ACT Energy Technologies Ltd. press release
Cathedral Energy Services Ltd. Further Progresses Plan with Record Second Quarter
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA ./
CALGARY, AB , Aug. 10, 2023 /CNW/ - Cathedral Energy Services Ltd.'s (the "Company" or "Cathedral") 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 the "Forward-Looking Statements" section in this news release. This news release contains references to Adjusted gross margin, Adjusted gross margin %, Adjusted EBITDAS, Adjusted EBITDAS margin % and Free cash flow. These terms do not have standardized meanings prescribed under International Financial Reporting Standards ("IFRS") and may not be comparable to similar measures used by other companies. See the "Non-GAAP Measures" section in this news release for definitions and tabular calculations.
SECOND QUARTER HIGHLIGHTS
The Company achieved the following 2023 Q2 results and highlights:
Revenue of $115,058 in 2023 Q2 is the highest for any second quarter in the Company's history and represents an increase of 316%, compared to $27,652 in 2022 Q2. Adjusted EBITDAS of $18,222 in 2023 Q2 is also a new record for any second quarter in the Company's history and represents an increase of 543%, compared to $2,836 in 2022 Q2. Net income of $2,416 , compared to a net loss of $2,824 in 2022 Q2. Despite the seasonally slower second quarter in Canada , the Company generated free cash flow of $4,984 , a testament to size and scale and a business model with lower capital intensity. Canadian directional drilling market share averaged 20.1% in 2023 Q2, an increase from 15.4% in 2022 Q2. U.S. directional drilling market share averaged 8.7% in 2023 Q2. Loans and borrowings less cash of $39,957 as at June 30, 2023 , compared to $69,360 as at December 31, 2022 . The Company received $16,012 in total cumulative proceeds related to the April 2022 bought deal offering warrants, which accounted for 99.7% of eligible warrants. The Company also received warrants proceeds of $138 and $1,200 relating to the February 2021 private placement warrants and the Precision Drilling acquisition, respectively, as of the date of this news release. Subsequent to June 30, 2023 , the Company acquired Rime Downhole Technologies, LLC ("Rime"), a privately-held, Texas -based, engineering business that specializes in building products for the downhole measurement-while-drilling ("MWD") industry in exchange for approximately USD $41,000 (refer to the subsequent event section of this news release). The Company retains a great deal of flexibility in regards to its capital budget with the ability to increase or decrease expenditures in response to changing market conditions, including commodity prices which generally drive activity levels. The Company is maintaining its 2023 net capital budget of $36,000 .
PRESIDENT'S MESSAGE
Comments from President & CEO Tom Connors :
"Record revenue of $115,058 and Adjusted EBITDAS of $18,222 for any second quarter in corporate history demonstrates continued and deliberate progress on the execution of our size and scale strategy. In fact, since we embarked on our plan we have delivered consistent growth in Adjusted EBITDAS on a weighted average shares outstanding basis when comparing the trailing twelve-month performance at each quarter end from the beginning of 2021."
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"With approximately 70% of our revenue on an annualized basis generated in the U.S., the transformative growth in our U.S. business offset the seasonal lows in Canada and bolstered Adjusted EBITDAS, cash flow and net income in a quarter, which is typically challenging. Our increased scale in previous quarters and more consistent performance driven by our U.S. business in the second quarter have contributed to stronger overall performance, which has allowed us to reduce our borrowings substantially from July 2022 . Although our debt levels did increase moderately with the recent Rime acquisition, we have continued confidence in activity levels and corresponding cash flows in order to maintain a strong level of liquidity in the business. With a focus on disciplined capital deployment, Cathedral will continue to reduce its leverage profile over the coming quarters, while also having the financial flexibility to allocate funds to share repurchases, depending on market conditions.
"Despite the recent challenging market conditions in the U.S., we achieved a job count in the mid-60's in the second quarter up from the high-40's in late Q1. While the higher job count comes with a higher mix of conventional work, bringing average day rates lower, it is a testament to the performance capabilities of our U.S. team and technology that enabled growth in demand from our customers for our services. We expect the U.S. rig count will bottom sometime in 2023 Q3 and are encouraged by our strong job count on approximately 60 active rigs that continues into the third quarter. We expect the job count to remain steady or slightly improved through the remainder of the year. With the higher job count comes full asset utilization, and in the short-term we anticipate a higher level of equipment rentals to meet demand as we wait on deliveries from our capital program.
"In Canada , the expansion of our business and market share led to a significantly more active second quarter than last year with 64% year-over-year Q2 revenue growth. Our customers remain disciplined with most committed to maintaining capital programs for 2023. Industry rig counts have ticked lower than the same period in 2022, but are expected to remain somewhat consistent to slightly improved in the back half of the year. We anticipate improved margins and consistent market share in the third quarter as the benefits from our repair program earlier in the year flow through to a lower need for rentals.
"With MWD components active on an estimated 40% of U.S. land rigs, our recent acquisition of Rime will provide a pipeline of technology that has wide market acceptance and adoption. We have a tremendous opportunity to deploy industry recognized technology to minimize rentals in Altitude and significantly expand margins as we build out our own proprietary MWD platform beginning in 2023 and into 2024. We are also excited about the expanded capacity to further differentiate ourselves in the market with industry leading technology now and into the future," concluded Mr. Connors.
FINANCIAL HIGHLIGHTS
Canadian dollars in 000's except for otherwise noted
| | Three months ended June 30, | Six months ended June 30, | | | | | 2023 | 2022 | 2023 | 2022 | | | | | | | | Revenues | $ 115,058 | $ 27,652 | $ 242,723 | $ 62,037 | | Gross margin % | 14 % | 2 % | 14 % | 10 % | | Adjusted gross margin % (1) | 23 % | 19 % | 22 % | 24 % | | Adjusted EBITDAS (1) | $ 18,222 | $ 2,836 | $ 33,409 | $ 9,749 | | Adjusted EBITDAS margin % (1) | 16 % | 10 % | 14 % | 16 % | | Cash flow - operating activities | $ 11,232 | $ 4,511 | $ 35,148 | $ 2,753 | | Free cash flow (deficit) (1) | $ 4,984 | $ (12,008) | $ 4,285 | $ (9,197) | | Net income (loss) | $ 2,416 | $ (2,824) | $ 3,210 | $ (581) | | Per share - basic and diluted | $ 0.01 | $ (0.02) | $ 0.01 | $ (0.01) | | Weighted average shares outstanding: | | | | | | Basic (000s) | 238,394 | 129,200 | 231,516 | 110,353 | | Diluted (000s) | 240,653 | 131,898 | 238,563 | 112,969 |
| As at | June 30, 2023 | December 31, 2022 | | | | | | Working capital, excluding current portion of loans and borrowings | $ 62,048 | $ 60,447 | | Total assets | $ 344,491 | $ 353,990 | | Loans and borrowings | $ 60,080 | $ 80,535 | | Shareholders' equity | $ 169,914 | $ 153,897 |
| | (1) Refer to the "Non-GAAP Measures" section |
OUTLOOK
Despite recent volatility in oil and gas prices, the outlook for oilfield services remains constructive. OPEC's continued vigilance around managing a solid floor price for oil in the mid- $60 per barrel has paid off in a summer West Texas Intermediate ("WTI") rally back to approximately $80 per barrel. Commodity markets are now discounting an economic soft landing in the global central bank fight against inflation. There are other factors driving the recovery in oil prices, including an intra-year plateauing of Permian oil production, stalled Russian oil export levels, the end of oil sales from the U.S. Strategic Petroleum Reserve, as well as generally strong oil demand forecasts from numerous agencies, such as the IEA and the EIA. U.S. natural gas prices have also moved higher in 2023 Q3 from second quarter levels, although the lack of additional North American LNG takeaway capacity until later 2024 may be a barrier to a larger near-term price recovery.
A survey of forecasts from seven Canadian-based investment banks shows an expectation for a bottoming of the U.S. land rig count sometime in 2023 Q3 or early 2023 Q4 with a slow ramp up through all four quarters of 2024 (Source: ATB Capital Markets, BMO Capital Markets, National Bank Financial, Peters & Co, Stifel, Raymond James Canada, TD Securities). Specifically, the consensus average U.S. land rig count is forecast to decline to 661 active rigs in 2023 Q3 from 699 in 2023 Q2 (5% drop) before recovering to 670 in 2023 Q4 (1% recovery). The forecast average U.S. land rig count for 2023 is currently 693, down only 2% year-over-year, on average. Although it is early, the forecast average among these seven investment banks is for a modest uptick in 2024 – to an average of approximately 700 active rigs. Looking to 2024 and beyond, to incentivize increased development, oil and natural gas prices need to stabilize at current or higher levels, while natural gas takeaway capacity needs to be added from the Haynesville and Permian to supply the plethora of LNG projects now under development. Once this infrastructure is in place, the call on oilfield service companies with a well-scaled U.S. operating footprint is likely to be considerable. Cathedral believes it is well on the way to establishing such an operating footprint in the U.S.
In Western Canada , the seven analysts predict that the average rig count will be modestly stronger year-over-year in 2023 and 2024 (9% and 4%, respectively), mostly due to the ramping in field spending, related to supplying the first natural gas into LNG Canada for 2025. Although the U.S. has been a much stronger growth market over the last decade, due primarily to field spending in the Permian, looking out to 2024, Canada appears to offer more near-term growth visibility. Canadian exploration and production ("E&P") companies are generating healthy levels of free cash flow and have improved their balance sheets dramatically. Improved E&P balance sheets are less exposed to oil and gas price volatility, which may lead to a moderation in the amplitude of the drilling cycles going forward. Cathedral expects to maintain a strong market share in Canada through the rest of 2023 and is equally optimistic on 2024 activity, given the ongoing ramp in LNG-related spending.
2022 ACQUISITIONS
In 2022, the Company executed five strategic acquisitions as detailed below:
U.S.- based company, Altitude Energy Partners, LLP in July 2022 for total consideration of $124,112 , comprised of a cash payment of $87,245 and a common share issuance of $36,867 , with the purchase price allocated primarily to working capital, property, plant and equipment, intangible assets and goodwill; U.S.- based operations, Discovery Downhole Services ("Discovery") in February 2022 for total consideration of $20,892 , comprised of a cash payment of $18,160 and a common share issuance of $2,732 , with the purchase price allocated primarily to inventory and property, plant and equipment; LEXA Drilling Technologies Inc. ("Lexa") in June 2022 for total consideration of $1,761 in exchange for intangible assets; Compass Directional Services ("Compass") in June 2022 for total consideration of $8,315 , comprised of a cash payment of $4,000 and a common share issuance of $4,315 , with the purchase price allocated primarily to inventory and property, plant and equipment; and the Canadian directional drilling business of Ensign Energy Services ("Ensign") in October 2022 for total common share consideration of $5,965 with the purchase price allocated primarily to inventory and property, plant and equipment.
In addition to the assets acquired as described above, there were certain other minor working capital, right-of-use assets and lease liabilities, and deferred tax liabilities recognized as part of the purchase price allocations.
RESULTS OF OPERATIONS
| | Three months ended June 30, | Six months ended June 30, | | | | | 2023 | 2022 | 2023 | 2022 | | | | | | | | Revenues | | | | | | Canada | $ 21,515 | $ 13,091 | $ 66,858 | $ 38,490 | | United States | 93,543 | 14,561 | 175,865 | 23,547 | | Total revenues | 115,058 | 27,652 | 242,723 | 62,037 | | Cost of sales: | | | | | | Direct costs | (88,509) | (22,481) | (189,741) | (47,005) | | Depreciation and amortization | (10,115) | (4,622) | (19,340) | (8,911) | | Share-based compensation | (96) | (49) | (240) | (92) | | Cost of sales | (98,720) | (27,152) | (209,321) | (56,008) | | | | | | | | Gross margin | $ 16,338 | $ 500 | $ 33,402 | $ 6,029 | | | | | | | | Gross margin % | 14 % | 2 % | 14 % | 10 % | | Adjusted gross margin % (1) | 23 % | 19 % | 22 % | 24 % | | | | | | |
| | (1) Refer to the "Non-GAAP Measures" section. |
Consolidated
The Company recognized $115,058 of revenues in 2023 Q2, an increase of $87,406 or 316%, compared to $27,652 in 2022 Q2. The Company recognized $242,723 of revenues in the six months ended June 30, 2023 , an increase of $180,686 or 291%, compared to $62,037 for the same period in 2022.
The Company recognized $98,720 of cost of sales in 2023 Q2, an increase of $71,568 or 264%, compared to $27,152 in 2022 Q2. The Company recognized $209,321 of cost of sales in the six months ended June 30, 2023 , an increase of $153,313 or 274%, compared to $56,008 for the same period in 2022.
The Gross margin % increased to 14% both in 2023 Q2 and the six months ended June 30, 2023 , compared to 2% and 10% for the same periods in 2022, respectively.
The Adjusted gross margin % increased to 23% in 2023 Q2, compared to 19% in 2022 Q2. The Adjusted gross margin % decreased to 22% in the six months ended June 30, 2023 , compared to 24% for the same period in 2022.
Depreciation and amortization expense allocated to cost of sales increased to $10,115 and $19,340 in 2023 Q2 and the six months ended June 30, 2023 , compared to $4,622 and $8,911 in the same periods in 2022, respectively, due to property, plant and equipment additions, including those related to the 2022 acquisitions.
Depreciation and amortization expense included in cost of sales as a percentage of revenue was 9% and 8% for 2023 Q2 and the six months ended June 30, 2023 , compared to 17% and 14% for the same periods in 2022, respectively.
Canadian segment
Revenues
Canadian revenues were $21,515 in 2023 Q2, an increase of $8,424 or 64%, compared to $13,091 in 2022 Q2, mainly due to acquisitions completed in 2022, including Compass and Ensign. The Company realized: i) a 33% increase in activity days to 1,662 days in 2023 Q2, compared to 1,246 days in 2022 Q2, and ii) a 23% increase in the average day rate to $12,945 per day in 2023 Q2, compared to $10,507 per day in 2022 Q2.
Canadian revenues were $66,858 in the six months ended June 30, 2023 , an increase of $28,368 or 74%, compared to $38,490 for the same period in 2022, mainly due to acquisitions completed in 2022, including Compass and Ensign. The Company realized: i) a 36% increase in activity days to 5,321 days in the six months ended June 30, 2023 , compared to 3,916 days the same period in 2022, and ii) a 28% increase in the average day rate to $12,565 per day in the six months ended June 30, 2023 , compared to $9,829 per day for the same period in 2022.
Based on publicly disclosed Canadian drilling activity, Cathedral's Canadian market share in 2023 Q2 and the six months ended June 30, 2023 was 20.1% and 23.4%, compared to 15.4% and 18.2% for the same periods in 2022, respectively.
Direct costs
Canadian direct costs included in cost of sales were $16,422 in 2023 Q2, an increase of $4,735 or 41%, compared to $11,687 in 2022 Q2. The increase is mainly due to higher costs related to the 2022 acquisitions. As a percentage of revenues, direct costs decreased to 76% in 2023 Q2 from 89% in 2022 Q2, mainly due to lower repair and maintenance, third-party rental costs and fixed costs as a percentage of revenues.
Canadian direct costs included in cost of sales were $51,151 in the six months ended June 30, 2023 , an increase of $20,935 or 69%, compared to $30,216 for the same period in 2022. The increase is mainly due to higher costs related to the 2022 acquisitions. As a percentage of revenues, direct costs decreased slightly to 77% in the six months ended June 30, 2023 from 79% for the same period in 2022.
United States segment
Revenues
U.S. revenues were $93,543 in 2023 Q2, an increase of $78,982 or 542%, compared to $14,561 in 2022 Q2, mainly as a result of the acquisitions completed in 2022, including Discovery and Altitude. The Company realized a 862% increase in activity days to 3,963 days in 2023 Q2, compared to 412 days in 2022 Q2. The average day rate decreased to $23,604 per day in 2023 Q2, compared to $35,343 per day in 2022 Q2, mainly as a result of the Altitude acquisition and a change in job mix.
U.S. revenues were $175,865 in the six months ended June 30, 2023 , an increase of $152,318 or 647%, compared to $23,547 for the same period in 2022, mainly as a result of the acquisitions completed in 2022, including Discovery and Altitude. The Company realized a 841% increase in activity days to 7,280 days in the six months ended June 30, 2023 , compared to 774 days for the same period in 2022. The average day rate decreased to $24,157 per day in the six months ended June 30, 2023 , compared to $30,422 per day for the same period in 2022, mainly as a result of the Altitude acquisition and a change in job mix.
Based on publicly disclosed U.S. drilling rig activity, Cathedral's U.S. market share for 2023 Q2 and the six months ended June 30, 2023 was 8.7% and 7.7%, respectively, compared to under 1% for the same periods in 2022.
Direct costs
U.S. direct costs included in cost of sales were $72,087 in 2023 Q2, an increase of $61,293 or 568%, compared to $10,794 in 2022 Q2. The increase is mainly due to higher costs related to the 2022 acquisitions, including Discovery and Altitude. As a percentage of revenues, direct costs also increased to 77% in 2023 Q2 from 74% in 2022 Q2, mainly due to higher labour and third-party equipment rental and other minor costs, offset by lower fixed costs as a percentage of revenues.
U.S. direct costs included in cost of sales were $138,590 in the six months ended June 30, 2023 , an increase of $121,801 or 725%, compared to $16,789 for the same period in 2022. The increase is mainly due to higher costs related to the 2022 acquisitions, including Discovery and Altitude. As a percentage of revenues, direct costs also increased to 79% in the six months ended June 30, 2023 , compared to 71% in the same period in 2022, mainly due to higher labour and third-party equipment rental costs.
S elling, general and administrative ( " SG&A " ) expenses
| | Three months ended June 30, | Six months ended June 30, | | | | | 2023 | 2022 | 2023 | 2022 | | | | | | | | Selling, general and administrative expenses: | | | | | | Direct costs | $ 12,004 | $ 3,287 | $ 26,090 | $ 6,853 | | Depreciation and amortization | 1,499 | 124 | 3,008 | 248 | | Share-based compensation | 674 | 83 | 1,449 | 174 | | Selling, general and administrative expenses | $ 14,177 | $ 3,494 | $ 30,547 | $ 7,275 |
The Company recognized SG&A expenses of $14,177 in 2023 Q2, an increase of $10,683 , compared to $3,494 in 2022 Q2. The increase is mainly due to the 2022 acquisitions. SG&A expenses as a percentage of revenues were 12% in 2023 Q2 and 2022 Q2.