to an uncertain outlook for the oilfield service industry. The resulting supply and demand imbalance for oil, and related decline in oil prices, has dramatically changed drilling activity in Cathedral's operating areas. Since early March 2020, U.S. rig count has declined 66% to 266 rigs. On a year-over-year basis, the Canadian rig count is down 86%. Relative to prior year operating levels, we are expecting operating levels to remain depressed for the balance of 2020. The main driver for Cathedral's revenue is the price for oil and natural gas, and for the near term, oil prices are expected to be challenged. As a result, Cathedral's management team will focus on what it can control – cost structure, improving operational efficiencies, bringing new technologies to the market and strategic sales and marketing of our offerings. Cathedral's management team has navigated through previous downturns and we expect to do the same this time.
Cathedral's largest cost is labour and with the forecasted decline in activity levels management was in the unfortunate position of having to lay off a significant amount of staff. Since mid-March, we have reduced our fixed labour costs associated with office and shop staff that has resulted in an annualized cost saving of $4,328. Management will continue to monitor its cost structure and adjust as necessary to match expected operating levels.
Management continues to evaluate and apply for U.S. and Canadian federal, state and provincial government relief programs for which Cathedral qualifies. To date, the main relief programs that Cathedral is participating in is the CanadaEmergency Wage Subsidy ("CEWS") and U.S. Paycheck Protection Program ("PPP").
To date, Cathedral has applied for and received $436in CEWS funding for the first two claim periods ending May 9, 2020. The Company is currently compiling information to file for the 3rdperiod ending June 6, 2020. The program has recently been extended to cover through to August 29, 2020, but details on the extended period have not been released.
On May 8, 2020, Cathedral received loan proceeds of $750 USDunder U.S. PPP. The proceeds will be used to support payroll expenditures for Cathedral's U.S. employees. A portion of the loan may be forgivable in accordance with certain U.S. Treasury guidelines. Cathedral estimates that approximately 70% of the loan proceeds ($525 USD) may be forgiven, if the U.S. Treasury guidelines are met.
On the technology forefront, despite low activity levels, we have been able to field test our RapidFire™ MWD platform and we are pleased with the initial results. Commercializing our RapidFire MWD platform is a key initiative for 2020 however testing and commercial deployment are being negatively impacted by reduced drilling activity. RapidFire is capable of transmitting data simultaneously via pulse and electro-magnetic ("EM"), allowing for high data rates and higher reliability through redundancy. In addition, the system can be configured in either a hard mount or retrievable configuration and is rated to operating temperatures that meet or exceed most competitive MWD systems. The second phase, initially planned to be released later in 2020, will offer a retrievable downhole generator, which will reduce operating costs and allow for high power EM transmission on extended run applications. Our nDurance™ drilling motors continue to draw interest due to material improvements in drilling performance. Our performance achievements with existing clients are expected to be leveraged into new rental opportunities.
2020 CAPITAL PROGRAM
During the three months ended March 31, 2020, the Company invested $855(2019 - $1,963) in equipment. The following table details the current period's net equipment additions:
| | | Three months ended | | | | | March 31, 2019 | | | Equipment additions: | | | | | Motors | $ | | 530 | | MWD | | | 299 | | Other | | | 26 | | Total cash additions | | | 855 | | Less: proceeds on disposal of equipment | | | (1,176) | | | | | | | Net equipment additions (1) | $ | | (321) | | (1)See "NON-GAAP MEASUREMENTS" | | | |
Our 2020 capital plan will be modest and we expect our "net equipment additions" (equipment additions less proceeds on equipment lost downhole) to be in the range of $nil to $2.5 million(depending on level of lost-in-hole proceeds). Focus of 2020 capital plan will be motor power section additions for premium lines, addition of RapidFire MWD tools and mud lube bearing motor upgrades.
RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH 31
| | | | | | | Revenues | 2020 | 2019 | | | | Canada | $ | 7,336 | $ | 7,364 | | United States | | 11,959 | | 29,878 | | Total | $ | 19,295 | $ | 37,242 |
Revenues2020 Q1 revenues were $19,295, which represented a decrease of $17,947or 48% from 2019 Q1 revenues of $37,242.
Canadian revenues (excluding motor rental revenues) decreased to $5,945in 2020 Q1 from $6,446in 2019 Q1; an 8% decrease. This decrease was the result of: i) a 7% decrease in activity days to 810 in 2020 Q1 from 874 in 2019 Q1 and ii) a less than 1% decrease in the average day rate to $7,340in 2020 Q1 from $7,375in 2019 Q1.
There was a 15% year-over-year decline in the average active land rig count in Canada(source: Baker Hughes) which compares to Cathedral's activity decline of 7%. Due to Cathedral's client mix, our decline was less than the general market decline.
U.S. revenues (excluding motor rental revenues) decreased 60% to $11,704in 2020 Q1 from $29,426in 2019 Q1. This decrease was the net result of: i) a 62% decrease in activity days to 865 in 2020 Q1 from 2,269 in 2019 Q1; and ii) a 4% increase in the average day rate to $13,531in 2020 Q1 from $12,969in 2019 Q1 (when converted to Canadian dollars).
The average active land rig count for the U.S. was down 24% in 2020 Q1 compared to 2019 Q1 (source: Baker Hughes). The Company experienced a 65% decline in activity days resulting in a decrease in market share compared to 2019 Q1. 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 programs, as well as loss of work related to pricing. Due to Cathedral's client mix, our decline exceeded the general market decline. Day rates in USD increased 3% to $10,079 USDin 2020 Q1 from $9,756 USDin 2019 Q1. The 2020 Q1 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 Canadaand were down slightly in the U.S. Combined rental revenues increased to $1,646in 2020 Q1 compared to $1,370in 2019 Q1. The increase is due to the increased availability of motors for rental due to less full service work being performed and the fact that Cathedral's nDurance drilling motors are noted for their reliability and drilling performance. Approximately 60% of the motor rental revenue related to Cathedral's motors used on RSS jobs.
Gross margin and adjusted gross marginGross margin for 2020 Q1 was -11% compared to -7% in 2019 Q1. Adjusted gross margin (see Non-GAAP Measurements) for 2020 Q1 was $2,307or 12% compared to $2,596or 7% for 2019 Q1.
Adjusted gross margin, as a percentage of revenue, increased due to decreases in equipment repairs and lower field labour partially offset by higher rentals as a percentage of revenue (actual rental costs were down year-over-year) and increased fixed component of cost of sales as a percentage of revenue (the amount was down, but not as percentage of revenues).
Depreciation of equipment allocated to cost of sales decreased to $4,376in 2020 Q1 from $5,004in 2019 Q1. Depreciation included in cost of sales as a percentage of revenue was 23% for 2020 Q1 and 13% in 2019 Q1.
Selling, general and administrative ("SG&A") expensesSG&A expenses were $2,810in 2020 Q1; a decrease of $563compared with $3,373in 2019 Q1. There were reductions in SG&A wages and related benefits and burdens due to a reduction in head count as well as decreases in almost all categories of expenses due to efforts to reduce spending. As a percentage of revenue, SG&A was 15% in 2020 Q1 compared to 9% in 2019 Q1.
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 $725in 2020 Q1; a decrease of $180compared with $905in 2019 Q1. The portion of total technology group costs related to new product development was $195and this amount has been capitalized as intangible assets (2019 Q1 - $230). Technology group costs not related to new product development were $530in 2020 Q1; a decrease of $145compared with $675in 2019 Q1. Total technology group costs decreased primarily due to reduction in staffing.
In light of the current market, Cathedral has consolidated its MWD repairs and, as part of this realignment, combined our Technology Group and MWD repair department. This has resulted in a reduction in overall head count of the combined group and will result in limited new product development in the near term.
Gain on disposal of equipmentDuring 2020 Q1, the Company had a gain on disposal of equipment of $1,004compared to $2,793in 2019 Q1. These gains mainly related 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 2020 Q1, the Company received proceeds on disposal of equipment of $1,176(2019 Q1 - $3,962).
Finance costs Finance costs consist of interest expenses on operating loans, long-term debt and bank charges of $29for 2020 Q1 versus $143for 2019 Q1.
Finance costs lease liability The lease liability interest decreased slightly to $238from $262.
Foreign exchange The Company had a foreign exchange loss of $2,436in 2020 Q1 compared to a gain of $542in 2019 Q1 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 2020 Q1 foreign currency loss are unrealized loss of $2,464(2019 Q1 - gain of $527) related to intercompany balances.
Impairment and direct write-downs Due to the decline in projected drilling activity for the remainder of 2020 and into 2021 as a result of the decrease in oil and natural gas prices, the Company determined that indicators of impairment existed as at March 31, 2020. The Company made a provision as a result of impairment test and direct write-downs of $6,994in 2020 Q1 to right of use assets ($6,834)and intangibles ($160). As part of the Company's response to changes in drilling activity, the decision was made to consolidate its repair activities and there are plans to close or significantly reduce activities at certain locations and the right of use asset for these locations was written down to $nil. There were $160intangible projects in progress where it is uncertain when or if staff resources will be available to bring the projects to commercialization. As such these projects were written down to $nil. There were no impairments or direct write-downs in 2019 Q1.
Income taxDue to U.S. legislative changes in 2020, an adjustment to prior year provision has been made to recognize the U.S. Federal portion of 2019 tax losses that will now be allow to be carried back to 2018 and recovered.
In 2019 Q1, 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.
LIQUIDITY AND CAPITAL RESOURCES
OverviewOn an annualized basis, the Company's principal source of liquidity is cash generated from operations and proceeds from equipment lost-in-hole. In addition, the Company has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity. Cash flow - operating activities in 2020 Q1 decreased to a use of funds of $1,943compared to use of funds of $854in 2019 Q1. This decrease was primarily due to the impact of changes in working capital in 2020 Q1 and reduced the Company's cash balances.
Working capitalAt March 31, 2020, the Company had working capital of $20,435(December 31, 2019- $20,181).
Credit facility At March 31, 2020, the Company's credit facility (the "Facility") consists of a $5 millionoperating facility and a $15 millionextendible revolving credit facility and expires December 31, 2020. The Facility is secured by a general security agreement over all present and future personal property. The Facility provides a definition of EBITDA ("Credit Agreement EBITDA") to be used in calculation of financial covenants.
The financial covenants associated with the Facility are:
Consolidated funded debt to consolidated Credit Agreement EBITDA ratio shall not exceed 3.0:1; and Consolidated interest coverage ratio shall not be less than 2.5:1.
The Facility bears interest at the financial institution's prime rate plus 0.75% to 2.25% or bankers' acceptance rate plus 1.75% to 3.00% with interest payable monthly. Interest rate spreads for the Facility depend on the level of funded debt compared to the 12 month trailing Credit Agreement EBITDA. The Facility provides a means to lock in a portion of the debt at interest rates through bankers' acceptance ("BA") based on the interest rate spread on the date the BA was entered into.