/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.
FORWARD LOOKING STATEMENTS
This news release contains certain forward-looking statements
and forward-looking information (collectively referred to herein as
"forward-looking statements") within the meaning of applicable
Canadian securities laws. All statements other than
statements of present or historical fact are forward-looking
statements. Forward-looking statements are often, but not
always, identified by the use of words such as "anticipate",
"achieve", "believe", "plan", "intend", "objective", "continuous",
"ongoing", "estimate", "outlook", "expect", "may", "will",
"project", "should" or similar words suggesting future
outcomes. In particular, this news release contains
forward-looking statements relating to, among other things: believe
we can regain the U.S. market share we have lost since 2H of 2018
and this will be based upon overall job execution and our
proprietary technology; for 2020 our technology focus will be
bringing to the market our RapidFire™ MWD platform; second phase
of RapidFire™ MWD platform 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; continue to focus on strategic initiatives and making
changes to our business to position us favorably over the
long-term; based on our leading-edge technology and executing our
Better Performance Every Day mantra we are confident about our
future prospects; we will continue to focus on what we can control
– costs, improving operational efficiencies and strategic sales and
marketing of our offerings; we are firm believers that size and
scale will be a key for long-term viability of oilfield services
companies and we will continue, as normal course of business, to
explore opportunities to maximize shareholder value and create that
size and scale; to the extent oil prices improve, the industry may
see expanded drilling programs in 2H 2020; our U.S. business will
be rebuilt as we progress through 2020; Cathedral is targeting to
regain the market share that is has lost since 2H 2018; the
rebuilding of our U.S. business 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; within the Canadian market, industry experts are
projecting the 2020 average rig count to be very similar to 2019
actual average of 134; 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; despite a challenging 2019, we are both optimistic and
confident about our future prospects; 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; and Cathedral expects to comply with
all covenants during 2020.
The Company believes the expectations reflected in such
forward-looking statements are reasonable as of the date hereof but
no assurance can be given that these expectations will prove to be
correct and such forward-looking statements should not be unduly
relied upon.
Various material factors and assumptions are typically applied
in drawing conclusions or making the forecasts or projections set
out in forward-looking statements. Those material factors and
assumptions are based on information currently available to the
Company, including information obtained from third party industry
analysts and other third party sources. In some instances,
material assumptions and material factors are presented elsewhere
in this MD&A in connection with the forward-looking
statements. You are cautioned that the following list of
material factors and assumptions is not exhaustive. Specific
material factors and assumptions include, but are not limited
to:
- oil and natural gas commodity prices and production
levels;
- capital expenditure programs and other expenditures by
Cathedral and its customers;
- impact of economic and social trends;
- the performance of Cathedral's business;
- the ability of Cathedral to obtain adequate and timely
financing on acceptable terms;
- the ability of Cathedral to comply with the terms and
conditions of its credit facility;
- changes under governmental regulatory regimes and tax,
environmental and other laws in Canada and the
United States ("U.S.");
- the ability of Cathedral to retain and hire qualified
personnel;
- competitive risks
- the ability of Cathedral to obtain parts, consumables,
equipment, technology, and supplies in a timely manner to carry out
its activities;
- the ability of Cathedral to maintain good working relationships
with key suppliers;
- risks associated with technology development and intellectual
property rights;
- obsolesce of Cathedral's equipment and/or technology;
- the ability to obtain sufficient insurance coverage to mitigate
operational risks;
- risks associated with future foreign operations;
- currency exchange and interest rates;
- risks associated with acquisitions, dispositions and business
development efforts;
- the ability of Cathedral to retain customers, market its
services successfully to existing and new customers and reliance on
major customers;
- the ability of Cathedral to maintain safety performance;
- environmental risks;
- risks related to legal proceedings; and
- business risks resulting from weather, disasters and related to
information technology.
Forward-looking statements are not a guarantee of future
performance and involve a number of risks and uncertainties some of
which are described herein. Such forward-looking statements
necessarily involve known and unknown risks and uncertainties,
which may cause the Company's actual performance and financial
results in future periods to differ materially from any projections
of future performance or results expressed or implied by such
forward-looking statements. These risks and uncertainties
include, but are not limited to, the risks identified in this
MD&A and in the Company's Annual Information Form under the
heading "Risk Factors". Any forward-looking statements are
made as of the date hereof and, except as required by law, the
Company assumes no obligation to publicly update or revise such
statements to reflect new information, subsequent or otherwise.
All forward-looking statements contained in this MD&A are
expressly qualified by this cautionary statement. Further
information about the factors affecting forward-looking statements
is available in the Company's current Annual Information Form that
has been filed with Canadian provincial securities commissions and
is available on www.sedar.com.
NON-GAAP MEASUREMENTS
Cathedral uses certain performance measures throughout this
document that are not defined under GAAP. Management believes that
these measures provide supplemental financial information that is
useful in the evaluation of Cathedral's operations and are commonly
used by other oilfield companies. Investors should be cautioned,
however, that these measures should not be construed as
alternatives to measures determined in accordance with GAAP as an
indicator of Cathedral's performance. Cathedral's method of
calculating these measures may differ from that of other
organizations, and accordingly, may not be comparable.
i) "Adjusted gross margin" - calculated as gross margin plus
non-cash items (depreciation and share-based compensation); is
considered a primary indicator of operating performance (see
tabular calculation);
ii) "Adjusted gross margin %" - calculated as adjusted gross
margin divided by revenues; is considered a primary indicator of
operating performance (see tabular calculation);
iii) "Adjusted EBITDAS" - defined as earnings before finance
costs, unrealized foreign exchange on intercompany balances, taxes,
depreciation, non-recurring costs (including severance), write-down
of equipment, write-down of inventory and share-based compensation;
is considered an indicator of the Company'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);
iv) "Net equipment additions" – is equipment additions
expenditures less proceeds from equipment lost down-hole.
Cathedral uses net equipment additions to assess net cash flows
related to the financing of Cathedral's equipment additions.
The following tables provide reconciliations from GAAP
measurements to non-GAAP measurements referred to in this
MD&A:
Adjusted gross margin
|
|
|
|
|
|
Three months ended
December 31
|
Year ended December
30
|
|
2019
|
2018
|
2019
|
2018
|
Gross
margin
|
$
|
(3,701)
|
$
|
(524)
|
$
|
(7,747)
|
$
|
4,018
|
Add non-cash items
included in cost of sales:
|
|
|
|
|
Write-down of
inventory
|
-
|
1,474
|
-
|
1,474
|
Depreciation
|
5,443
|
5,304
|
19,864
|
12,719
|
Share-based
compensation
|
19
|
56
|
117
|
180
|
|
|
|
|
|
Adjusted gross
margin
|
$
|
1,761
|
$
|
6,310
|
$
|
12,234
|
$
|
18,391
|
|
|
|
|
|
Adjusted gross margin
%
|
9%
|
15%
|
10%
|
11%
|
Adjusted EBITDAS
|
|
|
|
Three months ended
December 31
|
Year ended December
30
|
|
2019
|
2018
|
2019
|
2018
|
Loss before income
taxes
|
$
|
(6,332)
|
$
|
(6,106)
|
$
|
(18,717)
|
$
|
(6,139)
|
Add:
|
|
|
|
|
Depreciation included
in cost of sales
|
5,443
|
5,304
|
19,864
|
12,719
|
Depreciation included
in selling, general and administrative
expenses
|
133
|
71
|
1,161
|
202
|
Share-based
compensation included in cost of sales
|
19
|
56
|
117
|
180
|
Share-based
compensation included in selling, general and
administrative expenses
|
60
|
151
|
337
|
454
|
Finance
costs
|
172
|
181
|
593
|
443
|
Finance costs lease
liabilities
|
243
|
-
|
1,010
|
-
|
|
|
|
|
|
Subtotal
|
(262)
|
(343)
|
4,365
|
7,859
|
Unrealized foreign
exchange (gain) loss on intercompany balances
|
(554)
|
1,814
|
(1,347)
|
2,260
|
Provision for
settlement
|
-
|
-
|
425
|
-
|
Write-down of
inventory
|
-
|
1,474
|
-
|
1,474
|
Non-recurring
expenses
|
114
|
467
|
444
|
467
|
|
|
|
|
|
Adjusted
EBITDAS
|
$
|
(702)
|
$
|
3,412
|
$
|
3,887
|
$
|
12,060
|
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL
POSITION
December 31,
2019 and 2018
Dollars in '000s
(unaudited)
|
|
|
|
December
31
|
December
31
|
|
2019
|
2018
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
Cash
|
$
|
7,223
|
$
|
6,875
|
Trade
receivables
|
14,802
|
35,583
|
Prepaid
expenses
|
1,668
|
1,691
|
Inventories
|
10,423
|
11,750
|
|
|
|
Total current
assets
|
34,116
|
55,899
|
Equipment
|
46,882
|
61,068
|
Intangible
assets
|
3,019
|
2,827
|
Right of use
assets
|
19,590
|
-
|
Deferred tax
assets
|
2,693
|
1,976
|
|
|
|
Total non-current
assets
|
72,184
|
65,871
|
Total
assets
|
$
|
106,300
|
$
|
121,770
|
|
|
|
Liabilities and
Shareholders' Equity
|
|
|
Current
liabilities:
|
|
|
Operating
loan
|
$
|
-
|
$
|
188
|
Trade and other
payables
|
11,308
|
23,868
|
Current taxes
payable
|
314
|
991
|
Lease liabilities,
current portion
|
2,145
|
89
|
Liability for
settlements, current
|
168
|
164
|
|
|
|
Total current
liabilities
|
13,935
|
25,300
|
Loans and
borrowings
|
6,000
|
7,000
|
Liability for
settlements, long-term
|
156
|
327
|
Lease liabilities,
long-term
|
18,117
|
-
|
|
|
|
Total non-current
liabilities
|
24,273
|
7,327
|
Total
liabilities
|
38,208
|
32,627
|
|
|
|
Shareholders'
equity:
|
|
|
Share
capital
|
88,155
|
88,155
|
Contributed
surplus
|
10,864
|
10,410
|
Accumulated other
comprehensive income
|
9,934
|
12,252
|
Deficit
|
(40,861)
|
(21,674)
|
|
|
|
Total shareholders'
equity
|
68,092
|
89,143
|
Total liabilities and
shareholders' equity
|
$
|
106,300
|
$
|
121,770
|
CONDENSED CONSOLIDATED STATEMENT OF
COMPREHENSIVE LOSS
Three months and year ended
December 31, 2019 and
201
Dollars in '000s except per share amounts
(unaudited)
|
|
|
|
Three months ended
December 31
|
Year ended December
31
|
|
2019
|
2018
|
2019
|
2018
|
|
|
|
|
|
Revenues
|
$
|
19,299
|
$
|
43,127
|
$
|
120,276
|
$
|
160,827
|
Cost of
sales:
|
|
|
|
|
Direct
costs
|
(17,538)
|
(36,817)
|
(108,042)
|
(142,436)
|
Write-down of
inventory
|
-
|
(1,474)
|
-
|
(1,474)
|
Depreciation
|
(5,443)
|
(5,304)
|
(19,864)
|
(12,719)
|
Share-based
compensation
|
(19)
|
(56)
|
(117)
|
(180)
|
Total cost of
sales
|
(23,000)
|
(43,651)
|
(128,023)
|
(156,809)
|
Gross
margin
|
(3,701)
|
(524)
|
(7,747)
|
4,018
|
Selling, general and
administrative expenses:
|
|
|
|
|
Direct
costs
|
(3,624)
|
(4,483)
|
(12,361)
|
(15,040)
|
Depreciation
|
(133)
|
(71)
|
(1,161)
|
(202)
|
Share-based
compensation
|
(60)
|
(151)
|
(337)
|
(454)
|
Total selling,
general and administrative expenses
|
(3,817)
|
(4,705)
|
(13,859)
|
(15,696)
|
|
(7,518)
|
(5,229)
|
(21,606)
|
(11,678)
|
Technology group
expenses
|
(529)
|
(740)
|
(2,368)
|
(2,481)
|
Gain on disposal of
equipment
|
1,596
|
1,789
|
6,005
|
10,623
|
Loss from operating
activities
|
(6,451)
|
(4,180)
|
(17,969)
|
(3,536)
|
Finance
costs
|
(172)
|
(181)
|
(593)
|
(443)
|
Finance costs lease
liabilities
|
(243)
|
-
|
(1,010)
|
-
|
Foreign exchange gain
(loss)
|
534
|
(1,745)
|
1,280
|
(2,160)
|
Provision for
settlements
|
-
|
-
|
(425)
|
-
|
|
|
|
|
|
Loss before income
taxes
|
(6,332)
|
(6,106)
|
(18,717)
|
(6,139)
|
Income tax recovery
(expense):
|
|
|
|
|
Current
|
(1,285)
|
(906)
|
(1,285)
|
(2,297)
|
Deferred
|
1,549
|
2,213
|
815
|
4,434
|
Derecognition of
deferred tax asset
|
-
|
(13,059)
|
-
|
(13,059)
|
Total income tax
recovery (expense)
|
264
|
(11,752)
|
(470)
|
(10,922)
|
Loss
|
(6,068)
|
(17,858)
|
(19,187)
|
(17,061)
|
Other comprehensive
income (loss):
|
|
|
|
|
Foreign currency
translation differences for foreign
operations
|
(3,097)
|
3,329
|
(2,318)
|
4,108
|
Total comprehensive
loss
|
$
|
(9,165)
|
$
|
(14,529)
|
$
|
(21,505)
|
$
|
(12,953)
|
|
|
|
|
|
Loss per
share
|
|
|
|
|
Basic
|
$
|
(0.12)
|
$
|
(0.36)
|
$
|
(0.39)
|
$
|
(0.35)
|
CONDENSED CONSOLIDATED STATEMENT OF CASH
FLOWS
Three months and year ended December 31, 2019 and 2018
Dollars in
'000s
(unaudited)
|
|
|
|
Three months ended
December 31
|
Year ended December
31
|
|
2019
|
2018
|
2019
|
2018
|
Cash provided by
(used in):
|
|
|
|
|
Operating
activities:
|
|
|
|
|
Loss
|
$
|
(6,068)
|
$
|
(17,858)
|
$
|
(19,187)
|
$
|
(17,061)
|
Items not involving
cash
|
|
|
|
|
Depreciation
|
5,576
|
5,375
|
21,025
|
12,921
|
Share-based
compensation
|
79
|
207
|
454
|
634
|
Income tax (recovery)
expense
|
(264)
|
11,752
|
470
|
10,922
|
Gain on disposal of
equipment
|
(1,596)
|
(1,789)
|
(6,005)
|
(10,623)
|
Finance
costs
|
172
|
181
|
593
|
443
|
Finance costs lease
liabilities
|
243
|
-
|
1,010
|
-
|
Provision for
settlements
|
-
|
-
|
425
|
-
|
Unrealized foreign
exchange (gain) loss on intercompany
balances
|
(554)
|
1,814
|
(1,347)
|
2,260
|
Write-down of
inventory
|
-
|
1,474
|
-
|
1,474
|
|
|
|
|
|
Cash flow -
continuing operations
|
(2,412)
|
1,156
|
(2,562)
|
970
|
Changes in non-cash
operating working capital
|
3,064
|
2,686
|
9,247
|
4,044
|
Income taxes
paid
|
(754)
|
(437)
|
(1,900)
|
(1,282)
|
|
|
|
|
|
Cash flow - operating
activities
|
(102)
|
3,405
|
4,785
|
3,732
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
Equipment
additions
|
(697)
|
(4,471)
|
(6,018)
|
(17,391)
|
Intangible asset
additions
|
(12)
|
9
|
(1,077)
|
(1,226)
|
Proceeds on disposal
of equipment
|
2,836
|
2,201
|
8,726
|
12,877
|
Changes in non-cash
investing working capital
|
1,472
|
916
|
(284)
|
(562)
|
|
|
|
|
|
Cash flow - investing
activities
|
3,599
|
(1,345)
|
1,347
|
(6,302)
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
Change in operating
loan
|
-
|
187
|
(188)
|
(1,045)
|
Repayments on lease
liabilities
|
(568)
|
(52)
|
(2,095)
|
(205)
|
Proceeds on share
issuance from exercise of share options
|
-
|
-
|
-
|
71
|
Payment on
settlements
|
(524)
|
(80)
|
(604)
|
(316)
|
Restricted
cash
|
-
|
-
|
-
|
1,514
|
Interest
paid
|
(415)
|
(181)
|
(1,603)
|
(443)
|
Advances of loans and
borrowings
|
-
|
-
|
-
|
7,000
|
Repayments on loans
and borrowings
|
(1,000)
|
-
|
(1,000)
|
-
|
|
|
|
|
|
Cash flow - financing
activities
|
(2,507)
|
(126)
|
(5,490)
|
6,576
|
Effect of exchange
rate on changes on cash
|
(115)
|
145
|
(294)
|
186
|
Change in cash and
cash equivalents
|
875
|
2,079
|
348
|
4,192
|
Cash, beginning of
period
|
6,348
|
4,796
|
6,875
|
2,683
|
Cash, end of
period
|
$
|
7,223
|
$
|
6,875
|
$
|
7,223
|
$
|
6,875
|
Cathedral Energy Services Ltd. (the "Company" or
"Cathedral"), based in Calgary,
Alberta is incorporated under the Business Corporations Act
(Alberta) and operates in the U.S.
under Cathedral Energy Services Inc. The Company is publicly
traded on the Toronto Stock Exchange under the symbol "CET".
Cathedral, is a trusted partner to North American energy companies
requiring high performance directional drilling services. We
work in partnership with our customers to tailor our equipment and
expertise to meet their specific geographical and technical needs.
Our experience, technologies and responsive personnel enable our
customers to achieve higher efficiencies and lower project
costs. For more information, visit
www.cathedralenergyservices.com.
SOURCE Cathedral Energy Services Ltd.