Cathedral Energy Services Reports Results for 2019 Q4

  • Mar 12, 2020
  • Cathedral Energy

/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

CALGARY, March 12, 2020 /CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) announces its consolidated financial results for the three months and year ended December 31, 2019 and 2018.  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 December 31

Year ended December 31

2019

2018

2019

2018

Revenues

$

19,299

$

43,127

$

120,276

$

160,827

Adjusted gross margin % (1)

9%

15%

10%

11%

Adjusted EBITDAS (1)

$

(702)

$

3,412

$

3,887

$

12,060

Basic and diluted per share

$

(0.01)

$

0.07

$

0.08

$

0.24

As % of revenues

-4%

8%

3%

7%

Cash flow - operating activities

$

(102)

$

3,405

$

4,785

$

3,732

Earnings (loss) before income taxes

$

(6,332)

$

(6,106)

$

(18,717)

$

(6,139)

Basic and diluted per share

$

(0.13)

$

(0.12)

$

(0.38)

$

(0.12)

De-recognition of deferred tax asset

$

-

$

(13,059)

$

-

$

(13,059)

Net earnings

$

(6,068)

$

(17,858)

$

(19,187)

$

(17,061)

Basic and diluted per share

$

(0.12)

$

(0.36)

$

(0.39)

$

(0.35)

Equipment additions - cash basis

$

2,836

$

2,201

$

8,726

$

12,877

Weighted average shares outstanding

Basic (000s)

49,468

49,468

49,468

49,445

Diluted (000s)

49,468

49,469

49,522

49,547

December 31

December 31

2019

2018

Working capital

$

20,181

$

30,599

Total assets

$

106,300

$

121,770

Loans and borrowings excluding current portion

$

6,000

$

7,000

Shareholders' equity

$

68,092

$

89,143

(1) Refer to "NON-GAAP MEASUREMENTS"

2019 Q4 KEY TAKEAWAYS

Revenues decreased by $23,828 or 55% from $43,127 in 2018 Q4 to $19,299 in 2019 Q4;

Adjusted gross margin decreased from 15% to 9% primarily due to an increase in equipment rentals and the fixed component of cost of sales, offset by a decrease in repairs;

Total Adjusted EBITDAS decreased $4,114, from $3,412 to $(702) in 2019 Q4 as a result of reduced adjusted gross margin, and additional SG&A expenses occurring in Q4;

Cathedral commercialized our next generation of our FUSION™ Dual Telemetry Measurement-While-Drilling ("MWD") tool and our Linear Pulse ("LP") tool; and

Cathedral has also commercialized a specialized series of its nDurance™ performance drilling motors which are targeted for Rotary Steerable System ("RSS") applications.

OUTLOOK

Since the start of 2020, oil prices have weakened significantly as a consequence of the softening of global demand associated with COVID 19 virus and by the recent failure to reach a cut in oil supply from OPEC+ which was followed up by Saudi Arabia announcement that they intended to significantly increase oil production. These two items have resulted in oil prices and global equity markets being under pressure. For North American producers and oilfield services companies, the issue is now the extent and duration of this collapse in oil prices.  Since January 1, 2020, WTI has declined from approximately USD$61 to USD$31; a decline of 49%.  In response the decline in WTI, many North American producers have already announced materially reductions in their capital budgets for 2020.

Cathedral is focused on rebuilding of our U.S. business which will be guided by the new management team that was put in place in mid to late 2019 and into early 2020. Our focus is on our job execution, use of our proprietary technology and providing such quality services at a fair price – all centered around our strategy of building a business around our mantra of "Better Performance Every Day".

Our strategy in Canada is to maintain the optionality on future industry growth through focusing on serving stronger customers in areas we have advantages in, maintaining a focused and lean cost structure and again leveraging our differentiated technology advantages in the Canadian market.

For 2020, our technology focus will be bringing to the market our RapidFire™ MWD platform which commenced initial successful field trials in December 2019.  RapidFire is capable of transmitting data simultaneously via pulse and electro-magnetic ("EM"), allowing for high data rates and higher reliability through redundancy. In addition, the system can be configured in either a hard mount or retrievable configuration and is rated to operating temperatures that meet or exceed most competitive MWD systems. The second phase to be released later in 2020 will offer a retrievable downhole generator which will reduce operating costs and allow for high power EM transmission on extended run applications.

Our 2020 capital plan will be modest and we expect our "net equipment additions" (equipment additions less proceeds on equipment lost downhole) to be in the range of $nil to $2.5 million (depending on level of lost-in-hole proceeds). Focus of 2020 capital plan will be motor power section additions for premium lines, addition of RapidFire MWD tools and mud lube bearing motor upgrades. Our capital plan will be reviewed quarterly and adjusted depending on activity levels.

We will continue to focus on what we can control – costs, improving operational efficiencies, bringing new technologies to the market and strategic sales and marketing of our offerings.

RESULTS OF OPERATIONS – THREE MONTHS ENDED DECEMBER 31

Effective January 1, 2019, the Company adopted IFRS 16 Leases ("IFRS 16") (see discussion under "New Accounting Policies").  As a result of this new accounting policy, which was adopted retrospectively without restatement of comparative results, expenditures which previously were reported as cost of sales ("COS") or selling, general and administrative ("SG&A") expenses are now classified as lease liability obligation repayments and finance costs (interest expense) and the related right of use asset is depreciated against net income on a straight-line basis.  As finance costs and depreciation are excluded from Adjusted EBITDAS (refer to Non-GAAP measurements), Adjusted EBITDAS for the three months ended December 31, 2019 was higher in comparison to 2018 in the amount of $806 as a result of the IFRS 16 changes discussed previously.  Previously this amount was classified as rent expense (being $665 in COS amounts and $141 in SG&A amounts).

Revenues

2019 Q4

2018 Q4

Canada

$

6,815

$

8,146

United States

12,484

34,981

Total

$

19,299

$

43,127

Revenues     2019 Q4 revenues were $19,299, which represented a decrease of $23,828 or 55% from 2018 Q4 revenues of $43,127. 

Canadian revenues (excluding motor rental revenues) decreased to $6,167 in 2019 Q4 from $7,705 in 2018 Q4; a 20% decrease.  This decrease was the result of: i) a 14% decrease in activity days to 782 in 2019 Q4 from 912 in 2018 Q4 and ii) an 7% decrease in the average day rate to $7,886 in 2019 Q4 from $8,449 in 2018 Q4. 

There was a 22% year-over-year decline in the average active land rig count in Canada (source: Baker Hughes) and as Cathedral's activity decline was only 20%, there was a slight increase in market share in Canada.

U.S. revenues (excluding motor rental revenues) decreased 65% to $11,986 in 2019 Q4 from $34,573 in 2018 Q4.  This decrease was the net result of: i) a 66% decrease in activity days to 901 in 2019 Q4 from 2,677 in 2018 Q4; net of ii) a 3% increase in the average day rate to $13,303 in 2019 Q4 from $12,915 in 2018 Q4 (when converted to Canadian dollars).

The average active land rig count for the U.S. was down 23% in 2019 Q4 compared to 2018 Q4 (source: Baker Hughes).  The Company experienced a 66% decline in activity days resulting in a decrease in market share compared to 2018 Q4.  This decline was related to reductions in clients' drilling programs to stay within their cash flow, financial restructuring by certain clients that caused them to pause or cancel programs, as well as loss of work related to pricing.  Due to Cathedral's client mix, our decline exceeded the general market decline.  Day rates in USD increased 3% to $10,079 USD in 2019 Q4 from $9,760 USD in 2018 Q4.  The 2019 Q4 rate is up due to an increase in revenues from providing RSS services which are rented from a 3rd party.      

Motor rentals increased in both Canada and U.S.  Combined rental revenues increased to $1,146 in 2019 Q4 compared to $849 in 2018 Q4.  The increase is due to the increased availability of motors for rental due to less full service work being performed and the fact that Cathedral's nDurance drilling motors are noted for their reliability and drilling performance.

Gross margin and adjusted gross margin     Gross margin for 2019 Q4 was -19% compared to -1% in 2018 Q4.  Adjusted gross margin (see Non-GAAP Measurements) for 2019 Q4 was $1,761 or 9% compared to $6,310 or 15% for 2018 Q4.   

Adjusted gross margin, as a percentage of revenue, decreased due to increased rentals as a percentage of revenue (actual rental costs were down year-over-year) and increased fixed component of cost of sales as a percentage of revenue (the amount was down, but not as percentage of revenues).  The increases were partially offset by lower equipment repair costs.

Depreciation of equipment allocated to cost of sales increased slightly to $5,443 in 2019 Q4 from $5,304 in 2018 Q4.  Depreciation included in cost of sales as a percentage of revenue was 28% for 2019 Q4 and 12% in 2018 Q4.

Write-down of inventory     The Company made a provision related to slow moving and obsolete inventory used to service equipment of $1,474 in 2018 Q4.  There was no write-down in 2019 Q4.  For 2018, the impacted inventory was used to service older revisions to tools that are obsolete as well as tools that have had lower demand since the industry down-turn.  The tools with lower demand are primarily legacy non-proprietary motors that are being used less and less each year.

Selling, general and administrative ("SG&A") expenses     SG&A expenses were $3,817 in 2019 Q4; a decrease of $888 compared with $4,705 in 2018 Q4.  As a result of the implementation of IFRS 16, there was a decrease of $141 related to amounts previously classified as rent expense, but currently classified as lease liability repayments and finance costs (interest).  The Company recognized a bad debt of $562 related to a U.S. customer who entered Chapter 11 process.  Additionally, there were reductions in SG&A wages and related benefits and burdens due to a reduction in head count.  As a percentage of revenue, SG&A was 20% in 2019 Q4 compared to 11% in 2018 Q4. 

Technology group expenses     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.  Total technology group costs were $700 in 2019 Q4; a decrease of $254 compared with $954 in 2018 Q4.  The portion of total technology group costs related to new product development was $171 and this amount has been capitalized as intangible assets (2018 Q4 - $214).  Technology group costs not related to new product development were $529 in 2019 Q4; a decrease of $211 compared with $740 in 2018 Q4.  Technology group costs decreased primarily due to reduction in staffing.

Gain on disposal of equipment     During 2019 Q4, the Company had a gain on disposal of equipment of $1,596 compared to $1,789 in 2018 Q4.  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 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 2019 Q4, the Company received proceeds on lost-in-hole recoveries from clients of $2,836 (2018 Q4 - $2,201).

Finance costs     Finance costs consist of interest expenses on operating loans, long-term debt and bank charges of $172 for 2019 Q4 versus $181 for 2018 Q4. 

Finance costs lease liability     Increase is related to the adoption of IFRS 16 (see discussion under "New and Future Accounting Policies") effective January 1, 2019. 

Foreign exchange     The Company had a foreign exchange gain of $534 in 2019 Q4 compared to a loss of $(1,745) in 2018 Q4 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 2019 Q4 foreign currency loss are unrealized gain of $554 (2018 Q4 - loss of $1,814) related to intercompany balances.

Income tax     In 2018 Q4, Cathedral derecognized $13,059 of deferred tax assets due to a recent history of tax losses within Cathedral's Canadian entity.  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 26.5% for Canada and 23% for the U.S.

RESULTS OF OPERATIONS – YEAR ENDED DECEMBER 31

Adjusted EBITDAS for the year ended December 31, 2019 was higher in comparison to 2018 in the amount of $3,080.  Previously this amount was classified as rent expense (being $2,562 in COS amounts and $518 in SG&A amounts).

Revenues

2019

2018

Canada

$

26,155

$

31,123

United States

94,121

129,704

Total

$

120,276

$

160,827

Revenues     2019 revenues were $120,276, which represented a $40,551 decrease or 25% from 2018 revenues of $160,827. 

Canadian revenues (excluding motor rental revenues) decreased to $23,127 in 2019 from $28,495 in 2018; a 19% decrease.  This decrease was the result of: i) a 15% decrease in activity days to 3,004 in 2019 from 3,541 in 2018; and ii) a 4% decrease in the average day rate to $7,699 in 2019 from $8,047 in 2018. 

The average active land rig count in Canada declined 27% in 2019 compared to 2018 (source: Baker Hughes).  The decrease in the Company activity days of 15% resulted in the Company gaining market share.  The decreases in day rates was in part due to market pressures to reduce work as industry activity declined and in part due to the mix of work performed.

U.S. revenues (excluding motor rental revenues) decreased to $92,268 in 2019 from $128,206 in 2018; a 28% decrease.  This decrease was the net result of: i) a 34% decrease in activity days to 6,805 in 2019 from 10,382 in 2018; and ii) a 10% increase in the average day rate to $13,559 in 2019 from $12,349 in 2018 (when converted to Canadian dollars).    

The average active land rig count for the U.S. was down 8% in 2019 compared to 2018 (source: Baker Hughes).  The Company experienced a 35% decline in activity days resulting in a decrease in market share compared to 2018.  This decline was related to reductions in clients' drilling programs to stay within their cash flow, financial restructuring by certain clients that caused them to pause or cancel programs, as well as loss of work related to pricing.  Due to Cathedral's client mix, our decline exceeded the general market decline.  Day rates in USD increased 7% to $10,206 USD in 2019 from $9,515 USD in 2018.  The 2019 rate is up due to an increase in revenues from providing RSS services which are rented from a 3rd party.

Motor rentals increased in both Canada and U.S. Combined rental revenues increased to $4,881 in 2019 compared to $4,126 in 2018, an 18% increase.  The increase is due to increased availability of motors for rental due to less full service work being performed and the fact that Cathedral's nDuranceTM drilling motors are noted for their reliability and drilling performance.

Gross margin and adjusted gross margin     Gross margin for 2019 was -6% compared to 2% in 2018.  Adjusted gross margin (see Non-GAAP Measurements) for 2019 was $12,234 or 10% compared to $18,391 or 11% for 2018.   

The decrease in adjusted gross margin was due to increases in equipment rental expense and an increase in the fixed component of cost of sales.  While management has reduced the total amount of fixed cost component of costs of sales (mainly due to headcount reductions) to take into consideration the decline in activity levels it increased as a percentage of revenue.  Partially offsetting these amounts were reductions in equipment repairs. Depreciation of equipment allocated to cost of sales increased to $19,864 in 2019 from $12,719 in 2018 due to changes in estimated of useful lives made effective October 1, 2018.  Depreciation included in cost of sales as a percentage of revenue was 17% for 2019 and 8% in 2018.

Write-down of inventory     The Company made a provision related to slow moving and obsolete inventory used to service equipment of $1,474 in 2018.  There was no write-down in 2019.  For 2018, the impacted inventory was used to service older revisions to tools that are obsolete as well as tools that have had lower demand since the industry down-turn.  The tools with lower demand are primarily legacy non-proprietary motors that are being used less and less each year.

Selling, general and administrative ("SG&A") expenses     SG&A expenses were $13,859 in 2019; a decrease of $1,837 compared with $15,696 in 2018.  As a result of the implementation of IFRS 16, there was a decrease of $518 related to amounts previously classified as rent, but currently classified as lease liability repayments and finance costs (interest).  The Company recognized a bad debt of $562 related to a U.S. customer who entered Chapter 11 process.  Additionally, there were reductions in SG&A wages and related benefits and burdens.  As a percentage of revenue, SG&A was 12% in 2019 compared to 10% in 2018.

Technology group expenses     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. Total technology group costs were $3,333 in 2019; a decrease of $92 compared with $3,425 in 2018.  The portion of total technology group costs related to new product development was $965 and this amount has been capitalized as intangible assets (2018 - $944).  Technology group costs not related to new product development were $2,368 in 2019; a decrease of $113 compared with $2,481 in 2018. 

Gain on disposal of equipment     During 2019, the Company had a gain on disposal of equipment of $6,005 compared to $10,623 in 2018.  These gains mainly related to equipment lost-in-hole.  Proceeds from clients on lost-in-hole equipment are based on amounts specified in client service agreements and generally consider the replacement cost of the equipment. In most cases, the lost-in-hole proceeds exceed the net book value of the equipment and result in a gain.  The timing and amount of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter.  In 2019, the Company received proceeds from clients on lost-in-hole recoveries of $8,726 (2018 - $12,877).

Finance costs     Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $593 for 2019 compared to $443 for 2018.  The increase in finance costs relate to primarily to higher average debt levels in 2019. 

Finance costs lease liability     Increase is related to the adoption of IFRS 16 (see discussion under "New and Future Accounting Policies") effective January 1, 2019. 

Provision for settlement     In 2019 Q2, the Company made a settlement offer in respect of a wage and hour complaint (the "Complaint") that was filed against the Company's wholly owned U.S. subsidiary. The Complaint alleged that employees of the previously disposed Production Testing and Flowback division were entitled to recover unpaid or incorrectly calculated overtime wages under the Fair Labor Standards Act ("FLSA"). Payment of this amount was made in 2019 Q4.

Foreign exchange     The Company had a foreign exchange gain of $1,280 in 2019 compared to a loss of $(2,160) in 2018 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 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 2019 foreign currency gains are unrealized gain of $1,347 (2018 – loss of $2,260) related to intercompany balances.

Income tax     In 2018 Q4, Cathedral derecognized $13,059 of deferred tax assets due to a recent history of tax losses within Cathedral's Canadian entity. 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 26.5% for Canada and 23% for the U.S.

LIQUIDITY AND CAPITAL RESOURCES

Overview     On an annualized basis, the Company's principal source of liquidity is cash generated from operations and proceeds from equipment lost-in-hole.    In addition, the Company has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity. Cash flow from operations in 2019 increased to $4,785 from $3,732 in 2018. This increase was primarily due to an increase in the collection of receivables.

Working capital     At December 31, 2019 the Company had working capital of $20,181 (2018 - $30,599).

Credit facility     The Company's credit facility (the "Facility") consists of a $5 million operating facility and a $15 million extendible revolving credit facility and expires December 31, 2021. The Facility is secured by a general security agreement over all present and future personal property. The Facility provides a definition of EBITDA ("Credit Agreement EBITDA") and Funded Debt to be used in calculation of financial covenants.

The financial covenants associated with the Facility are:

Consolidated Funded Debt to consolidated Credit Agreement 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 compared to the 12 month trailing Credit Agreement 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.

Compliance with Facility covenants

Based on current available information, Cathedral expects to comply with all covenants for the next twelve months.

At December 31, 2019, the Company had drawn $6,000 of its revolving credit facility, $nil of its operating facility and had $7,223 in cash. At December 31, 2019, the Company had consolidated Funded Debt of $311 which includes six outstanding Letters Of Credit ("LOC"). The Credit Agreement EBITDA was $4,301.

The calculation of the financial covenants under the Facility as at December 31, 2019 is as follows:

Covenant

Actual Ratio

Required Ratio

Consolidated funded debt to consolidated Credit Agreement EBITDA ratio

0.1

3.0:1 (maximum)

Consolidated interest coverage ratio

7.3:1

2.5:1 (minimum)

Contractual obligations     In the normal course of business, the Company incurs contractual obligations and those obligations are disclosed in the Company's annual financial statements for the year ended December 31, 2019.    

The Company has issued the following six LOC:

three securing rent payments on property leases and renew annually with the landlords. The two LOCs are $700 CAD for the first ten years of the lease and then reduces to $500 for the last five years of the lease. The third LOC is currently for $542 USD and increases annually based upon annual changes in rent;

$75 USD issued for U.S. workers compensation coverage; and

two securing the Company's corporate credit cards in the amounts of $75 CAD and $175 USD.

The following table outlines the anticipated payments related to commitments subsequent to December 31, 2019:

Total

2020

2021

2022

2023

2024

Thereafter

Equipment purchase obligations

$

409

$

409

$

-

$

-

$

-

$

-

$

-

Secured revolving term loan

6,000

-

-

6,000

-

-

-

Operating lease obligations

29,117

3,508

3,505

3,528

3,565

3,602

11,409

Provision for settlement

491

164

164

163

Finance lease obligations

91

91

-

-

-

-

-

Total

$

36,108

$

4,172

$

3,669

$

9,691

$

3,565

$

3,602

$

11,409

As at December 31, 2019, the Company's commitment to purchase equipment is approximately $218. Cathedral anticipates expending these funds in 2020 Q1.

Share capital     At March 12, 2020, the Company has 49,468,117 common shares and 2,599,000 options outstanding with a weighted average exercise price of $0.70.

In 2019 Q3, the Company issued 1,056,000 stock options to staff and directors with an average exercise price of $0.30 per option.

2019 CAPITAL PROGRAM

During the year ended December 31, 2019 the Company invested $6,018 (2018 - $17,391) in equipment and $1,077 (2018 - $1,226) in new technology development primarily related to MWD systems. 

The following table details the current period's net equipment additions:

Year ended

December 31, 2019

Equipment additions:

Motors and related equipment

$

3,388

MWD and related equipment

2,005

Other

625

Total cash additions

6,018

Less: proceeds on disposal of equipment (excluding capital lease settlements)

(8,726)

Net equipment additions (1)

$

(2,708)

(1)See "NON-GAAP MEASUREMENTS"

2020 CAPITAL PROGRAM

Our 2020 capital plan will be modest and we expect our "net equipment additions" (equipment additions less proceeds on equipment lost downhole) to be in the range of $nil to $2.5 million (depending on level of lost-in-hole proceeds). Focus of 2020 capital plan will be motor power section additions for premium lines, addition of RapidFire MWD tools and mud lube bearing motor upgrades.

ANNUAL MEETING

Cathedral will be holding its Annual Meeting ("Meeting") at 3:00 pm (MDT) on May 12, 2020 at our Head Office 6030 – 3 Street SE, Calgary, Alberta. Business at the meeting will include the election of directors and appointment of auditors.