ACT Energy Technologies Ltd. press release
Cathedral Energy Services Reports Results for 2016 Q2
TSX - Toronto Stock Exchange · Canada
##
Canada NewsWire
CALGARY, Aug. 9, 2016
_/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA_/
CALGARY, Aug. 9, 2016/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, 2016and 2015. 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 | | | | | | | | | | 2016 | 2015 | 2016 | 2015 | | | | | | | Revenues | $ | 15,587 | $ | 29,679 | $ | 36,682 | $ | 79,756 | | | Adjusted gross margin % (1) | 13% | 11% | 19% | 17% | | | | | | | Adjusted EBITDAS (1) | $ | (1,638) | $ | (1,237) | $ | (162) | $ | 4,549 | | | | Diluted per share | $ | (0.05) | $ | (0.03) | $ | - | $ | 0.13 | | | As % of revenues | -11% | -4% | 0% | 6% | | | | | | Funds from (used in) operations (1) | $ | (1,798) | $ | (853) | $ | (1,631) | $ | 3,112 | | | | Diluted per share | $ | (0.05) | $ | (0.02) | $ | (0.04) | $ | 0.09 | | Earnings (loss) before income taxes | $ | (10,222) | $ | (6,342) | $ | (1,051) | $ | (7,137) | | | | Basic per share | $ | (0.28) | $ | (0.17) | $ | (0.03) | $ | (0.20) | | | Diluted per share | $ | (0.28) | $ | (0.17) | $ | (0.03) | $ | (0.20) | | Gain on disposal of foreign subsidiary | $ | - | $ | - | $ | 10,865 | $ | - | | | Provision for settlement | $ | (3,796) | $ | - | $ | (3,796) | $ | - | | | Write-down of deferred taxes related to CRA settlement | $ | - | $ | (10,768) | $ | - | $ | (10,768) | | | Net earnings (loss) | $ | (6,916) | $ | (15,266) | $ | 2,767 | $ | (15,990) | | | | Basic per share | $ | (0.19) | $ | (0.42) | $ | 0.08 | $ | (0.44) | | | Diluted per share | $ | (0.19) | $ | (0.42) | $ | 0.08 | $ | (0.44) | | Dividends declared per share | $ | - | $ | 0.04 | $ | - | $ | 0.08 | | | Property and equipment additions - cash basis | $ | 70 | $ | 1,845 | $ | 338 | $ | 6,148 | | | Weighted average shares outstanding | | | | | | | | | | | | Basic (000s) | 36,295 | 36,295 | 36,295 | 36,295 | | | | | | | Diluted (000s) | 36,295 | 36,295 | 36,295 | 36,295 | | | | | | | | | | | | | | | | | | | | June 30 | December 31 | | | | | | | | | | 2016 | 2015 | | | | | | | Working capital | | | $ | 17,210 | $ | 13,550 | | | | | Total assets | | | $ | 137,002 | $ | 155,610 | | | | | Loans and borrowings excluding current portion | | | $ | 25,298 | $ | 30,477 | | | | | Shareholders' equity | | | $ | 97,724 | $ | 96,607 | | | | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | | | | | |
2016 Q2 KEY TAKEAWAYS
Negotiated a settlement of our collective action wage and hour lawsuits in the United States("U.S.");
Adjusted gross margin improved to 13% in 2016 Q2 from 11% in 2015 Q2;
Loans and borrowings were reduced by $5,317compared to December 31, 2015including a reduction of the revolving term loan of $5,000to $25,000;
Revenues and profitability were significantly affected by reduced industry activity and pricing pressures resulting from continued decline in commodity prices in early 2016;
Revenues of $15,587in 2016 Q2 compared to $29,679in 2015 Q2, a 47% decline and Adjusted EBITDAS loss of $(1,638)in 2016 Q2 compared to $(1,237)loss in 2015 Q2; and
Management continues to focus on initiatives to manage costs, improve margins, improve revenue through enhanced focus on our sales and marketing capabilities and manage Cathedral's financial obligations and liquidity.
OUTLOOK
2016 Q2 continued to be challenging for the oilfield services sector, particularly for those companies tied to drilling and well completion activity. The impact of commodity price declines in the first quarter further impacted activity levels in Q2 due to exploration and production companies continuing to cut their drilling and completions budgets.
The U.S. rig count declined 42% from January 1, 2016to a low of 404 active rigs in May – down from an average rig count of 807 for the second half of 2015. Canadasuffered similar activity declines which were further exacerbated by energy companies curtailing activities due to an early and extended spring breakup. In Canadathere was an average of 48 rigs operating in 2016 Q2 compared to 98 rigs in the comparable quarter in 2015. The bright light in the first half of 2016 is that our market share continued to increase in the U.S. as measured by the number of rigs we provided services on and in July our U.S. directional drilling job count continued to increase.
Optimism for the sector started to improve in June as WTI prices moved into the $45/bbl U.S. dollars ("USD") to $50/bbl USD range. Supporting our previous assertion that WTI pricing needs to be in the $50/bbl USD range for activity levels to improve we saw a significant pickup in our sales prospects in June and July through requests for proposals and customer indications for work in the second half of the year. However, it is not clear how the recent WTI price retreat into the $40/bbl USD range will impact this, however, we suspect the prior customer enthusiasm may wane in the short term as a consequence.
A key accomplishment in the quarter was negotiating a settlement of our collective action wage and hour lawsuits in the U.S. (see "Provision for settlement" under "Results of Operations"). We employed an innovative approach to dealing with this challenge and the outcome is something we believe is manageable within our current financial constraints. It was also important to deal with this liability as it was creating significant uncertainty in the market and consuming a large amount of management's time and energy.
Although the industry, analysts and other commentators continue to believe prospects will improve and signs of this are being demonstrated, our banking syndicate has taken a more conservative view. As such, the syndicate is requiring we further reduce our credit facility to $30 millionby December 31, 2016and to $25 millionby March 31, 2017. As at the date hereof, our total drawn facility was $27.3 millionand we had cash balances of $2.2 million. The bank has indicated they want to see Cathedral's debt levels come within more typical industry averages based on cash flow the business has been able to generate in this current environment. In this context, management and the board are investigating alternatives to achieve the banks objectives and maximize shareholder value. These alternatives may include alternative forms of financing and looking at potential corporate partnerships and transactions.
We still view Cathedral's business prospects very favorably. We continue to focus on ways to better manage our business in this environment and are actively implementing initiatives to make our business stronger.
DIVIDENDS
In 2015 Q4, the Board of Directors made the decision to suspend the payment of Cathedral's quarterly dividend until industry conditions improve. This decision was based on the reductions in commodity prices and uncertainties around expected drilling and completion activity in 2016. Additionally, this allows the Company 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.
2016 CAPITAL PROGRAM
During the six months ended June 30, 2016Company invested $338(2015 - $6,148) in property and equipment. The following table details the current period's net property and equipment additions:
| | | Six months ended | | | | | | June 30, 2016 | | | | Property and equipment additions: | | | | | | | Growth capital (1) | | $ | 122 | | | Maintenance capital(1) | | 28 | | | | Replacement capital (1) | | 188 | | | | Infrastructure capital(1) | | - | | | Total cash additions | | 338 | | | | Less: proceeds on disposal of property and equipment | | (2,030) | | | | Net property and equipment additions (1) | | $ | (1,692) | | | (1)See "NON-GAAP MEASUREMENTS" | | | | |
Cathedral's 2016 capital budget remains at $1,000with $200for growth capital and $800for replacement or maintenance capital. The growth additions are primarily for MWD system enhancements and maintenance capital is primarily to replace items which have been lost-in-hole or are required to maintain existing capacity levels. Proceeds from disposal of property and equipment are primarily related to equipment lost-in-hole. The capital budget will be reviewed quarterly.
The following is a summary of major equipment owned by the Company:
| | June 30 | December 31 | June 30 | | | 2016 | 2015 | 2015 | | Directional Drilling - MWD systems | 140 | 140 | 140 | | Flowback and Production Testing ("F&PT") units | 66 | 66 | 66 |
RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 30
| | Three months ended June 30, 2016 | | Three months ended June 30, 2015 | | | | | | | | | | | | | | Flowback and | | | | Flowback and | | | | | | | | | | Directional | production | | | Directional | production | | | | | | | | | Revenues | drilling | testing | Total | | drilling | testing | Total | | | | | | | | Canada | $ | 3,286 | $ | 913 | $ | 4,199 | | $ | 6,629 | $ | 2,936 | $ | 9,565 | | United States | 11,339 | 49 | 11,388 | | 15,290 | 4,824 | 20,114 | | | | | | | | | | | | | | | | | | | | | | | Total | $ | 14,625 | $ | 962 | $ | 15,587 | | $ | 21,919 | $ | 7,760 | $ | 29,679 |
Revenues 2016 Q2 revenues were $15,587which represented a decrease of 14,093 or 48% from 2015 Q2 revenues of $29,679. All divisions experienced revenue decreases compared to 2015 Q2 due to reduced activity levels resulting from customer reactions to decreases in commodity prices and day rate decreases primarily related to competitive pressure and pricing concessions requested by customers due to market conditions.
Canadian Directional Drilling revenues (excluding motor rental revenues) decreased to $1,799in 2016 Q2 from $5,413in 2015 Q2; a 67% decrease. This decrease was the result of: i) a 51% decrease in activity days to 271 in 2016 Q2 from 552 in 2015 Q2; and ii) a 32% decrease in the average day rate to $6,638in 2016 Q2 from $9,806in 2015 Q2.
The decrease in activity days was mainly due to overall reductions in activity levels in Canadaas well as certain Cathedral customers reducing their drilling programs and others who stopped drilling during the period. The average active land rig count for Canadawas down 53% in 2016 Q2 compared to 2015 Q2 and was down 68% from 2016 Q1. The decrease in day rates was in part due to type of work performed, but mainly due to decreases in day rates charged to customers which were a result of competitive pressure and pricing concessions provided to customers to secure work.
Partially offsetting these declines was an increase of $271on the rental of motors, particularly Cathedral's CLAW™ motor. Motor rental revenues for 2016 Q2 were $1,487(2015 Q2 - $1,216).
U.S. Directional Drilling revenues (excluding motor rental revenues) decreased to $10,431in 2016 Q2 from $15,075in 2015 Q2; a 31% decrease. This decrease was the result of: i) a 27% decrease in activity days to 984 in 2016 Q2 from 1,349 in 2015 Q2; and ii) a 5% decrease in the average day rate to $10,601in 2016 Q2 from $11,175in 2015 Q2 (when converted to Canadian dollars). All U.S. districts experienced a decrease in activity levels. The average active land rig count for U.S. was down 53% in 2016 Q2 compared to 2015 Q2 and was down 25% from 2016 Q1. Rates in USD fell to $8,228 USDin 2016 Q2 from $9,095 USDin 2015 Q2, a 10% 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. U.S. motor rental revenues for 2016 Q2 were $908compared to $215in 2015 Q2.
Canadian F&PT revenues decreased to $913in 2016 Q2 from $2,936in 2015 Q2; a 69% decrease. The decrease was due to the reduction in activity levels due to the industry downturn as well as a 27% decline in pricing. Wells completed in Canadafell approximately 43% in 2016 Q2 compared to 2015 Q2.
U.S. F&PT revenues decreased to $49in 2016 Q2 from $4,824in 2015 Q2, a 99% decrease. In Q1 2016, the company made the decision to scale down the operations of its U.S. F&PT division to reflect current industry activity levels and mitigate losses. Business development activities have continued in order to enable the business to secure work where it makes economic sense. As industry activity levels improve, management's intention is to further ramp up operations commensurately.
Gross margin and adjusted gross margin Gross margin for 2016 Q2 was negative (14%) compared to negative (6%) in 2015 Q2. Adjusted gross margin (see Non-GAAP Measurements) for 2016 Q2 was $1,980or 13% compared to $3,355or 11% for 2015 Q2.
The Company has implemented a number of cost reductions throughout 2015 and 2016 including reducing wages for field, support and office staff, implementing work force reductions and reducing other direct cost items. Even with lower revenue day rates in many divisions the adjusted gross margin improved due to reduced field labour costs, however, these reductions were offset by higher repairs on percentage of revenue basis.
Additionally, there was a reduction in the fixed component of cost of sales of 36% compared with 2015 Q2 amount. However, on a percentage of revenue basis, these costs were greater in 2016 Q2 increasing 5% over 2015 Q2.
Depreciation allocated to cost of sales decreased to $4,195in 2016 Q2 from $5,134in 2015 Q2. Depreciation included in cost of sales as a percentage of revenue was 27% for 2016 Q2 and 17% in 2015 Q2.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $3,947in 2016 Q2; a decrease of $777compared with $4,724in 2015 Q2. As a percentage of revenue, SG&A was 25% in 2016 Q2 and 16% in 2015 Q2.
Excluding the non-cash items of depreciation and share-based compensation, SG&A was $3,881in 2016 Q2 compared to $4,639in 2015 Q2, a decrease of $758or 16%. 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% and a further 5% to 9% on January 1, 2016. There have been additional reductions to staffing levels in 2015 and 2016. Staffing costs included in SG&A include executive, sales, accounting, human resources, payroll, safety, technology support and related support staff. As well there were year-over-year reductions in virtually every other SG&A item due to efforts to reduce expenditures.
Gain on disposal of equipmentDuring 2016 Q2, the Company had a gain on disposal of equipment of $194compared to $135in 2015 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.
Foreign exchange loss The Company had a foreign exchange loss of $(55)in 2016 Q2 compared to a gain of $543in 2015 Q2 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 2016 Q2 foreign currency gains are unrealized losses of $27(2015 Q2 – gain of $647) related to intercompany balances.
Finance costs Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $411for 2016 Q2 versus $446for 2015 Q2. The decrease in finance costs relate to a decreased utilization of the Company's credit facility.
Provision for settlement Subsequent to June 30, 2016, 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 Company's wholly-owned subsidiary, Cathedral Energy Services Inc. ("INC"). The first collective action lawsuit, Wallace vs. Cathedral Energy Services Inc. ("Wallace"), was filed on November 6, 2014, in the United States District Court for the Southern District of Texas, Houston Division (the "HoustonCourt") alleging that INC employed or contracted Measurement While Drilling ("MWD") and Directional Drilling ("DD") operators were entitled to recover unpaid overtime wages under the Fair Labor Standards Act ("FLSA"). The second collective action lawsuit, Price vs. Cathedral Energy Services Inc., was filed on April 9, 2015, in the United States District Court District of Colorado, Denver Division (and subsequently transferred to HoustonCourt) alleging that the Company incorrectly calculated the overtime pay for certain hourly paid operators in violation of the FLSA. Legal actions involving similar alleged FLSA violations have been filed in the United Statesagainst a number of other oilfield service companies. Cathedral has denied the allegations, and vigorously defended the litigation leading up to entering into the Settlement Agreement.
The Settlement Agreement provides a mechanism for finally resolving and releasing the claims for all INC employed and contracted MWD and DD operators. Under the terms of the Settlement Agreement, the parties will establish a settlement fund of up to $3,400 USD. The final determination of the settlement fund amount will be based on the number of claimants that participate in the settlement and Cathedral estimates the final settlement amount will be in the $2,900 USDrange. The settlement fund payments will be paid quarterly by the Corporation 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.
All claims in both Collective actions have been settled and the HoustonCourt, approved the settlement of the Wallace claim on August 8, 2016. Any settlement fund payments made by Cathedral are subject to the approval of Cathedral's banking syndicate.
Income taxFor 2016 Q2, the Company had an income tax recovery of $3,306compared to expense of $(8,924)in 2015 Q2. Excluding the non-cash gain on disposal of foreign subsidiary and adjustment to prior years' tax provisions, the effective tax rate was 31% for 2016 Q2 and 29% for 2015 Q2. Income tax expense is booked based upon expected annualized effective rates.
Included in the 2015 Q2 amount is a charge to earnings of $10,768related to a write-off of a portion of the tax attributes obtained as part of the December 18, 2009conversion from an income trust to a corporation ("Conversion"). Cathedral elected to enter into the agreement with Canada Revenue Agency ("CRA") as a highly satisfactory solution to avoid potential costly and time consuming legal proceedings and allow management to focus its efforts on business operations and enhancing shareholder value. The CRA agreement did not give rise to any cash outlay by Cathedral for prior taxation years. Cathedral continues to have access to a portion of the tax attributes obtained as part of the Conversion to offset federal and provincial taxes in subsequent taxation years.