ACT Energy Technologies Ltd. press release
Cathedral Energy Services reports results for 2018 Q1
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
CALGARY, May 7, 2018
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, May 7, 2018/CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) announces its consolidated financial results for the three months ended March 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 March 31 | | | | | | | | 2018 | | 2017 | | | | | | | | | | Revenues | $ | 40,157 | $ | 38,323 | | | | | | | | | | Adjusted gross margin %(1) | | 12% | | 22% | | | | | | | | | | Adjusted EBITDAS (1) | $ | 3,443 | $ | 6,796 | | | | Diluted per share | $ | 0.07 | $ | 0.16 | | | As % of revenues | | 9% | | 18% | | | | | | | | | Cash flow - operating activities | $ | 2,132 | $ | (568) | | | | | | | | | | Earnings before income taxes | $ | 345 | $ | 3,972 | | | | Basic and diluted per share | $ | 0.01 | $ | 0.09 | | | | | | | | | Net earnings | $ | 294 | $ | 2,699 | | | | Basic and diluted per share | $ | 0.01 | $ | 0.06 | | | | | | | | | Equipment additions - cash basis | $ | 4,474 | $ | 1,036 | | | | | | | | | | Weighted average shares outstanding | | | | | | | | Basic (000s) | | 49,401 | | 42,606 | | | Diluted (000s) | | 49,586 | | 42,761 | | | | | | | | | | | March 31
2018 | | December 31
2017 | | | | | | | | | | Working capital | $ | 33,204 | $ | 31,016 | | | | | | | | | | Total assets | $ | 125,415 | $ | 121,630 | | | | | | | | | | Loans and borrowings excluding current portion | $ | 2,540 | $ | 46 | | | | | | | | | | Shareholders' equity | $ | 103,044 | $ | 101,391 | | | | | | | | | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | |
2018 Q1 KEY TAKEAWAYS
Revenues increased 5% from $38,323in 2017 Q1 to $40,157in 2018 Q1.
Adjusted gross margin decreased to 12% from 22% in 2017 Q1. This decline was primarily attributed to higher labour costs and related benefits and higher equipment repairs, in part due to a more demanding drilling environment and to a lesser extent bringing the Company's fleet back to operating condition following the industry downturn.
Adjusted EBITDAS decreased 49% from $6,796in 2017 Q1 to $3,443in 2018 Q1. Adjusted EBITDAS margin decreased to 9% of revenues in 2018 Q1 from 18% in 2017 Q1.
The Company continues to make investments in equipment to relieve capacity constraints and to improve equipment reliability and performance.
OUTLOOK
The first quarter of 2018 was challenging for Cathedral compared to 2017 Q3 and Q4. In the U.S., our day rate declined from 2017 Q4 due to a change in the mix of work and some clients altering the timing of their drilling programs. Despite this, we did see a slight increase in U.S. activity levels. In Canada, we achieved an increase in day rates compared to 2017 Q4 along with activity levels improving sequentially.
In both Canadaand the U.S. we were impacted by increasing equipment repair expenses. Beginning in the second half of 2017, equipment repair costs have been increasing due to the progressively demanding downhole drilling environment and client's drilling practices. In addition, because of reduction in the time to drill wells, the frequency of equipment repairs and refurbishments has increased with the result that these costs are now spread over less revenue (most of Cathedral's revenue is based on rates per day). In response to increasing equipment damages, Cathedral is implementing operating specifications for its equipment with its clients. This program aims to help our clients achieve better overall drilling performance by optimizing rate of penetration while reducing non-productive drilling time that results from equipment failures. Over the past year, we have continued to improve our recoveries for equipment damages from clients by better delineating what damages are a result of poor drilling practices. We are also examining strategies to recover equipment refurbishment costs through different pricing structures and price increases. We continue to implement engineering improvements to our equipment to improve durability and performance and our operations and drilling engineering teams continue work with our clients to help them achieve "_Better Performance Every Day"_.
In 2018 Q1, we also experienced increased shop and field wage rates compared to 2017 Q4 and the U.S operations experienced a significant increase in employee health related benefit expenses in the period. Increased wages to attract and retain quality people, particularly in the U.S., has been a challenge over the past year as industry activity levels improved. Cathedral self-funds its benefits plan and claims on the plan tend to be volatile. A key objective for us is to improve labor efficiency including optimizing the labor required on site and through promoting remote operations support to our clients, which we believe results in higher customer service quality. We continue to focus on our labor efficiency and other expense categories which are adversely impacting our business.
In the quarter, we continued to rollout of our new CLAW-XT™ high performance motor and clients have been pleased with its performance. We have committed additional capital to further build out the CLAW-XT fleet, however, the industry in general is experiencing delays from certain third-party vendors which is impacting our rollout plans. With respect to our new drilling motor for use with rotary steerable systems (RSS), we are expecting to conduct field testing in late Q2/early Q3. Our rollout of new MWD technology, including the downhole power generator (EMc2™) and our new Cathedral Linear Pulser add-ons to our FUSION™ Measurement-While-Drilling (MWD) platform, is on track. Progress on our next generation Dual Telemetry (DT) MWD tool remains on track for launch in 2019. In 2018 Q1, we were approved for financial contribution from the Government of Canadafor the DT project which will help us hire additional resources and expand the project scope.
With WTI prices firmly in the $60bbl USD range and an improved outlook for WTI pricing longer term there has been a 10% increase in the U.S. active rig count to 1,021 active rigs at the end of April. This increased rig count is positive for Cathedral from the perspective of potentially achieving better pricing for our services and improved activity levels in the U.S. which is our primary focus market.
Despite a challenging 2018 Q1, we are both optimistic and confident about our prospects for 2018 and beyond. We remind our shareholders that Q2 is typically a lower revenue quarter for the Canadian oil field services industry, including Cathedral, due to lower activity levels in Canadaas a result of spring break-up.
2018 CAPITAL PROGRAM
During the three months ended March 31, 2018the Company invested $4,474(2017 - $1,036) in equipment. The following table details the current period's net equipment additions:
| | | | | | | | Three months ended | | | | | March 31, 2018 | | | Equipment additions: | | | | | | Motors | $ | 2,422 | | | MWD | | 1,916 | | | Other | | 136 | | Total cash additions | | 4,474 | | | Less: proceeds on disposal of equipment (excluding capital lease settlements) | | (3,775) | | | Net equipment additions (1) | $ | 699 | | | (1)See "NON-GAAP MEASUREMENTS" | | | |
Cathedral's current 2018 capital budget totals $14,600which includes $1,400for of intangible additions and $3,317of equipment commitments from 2017 resulting in new equipment additions of $9,883for 2018.
The Company is monitoring capital expenditure levels as we move forward and will adjust the plan accordingly, including considering subsequent proceeds received on equipment lost-in-hole. Delivery lead times on capital items, including component parts for self-constructed assets, range from 60 to 180 days.
RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH 31
| | | | | Revenues | 2018 | 2017 | | | | | | Canada | $ 10,637 | $ 10,466 | | | | | | United States | 29,520 | 27,857 | | | | | | Total | $ 40,157 | $ 38,323 |
Revenues2018 Q1 revenues were $40,157, which represented an increase of $1,834or 5% from 2017 Q1 revenues of $38,323. Both Canada and United States("U.S.") operations had slight increases due to increases in drilling activity.
Canadian revenues (excluding motor rental revenues) increased to $9,698in 2018 Q1 from $9,307in 2017 Q1; a 4% increase. This increase was the result of: i) a 11% decrease in activity days to 1,272 in 2018 Q1 from 1,423 in 2017 Q1; net of ii) a 17% increase in the average day rate to $7,624in 2018 Q1 from $6,540in 2017 Q1.
The average active land rig count in Canadawas down 8% in 2018 Q1 compared to 2017 Q1 (source: Baker Hughes). The increase in day rates was primarily due to increases that occurred starting in 2017 Q2. The 2018 Q1 rate is in line with the sequential rate increases experienced through 2017.
U.S. Directional Drilling revenues (excluding motor rental revenues) increased to $29,132in 2018 Q1 from $27,578in 2017 Q1; a 6% increase. This increase was the result of: i) a 3% decrease in activity days to 2,498 in 2018 Q1 from 2,565 in 2017 Q1; net of ii) a 8% increase in the average day rate to $11,662in 2018 Q1 from $10,752in 2017 Q1 (when converted to Canadian dollars).
The average active land rig count for the U.S. was up 34% in 2018 Q1 compared to 2017 Q1 (source: Baker Hughes). The Company experienced a 3% decrease in activity days which resulted in a decrease in market share over this period. This decrease was largely due to equipment constraints starting in Q2, 2017 that the Company has been working to resolve with its capital budget program as well as certain clients altering the timing of their drilling programs. Day rates in USD increased to $9,231 USDin 2018 Q1 from $8,117 USDin 2017 Q1; a 14% increase. The increase in day rates was primarily due to increases that occurred starting in 2017 Q2. The 2018 Q1 rate is in line with the sequential rates seen in remainder of 2017.
Gross margin and adjusted gross marginGross margin for 2018 Q1 was 6% compared to 15% in 2017 Q1. Adjusted gross margin (see Non-GAAP Measurements) for 2018 Q1 was $4,762or 12% compared to $8,486or 22% for 2017 Q1.
Adjusted gross margin, as a percentage of revenue, decreased due to higher equipment repairs and higher labour costs and related benefits. Labor costs are a result of wage increases, including the reinstatement of previous wage rollbacks, increased U.S. health benefits and to a lesser extent, staff additions. Increased equipment repairs were in part due to a more demanding drilling environment and to a lesser extent bringing the Company's fleet back to operating condition following the industry downturn.. In addition, there was an increase in the fixed component of cost of sales which were 3% higher on a percentage of revenue basis in 2018 Q1 compared to 2017 Q1. The increase in the fixed component of cost of sales as a percentage of revenue was mostly attributable to increases in costs largely related to office and shop payroll and other labour related costs.
Depreciation allocated to cost of sales decreased to $2,215in 2018 Q1 from $2,606in 2017 Q1. Depreciation included in cost of sales as a percentage of revenue was 6% for 2018 Q1 and 7% in 2017 Q1.
Selling, general and administrative expenses ("SG&A") SG&A expenses were $3,827in 2018 Q1; an increase of $499compared with $3,328in 2017 Q1. As a percentage of revenue, SG&A was 10% in 2018 Q1 compared to 9% in 2017 Q1. SG&A increased primarily due to wage increases, including the reinstatement of previous wage rollbacks, increased U.S. health benefits and to a lesser extent, staff additions. Staffing costs included in SG&A include executive, sales, accounting, human resources, payroll, safety and related support staff.
Technology group expensesTechnology group expenses were $601in 2018 Q1; an increase of $106compared with $495in 2017 Q1. Technology group expenses are related to new product development, upgrades and support and consist of salaries and related benefits and burdens as well as shop supplies. Technology group expenses increased primarily due to wage increases, including the reinstatement of previous wage rollbacks, and staff additions. In 2018 Q1, an additional $230of technology group expenses were capitalized as intangible assets (2017 Q1 - $nil).
Gain on disposal of equipmentDuring 2018 Q1, the Company had a gain on disposal of equipment of $3,008compared to $2,014in 2017 Q1. 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 Q1, the Company received proceeds on lost-in-hole recoveries of $3,740(2017 Q1 - $2,250).
Finance costsFinance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $45for 2018 Q1 versus $302for 2017 Q1. The decrease in finance costs relate to the reduction of loans within the Company's credit facility. In 2017 Q1, the Company finalized the sale of its Flowback and Production Testing assets, raised funds through a private placement of shares and repaid the outstanding long-term debt.
Foreign exchangeThe Company had a foreign exchange loss of $(697)in 2018 Q1 compared to a gain of $218in 2017 Q1 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 2018 Q1 foreign currency gains are unrealized loss of $669(2017 Q1 - gain of $192) related to intercompany balances.
Income taxFor 2018 Q1, the Company had an income tax expense of $51compared to $1,273in 2017 Q1. The 2018 Q1 effective tax rate was 15%. The 2018 Q1 rate is lower than anticipated as one legal entity has pre-tax income and the other has pre-tax losses. Income tax expense is booked based upon expected annualized effective rates based upon the statutory rates of 27% for Canadaand 22.5% for U.S.
LIQUIDITY AND CAPITAL RESOURCES
OverviewOn an annualized basis the Company's principal source of liquidity is cash generated from operations. In addition, the Company has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity. For the three months ended March 31, 2018, the Company had funds from operations of $2,132(2017 – funds used in operations $568). The increase in funds is mainly due to changes in non-cash working capital balances.
Working capitalAt March 31, 2018the Company had working capital of $33,204(December 31, 2017- $31,016). The increase in working capital level was primarily due to cash flow from operations.
Credit facilityIn December 2017, the Company signed a new credit facility (the "Facility") with a new lending syndicate. The Facility consists of a $5 millionoperating facility and $15 millionextendible revolving credit facility and expires December 31, 2019. The Facility is secured by a general security agreement over all present and future personal property.
The financial covenants associated with the amended Facility are:
| Consolidated funded debt to consolidated Facility 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 to the 12 month trailing Facility 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.
At March 31, 2018, the Company had cash balances in excess of outstanding letters of credit, capital lease obligations and operating and revolving loan balances. As such its funded debt to Facility EBITDA ratio ("Funded debt ratio") was negative (i.e. net cash balance). As such, the Funded debt ratio has been met, but is not meaningful ("NM") for presentation. For the rolling twelve months ended March 31, 2018, Facility EBITDA was $17,537.
| Ratio | Actual | Required | | Consolidated funded debt to consolidated Facility EBITDA ratio | NM | 3.0:1 | | Consolidated interest coverage ratio | 41.1:1 | 2.5:1 |
Based on current available information, Cathedral expects to comply with all covenants for the next twelve months.
Contractual obligationsIn the normal course of business, the Company incurs contractual obligations and those obligations are disclosed in the Company's MD&A for the year ended December 31, 2017. As at March 31, 2018, the Company had a commitment to purchase approximately $4,438of equipment. Cathedral anticipates expending these funds 2018 Q2 and Q3 based upon current delivery lead times.
Share capitalAt May 7, 2018, the Company has 49,438,117 common shares and 2,892,834 options outstanding with a weighted average exercise price of $1.44.
FORWARD LOOKING STATEMENTS
This news release contains certain forward-looking statements and forward-looking information (collectively referred to herein as "forward-looking statements") within the meaning of applicable Canadian securities laws. All statements other than statements of present or historical fact are forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as "anticipate", "achieve", "believe", "plan", "intend", "objective", "continuous", "ongoing", "estimate", "outlook", "expect", "may", "will", "project", "should" or similar words suggesting future outcomes. In particular, this news release contains forward-looking statements relating to, among other things: examining strategies to recover equipment refurbishment costs through different pricing structures and price increases; continue to implement engineering improvements to our equipment to improve durability and performance;
oil prices will continue to be volatile and North American rig counts will show flat to slow growth; our strategy is that any market share we gain in 2018 will be at the expense of competitors; U.S. market will continue to be our primary focus in 2018 and we will continue to favor this market in terms of resource and equipment allocation; intend to continue to develop our Canadian business where we see good prospects; launch of the new DT platform is anticipated to occur in 2019; intends to manufacture additional motors as part of its 2018 capital expenditure program; Cathedral intends to invest in developing further drilling motor capabilities for the RSS market in 2018; Cathedral will also be further supplementing its MWD fleet with additional downhole generators; optimistic and confident about our prospects going into 2018; with respect to our new drilling motor for use with rotary steerable systems (RSS), we are expecting to conduct field testing in late Q2/early Q3; progress on our next generation Dual Telemetry (DT) Measurement-While-Drilling (MWD) tool remains on track for launch in 2019; increased rig count is positive for Cathedral from the perspective of potentially achieving better pricing for our services and improved activity levels in the U.S.; we are both optimistic and confident about our prospects for 2018 and beyond; Q2 is typically a lower revenue quarter for the Canadian oil field services industry, including Cathedral, due to lower activity levels in Canadaas a result of spring break-up; projected capital expenditures and commitments and the financing thereof; and Cathedral expects to comply with all covenants during 2018.