ACT Energy Technologies Ltd. press release
Cathedral Energy Services Reports Results for 2018 Q4
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
CALGARY, March 7, 2019
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, March 7, 2019/CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) announces its consolidated financial results for the three months and year ended December 31, 2018and 2017. 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 December 31 | Year ended December 31 | | | | | | | | | 2018 | 2017 | 2018 | 2017 | | | | | | Revenues | $ | 43,127 | $ | 38,402 | $ | 160,827 | $ | 147,095 | | Adjusted gross margin % (1) | | 15% | | 17% | | 11% | | 18% | | Adjusted EBITDAS (1) | $ | 3,412 | $ | 5,606 | $ | 12,060 | $ | 18,674 | | Basic and diluted per share | $ | 0.07 | $ | 0.11 | $ | 0.24 | $ | 0.39 | | As % of revenues | | 8% | | 15% | | 7% | | 13% | | Cash flow - operating activities | $ | 3,405 | $ | 1,137 | $ | 3,732 | $ | 2,952 | | Earnings (loss) before income taxes | $ | (6,106) | $ | (6,398) | $ | (6,139) | $ | (382) | | Basic and diluted per share | $ | (0.12) | $ | (0.13) | $ | (0.12) | $ | (0.01) | | Derecognition of deferred tax asset | $ | (13,059) | $ | - | $ | (13,059) | $ | - | | Net earnings | $ | (17,858) | $ | (4,490) | $ | (17,061) | $ | 87 | | Basic and diluted per share | $ | (0.36) | $ | (0.09) | $ | (0.35) | $ | - | | Equipment additions - cash basis | $ | 2,201 | $ | 2,535 | $ | 12,877 | $ | 9,203 | | Weighted average shares outstanding | | | | | | | | | | Basic (000s) | 49,468 | 49,013 | 49,445 | 47,381 | | | | | | Diluted (000s) | 49,469 | 49,509 | 49,586 | 47,577 | | | | | | | | | | | | | | | | | | | December 31 | December 31 | | | | | | | | | 2018 | 2017 | | | | | | Working capital | | | $ | 30,599 | $ | 31,016 | | | | Total assets | | | $ | 121,770 | $ | 121,630 | | | | Loans and borrowings excluding current portion | | | $ | 7,000 | $ | 46 | | | | Shareholders' equity | | | $ | 89,143 | $ | 101,391 | | | | | | | | | | | | | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | | | | |
2018 Q4 KEY TAKEAWAYS
Revenues increased by $4,725or 12% from $38,402in 2017 Q4 to $43,127in 2018 Q4;
Adjusted gross margin decreased from 17% to 15% due to higher field labour and related expenses and an increase in the fixed component of cost of sales, offset by a decrease in repairs;
Total Adjusted EBITDAS decreased $2,194, or 39% to $3,412in 2018 Q4 as a result of reduced adjusted gross margin, and additional SG&A expenses occurring in Q4;
In 2018 Q4, Cathedral derecognized $13,059of deferred tax assets due to a recent history of tax losses within Cathedral's Canadian entity; and
Additional investment in technology development in 2018 resulted in deployment of new products, progress being made on Cathedral's next generation Dual Telemetry Measurement-While-Drilling ("MWD") tool and performance and reliability enhancements being incorporated into Cathedral's existing MWD equipment fleet.
OUTLOOK
In 2018, the U.S. rig count continued to grow from 929 rigs at the end of 2017 to 1,083 active rigs at the end of 2018 for an average rig count of 1,032 during the year (source: Baker Hughes Rig Count data). In 2018, the U.S. rig count growth was largely driven by West Texas Intermediate ("WTI") oil price increases from the USD $60bbl range at the beginning of 2018 to the USD $75bbl range by mid-year. However, starting in October 2018there was a sharp decrease in WTI pricing into the $50bbl range by the end of the year. This oil price drop resulted in many energy companies reviewing their drilling budgets for 2019 with the result that there has been a modest drop in the U.S. rig count in early 2019.
Another factor which may impact U.S. rig activity in 2019 is takeaway capacity issues in the Permian. These are expected to be resolved in late 2019 and early 2020. Investors are also messaging to energy companies that they need to live within their cash flow. All the above considerations have industry analysts prognosticating there could be a drop in the U.S. average rig count in 2019 by up to 10%. This rig count drop may impact Cathedral's activity levels in 2019 however, the impact is uncertain when it comes down to individual customer situations and Cathedral's operations and sales performance in this environment. The U.S. market is our primary focus and our intention is to continue to grow our market share. We believe that our recent equipment additions and upgrades position us well to achieve this.
Following curtailment in 2018 Q4, the Canadian operating environment has seen volatility in the early months of 2019. Coinciding with the WTI price drop in late 2018, the Canadian industry was further impacted by high oil price differentials resulting from oil take-away capacity from Canadabeing constrained. At the end of 2018 many Canadian energy companies were reviewing their drilling budgets with a view to reduce them in 2019. Since the end of 2018 pricing for Canadian oil has improved, however, drilling activity levels in Canadaremain very uncertain at least in the first half of 2019. Analysts anticipate Canadian drilling activity levels will be down year-over-year 8% to 39% - with the wide range highlighting the degree of uncertainty.
Although the outlook for Canadalooks challenging in the short-term, the expectation is that things will improve into 2020 based on additional take-away capacity coming on line. The Canadian industry also stands to get a boost in the early 2020s based on Liquefied Natural Gas (LNG) export capacity coming on stream mid-decade.
Our strategy in Canadais to maintain the optionality on future industry growth through focusing on serving stronger customers in areas we have advantages in, maintaining a focused and lean cost structure and again leveraging our differentiated technology advantages in the Canadian market.
There continues to be movement in the industry to combine or consolidate operations in order to achieve enhanced profitability through greater size and scale. In order to leverage our existing strong balance sheet, to improve equipment utilization and to better leverage our proprietary technologies our strategy includes looking at opportunities for growth through market share additions and accretive combination with other entities.
After a large capital spend over the last two years we can now shift to a more modest capital program as we deploy the new equipment. Our primary capital expenditure focus to the end of 2018 was on our motor fleet. In early 2019 we are expecting to field test two new patented motor designs – "Double Bend" and "Double Pad". Both motor designs are based upon substantially the same principles and are expected to significantly reduce drag, stick slip and rotary torque as well as extending the length of laterals that can be drilled with a conventional bottom hole assembly ("BHA") as compared to using a rotary steerable system. We have had discussions with a number of U.S. operators that are interested in testing this new technology. We also expect to add a mud lube version of our nDurance™ bearing section into our motor fleet. Introducing a mud lube bearing assembly, in addition to our sealed bearing design, is aimed at facilitating better motor performance in areas of high downhole temperature and with higher mud flow and pressure situations.
In 2019 our focus is primarily on building out our new MWD technology. Our 2019 net Capital Budget is targeted at approximately $4,000and $1,700of intangible additions related to technology developments. Subject to operating results and industry outlook, equipment lost-in-hole will be replaced and funded from the proceeds received.
Although we expect the first half of 2019 to be very fluid based on changing market conditions, we are in a strong position and ready to seize opportunities.
RESULTS OF OPERATIONS – THREE MONTHS ENDED DECEMBER 31
| | | | | | | Revenues | 2018 Q4 | 2017 Q4 | | | | Canada | $ | 8,146 | $ | 7,749 | | United States | | 34,981 | | 30,653 | | Total | $ | 43,127 | $ | 38,402 |
Revenues2018 Q4 revenues were $43,127, which represented an increase of $4,725or 12% from 2017 Q4 revenues of $38,402.
Canadian revenues (excluding motor rental revenues) increased to $7,705in 2018 Q4 from $6,216in 2017 Q4; a 24% increase. This increase was the result of: i) a 12% increase in activity days to 912 in 2018 Q4 from 814 in 2017 Q4 and ii) an 11% increase in the average day rate to $8,449in 2018 Q4 from $7,637in 2017 Q4.
The average active land rig count in Canadawas down 13% in 2018 Q4 compared to 2017 Q4 (source: Baker Hughes). Cathedral's activity levels relative to the industry were impacted by the scope of its customer drilling programs and their geographical focus relative to the overall industry. The increase in day rates was due to general increases in customer pricing.
U.S. revenues (excluding motor rental revenues) increased to $34,573in 2018 Q4 from $30,561in 2017 Q4; a 13% increase. This increase was the result of: i) a 9% increase in activity days to 2,677 in 2018 Q4 from 2,453 in 2017 Q4; and ii) a 4% increase the average day rate to $12,915in 2018 Q4 from $12,459in 2017 Q4 (when converted to Canadian dollars).
The average active land rig count for the U.S. was up 17% in 2018 Q4 compared to 2017 Q4 (source: Baker Hughes). The Company experienced a 13% increase in activity days resulting in a slight decrease in market share compared to 2017 Q4. Day rates in USD decreased slightly to $9,760 USDin 2018 Q4 from $9,799 USDin 2017 Q4; a change of less than 1%.
Motor rentals in Canadadeclined while U.S. rentals increased. Combined rental revenues declined to $849in 2018 compared to $1,624in 2017 primarily as a result of reduced motor rentals from Canadian customers in 2018 Q4 resulting from a pause in their Canadian drilling programs. U.S. rental increases are attributable to new CLAWTM250 and 400 motors.
Gross margin and adjusted gross margin Gross margin for 2018 Q4 was 2% compared to 10% in 2017 Q4. Adjusted gross margin (see Non-GAAP Measurements) for 2018 Q4 was $6,310or 15% compared to $6,602or 17% for 2017 Q4.
Adjusted gross margin, as a percentage of revenue, decreased due to higher field labour and related expenses and an increase in the fixed component of cost of sales, offset by a decrease in repairs. The field labour increased due to industry pressures to retain staff. The increase in the fixed component of cost of sales was mostly attributable to increased office and shop payroll and other labour related costs.
Depreciation allocated to cost of sales increased to $5,304in 2018 Q4 from $2,915in 2017 Q4 due to changes in estimate of useful life made effective October 1, 2018. This increased depreciation in 2018 Q4 by $5,184. Depreciation included in cost of sales as a percentage of revenue was 12% for 2018 Q4 and 8% in 2017 Q4.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $4,705in 2018 Q4; an increase of $2,169compared with $2,536in 2017 Q4. As a percentage of revenue, SG&A was 11% in 2018 Q4 compared to 7% in 2017 Q4. SG&A increased primarily due to U.S. state sales taxes on intercompany equipment rentals as 2017 Q4 had an adjustment related to amounts accrued previously in 2017. 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. Additionally, there was an increase in wages in 2018 Q4 for severance costs that are not expected to recur.
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 expenses were $954in 2018 Q4; an increase of $327compared with $627in 2017. There was capitalization of $214of technology group expenses related to new product development as intangible assets (2017 - $nil). Technology group expenses not related to new product development were $740in 2018; an increase of $113compared with $627in 2017. Technology group expenses increased primarily due to wage increases, including the reinstatement of previous wage rollbacks and new staff additions.
Gain on disposal of equipmentDuring 2018 Q4, the Company had a gain on disposal of equipment of $1,789compared to $2,038in 2017 Q4. 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. In 2018 Q4, the Company received proceeds on lost-in-hole recoveries from clients of $2,201(2017 Q4 - $2,535).
Finance costs Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $181for 2018 Q4 versus $157for 2017 Q4.
Foreign exchange The Company had a foreign exchange loss of $(1,745)in 2018 Q4 compared to $(193)in 2017 Q4 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 2018 Q4 foreign currency loss are unrealized losses of $(1,814)(2017 Q4 - $(113)) related to intercompany balances.
Write-down of inventory The Company made a provision related to slow moving and obsolete inventory used to service equipment of $1,474(2017 - $151). The impacted inventory was used to service older revisions to tools that are obsolete as well as tools that have had lower demand since the industry down-turn. The tools with lower demand are primarily legacy non-proprietary motors that are being used less and less each year.
Write-downs of equipment and intangibles The Company determined an impairment test for the directional drilling Cash Generating Unit (CGU) was not required as at December 31, 2018or December 31, 2017. However, in 2017 the Company chose to write-off certain assets where utilization was very low due to low market demand in the amount of $8,287. The assets written down included non-proprietary drilling motors and certain non-proprietary MWD systems. The non-proprietary MWD systems had been purchased in connection with international operations which were subsequently discontinued. This equipment was not used extensively in the Company's North American operations and was fully written-off. The Company has experienced lower demand for non-proprietary motors in the current drilling environment as their performance capabilities are lower than the Company's proprietary motors. As a consequence, the Company conducted a review and wrote-off the remaining net book value for any non-proprietary motors that were no longer expected to be utilized. There was also an impairment of $146related to a technology development project in 2017.
Income taxFor 2018 Q4, the Company had an income tax expense of $11,752compared to an income tax recovery of $1,908in 2017 Q4 In 2018 Q4, Cathedral derecognized $13,059of deferred tax assets due to a recent history of tax losses within Cathedral's Canadian entity. Cathedral has approximately 37,700 of unrecognized tax attributes and approximately $5,100of investment tax credits that can be used to offset future Canadian taxes.
Excluding adjustments to prior years' tax provisions and the derecognition of deferred tax assets, the effective tax rate was 18% (2017 -24%). The effective tax rate for 2018 Q4 is impacted by one legal entity having pre-tax income and the other having pre-tax losses. Income tax expense is booked based upon expected annualized effective rates based upon the statutory rates of 27% for Canadaand 23% for the U.S.
RESULTS OF OPERATIONS – YEAR ENDED DECEMBER 31
| Revenues | 2018 | 2017 | | | | Canada | $ | 31,123 | $ | 32,315 | | United States | | 129,704 | | 114,780 | | Total | $ | 160,827 | $ | 147,095 |
Revenues 2018 revenues were $160,827, which represented a $13,732increase or 9% from 2017 revenues of $147,095.
Canadian revenues (excluding motor rental revenues) increased to $28,495in 2018 from $27,644in 2017; a 3% increase. This increase was the result of: i) a 9% decrease in activity days to 3,541 in 2018 from 3,890 in 2017; and ii) a 13% increase in the average day rate to $8,047in 2018 from $7,106in 2017.
The average active land rig count in Canadadeclined 9% in 2018 compared to 2017 (source: Baker Hughes). The decrease in the Company's activity days of 9% was in line with the industry decrease. The slight increases in day rates was due to general increases in customer pricing.
U.S. revenues (excluding motor rental revenues) increased to $128,206in 2018 from $114,012in 2017; a 12% increase. This increase was the result of: i) a 6% increase in activity days to 10,382 in 2018 from 9,782 in 2017; and ii) a 6% increase in the average day rate to $12,349in 2018 from $11,655in 2017 (when converted to Canadian dollars).
The average active land rig count for the U.S. was up 20% in 2018 compared to 2017 (source: Baker Hughes). The Company experienced a 6% increase in activity days relative to the industry resulting in a decrease in market share over this period. This market share decrease was largely due to equipment availability constraints starting in 2017 that extended into 2018. The Company's investment in new equipment as well as client changes in the timing and scope of their drilling programs resulted in an improvement in market share in 2018 H2. Day rates in USD increased to $9,515 USDin 2018 from $8,981 USDin 2017; a 6% increase. The increase in day rates was primarily due to customer price increases.
Motor rentals in Canadadeclined while U.S. rentals increased. Combined rental revenues declined to $4,126in 2018 compared to $5,439in 2017 primarily as a result of reduced motor rentals from Canadian customers in 2018 Q3 and Q4 and particularly one customer pausing their Canadian drilling program. U.S. rental increases are attributable to the new CLAW TM250 and 400 motors.
Gross margin and adjusted gross margin Gross margin for 2018 was 3% compared to 11% in 2017. Adjusted gross margin (see Non-GAAP Measurements) for 2018 was $18,391or 11% compared to $26,677or 18% for 2017.
Adjusted gross margin, as a percentage of revenue, decreased due to higher equipment repairs, higher field labour and related benefits and burdens and specific one-time credits related to performance issues with certain U.S. clients in Q2. Adjusted gross margin were also adversely impacted by specialty equipment rentals in Q2 that were billed through to clients with a lower mark-up than typical margins. The impact of these rentals and the performance credits on U.S. work caused 1% of the decrease in adjusted gross margin.
The remaining decrease in adjusted gross margin was primarily from increased equipment repairs in 2018 H1 and higher field labour expenses in H2. Repairs increased in part due to a more demanding drilling environment and to a lesser extent upgrades being made to the Company's existing equipment fleet. Field labour cost increased as a result of industry wage pressures to retain staff. Lastly, there was an increase in the fixed component of cost of sales that were 2% higher on a percentage of revenue basis in 2018 compared to 2017. This increase was mostly attributable to office and shop payroll and other labour related costs. 2018 H2 adjusted gross margin improved compared to 2018 H1.