Cathedral Energy Services Ltd. reports results for 2010 Q2 and 2010 Q3
dividend
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, Aug. 4 /CNW/ -
Cathedral Energy Services Ltd. (the "Company" or "Cathedral" /TSX: CET) is pleased to report its results for 2010 Q2 and 2010 Q3 dividend. Dollars are in '000's except for day rates and per share amounts.
FINANCIAL HIGHLIGHTS
$ in 000's except per share amounts
Three months ended Six months ended
June 30 June 30
------------------- -------------------
2010 2009 2010 2009
-------------------------------------------------------------------------
Revenues (excluding discontinued
operations 2010 YTD - $2,359;
2009 YTD - $7,098) $ 23,979 $ 10,654 $ 59,655 $ 37,183
Gross margin %(1) 41% 48% 46% 48%
EBITDAS from continuing
operations(1) $ 2,608 $ 480 $ 14,224 $ 7,822
Per share - diluted $ 0.07 $ 0.01 $ 0.39 $ 0.23
EBITDAS(1) $ 2,415 $ (1,721) $ 12,894 $ 5,064
Per share - diluted $ 0.07 $ (0.05) $ 0.35 $ 0.15
Income (loss) before taxes and
discontinued operations $ (1,739) $ (904) $ 7,352 $ 2,369
Net income (loss) $ (3,440) $ (1,484) $ 3,297 $ (80)
Basic per share and diluted $ (0.09) $ (0.04) $ 0.09 $ -
Dividends declared per share $ 0.06 $ 0.12 $ 0.12 $ 0.42
Property and equipment additions $ 8,514 $ 1,839 $ 16,228 $ 5,976
Weighted average shares
outstanding:
Basic ('000) 36,408 34,290 36,404 33,441
Diluted ('000) 36,594 34,290 36,668 33,441
June 30 December 31
2010 2009
-------------------------------------------------------------------------
Working capital $ 14,077 $ 22,451
Long-term debt excluding current portion $ 34,514 $ 39,526
Shareholders' equity $ 98,174 $ 97,422
-------------------------------------------------------------------------
(1) Refer to MD&A; see "NON-GAAP MEASUREMENTS"
MANAGEMENT'S DISCUSSION & ANALYSIS
This Management's Discussion & Analysis ("MD&A") for the three and six months ended June 30, 2010 should be read in conjunction with the annual audited consolidated financial statements and notes thereto for the year ended December 31, 2009, as well as the MD&A in the 2009 Annual Report of Cathedral Energy Services Ltd. ("the Company" / "Cathedral"). This MD&A has been prepared as of August 4, 2010. Dollar amounts are in '000's except for day rates and per share amounts.
FORWARD LOOKING STATEMENTS
This MD&A 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 MD&A contains forward-looking statements relating to: access to capital; projected capital expenditures and commitments and the financing thereof; equipment delivery and deployment dates; establishment of new operating bases; customer commitments; financial results; activity levels; technology advances; and dividends. 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:
- the performance of the Company's businesses, including current
business and economic trends;
- oil and natural gas commodity prices and production levels;
- capital expenditure programs and other expenditures by the Company and
its customers;
- the ability of the Company to retain and hire qualified personnel;
- the ability of the Company to obtain parts, consumables, equipment,
technology, and supplies in a timely manner to carry out its
activities;
- the ability of the Company to maintain good working relationships with
key suppliers;
- the ability of the Company to market its services successfully to
existing and new customers;
- the ability of the Company to obtain timely financing on acceptable
terms;
- currency exchange and interest rates;
- risks associated with foreign operations;
- the ability of the Company to realize the benefit of its conversion
from an income trust to a corporation;
- changes under governmental regulatory regimes and tax, environmental
and other laws; and
- a stable competitive environment.
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 and Annual Report which have been filed with Canadian provincial securities commissions and are available on www.sedar.com.
NON-GAAP MEASUREMENTS
This MD&A refers to certain financial measurements that do not have any standardized meaning within Canadian Generally Accepted Accounting Principles ("GAAP") and therefore may not be comparable to similar measures provided by other companies.
The specific measures being referred to include the following:
i) "Gross margin" - calculated as revenues less operating expenses is
considered a primary indicator of operating performance (see tabular
calculation under Results of Operations);
ii) "Gross margin %" - calculated as gross margin divided by revenues is
considered a primary indicator of operating performance (see tabular
calculation under Results of Operations);
iii) "EBITDAS" - defined as earnings before interest on long-term debt,
taxes, depreciation, amortization, non-cash compensation expense and
unrealized foreign exchange gain/loss; this measure 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. The
definition of EBITDAS was changed in 2009 Q2 to adjust for
unrealized foreign exchange gain/loss. Comparative amounts presented
have been restated to the new calculation (see tabular calculation
under EBITDAS);
iv) "EBITDAS from continuing operations" - defined as earnings before
interest on long-term debt, taxes, depreciation, amortization, non-
cash compensation expense and unrealized foreign exchange gain/loss
excluding the portion due from discontinued operations in each
component of the calculation;
v) "EBITDAS from discontinued operations" - defined as earnings before
interest on long-term debt, taxes, depreciation, amortization, non-
cash compensation expense and unrealized foreign exchange gain/loss
from discontinued operations of the Company's former wireline
division in each component of the calculation;
vi) "Maintenance capital expenditures" - refers to capital expenditures
required to maintain existing levels of service but excludes
replacement cost of lost-in-hole equipment to the extent the
replacement equipment is financed from the proceeds on disposal of
the equipment lost-in-hole; and
vii) "Funds from continuing operations" - calculated as cash flow from
continuing operating activities before changes in non-cash working
capital is considered an indicator of the Company's ability to
generate funds flow from operations but excluding changes in non-
cash working capital which is financed using the Company's bank
indebtedness/line of credit facility.
OVERVIEW
The Company is incorporated under the Business Corporations Act (Alberta) (the "Act"). The Company was created as a result of the conversion of Cathedral Energy Services Income Trust (the "Trust") to a corporation pursuant to a Plan of Arrangement under the Act, entered into by various entities including the Trust, Cathedral Energy Services Ltd. and SemBioSys Genetics Inc. (the "Reorganization"). The Reorganization was completed on December 18, 2009 (see 2009 Annual Report for further details). As a result of the application of the continuity of interests method of accounting, certain terms such as shareholders'/unitholders', dividends/distributions and share-based/unit-based may be used interchangeably throughout this MD&A.
In 2010 Q1, the Company made the decision to discontinue its operations of the wireline division. On March 31, 2010, it closed its Canadian slickline operations and on April 20, 2010 it completed the sale of its U.S. wireline operations. As such, for the three and six months ended June 30, 2010 the revenues and expenses for the wireline business have been included in the statements of operations and statements of cash flows as discontinued operations and the related assets are classified as held for sale in the balance sheet. The 2009 figures have been reclassified to be consistent with this presentation.
On April 20, 2010, the Company closed the sale of its U.S. based electric wireline business to Pure Energy Services Ltd. ("Pure") in exchange for the operating assets of Pure's Motorworks division and $2,112 cash. The Motorworks division includes 58 drilling motors, 23 drilling jars, spare mud motor power sections and shop equipment valued at $4,980. The assets of the Motorworks operations will be utilized in Cathedral's current directional drilling business, and the net sale proceeds were used to reduce bank indebtedness.
The Company completed 2010 Q2 with quarterly revenues of $23,979 and year-to-date revenues of $59,655 compared to 2009 Q2 revenues of $10,654 and 2009 year-to-date revenues of $37,183. Year-to-date revenues have increased 60% from 2009. The 2010 Q2 revenues were comprised of 74% (2009 Q2 - 81%) from the directional drilling division and 26% (2009 Q2 - 19%) from the production testing division.
2010 Q2 EBITDAS was $2,415 ($0.07 per share diluted) which represents a $4,136 increase from 2009 Q2 negative EBITDAS of $1,721 (($0.05) per share diluted). For the three months ended June 30, 2010, the Company's net loss was $3,440 (($0.09) per share diluted) as compared to a $1,484 net loss (($0.04) per share diluted) in 2009. Included in the quarter's loss for 2010 was an unrealized foreign exchange loss on intercompany balances of $945 (($0.03) per share diluted). This is compared to an unrealized foreign exchange gain on intercompany balances of $2,201 ($0.06 per share diluted) for the comparative period in 2009.
2010 year-to-date EBITDAS was $12,894 ($0.35 per share diluted) which represents a $7,830 or 155% increase from $5,064 ($0.15 per share diluted) in 2009. On a 2010 year-to-date basis, the Company's net income was $3,297 ($0.09 per share diluted) as compared to an $80 net loss ($0.00 per share diluted) in 2009. Included in the 2010 year-to-date net income was an unrealized foreign exchange loss on intercompany balances of $319 (($0.01) per share diluted). This is compared to an unrealized foreign exchange gain on intercompany balances of $1,653 ($0.05 per share diluted) for the comparative period in 2009.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2010
Revenues and operating expenses
2010 Q2 2009 Q2 Change %
-------------------------------------------------------------------------
Revenues $ 23,979 $ 10,654 $ 13,325 125
Operating expenses (14,210) (5,515) 8,695 157
-------------------------------------------------------------------------
Gross margin - $ $ 9,769 $ 5,139 $ 4,630 90
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin - % 41% 48% (7%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Three months ended
June 30, 2010 June 30, 2009
-------------------------------------------------------------------------
Direct- Produc- Direct- Produc-
ional tion ional tion
Revenues drilling testing Total drilling testing Total
-------------------------------------------------------------------------
Canada $ 7,704 $ 2,512 $ 10,216 $ 3,372 $ 310 $ 3,682
United States 9,977 3,741 13,718 5,294 1,678 6,972
International 45 - 45 - - -
-------------------------------------------------------------------------
$ 17,726 $ 6,253 $ 23,979 $ 8,666 $ 1,988 $ 10,654
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2010 Q2 revenues were $23,979 which represented an increase of $13,325 or 125% from 2009 Q2 revenues of $10,654. The increase is primarily attributed to the strengthening demand for oil drilling services, an increased focus on shale gas drilling and operations related to the unconventional gas and oil plays and increases in horizontal multi-frac wells.
The directional drilling division revenues have increased from $8,666 in 2009 to $17,726 in 2010. This increase is the net result of: i) a 135% increase in activity days from 833 in 2009 to 1,955 in 2010; and ii) a decrease in the average day rate from $10,181 in 2009 to $8,839 in 2010, which was due in large part to the decrease in U.S. rates due to the strength in the Canadian dollar compared with 2009 Q2. In addition, overall day rates have decreased due to market pressures. Canadian activity days increase from 354 to 877 and U.S. activity days increased from 479 to 1,078.
The Company's production testing division contributed $6,253 in revenues during 2010 Q2 which is a 214% increase over 2009 revenues of $1,988. This increase is attributable in part to the year-over-year increase in production testing units from 33 in 2009 Q2 to 39 in 2010 Q2 and to the overall increase in oilfield service activities on a year-over-year basis.
The gross margin for 2010 Q2 was 41% compared to 48% in 2009 Q2. The decrease is attributed to a number of factors including increases in repairs and rental expense, both of which primarily relate to the Company's directional drilling division. Repairs have increased due to operations in demanding environments. The Company is investing in changes to its equipment which it anticipates will improve performance in these areas.
General and administrative General and administrative expenses were $7,287 in 2010 Q2, an increase of $2,747 compared with $4,540 in 2009. The increase was primarily related to increases in payroll related expenses and facility rental costs as well as other general increases due to increased activity levels. As a percentage of revenues, general and administrative expenses were 30% in 2010 Q2 and 43% in 2009 Q2.
Depreciation and amortization Depreciation for 2010 Q2 was $2,440 as compared to $3,023 in 2009 Q2. This decrease is due to in part the declining balance depreciation method used by the Company and is expected as its assets get older. In addition, the Company reviewed its estimate of useful lives of assets as at January 1, 2010 and adjusted its declining balance depreciation rates accordingly. As a percentage of revenues, depreciation amounted to 10% for 2010 and 28% for 2009.
Interest Interest expense related to long-term debt increased slightly from $299 in 2009 Q2 to $307 in 2010 Q2 due to an increase in the average level of debt outstanding and a slight increase in the effective interest rates. Other interest expense increased from $48 in 2009 Q2 to $73 in 2010 Q2; this relates mainly to interest charges on use by the Company of its bank indebtedness/line of credit facility.
Foreign exchange gain/loss The Company's foreign exchange gain changed from a gain of $2,073 in 2009 Q2 to a loss of $1,108 in 2010 Q2 due to the fluctuations in the Canadian dollar in comparison to the U.S. dollar. Upon consolidation, the Company's foreign operations are considered to be self-sustaining and therefore 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 operations. Included in the 2010 Q2 foreign currency loss are unrealized losses of $945 related to intercompany balances as compared to unrealized gains of $2,201 in the same period in 2009.
Share-based compensation For 2010 Q2 the Company had share-based compensation expense of $655 as compared to $263 for 2009 Q2. The increase is mainly due to options issued over the past year. The value of the options is being amortized against income over the three-year vesting periods.
Gain on disposal of property and equipment During 2010 Q2 the Company had a gain on disposal of property and equipment of $362, compared to $57 in 2009 Q2. The Company's gains are mainly due to recoveries of lost-in-hole equipment costs including previously expensed depreciation on the related assets. The timing of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter.
Taxes For 2010 Q2, the Company had a tax expense of $1,142 as compared to tax recovery of $1,603 in 2009 Q2. All of the Company's current taxes are due to taxable income of its U.S. operations.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2010
Revenues and operating expenses
2010 YTD 2009 YTD Change %
-------------------------------------------------------------------------
Revenues $ 59,655 $ 37,183 $ 22,472 60
Operating expenses (32,215) (19,179) 13,036 68
-------------------------------------------------------------------------
Gross margin - $ $ 27,440 $ 18,004 $ 9,436 52
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin - % 46% 48% (2%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six months ended Six months ended
June 30, 2010 June 30, 2009
-------------------------------------------------------------------------
Direct- Produc- Direct- Produc-
ional tion ional tion
Revenues drilling testing Total drilling testing Total
-------------------------------------------------------------------------
Canada $ 26,102 $ 7,737 $ 33,839 $ 14,165 $ 4,035 $ 18,200
United States 18,977 6,794 25,771 14,850 4,133 18,983
International 45 - 45 - - -
-------------------------------------------------------------------------
$ 45,124 $ 14,531 $ 59,655 $ 29,015 $ 8,168 $ 37,183
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2010 revenues were $59,655 which represented an increase of $22,472 or 60% from 2009 revenues of $37,183. The increase is primarily attributed to the strengthening demand for oil drilling services, an increased focus on shale gas drilling and operations related to the unconventional gas and oil plays and increases in horizontal multi-frac wells.
The directional drilling division revenues have increased from $29,015 in 2009 to $45,124 in 2010 or 56%. This increase is the net result of: i) a 89% increase in activity days from 2,762 in 2009 to 5,216 in 2010; and ii) a decrease in the average day rate from $10,231 in 2009 to $8,467 in 2010, which was due in large part to the decrease in U.S. rates due to the strength of the Canadian dollar compared with 2009. Overall day rates have declined on a year-over-year basis due to market pressures. Canadian activity days increased from 1,483 to 3,180 and U.S. activity days increased from 1,279 to 2,036.
The Company's production testing division contributed $14,531 in revenues during 2010 which is a 78% increase over 2009 revenues of $8,168. This increase is attributable in part to the year-over-year increase in production testing units from 33 in 2009 Q2 to 39 in 2010 Q2 and to the overall increase in oilfield service activities on a year-over-year basis.
The gross margin for 2010 was 46% compared to 48% in 2009. The decrease is attributed to a number of factors including increases in repairs and rental expense, both of which primarily relate to the Company's directional drilling division. Repairs have increased due to operations in demanding environments. The Company is investing in changes to its equipment which it anticipates will improve performance in these areas.
General and administrative General and administrative expenses were $14,127 in 2010, an increase of $3,550 compared with $10,577 in 2009. The increase was primarily related to increases in payroll related expenses and facility rental costs as well as other general increases due to increased activity levels. As a percentage of revenues, general and administrative expenses were 24% in 2010 and 28% in 2009.
Depreciation and amortization Depreciation for 2010 was $4,594 as compared to $5,901 in 2009. This decrease is due to in part the declining balance depreciation method used by the Company and is expected as its assets get older. In addition, the Company reviewed its estimate of useful lives of assets as at January 1, 2010 and adjusted its declining balance depreciation rates accordingly. As a percentage of revenues, depreciation amounted to 8% for 2010 and 16% for 2009.
Interest Interest expense related to long-term debt decreased from $665 in 2009 to $614 in 2010 due to a decrease in the average debt outstanding for the period. Other interest expense increased from $163 in 2009 to $184 in 2010; this relates mainly to interest charges on use by the Company of its bank indebtedness/line of credit facility.
Foreign exchange gain/loss The Company's foreign exchange gain changed from a gain of $1,434 in 2009 to a loss of $432 in 2010 due to the fluctuations in the Canadian dollar in comparison to the U.S. dollar. Upon consolidation, the Company's foreign operations are considered to be self-sustaining and therefore gains and losses due to fluctuations in the foreign currency exchange rates are recorded in 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 operations. Included in the 2010 foreign currency loss are unrealized losses of $319 related to intercompany balances as compared to unrealized gains of $1,653 in the same period in 2009.
Share-based compensation expense For 2010, the Company had share-based compensation expense of $1,345 as compared to $540 for 2009. The increase is mainly due to options issued over the past year. The value of the options is being amortized against income over the three-year vesting periods.
Gain on disposal of property and equipment During 2010 the Company had a gain on disposal of property and equipment of $1,208, as compared to $777 in 2009. The Company's gains are mainly due to recoveries of lost-in-hole equipment costs including previously expensed depreciation on the related assets. The timing of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter.
Taxes For 2010, the Company had a tax expense of $1,471 as compared to tax recovery of $777 in 2009. All of the 2010 year-to-date current income tax provision of $734 (2009 - $4,871) relates to the Company's U.S. operations and is taxed at an effective rate of 35.5%. All of the Company's Canadian taxable income was reduced to $nil due to the utilization of tax pools and tax loss carry-forwards. The Company's future tax provision for the utilization of these pools was offset by a $555 decrease in the Company's deferred credit.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity is cash generated from operations. The Company also has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity. At June 30, 2010, the Company had an operating line of credit with a major Canadian bank in the amount of $20,000 (December 31, 2009 - $20,000) of which $7,554 (December 31, 2009 - $2,181) was drawn. In addition, the Company has a non-reducing revolving term loan facility in the amount of $45,000 (December 31, 2009 - $45,000) of which $34,500 was drawn as at June 30, 2010 (December 31, 2009 - $39,500). In addition, at June 30, 2010, the Company had other long-term debt of $74 (December 31, 2009 - $234).
Operating activities Cash flow from operating activities for the three and six months ended June 30, 2010 was $9,875 and $11,655 as compared to $9,170 and $21,474 in the same periods in 2009. Funds from continuing operations (see Non-GAAP Measurements) for 2010 were $873 and $11,668 as compared to $(1,122) and $1,509 in 2009. This increase was caused mainly by an increase in earnings due to increased activity levels. The Company has a working capital position at June 30, 2010 of $14,077 as compared to $22,451 at December 31, 2009. During 2010 Q2, the Company used excess cash/working capital to reduce its term loan by $5,000.
Investing activities Cash used in investing activities for the three and six months ended June 30, 2010 amounted to $2,948 and $8,368 as compared to $2,903 and $8,238 for the same periods in 2009. During the three and six months ended 2010, the Company invested a total of $8,514 and $16,228 (2009 - $1,839 and $5,976) in property and equipment with the main additions being deposits for resitivity (logging while drilling equipment), and the purchase of 4 production testing units. These additions do not include the $4,980 of directional drilling assets acquired in the asset swap with Pure. The Company received a total of $5,173 and $6,435 from the sale of property and equipment for the three and six months ended June 30, 2010 (2009 - $548 and $1,626); excluding $4,980 of wireline equipment disposed of in the asset swap with Pure. At June 30, 2010, the Company's operating entities had 97 MWD systems and 39 production testing units.
Financing activities Cash used in financing activities for the three and six months ended June 30, 2010 amounted to $4,607 and $1,925 as compared to $4,109 and $15,495 for the same periods in 2009. The Company repaid long-term debt of $5,106 and $5,160 during the three and six months ended June 30, 2010 (2009 - $5,051 and $5,106). Advances on bank indebtedness during the three and six months ended June 30, 2010 were $2,637 and $5,373 (2009 - repayments of $8,440 and $15,406). During the three and six months ended June 30, 2010 the Company paid dividends of $2,184 (2009 - $4,438 and $10,303). During the three and six months ended June 30, 2010 the Company received proceeds for the exercise of stock options of $46 (2009 - $nil).
As at June 30, 2010, the Company was in compliance with all covenants under its credit facility. At August 4, 2010, the Company had 36,414,061 shares and 3,386,535 options outstanding.
Contractual obligations In the normal course of business, the Company incurs contractual obligations and those obligations are disclosed in the Company's MD&A for the year ended December 31, 2009. As at June 30, 2010, the Company has a commitment to purchase approximately $3,634 of property and equipment.
UPDATED 2010 CAPITAL PROGRAM
For 2010, the Board of Directors of the Company has approved an updated capital budget of $31,797 (excluding $4,980 of directional drilling equipment acquired in the asset swap with Pure). Included in the 2010 capital budget is approximately $7,895 for maintenance capital and $2,000 allocated to the new head office and operations centre located in Calgary, which was purchased in 2009. The maintenance capital includes the retro-fit and upgrades to downhole tools. The balance of the 2010 capital program relates mainly to the purchase and integration of resistivity (logging while drilling "LWD") equipment, 8 Electro-Magnetic Measurement-While-Drilling ("EM-MWD") systems, 5 pulse MWD systems and 9 high pressure production testing units. These capital expenditures are expected to be financed by way of cash flow from operations, proceeds on the disposal of wireline and other property and equipment and the Company's credit facility.
DIVIDENDS
It is the intent of the Company to pay quarterly dividends to shareholders. The Board of Directors will review the amount of dividends on a quarterly basis with due consideration to current performance, historical and future trends in the business, the expected sustainability of those trends and enacted tax legislation which will affect future taxes payable as well as required long-term debt repayments, maintenance capital expenditures required to sustain performance and future growth capital expenditures. The Directors have approved a 2010 Q3 dividend in the amount of $0.06 per share which will have a date of record of September 30, 2010 and a payment date of October 15, 2010.
CONTROLS AND PROCEDURES
Management is responsible for establishing and maintaining adequate disclosure controls and internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with GAAP. Internal control over financial reporting may not prevent or detect fraud or misstatements because of limitations inherent in any system of internal control. There were no significant changes in the design or effectiveness of the Company's disclosure controls or internal controls over financial reporting in the second quarter of 2010.
NEW ACCOUNTING POLICIES
In February, 2008, the CICA confirmed that the use of International Financial Reporting Standards ("IFRS") will be required in Canada for publicly accountable profit oriented enterprises for fiscal years beginning on or after January 1, 2011. The Company will be required to report using IFRS beginning January 1, 2011.
The Company's IFRS project plan has four phases: education, analysis, design and implementation and testing. The Company is continuing the process of education for all levels of the organization and has completed the analysis phase during which it identified specific significant differences between Canadian GAAP and IFRS. The Company is in the design phase in which it is determining its policies and procedures for IFRS. This phase will be completed and the Company will move into the implementation and testing phase in 2010 Q3.
The Company is in the process of preparing draft accounting policy choices and financial statement formats which will be presented and vetted by the Company's external auditors and Audit Committee. During 2010 Q3, the Company anticipates completion of this process and to quantify the impact of any changes.
Based upon work completed to date, the Company has determined that IFRS may have a significant impact on share-based compensation and the valuation of goodwill. In addition, the Company anticipates that its policies with respect to financial statement presentation and various other items will change as a result of adopting IFRS. The areas impacted by IFRS discussed above should not be regarded as a comprehensive list of changes that will result from the transition to IFRS. The impact of IFRS on the consolidated financial statements is not quantifiable at this time.
BUSINESS RISKS
The MD&A for the year ended December 31, 2009, which is included in the Company's 2009 Annual Report, includes an overview on business risks associated with the Company and its operating entities. Those business risks remain in effect as at June 30, 2010.
EBITDAS
EBITDAS (refer to Non-GAAP Measurements) is calculated as follows:
Three months ended Six months ended
June 30 June 30
------------------- --------------------
2010 2009 2010 2009
-------------------------------------------------------------------------
Income (loss) from continuing
operations $ (2,881) $ 699 $ 5,881 $ 3,146
Add (deduct):
Depreciation 2,440 3,023 4,594 5,901
Interest - long-term debt 307 299 614 665
Share-based compensation 655 263 1,345 540
Unrealized exchange (gain)
loss 945 (2,201) 319 (1,653)
Taxes (recovery) 1,142 (1,603) 1,471 (777)
-------------------------------------------------------------------------
EBITDAS from continuing
operations 2,608 480 14,224 7,822
EBITDAS from discontinued
operations (193) (2,201) (1,330) (2,758)
-------------------------------------------------------------------------
EBITDAS $ 2,415 $ (1,721) $ 12,894 $ 5,064
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SUMMARY OF QUARTERLY RESULTS
-------------------------------------------------------------------------
Three month period ended Jun Mar Dec Sep
2010 2009 2009 2009
-------------------------------------------------------------------------
Revenues(1) $ 23,979 $ 35,676 $ 24,740 $ 20,176
EBITDAS 2,415 10,479 5,864 5,724
Net income (loss) (3,440) 6,737 2,236 3,125
Net income (loss) per share
- basic (0.09) 0.19 0.06 0.09
Net income (loss) per share
- diluted (0.09) 0.18 0.06 0.09
Dividends declared per share 0.06 0.06 - 0.04
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three month period ended Jun Mar Dec Sep
2010 2009 2009 2009
-------------------------------------------------------------------------
Revenues (1) $ 10,654 $ 26,529 $ 43,514 $ 45,549
EBITDAS (1,721) 6,785 13,554 16,887
Net income (loss) (1,484) 1,404 9,737 10,296
Net income (loss) per share
- basic (0.04) 0.04 0.30 0.32
Net income (loss) per share
- diluted (0.04) 0.04 0.30 0.32
Dividends declared per share 0.12 0.15 0.21 0.21
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Revenue for has been restated to exclude discontinued operations,
consistent with 2010 Q1 presentation.
OUTLOOK
The focus on horizontal, multi-stage fracturing technology to complete conventional and unconventional resource plays in both Canada and the U.S. has allowed for continued strength in activity levels for the oilfield services sector. This change in completion techniques has dramatically increased the percentage of wells being drilled horizontally to over 60% of the total wells drilled. Since breakup, both of Cathedral's operating divisions, directional drilling and production testing, are experiencing activity levels above those of 2010 Q1. With the increase in demand, both divisions have increased their rates.
Cathedral continues its expansion into Texas/Oklahoma area region with the focus on providing directional drilling services in the Haynesville and Eagleford shale plays. The Company expects to have a Houston, Texas operations base set up to service this region in 2010 Q4. The combination of operations bases in Wyoming, Pennsylvania and Texas will provide Cathedral with access to the major activity centers within the U.S. Cathedral expects its activity levels in each of these U.S. regions to accelerate.
On the production testing side, activity levels in both Canada and the U.S. have exceeded the Company's expectations. By mid-August 2010 Cathedral should have received all of the remaining production testing units that is has ordered and all of this equipment should be deployed by the end of August 2010. During 2010 Q2 Cathedral commissioned three high pressure units into the Marcellus region in northeast U.S. for a major oil and natural gas producer. Cathedral looks to continue to expand its production testing services and as customer demand grows, the Company expects to add to its fleet of equipment.
CONSOLIDATED BALANCE SHEETS
Dollars in '000's June 30 December 31
(unaudited) 2010 2009
-------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,857 $ 491
Accounts receivable 27,431 27,727
Income taxes receivable 1,723 2,550
Inventory 6,988 5,389
Prepaid expenses and deposits 1,961 1,629
Assets held for sale - 740
-------------------------------------------------------------------------
39,960 38,526
Property and equipment 92,936 77,425
Assets held for sale 4,319 14,027
Future income taxes 22,867 23,491
Intangibles - 293
Goodwill 18,448 19,775
-------------------------------------------------------------------------
$ 178,530 $ 173,537
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness $ 7,554 $ 2,181
Accounts payable and accrued liabilities 16,084 13,686
Dividends payable 2,185 -
Current portion of long-term debt 60 208
-------------------------------------------------------------------------
25,883 16,075
Long-term debt 34,514 39,526
Deferred credit 19,959 20,514
-------------------------------------------------------------------------
80,356 76,115
-------------------------------------------------------------------------
Shareholders' equity:
Share capital 69,049 68,995
Contributed surplus 5,727 4,390
Retained earnings 24,932 26,004
Accumulated other comprehensive income (loss) (1,534) (1,967)
-------------------------------------------------------------------------
98,174 97,422
-------------------------------------------------------------------------
$ 178,530 $ 173,537
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Dollars in 000's except per share amounts
(unaudited)
Three months ended Six months ended
June 30 June 30
------------------- --------------------
2010 2009 2010 2009
-------------------------------------------------------------------------
Revenues $ 23,979 $ 10,654 $ 59,655 $ 37,183
-------------------------------------------------------------------------
Expenses:
Operating 14,210 5,515 32,215 19,179
General and administrative 7,287 4,540 14,127 10,577
Depreciation 2,440 3,023 4,594 5,901
Interest - long-term debt 307 299 614 665
Interest - other 73 48 184 163
Foreign exchange (gain) loss 1,108 (2,073) 432 (1,434)
Share-based compensation 655 263 1,345 540
-------------------------------------------------------------------------
26,080 11,615 53,511 35,591
-------------------------------------------------------------------------
(2,101) (961) 6,144 1,592
Gain on disposal of property and
equipment 362 57 1,208 777
-------------------------------------------------------------------------
Income (loss) before taxes and
discontinued operations (1,739) (904) 7,352 2,369
-------------------------------------------------------------------------
Taxes:
Current 1,066 1,246 734 4,871
Future (recovery) 76 (2,849) 737 (5,648)
-------------------------------------------------------------------------
1,142 (1,603) 1,471 (777)
-------------------------------------------------------------------------
Income (loss) from continuing
operations (2,881) 699 5,881 3,146
Loss from discontinued
operations, net of tax (559) (2,183) (2,584) (3,226)
-------------------------------------------------------------------------
Net income (loss) (3,440) (1,484) 3,297 (80)
Retained earnings, beginning
of period 30,557 28,076 26,004 31,559
Dividends (2,185) (4,582) (4,369) (9,469)
-------------------------------------------------------------------------
Retained earnings, end of
period $ 24,932 $ 22,010 $ 24,932 $ 22,010
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income (loss) from continuing
operations per share:
Basic and diluted $ (0.08) $ 0.02 $ 0.16 $ 0.09
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Loss from discontinued
operations per share:
Basic and diluted $ (0.01) $ (0.06) $ (0.07) $ (0.09)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income (loss) per share:
Basic and diluted $ (0.09) $ (0.04) $ 0.09 $ 0.00
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED
OTHER COMPREHENSIVE LOSS
Dollars in 000's
(unaudited)
Three months ended Six months ended
June 30 June 30
------------------- --------------------
2010 2009 2010 2009
-------------------------------------------------------------------------
Net income (loss) $ (3,440) $ (1,484) $ 3,297 $ (80)
Other comprehensive income
(loss):
Unrealized foreign exchange
gain (loss) on translation
of self-sustaining foreign
operations 1,340 2,670 433 (2,116)
-------------------------------------------------------------------------
Comprehensive income (loss)
for the period $ (2,100) $ 1,186 $ 3,730 $ (2,196)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive
income (loss), beginning of
period $ (2,874) $ (1,460) $ (1,967) $ 3,326
Other comprehensive income
(loss) 1,340 2,670 433 (2,116)
-------------------------------------------------------------------------
Accumulated other comprehensive
income (loss), end of period $ (1,534) $ 1,210 $ (1,534) $ 1,210
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in 000's
(unaudited)
Three months ended Six months ended
June 30 June 30
------------------- --------------------
2010 2009 2010 2009
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Income (loss) from continuing
operations $ (2,881) $ 699 $ 5,881 $ 3,146
Items not involving cash:
Depreciation and amortization 2,440 3,023 4,594 5,901
Future taxes (recovery) 76 (2,849) 737 (5,648)
Unrealized foreign exchange
(gain) loss 945 (2,201) 319 (1,653)
Share-based compensation
expense 655 263 1,345 540
Gain on disposal of property
and equipment (362) (57) (1,208) (777)
-------------------------------------------------------------------------
Cash flow from continuing
operations 873 (1,122) 11,668 1,509
Cash flow from discontinued
operations (672) (1,236) (1,579) (1,324)
Changes in non-cash operating
working capital 9,674 11,528 1,566 21,289
-------------------------------------------------------------------------
9,875 9,170 11,655 21,474
-------------------------------------------------------------------------
Investing activities:
Property and equipment
additions from continuing
operations (8,495) (1,793) (16,133) (5,761)
Property and equipment
additions from discontinued
operations (19) (46) (95) (215)
Proceeds on disposal of
property and equipment from
continuing
operations 498 344 1,746 1,422
Proceeds on disposal of property
and equipment held for sale
from discontinued operations 4,675 204 4,689 204
Changes in non-cash investing
working capital 393 (1,612) 1,425 (3,888)
-------------------------------------------------------------------------
(2,948) (2,903) (8,368) (8,238)
-------------------------------------------------------------------------
Financing activities:
Proceeds on shares issued for
cash, net of issuance costs - 13,820 - 13,820
Dividends paid (2,184) (4,438) (2,184) (10,303)
Repayment of long-term debt (5,106) (5,051) (5,160) (5,106)
Advances under long-term debt - - - 1,500
Proceeds on exercise of options 46 - 46 -
Change in bank indebtedness 2,637 (8,440) 5,373 (15,406)
-------------------------------------------------------------------------
(4,607) (4,109) (1,925) (15,495)
-------------------------------------------------------------------------
Effect of exchange rate on
changes in cash and cash
equivalents 13 (183) 4 1
-------------------------------------------------------------------------
Change in cash and cash
equivalents 2,333 1,975 1,366 (2,258)
Cash and cash equivalents
(cheques issued in excess of
bank balances), beginning of
period (476) 3,318 491 7,551
-------------------------------------------------------------------------
Cash and cash equivalents, end
of period $ 1,857 $ 5,293 $ 1,857 $ 5,293
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cathedral Energy Services Ltd. (the "Company"/"Cathedral") and its wholly owned subsidiary, Cathedral Energy Services Inc., are engaged in the business of providing selected oilfield services to oil and natural gas companies in western Canada and selected oil and natural gas basins in the United States. The Company is in the process of establishing operations in Venezuela for providing directional drilling services through its wholly owned subsidiaries Directional Plus International Ltd. and Directional Plus de Venezuela, C.A. The Company's operating activities are divided into drilling and production testing business units. The Company's shares trade on the TSX under the symbol: CET. For more information, visit www.cathedralenergyservices.com.
%SEDAR: 00000484E
For further information: Requests for further information should be directed to: Mark L. Bentsen, President and Chief Executive Officer or P. Scott MacFarlane, Chief Financial Officer, Cathedral Energy Services Ltd., 1700, 715 - 5th Avenue S.W., Calgary, Alberta, T2P 2X6, Telephone: 403.265.2560, Fax: 403.262.4682, www.cathedralenergyservices.com
Share this article