ACT Energy Technologies Ltd. press release
Cathedral Energy Services reports results for 2007 Q4 and the year ended December 31, 2007
TSX - Toronto Stock Exchange · Canada
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, March 6 /CNW/ - Cathedral Energy Services Income Trust (the "Trust" / TSX: CET.UN) is pleased to report its results for 2007 Q4 and the year-end December 31, 2007. Dollars are in '000's except for day rates and per Trust Unit amounts.
FINANCIAL HIGHLIGHTS
Three months ended Years ended December 31 December 31 2007 2006 2007 2006 Revenues $ 39,054 $ 35,327 $ 145,106 $ 138,254
EBITDAS(1) $ 13,707 $ 13,046 $ 46,731 $ 52,793 Per Trust Unit - diluted $ 0.43 $ 0.42 $ 1.47 $ 1.68
Income before taxes $ 9,772 $ 9,573 $ 31,990 $ 39,679
Net income $ 10,365 $ 8,127 $ 24,863 $ 35,348 Per Trust Unit - basic $ 0.33 $ 0.26 $ 0.79 $ 1.16 Per Trust Unit - diluted $ 0.33 $ 0.26 $ 0.78 $ 1.12
Cash distributions declared per Trust Unit $ 0.21 $ 0.26 $ 0.84 $ 0.805
Distributable cash(2) $ 12,043 $ 11,283 $ 38,993 $ 45,972
Cash distributions declared $ 6,649 $ 8,026 $ 26,405 $ 24,681
Payout ratio(3) 55% 71%(4) 68% 54%(4)
Property and equipment additions and corporate acquisitions: Paid or payable in cash $ 5,205 $ 4,448 $ 19,857 $ 26,436 Paid or payable in Trust Units - 320 - 1,820 $ 5,205 $ 4,768 $ 19,857 $ 28,256
Weighted average Trust Units outstanding: Basic ('000) 31,652 30,831 31,402 30,578 Diluted ('000) 31,836 31,316 31,781 31,423
December 31 December 31 2007 2006 Working capital $ 16,947 $ 15,051
Long-term debt and capital lease obligations excluding current portion $ 17,441 $ 15,552
Unitholders' equity $ 79,250 $ 76,223 (1) EBITDAS, earnings before interest on long-term debt and capital lease obligations, taxes, depreciation, amortization and non-cash compensation expense is provided to assist investors in determining the ability of the Trust to generate cash from operations. EBITDAS does not have any standardized meaning within Canadian Generally Accepted Accounting Principles and therefore may not be comparable to similar measures presented by other companies and/or trusts. During 2007 the Trust re-named "EBITDA" to "EBITDAS" but the formula used to calculate both terms are the same. (2) Distributable cash is defined as cash flow from operating activities before changes in non-cash operating working capital less required principal repayments on long-term debt and capital lease obligations and maintenance capital expenditures. Distributable cash does not have any standardized meaning within Canadian Generally Accepted Accounting Principles and therefore may not be comparable to similar measures presented by other trusts. During 2007 the Trust re-named "distributable income" to "distributable cash" but the formula used to calculate both terms are the same. (3) Cash distributions declared as a percentage of distributable cash. (4) Payout ratio is 57% for 2006 Q4 and 50% for the year ended December 31, 2006 if the December 2006 "special" cash distribution of $0.05 per Trust Unit is excluded.
FORWARD-LOOKING INFORMATION
Certain statements in this news release including (i) statements that may contain words such as "anticipate", "could", "expect", "seek", "may" "intend", "will", "believe", "should", "project", "forecast", "plan" and similar expressions, including the negatives thereof, (ii) statements that are based on current expectations and estimates about the markets in which the Trust/Cathedral operates and (iii) statements of belief, intentions and expectations about developments, results and events that will or may occur in the future, constitute "forward-looking statements" and are based on certain assumptions and analysis made by the Trust/Cathedral. Forward-looking statements in this MD&A include, but are not limited to, statements with respect to future capital expenditures, including the amount, nature and timing thereof; oil and natural gas prices and demand; other development trends within the oil and natural gas industry; business strategy; expansion and growth of the Trust's/Cathedral's business and operations including the Trust/Cathedral's market share and position in the oilfield service market; and other such matters. Such forward-looking statements are subject to important risks and uncertainties, which are difficult to predict and that may affect the Trust's/Cathedral's operations, including, but not limited to: the impact of general economic conditions in Canada and the United States; industry conditions, including the adoption of new environmental, safety and other laws and regulations and changes in how they are interpreted and enforced; volatility of oil and natural gas prices; oil and natural gas product supply and demand; risks inherent in the Trust's/Cathedral's ability to generate sufficient cash flow from operations to meet its current and future obligations; increased competition; the lack of availability of qualified personnel or labor unrest; fluctuation in foreign exchange or interest rates; stock market volatility; opportunities available to or pursued by the Trust/Cathedral and other factors, many of which are beyond the control of the Trust/Cathedral. The Trust's/Cathedral's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do transpire or occur, what benefits the Trust/Cathedral will derive therefrom. Subject to applicable law, the Trust disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
All forward-looking statements contained in this document are expressly qualified by this cautionary statement. Further information about the factors affecting forward-looking statements is available in the Trust's current Annual Information Form which has been filed with the applicable Canadian provincial securities commissions and are available on www.sedar.com.
NON-GAAP MEASURES
This news release refers to certain financial measurements that do not have any standardized meaning within Canadian Generally Accepted Accounting Principles ("GAAP") and therefore may not be comparable to similar measures provided by other companies and/or trusts.
The specific measures being referred to include the following:
i) "Gross margin" - calculated as revenues less operating expenses is considered a primary indicator of operating performance (see tabular calculation under Results of Operations);
ii) "EBITDAS" - defined as earnings before interest on long-term debt and capital lease obligations, taxes, depreciation, amortization and non-cash compensation expense; this measure is considered an indicator of the Trust's ability to generate funds flow from operations prior to consideration of how activities are financed, how the results are taxed and measured and non-cash expenses (see tabular calculation under EBITDAS); during 2007 the Trust re-named "EBITDA" to "EBITDAS" but the formula used to calculate both terms are the same;
iii) "Distributable cash" - defined as cash flow from operating activities before changes in non-cash operating working capital less required principal repayments on long-term debt and capital lease obligations and maintenance capital expenditures; distributable cash is a key performance measurement used by management, analysts and investors to evaluate the financial performance of the Trust (see tabular calculation under Distributions); during 2007 the Trust re- named "distributable income" to "distributable cash" but the formula used to calculate both terms are the same;
iv) "Maintenance capital expenditures" - refers to capital expenditures required to maintain existing levels of service but excludes replacement cost of lost-in-hole equipment to the extent the replacement equipment is financed from the proceeds on disposal of the equipment lost-in-hole;
v) "Payout ratio" - calculated as cash distributions declared divided by distributable cash, is an indicator of the Trust's ability to fund its distributions from the Trust's ongoing operations excluding changes in non-cash working capital (see tabular calculation under Distributions) (see distributable cash definition above); and
vi) "Funds from operations" - calculated as cash flow from operating activities before changes in non-cash working capital is considered an indicator of the Trust's ability to generate funds flow from operations but excluding changes in non-cash working capital which is financed using the Trust's bank indebtedness/line of credit facility.
OVERVIEW
Cathedral Energy Services Income Trust is pleased to report results for both the fourth quarter of 2007 and the year-ended December 31, 2007. Despite a significant decrease in oilfield services activity in western Canada, the Trust was able to achieve a quarter-over-quarter increase in revenues as well as record annual revenues in 2007. Revenues for Q4 increased $3,727 or 10.6% 39,054 from $35,327 in the comparative period in 2006. On a year-over-year basis, revenues increased $6,852 or 5.0% to $145,106 from $138,254 in 2006. This increase was led by our directional drilling business in both Canada and the U.S. 2007 Q4 EBITDAS was $13,707 which compares to $13,046 in 2006. EBITDAS for the year ended December 31, 2007 was $46,731 while the comparative figure for 2006 was $52,793.
Net income for the three months ended December 31, 2007 was $10,365 ($0.33 per diluted Trust Unit) which compares to $8,127 ($0.26 per diluted Trust Unit) in the same quarter of 2006. For the year ended December 31, 2007, net income was $24,863 ($0.78 per diluted Trust Unit) which compares to $35,348 ($1.12 per diluted Trust Unit) for 2006. Considering the environment in which the Trust operated in 2007, management is pleased with the operating results for the year.
RESULTS OF OPERATIONS - 2007 COMPARED TO 2006
Revenues and operating expenses
2007 2006 Change % Revenues $ 145,106 $ 138,254 $ 6,852 5 Operating expenses (73,482) (64,886) 8,596 13 Gross margin - $ $ 71,624 $ 73,368 $ (1,744) (2) Gross margin - % 49.4% 53.1% 3.7%
For 2007 the Trust continued to generate record annual revenues of $145,106 which represented an increase of 5.0% over 2006 revenues. The increase was mainly a result of: i) a 4.6% increase in the average day rate for directional drilling services to $8,857 per day (2006 - $8,470) and ii) a 11.1% increase in directional drilling activity days to 12,274 activity days (2006 - 11,046 days). The largest portion of the increase in the average day rate is related to a shift towards providing premium and specialized services as opposed to an increase in the overall base day rate. In Canada the Trust's 2007 activity levels decreased by 2.5% which was significantly less than the overall decline in drilling activity in the Canadian market. Despite the decline in natural gas drilling in western Canada, the Trust was able to minimize the market decline from prior year activity levels due to the continuing strength of the Trust's client base, involvement in multi-well programs and an increase in the percentage of wells drilled in western Canada that are horizontal or directional versus vertical in nature. The Rocky Mountain region of the United States is the Trust's main area of operations in the U.S. and it remains a very active area. The Trust's U.S. operations have now been expanded to provide directional drilling services in North Dakota and Michigan. The Trust's directional revenues from the U.S. were $41,519 in 2007, an $11,272 (37.3%) increase from 2006 revenues of $30,247. Due to demand in the U.S. market, 5 Measurement-While-Drilling ("MWD") systems were transferred to the U.S. in 2007 and an additional MWD system was transferred to the U.S. in early 2008; the Trust now has 24 MWD systems in the U.S. market. The Trust's geographic diversification, by way of providing directional drilling services in southeast Saskatchewan and U.S., has been a significant factor in its ability to organically grow its revenues within the directional drilling division.
In 2007, a competitor of the Trust purchased the ranging tool technology used by the Trust in drilling SAGD wells. During 2007 Cathedral was allowed to use this technology to complete projects it had in place but effective in 2008 this technology will not be available to Cathedral. In 2007 SAGD related revenues were $1,863 (2006 - $nil). Cathedral is currently pursuing alternative technologies to allow it to return to the SAGD market.
The continued decline in natural gas drilling expenditures in the western Canada market resulted in lower revenues for both of the Trust's production testing and wireline divisions. The Trust's production testing division, Tier One, contributed $12,051 in revenues during 2007 which is a 24.0% decline from 2006 revenues of $15,847. Advance Wireline and Xtreme Wireline combined to generate total Canadian and U.S. revenues of $21,682 for 2007 compared to $26,188 for 2006, a 17.2% decrease. Late in 2007 Q2, one wireline unit was transferred from the Canadian operations to the newly formed U.S. division of Advance Wireline but revenue generating operations did not commence until 2007 Q3. A second wireline unit was transferred to the U.S. in 2007 Q3 and in early 2008 Q1 a third wireline unit was also transferred. As result of this expansion the U.S. wireline division generated $790 in revenues for 2007.
The gross margin for 2007 was 49.4%, which compares to 53.1% in 2006. The decrease is attributed to a number of factors including: i) shift to providing more horizontal drilling services (versus directional) which provide a lower gross margin than from directional drilling; ii) increases in directional field labour rates; iii) increase in wireline field labour costs as a percentage of revenues due to of a portion of these labour charges being fixed in nature; and iv) offsetting the previous items was an increase in the average day rate for directional drilling services.
General and administrative expenses
2007 2006 Change % General and administrative expenses $ 25,774 $ 22,066 $ 3,708 17
General and administrative expenses increased from $22,066 in 2006 to $25,774 in 2007 - an increase of $3,708. The increase was mainly related to the Trust's directional/horizontal drilling business and the contributing factors to that increase were the result of increased personnel and facility rental costs as well as an overall increase in directional drilling activity level of the U.S. directional drilling operations. Other items contributing to the overall increase were: i) a $630 increase in costs related to bad debt write-offs; ii) costs related to the set-up of the U.S. wireline division in 2007; iii) approximately $300 of professional fees incurred in 2007 Q3 related to an aborted corporate acquisition, and iv) costs associated with pursuing international business opportunities. As a percentage of revenues, general and administrative expenses were 17.8% in 2007 and 16.0% in 2006.
Depreciation and amortization
2007 2006 Change % Depreciation and amortization $ 12,054 $ 10,692 $ 1,362 13
This increase is related to the Trust's investment in property and equipment over the past 12 months including 10 MWD systems along with the expansion of the mud motor and drilling collar fleet to complement the increase in directional drilling job capacity, upgrade of low pressure production testing units to higher pressure units and the purchase of 7 wireline units (one older wireline unit was sold in 2007) and auxiliary wireline equipment. As a percentage of revenues, depreciation and amortization amounted to 8.3% for 2007 and 7.7% for 2006.
Interest
2007 2006 Change % Interest - long-term debt and capital lease obligations $ 1,084 $ 936 $ 148 16 Interest - other $ 404 $ 482 $ (78) (16)
The main contributing factor to the increase in interest related to long-term debt and capital lease obligations is an increase in the average level of debt outstanding on a year-over-year basis. The $78 decrease in other interest expense is related to the Trust's decreased utilization of its operating line of credit.
Foreign exchange loss (gain)
2007 2006 Change % Foreign exchange loss (gain) $ 492 $ (27) $ 519 n/a
The Trust derives revenues from the U.S. which are denominated in the local currency and a significant portion of the U.S. operations costs are also denominated in the same local currency. In addition, the Trust's Canadian operations are subject to foreign currency exchange rate risk in that some purchases for parts, supplies and components in the manufacture of equipment are denominated in U.S. dollars. On a consolidated basis, the Trust has an exposure to foreign currency fluctuations related to its net monetary investment in its U.S. subsidiary. The 2007 foreign exchange loss is due mainly to the U.S. dollar weakening significantly against the Canadian dollar in 2007 versus 2006 and the Trust's net monetary investment in its U.S. subsidiary.
Non-cash compensation expense
2007 2006 Change % Non-cash compensation expense $ 1,603 $ 1,486 $ 117 8
The Trust Unit options granted are valued using the Black-Scholes option pricing model and such value is being amortized against income over their three-year vesting period.
Gain on disposal of property and equipment
2007 2006 Change % Gain on disposal of property and equipment $ 1,777 $ 1,946 $ (169) (9)
The gain on disposal of property and equipment can vary significantly from year-to-year as almost all of the disposals relate to downhole equipment lost-in-hole. Cathedral recovers lost-in-hole equipment costs including previously expensed depreciation on the related assets.
Taxes
2007 2006 Change % Taxes $ 7,127 $ 4,331 $ 2,796 65
For 2007, the Trust had a tax expense of $7,127 (effective tax rate of 22.3%) which compares to $4,331 (effective tax rate of 10.9%) in 2006. The 2007 tax provision includes a cumulative non-cash adjustment of $2,754 ($0.09 per diluted Trust Unit) related to the substantive enactment of the previously announced changes to the taxation of income and royalty trusts, other than real estate investment trusts. Removing the 2007 adjustment noted above the effective tax rate for 2007 was 13.7%. The adjusted effective tax rate has increased 10.9% in 2006 to 13.7% in 2007 due mainly to the continuing growth in the U.S. operations which are taxed at a higher rate as well as some expenses not being deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Trust's principal source of liquidity is cash generated from operations and also has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity. At December 31, 2007, the Trust had an operating line of credit with a major Canadian bank in the amount of $12,500 (2006 - $12,500) of which $6,030 (2006 - $6,460) was drawn. The Trust has a non-reducing revolving term loan facility in the amount of $25,000 (2006 - $25,000) of which $17,000 (2006 - $15,000) was drawn as at December 31, 2007. In addition, at December 31, 2007, the Trust had obligations under capital leases in the amount of $451 (2006 - $664) and other long-term debt of $283 (2006 - $171).
Operating activities
Cash flow from operating activities decreased from $39,929 in 2006 to $39,729 - a decrease of $200 or 0.5%. Funds from operations (see Non-GAAP Measures) for 2007 was $39,693 which compares to $46,831 for 2006; the decline of $7,138 is attributable to a decline in operating profits due to compression of the gross margin realized in 2007 and an increase in general and administrative expenses. The Trust has a strong working capital position at December 31, 2007 at $16,947 which compares to $15,051 at the end of 2006.
Investing activities
Cash used in investing activities for the year ended December 31, 2007 amounted to $16,607 compared to $24,366 in 2006. During 2007 the Trust invested an additional $19,857 (2006 - $26,436) in property and equipment. For 2007 the significant property and equipment additions included progress payments on construction of a new mud motor repair facility in Nisku, Alberta, 10 MWD systems along with the expansion of the mud motor and drilling collar fleet to complement the increase in directional drilling job capacity, upgrade of low pressure production testing units to higher pressure units and the purchase of 7 wireline units (one older wireline unit was sold in 2007) and auxiliary wireline equipment. With the exception of the $2,000 draw on non-reducing revolving term loan facility which was used to finance the construction of the Nisku mud motor repair facility, and the $228 of 0% financing for automotive equipment additions, all of the 2007 additions to property and equipment have been financed from cash flow from operations. Fluctuations in non-cash working capital related to investing activities are a function of when proceeds on disposal of property and equipment are received and when payments for property and equipment purchases are made.