ACT Energy Technologies Ltd. press release

Cathedral Energy Services Reports Results for 2021 Q2

2021-08-11

TSX - Toronto Stock Exchange · Canada · Corporate Finance

Canada NewsWire

_/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA _/

CALGARY, AB , Aug. 10, 2021 /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, 2021 and 2020. 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 | | | | | | | | | 2021 | 2020 | 2021 | 2020 | | | | | | Revenues | $ | 7,322 | $ | 8,841 | $ | 18,687 | $ | 28,136 | | Adjusted gross margin % (1) | -11% | 4% | 9% | 9% | | | | | | Adjusted EBITDAS (1) | $ | (2,683) | $ | (823) | $ | (1,861) | $ | 235 | | Basic and diluted per share | $ | (0.05) | $ | (0.02) | $ | (0.04) | $ | - | | As % of revenues | -37% | -9% | -10% | 1% | | | | | | Cash flow - operating activities | $ | (1,892) | $ | (641) | $ | (2,300) | $ | (2,584) | | Loss from operating activities | $ | (6,011) | $ | (4,720) | $ | (8,251) | $ | (9,146) | | Basic per share | $ | (0.11) | $ | (0.10) | $ | (0.16) | $ | (0.18) | | Impairments and direct write-downs | $ | - | $ | - | $ | - | $ | (6,994) | | Loss | $ | (5,846) | $ | (3,815) | $ | (7,932) | $ | (16,405) | | Basic per share | $ | (0.11) | $ | (0.08) | $ | (0.15) | $ | (0.33) | | Equipment additions (recovery) - cash basis | $ | 738 | $ | (86) | $ | 1,329 | $ | 769 | | Weighted average shares outstanding | | | | | | | | | | Basic (000s) | 54,935 | 49,468 | 52,547 | 49,468 | | | | | | Diluted (000s) | 55,721 | 49,468 | 52,873 | 49,468 | | | | | | | | | | | | | | | | | | | June 30 | December 31 | | | | | | | | | 2021 | 2020 | | | | | | Working capital | | | $ | 6,545 | $ | 7,680 | | | | Total assets | | | $ | 60,171 | $ | 64,280 | | | | Loans and borrowings excluding current portion | | | $ | 2,304 | $ | 1,560 | | | | Shareholders' equity | | | $ | 34,589 | $ | 39,974 | | | | | | | | | | | | | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | | | | |

2021 Q2 KEY TAKEAWAYS

Revenues decreased by $1,519 or 17% from $8,841 in 2020 Q2 to $7,322 in 2021 Q2 and this, along with an increase in repairs led to a lower adjusted gross margin and lower adjusted EBITDAS; The Company finalized an amendment to its credit facility that extends the facility to June 30, 2023 , which also returned the facility to full $12,000 availability and added $1,000 in HASCAP financing; Q2 saw Ian Graham , CFO, and Fawzi Irani , Senior Vice President, U.S. Operations join Cathedral. They join Tom Connors who was appointed CEO in Q1 and Randy Pustanyk , Executive VP, to complete the new management team; In Q2, the Company completed a $3,164 private placement; and In July 2021 the Company completed acquisition of Precision's directional drilling business for a purchase price of $6,350 which included a $3,000 cash investment by Precision for 13,400,000 Cathedral common shares and 2,000,000 share purchase warrants with an exercise price of $0.60 .

OUTLOOK

During Q2 Cathedral's top management team was put in place and the company began executing on a plan to solidify its balance sheet, increase its share of the directional drilling business across North America and solidify its industry leading technological capabilities.

With our recent acquisition of Precision Drilling's directional drilling business, we have further solidified our position in the Canadian market among the top four directional drilling contractors with 18+% market share. The $3,000 cash that accompanied the assets will allow us to expand our high-performance motor fleet and to increase our RapidFireTM MWD system job capacity to 18 from the 12 previously announced. It also represents a key first step on a strategic path towards necessary consolidation required to help the market transition to the next phase of recovery. Going forward, we are confident the combination of capabilities and expertise of both companies will create value for our customers and that our Marketing Alliance and partnership with Precision will deliver a mechanism for additional growth and expansion.

The North American oilfield services industry continues to improve from the lows of 2020 with strong commodity pricing for both oil and gas meaning improved balance sheets and increased capital spending by E&P companies leading to higher levels of drilling activity in the back half of 2021 and into 2022.

In our Canadian market, we had substantially improved activity in the second quarter versus the same quarter in 2020 and Q3 activity is expected to rival or exceed rig counts witnessed in the first quarter, normally considered a period of peak activity in any year. If commodity prices continue at these levels some industry analysts and observers are predicting as much as a 25%+ improvement in overall activity levels in 2022 versus 2021. As rig counts improve in the third and fourth quarters of this year, we anticipate a tight labour market with increased pressure on labour costs, accompanied by an improving pricing environment. In addition to an overall improvement in market conditions, we continue to experience demand from our customers for our nDurance drilling motors, because of reduced drilling times in challenging environments, particularly in rotary steerable applications. Our RapidFire TM Measurement-While-Drilling ("MWD") system is now commercial and active in the Western Canadian Sedimentary Basin ("WCSB") and delivering performance with high reliability in robust drilling environments. The consistent performance of our technology and people, continues to result in gains in market share with CET emerging the second quarter as one of top five most active directional drilling contractors in the Canadian market

In our US market, the rebound in activity for our business lagged the overall industry in the first half of the year as we continued to work through the transformation of our management team and focused on new customers. However, under Fawzi Irani we have now begun the process of the transforming our US team with a focus on new customers. With the track record and experience of our newly hired management and sales team we are confident our activity levels relative to the overall market will improve going forward. In anticipation and preparation of an increased job count in the back half of the year, we did experience a higher than usual maintenance and repair cost in the quarter which will later translate to improved margins as we deliver operations in the field.

We also completed the extension and amendment of our credit facility in the quarter, thus securing a more traditional banking agreement, improving our financial structure, and expanding our liquidity. The successful application under the HASCAP program combined with the previously mentioned Precision capital injection give the Company the ability to expand our capital budget and product offering without placing undo pressure on the Balance Sheet. We will continue to execute our growth strategies while maintaining a low leverage profile.

The second quarter marked a number of positive changes and milestones for Cathedral and we feel well positioned financially and operationally to capitalize on the growing demand for our services in the coming quarters.

2021 CAPITAL PROGRAM

During the six months ended June 30, 2021 , the Company invested $1,329 (2020 - $769 ) in equipment. The following table details the current period's net equipment additions:

| | | | | | | | Six months ended | | | | | June 30, 2021 | | | Equipment additions: | | | | | Motors | | $ | 832 | | MWD | | 367 | | | Other | | 130 | | | Total cash additions | | $ | 1,329 |

The Company's 2021 capital plan is approximately $6,000 . The focus of 2021 capital plan will be motor power section additions for premium lines and addition of RapidFire™ Measurement-While-Drilling dual telemetry systems tools The additions of $1,329 were partially funded by proceeds on disposal of equipment of $298 .

RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 30

| | | | | | | | Revenues | | 2021 | 2020 | | | | Canada | | $ | 3,207 | $ | 1,130 | | United States | | 4,115 | 7,711 | | | | Total | | $ | 7,322 | $ | 8,841 |

Revenues 2021 Q2 revenues were $7,322 , which represented a decrease of $1,519 or 17% from 2020 Q2 revenues of $8,841 .

Canadian revenues (excluding motor rental revenues) increased to $3,012 in 2021 Q2 from $570 in 2020 Q2; a 428% increase. This increase was the net result of: i) a 473% increase in activity days to 453 in 2021 Q2 from 79 in 2020 Q2 and ii) an 8% decrease in the average day rate to $6,649 in 2021 Q2 from $7,217 in 2020 Q2.

There was a 197% year-over-year increase in the average active land rig count in Canada (source: Baker Hughes) which contributed to Cathedral's activity increase of 488%. Due to Cathedral's client mix, we had greater activity improvements as compared with the general market increase. The decrease in day rates was due to a reduction in certain ancillary revenues.

U.S. revenues (excluding motor rental revenues) decreased 53% to $3,471 in 2021 Q2 from $7,456 in 2020 Q2. This decrease was the result of: i) a 33% decrease in activity days to 421 in 2021 Q2 from 627 in 2020 Q2; and ii) a 31% decrease in the average day rate to $8,245 in 2021 Q2 from $11,892 in 2020 Q2 (when converted to Canadian dollars).

The average active land rig count for the U.S. was up 14% in 2021 Q2 compared to 2020 Q2 (source: Baker Hughes). The Company experienced a 36% decline in activity resulting in a decrease in market share compared to 2020 Q2. Day rates in USD decreased 21% to $6,722 USD in 2021 Q2 from $8,551 USD in 2020 Q2. The 2021 Q2 rate is down due to a decrease in revenues from providing rotary steerable system (RSS) services which are rented from a 3rd party and a reduction in certain ancillary revenues.

Motor rentals decreased in Canada but this was offset by increases in the U.S. Combined rental revenues increased slightly to $838 in 2021 Q2 compared to $815 in 2020 Q2.

Government grants The Company recognized the benefit from the Canada Emergency Wage Subsidy ("CEWS") program of $451 (2020 - $637 ) which reduced salary expenses as follows:

Cost of sales $267 (2020 - $261 ); Selling, general and administrative expenses $148 (2020 - $264 ); and Technology group expenses $33 (2020 - $112 ).

Additionally, the Company received $250 (2020 - $nil) from the Canadian Emergency Rent Subsidy ("CERS"), which reduced cost of sales $214 (2020 - $nil) and selling, general and administrative $36 (2020 - $nil).

Gross margin and adjusted gross margin Gross margin for 2021 Q2 was -49% compared to -36% in 2020 Q2. Adjusted gross margin (see Non-GAAP Measurements) for 2021 Q2 was $(733) or -11% compared to $342 or 4% for 2020 Q2.

Adjusted gross margin, as a percentage of revenue, decreased due to the decrease in revenue day rate and by higher repairs and field labour expenses.

Depreciation of equipment allocated to cost of sales decreased to $2,825 in 2021 Q2 from $3,540 in 2020 Q2. Depreciation included in cost of sales as a percentage of revenue was 39% for 2021 Q2 and 40% in 2020 Q2.

Selling, general and administrative ("SG&A") expenses SG&A expenses were $2,281 in 2021 Q2; an increase of $467 compared with $1,814 in 2020 Q2. There were increases in SG&A wages and legal expenses and reduced CEWS grants. As a percentage of revenue, SG&A was 31% in 2021 Q2 compared to 21% in 2020 Q2.

Technology group expenses Technology group expenses were $162 in 2021 Q2; a slight decrease of $43 compared with $205 in 2020 Q2. Technology 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.

Gain on disposal of equipment During 2021 Q2, the Company had a gain on disposal of equipment of $56 compared to $515 in 2020 Q2. These gains are mainly related to equipment lost-in-hole. Proceeds from clients on lost-in-hole equipment are based on amounts specified in service agreements. 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 2021 Q2, the Company received proceeds on disposal of equipment of $77 (2020 Q2 - $610 ).

Finance costs Finance costs consisting of interest expenses on loans and borrowings and bank charges were $106 for 2021 Q2 versus $89 for 2020 Q2.

Finance costs lease liability The lease liability interest decreased slightly to $201 from $239 .

Foreign exchange The Company had a foreign exchange gain of $427 in 2021 Q2 compared to $1,107 in 2020 Q2 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 2021 Q2 foreign currency loss are unrealized gain of $478 (2020 Q2 - $1,104 ) related to intercompany balances.

Income tax Previously, Cathedral derecognized deferred tax assets due to a recent history of tax losses within both of Cathedral's legal entities. 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 25.5% for Canada and 23% for the U.S.

RESULTS OF OPERATIONS – SIX MONTHS ENDED JUNE 30

| | | | | | | | Revenues | | 2021 | 2020 | | | | Canada | | $ | 11,308 | $ | 8,466 | | United States | | 7,379 | 19,670 | | | | Total | | $ | 18,687 | $ | 28,136 |

Revenues 2021 revenues were $18,687 , which represented a decrease of $9,449 or 34% from 2020 revenues of $28,136 .

Canadian revenues (excluding motor rental revenues) increased to $10,452 in 2021 from $6,515 in 2020; a 60% increase. This increase was the net result of: i) a 82% increase in activity days to 1,616 in 2021 from 889 in 2020 and ii) an 12% decrease in the average day rate to $6,468 in 2021 from $7,329 in 2020.

There was a 3% year-over-year increase in the average active land rig count in Canada (source: Baker Hughes) which contrasts to Cathedral's activity increase of 82%. Due to Cathedral's client mix, we had greater activity improvements as compared with the general market increase. The decrease in day rates was due to a reduction in certain ancillary revenues.

U.S. revenues (excluding motor rental revenues) decreased 68% to $6,177 in 2021 from $19,160 in 2020. This decrease was the result of: i) a 53% decrease in activity days to 700 in 2021 from 1,492 in 2020; and ii) a 31% decrease in the average day rate to $8,825 in 2021 from $12,842 in 2020 (when converted to Canadian dollars).

The average active land rig count for the U.S. was down 29% in 2021 compared to 2020 (source: Baker Hughes). The Company experienced a 52% decline in activity resulting in a decrease in market share compared to 2020. Day rates in USD decreased 25% to $7,095 USD in 2021 from $9,437 USD in 2020. The 2021 rate is down due to a decrease in revenues from providing rotary steerable system (RSS) services which are rented from a 3rd party and a reduction in certain ancillary revenues.

Motor rentals decreased in Canada but this was partially offset by increases in the U.S. Combined rental revenues decreased to $2,057 in 2021 compared to $2,460 in 2020. The decrease is due to a significant Canadian rental client not drilling in 2021 H1, although they are expected to resume their program in 2021 H2.

Government grants The Company recognized the benefit from the CEWS program of $657 (2020 - $637 ) which reduced salary expenses as follows:

Cost of sales $390 (2020 - $261 ); Selling, general and administrative expenses $214 (2020 - $264 ); and Technology group expenses $53 (2020 - $112 ).

Additionally, the Company received $385 (2020 - $nil) from CERS, which reduced cost of sales $314 (2020 - $nil) and selling, general and administrative $71 (2020 - $nil).

Gross margin and adjusted gross margin Gross margin for 2021 was -22% compared to -19% in 2020. Adjusted gross margin (see Non-GAAP Measurements) for 2021 was $1,647 or 9% compared to $2,649 or 9% for 2020.

While adjusted gross margin was unchanged as a percentage of revenue, the components changed. Adjusted gross margin was negatively impacted by a decrease in revenue day rate and by higher repairs and field labour expenses. These were offset by lower third party equipment rentals, reductions to the fixed portion of cost of sales and the impact of CERS and lower severance.

Depreciation of equipment allocated to cost of sales decreased to $5,712 in 2021 from $7,916 in 2020. Depreciation included in cost of sales as a percentage of revenue was 31% for 2021 and 28% in 2020.

Selling, general and administrative ("SG&A") expenses SG&A expenses were $4,046 in 2021; a decrease of $578 compared with $4,624 in 2020. There were reductions in SG&A wages and related benefits and burdens due to a lower head count, wage rollbacks and a reduction in severance versus 2020. As a percentage of revenue, SG&A was 22% in 2021 compared to 16% in 2020.

Technology group expenses Technology group expenses were $350 in 2021; a decrease of $385 compared with $735 in 2020. Technology 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. In 2020, Cathedral 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 equipment During 2021, the Company had a gain on disposal of equipment of $244 compared to $1,519 in 2020. 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. 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 2021, the Company received proceeds on disposal of equipment of $298 (2020 - $1,786 ).

Finance costs Finance costs consisting of interest expenses on loans and borrowings and bank charges were $189 for 2021 versus $118 for 2020.

Finance costs lease liability The lease liability interest decreased slightly to $410 from $477 .

Foreign exchange The Company had a foreign exchange gain of $918 in 2021 compared to a loss of $(1,329) in 2020 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 2021 foreign currency loss are unrealized gain of $922 (2020 - loss of $1,360 ) related to intercompany balances.

Impairment and direct write-downs Due to the decline in projected drilling activity in 2020 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 $6,994 in 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 close or significantly reduce activities at certain locations. The right of use asset for these locations was written down to $nil. There were $160 intangible projects in progress where it was uncertain when or if staff resources would 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 2021.