ACT Energy Technologies Ltd. press release

Cathedral Energy Services reports results for 2016 Q1

2016-05-11

TSX - Toronto Stock Exchange · Canada

Canada NewsWire

CALGARY, May 10, 2016

/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

CALGARY, May 10, 2016/CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) announces its consolidated financial results for the three months ended March 31, 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.

2016 Q1 KEY TAKEAWAYS

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

Revenues of $21,095in 2016 Q1 compared to $50,077in 2015 Q1, a 58% decline and Adjusted EBITDAS of $1,476in 2016 Q1 compared to $5,786in 2015 Q1;

Adjusted gross margin improved to 23.3% in 2016 Q1 from 20.2% in 2015 Q1;

Bank loans were reduced by $4,579compared to December 31, 2015including a reduction of the revolving term loan of $2,500to $27,500;

During 2016 Q1, the Company completed the sale of its wholly-owned Barbadossubsidiary, Directional Plus International Ltd. ("DPI"), for net proceeds of $nil which resulted in a non-cash gain on sale of $10,865. DPI held the Company's investment in Venezuelaand this sale completes Cathedral's exit from carrying on a business in Venezuela; 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 March 31 | | | | | | | | | 2016 | 2015 | | | | | Revenues | | | $ | 21,095 | $ | 50,077 | | | Adjusted gross margin % (1) | | | | 23.3% | 20.2% | | | | Adjusted EBITDAS (1) | | | $ | 1,476 | $ | 5,786 | | | | Diluted per share | | | $ | 0.04 | $ | 0.16 | | | As % of revenues | | | | 7% | 12% | | | Funds from continuing operations (1) | | | $ | 167 | $ | 3,965 | | | | Diluted per share | | | $ | - | $ | 0.11 | | Earnings (loss) before income taxes | | | $ | 9,171 | $ | (795) | | | | Basic per share | | | $ | 0.25 | $ | (0.02) | | | Diluted per share | | | $ | 0.25 | $ | (0.02) | | Net earnings (loss) | | | $ | 9,683 | $ | (724) | | | | Basic per share | | | $ | 0.27 | $ | (0.02) | | | Diluted per share | | | $ | 0.27 | $ | (0.02) | | Dividends declared per share | | | $ | - | $ | 0.04 | | | Equipment additions - cash basis | | | $ | 268 | $ | 4,303 | | | Weighted average shares outstanding | | | | | | | | | | Basic (000s) | | | 36,295 | 36,295 | | | | | Diluted (000s) | | | 36,295 | 36,295 | | | | | | | | | | | | | | | | March 31 | December 31 | | | | | | | | 2016 | 2015 | | | | | Working capital | | | $ | 22,892 | $ | 13,550 | | | Total assets | | | $ | 141,608 | $ | 155,610 | | | Loans and borrowings excluding current portion | | | $ | 27,848 | $ | 30,477 | | | Shareholders' equity | | | $ | 104,493 | $ | 96,607 | | | (1) Refer "NON-GAAP MEASUREMENTS" | | | | | | | | | | | | | | | | |

OUTLOOK

2016 Q1 was challenging for the oilfield services sector, particularly for those companies tied to drilling and well completion activity. During the quarter oil prices (WTI) slid into the $30/bbl U.S. dollar ("USD") range hitting lows of $26/bbl USD in January due to worldwide supply-demand imbalances. The price of natural gas was also weak, again due to oversupply issues related to a warm winter in the U.S. and Canada. These low pricing levels had a dramatic impact on oilfield service activity levels as exploration and production companies continued to cut their drilling and completions budgets in light of their reduced cash flow.

As a result of the weak commodity pricing, both the U.S. and Canadian rig counts declined significantly in the first quarter. The U.S. rig count declined 36% from January 1, 2016to 450 active rigs as at April 1– 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 in the quarter due to warm weather causing an early spring breakup. In Canadathere was an average of 165 rigs operating in 2016 Q1 compared to 313 rigs in the comparable quarter in 2015. There were 49 rigs operating in Canadaon April 1, 2016a decline of 74% from the January average. The Canadian rig count has declined further since April 1.

Oil prices have recently firmed up into the $40/bbl USD range and there are indications pricing may continue to improve into the back half of 2016 based on supply and demand fundamentals improving. However, for any meaningful increase in industry activity levels we believe oil prices have to move firmly into the $50plus USD range. We also expect to see oilfield service activity levels lag energy price increases based on companies having to rebuild their balance sheets before they can commit to increased capital spending. In short, we expect the remainder of 2016 to be challenging for Cathedral and the energy industry in general.

Throughout the quarter we continued to focus on our key strategic initiatives as outlined in our year-end report. From a cost containment perspective we undertook further staff reductions in Canadato counter the low activity levels we experienced in Q1 and anticipated for Q2. These reductions followed wage rollbacks which were implemented in Canadaand the U.S. in early Q1. Despite the low activity and related revenue challenges in the quarter, we generated positive Adjusted EBITDAS and cash flow and reduced our bank debt. Our EBITDA per credit agreement well exceeded the minimum EBITDA per credit agreement required under our banking covenants for the first quarter.

We recently made the decision to centralize our Canadian Flowback and Production Testing ("F&PT") operations in Grande Prairie, Albertato further rationalize costs and gain operating efficiencies. To ensure we are still responsive to customer geographical needs, we have put in place a strategy to stage our equipment in additional key locations in Western Canadaincluding out of our Niskufacility. In the U.S. we are in the process of restructuring our F&PT division having made the decision to change this division's leadership team. We are now better using our U.S. Directional Drilling sales resources to expand our U.S. F&PT business development prospects and have recalibrated this division's cost base to better align with lower activity levels expected for the next couple of quarters. Despite the current low activity levels in our F&PT divisions, we still believe this will be the first area of our business to benefit from an activity level rebound as this service offering is tied more directly to generating short-term cash flow for producers.

Our business prospects in the U.S. directional drilling are trending favorably based on the shift we made in our sales strategy in late 2015. Our success in the U.S. is also a result of having differentiated technology in this market and having an active presence and growing reputation in the key U.S. basins such as the Permian. We are currently implementing new sales strategies and processes in Canadato ensure we are favorably positioned with a tailored product and services suite specific to each targeted basin (e.g. Montney). Our drilling motors continue to be recognized in the market as best-in-breed resulting in our motor rental business continuing to grow both in the U.S. and Canada. Our continuing efforts to ruggedize and advance our proprietary Measurement-While-Drilling ("MWD") equipment to improve reliability in ever-demanding downhole environments stands to position us favorably in the future from a competitive perspective.

We recognize our business and industry has experienced transformational changes and the way things were done in the past will not be the way things will work tomorrow. We recognize the future will demand different ways of doing business and that we need to adapt and innovate to ensure that we are on the forefront of these changes. The many challenges we have faced, and the significant changes we have made to our business as a result, have made Cathedral a much stronger company and positioned us favorably for when industry activity levels improve.

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.

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. Effective the date of the Meeting, Mr. Robert (Bob) L. Chaissonwill be retiring from Cathedral's Board of Directors after 10 years of service. The Board of Directors and management would like to acknowledge Bob's contribution including his wealth of knowledge as a seasoned and successful energy industry executive and customer. We wish Bob well in his future endeavors.

2016 CAPITAL PROGRAM

During 2016 Q1 the Company invested $268(2015 Q1 - $4,303) in equipment. The following table details the current period's net equipment additions:

The growth capital additions were $74for MWD system enhancement. Replacement capital relates to ancillary motor equipment.

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, that are required to maintain existing capacity levels. The capital budget will be reviewed quarterly.

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

| | | | | | | March 31 | December 31 | March 31 | | | 2016 | 2015 | 2015 | | Directional Drilling - MWD systems | 140 | 140 | 140 | | F&PT units | 66 | 66 | 66 | | | | | | | | | | |

RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH 31

| | | | | | | | | | | | | | | | | Three months ended March 31, 2016 | | Three months ended March 31, 2015 | | | | | | | | | | | | | Directional | | | | Directional | | | | | | | | | | Revenues | Drilling (1) | F&PT | Total | | Drilling (1) | F&PT | Total | | | | | | | | Canada | $ | 5,663 | $ | 1,864 | $ | 7,527 | | $ | 15,044 | $ | 4,998 | $ | 20,042 | | United States | 13,082 | 486 | 13,568 | | 21,753 | 8,282 | 30,035 | | | | | | | | | | | | | | | | | | | | | | | Total | $ | 18,745 | $ | 2,350 | $ | 21,095 | | $ | 36,797 | $ | 13,280 | $ | 50,077 | | (1) Includes motor rental revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

Revenues

2016 Q1 revenues were $21,095which represented a decrease of $28,982or 58% from 2015 Q1 revenues of $50,077. All divisions experienced revenue decreases compared to 2015 Q1 due to reductions in commodity prices and day rate decreases directly related to pricing concessions requested by customers due to market conditions. The active land rig count for Canadaand U.S. was down 47% and 60% respectively in 2016 Q1 compared to 2015 Q1. Canadian wells completed fell approximately 62% in 2016 Q1 compared to 2015 Q1.

Canadian Directional Drilling revenues (excluding motor rental revenues) decreased to $3,354in 2016 Q1 from $14,792in 2015 Q1; a 77% decrease. This decrease was the result of: i) a 67% decrease in activity days to 501 in 2016 Q1 from 1,507 in 2015 Q1; and ii) a 32% decrease in the average day rate to $6,695in 2016 Q1 from $9,816in 2015 Q1.

The decrease in activity days was mainly due to overall reductions in activity levels in Canadaas well as certain of Cathedral's customers reducing their drilling programs more than industry average and some who stopped drilling. The decrease in 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.

Partially offsetting these declines was an increase of $2,057on the rental of motors, particularly Cathedral's CLAW™ motor. Motor rental revenues for 2016 Q1 were $2,309(2015 Q1 - $252).

U.S. Directional Drilling revenues (excluding motor rental revenues) decreased to $11,977in 2016 Q1 from $21,470in 2015 Q1; a 44% decrease. This decrease was the net result of: i) a 47% decrease in activity days to 979 in 2016 Q1 from 1,831 in 2015 Q1; and ii) a 4% increase in the average day rate to $12,234in 2016 Q1 from $11,726in 2015 Q1 (when converted to Canadian dollars). All U.S. districts experienced a decrease in activity levels. The U.S. average day rate in Canadian dollars increased due to the stronger U.S. dollar. Rates in USD fell to $8,906 USDin 2016 Q1 from $9,486 USDin 2015 Q1, a 6% 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 Q1 were $1,105compared to $283in 2015 Q1.

Canadian F&PT revenues decreased to $1,864in 2016 Q1 from $4,998in 2015 Q1; a 63% decrease. The decrease was due to the reduction in activity levels due to the industry downturn as well as a 32% decline in pricing.

U.S. F&PT revenues decreased to $486in 2016 Q1 from $8,282in 2015 Q1, a 94% decrease. The decrease was due to a number of Cathedral's key customers ceased completion activity and work lost when work went through rebid process. In Q1 2016, the company made the decision to restructure its U.S. F&PT division to position it better for the current industry dynamics.

Gross margin and adjusted gross margin Gross margin for 2016 Q1 was 3.1% compared to 10.0% in 2015 Q1. Adjusted gross margin (see Non-GAAP Measurements) for 2016 Q1 was $4,905or 23.3% compared to $10,120or 20.2% for 2015 Q1.

The Company initiated a number of cost reductions throughout 2015 and into 2016 Q1 including reducing wages for field, support and office staff, implementing work force reductions and reducing other direct cost items. Even with lower day rates in many divisions the adjusted gross margin improved due to reduced field labour costs, which were offset by higher repairs on percentage of revenue basis.

Additionally, there was a reduction in the fixed component of direct cost of sales of 28.6% compared with 2015 Q1 amount. However, the percentage of revenue for these costs was greater in 2016 Q1 due to the reduction in revenues. On a percentage of revenue basis, the fixed costs increased 10.2% from 2015 Q1.

Depreciation allocated to cost of sales decreased to $4,233in 2016 Q1 from $5,091in 2015 Q1. Depreciation included in cost of sales as a percentage of revenue was 20.1% for 2016 Q1 and 10.2% in 2015 Q1.

Selling, general and administrative expenses ("SG&A")SG&A expenses were $4,938in 2016 Q1; a decrease of $655compared with $5,593in 2015 Q1. As a percentage of revenue, SG&A was 23% in 2016 Q1 and 11% in 2015 Q1. Included in 2016 Q1 amounts are $364of severance costs compared to $134in 2015 Q1

Excluding the non-cash items of depreciation and share-based compensation and severance, SG&A was $4,490in 2016 Q1 compared to $5,388in 2015 Q1, a decrease of $898or 17%. 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, research and development and related support staff.

Gain on disposal of equipmentDuring 2016 Q1, the Company had a gain on disposal of equipment of $892compared to $1,169in 2015 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 2015 Q1 the Company completed the previously discussed sale and leaseback of its Oklahoma Cityoperating facility. This resulted in a gain on sale of land and buildings of $508.

Gain on disposal of foreign subsidiary During 2016 Q1, the Company completed the sale of its wholly-owned Barbadossubsidiary, DPI, for net proceeds of $nil which resulted in a non-cash gain on sale of $10,865. DPI held the Company's investment in Venezuelaand this sale completes Cathedral's exit from carrying on a business in Venezuela.

Foreign exchange loss The Company had foreign exchange gain of $2,354in 2016 Q1 compared to a loss of $1,426in 2015 Q1 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 Q1 foreign currency gains are unrealized gains of $2,364(2015 Q1 – loss of $1,276) related to intercompany balances.

Finance costs Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $387for 2016 Q1 versus $467for 2015 Q1. The decrease in finance costs relate to a decreased utilization of the Company's credit facility.

Income taxFor 2016 Q1, the Company had an income tax recovery of $512compared to recovery of $71in 2015 Q1. Excluding the non-cash gain on disposal of foreign subsidiary, the effective tax rate was 30% for 2016 Q1 and 9% for 2015 Q1. Income tax expense is booked based upon expected annualized effective rates. The 2015 Q1 tax rate was lower than anticipated due to losses in Canadarecorded at effective rate of 23.25% and income in U.S. recorded at effective rate of 42.5%.

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 period ended March 31, 2016, the Company had funds from continuing operations (see Non-GAAP Measurements) of $167(2015 - $3,965). The decrease in funds from continuing operations is due to lower activity levels and reductions in revenue day rates. In 2016 Q1 the Company reduced its bank loans by $4,579which included a reduction in the revolving term loan of $2,500. Cash balances as at March 31, 2016were $2,200.