Cathedral Energy Services Ltd. Reports Results for 2012 Q2 and 2012 Q3 Dividend

/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

CALGARY, Aug. 9, 2012 /CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" /TSX: CET) is pleased to report its results for 2012 Q2 and 2012 Q3 dividend.

FINANCIAL HIGHLIGHTS
Dollars in 000's except per share amounts

		Three months ended June 30				Six months ended June 30
			2012		2011		2012		2011
Revenues		$	40,699	$	31,746	$	108,528	$	86,595
Adjusted gross margin % ^(1)			19.1%		20.6%		28.4%		28.7%
EBITDAS ^(1)		$	2,068	$	2,643	$	24,024	$	17,451
	Diluted per share	$	0.05	$	0.07	$	0.63	$	0.46
EBITDAS ^(1)as % of revenues			5.1%		8.3%		22.1%		20.2%
Funds from continuing operations ^(1)		$	1,148	$	1,563	$	18,645	$	15,496
	Diluted per share	$	0.03	$	0.04	$	0.49	$	0.41
Net earnings (loss)		$	(3,222)	$	(1,609)	$	9,406	$	6,508
	Basic per share	$	(0.09)	$	(0.04)	$	0.25	$	0.18
	Diluted per share	$	(0.09)	$	(0.04)	$	0.25	$	0.17
Dividends declared per share		$	0.075	$	0.060	$	0.150	$	0.120
Property and equipment additions		$	6,542	$	12,709	$	18,487	$	25,567
Weighted average shares outstanding
	Basic (000s)		37,485		37,071		37,420		36,953
	Diluted (000s)		37,744		38,011		37,911		38,085
							June 30		December 31
							2012		2011
Working capital						$	40,742	$	40,052
Total assets						$	238,552	$	231,923
Loans and borrowings excluding current portion						$	50,768	$	50,694
Total shareholders' equity						$	141,596	$	136,107
^(1) Refer to "NON-GAAP MEASUREMENTS"

 

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: capital expenditures are expected to be financed by way of cash flow from operations and the Company's credit facility; expectation that focus on horizontal, multi-stage fracturing to complete conventional and unconventional oil and liquids-rich natural gas plays across North America is expected to continue to drive Cathedral's operating results; expectation a larger percentage of Cathedral's year-over-year growth in revenues to be from the U.S. market; Cathedral expects to add 14 MWD systems and nine production testing units in 2012; introduction of new technologies; significant increase in activity levels in Northeast and Houston regions of the U.S.; the new proprietary mud motor is expected to significantly reduce operating costs as well as increase durability; and progress toward the commencement of providing directional drilling services in its joint venture company, Vencana Servicios Petroleros, S.A.  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 news release 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 including Venezuela;
• the ability of the Company to realize the benefit of its conversion from an income trust to a corporation;
• risks associated with finalizing ancillary joint venture agreements that are required prior to the commencement of operations of the Venezuela joint venture;
• risks associated with Venezuela joint venture company being awarded work by the Venezuela state run oil and natural gas corporation;
• changes under governmental regulatory regimes and tax, environmental and other laws in Canada, United States ("U.S.") and Venezuela; 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 news release 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 news release 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 news release refers to certain non-GAAP measurements that do not have any standardized meaning within IFRS and therefore may not be comparable to similar measures provided by other companies.  Management utilizes these non-GAAP measurements to evaluate Cathedral's performance.

The specific measures being referred to include the following:

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 below);

ii) "Adjusted gross margin %" - calculated as adjusted gross margin divided by revenues; is considered a primary indicator of operating performance (see tabular calculation below);

iii) "EBITDAS" - defined as earnings before finance costs, unrealized foreign exchange on intercompany balances, unrealized foreign exchange due to hyper-inflation accounting, taxes, depreciation 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 below);

iv) "Maintenance capital expenditures" - refers to capital expenditures required to maintain existing levels of service but excludes replacement cost of lost-in-hole equipment to the extent the replacement equipment is financed from the proceeds on disposal of the equipment lost-in-hole; and

v) "Funds from continuing operations" - calculated as cash provided by operating activities before changes in non-cash working capital, cash flow from discontinued operations and income taxes paid less current tax expense; is considered an indicator of the Company's ability to generate funds flow from operations on an after tax basis but excluding changes in non-cash working capital which is financed using the Company's operating loan (see tabular calculation below).

The following tables provide reconciliations from GAAP measurements to non-GAAP measurements referred to in this news release:

Adjusted gross margin

		Three months ended June 30				Six months ended June 30
			2012		2011		2012		2011
Gross margin		$	3,193	$	2,752	$	21,891	$	17,651
Add non-cash items included in cost of sales:
	Depreciation		4,530		3,688		8,794		7,067
	Share-based compensation		69		99		171		163
Adjusted gross margin		$	7,792	$	6,539	$	30,856	$	24,881
Adjusted gross margin %			19.1%		20.6%		28.4%		28.7%

 

EBITDAS

			Three months ended June 30				Six months ended June 30
				2012		2011		2012		2011
Earnings (loss) from continuing operations
		before income taxes	$	(3,650)	$	(1,986)	$	12,999	$	8,705
Add (deduct):
	Gain on dispoal of property and equipment from
		discontinued operations		-		166		-		449
Depreciation included in cost of sales				4,530		3,688		8,794		7,067
Depreciation included in selling, general
		and administrative expenses		159		28		315		77
Share-based compensation included in cost of sales				69		99		171		163
Share-based compensation included in selling, general
		and administrative expenses		246		370		514		748
Unrealized foreign exchange (gain) loss
		on intercompany balances		201		(103)		145		(574)
Finance costs				513		381		1,086		816
EBITDAS			$	2,068	$	2,643	$	24,024	$	17,451

 

Funds from continuing operations

			Six months ended June 30
				2012		2011
Cash flow from operating activities			$	59,229	$	20,766
Add (deduct):
		Changes in non-cash operating working capital		(41,950)		(6,043)
		Income taxes paid		3,013		671
		Current tax recovery (expense)		(1,647)		102
Funds from continuing operations			$	18,645	$	15,496

 

OVERVIEW

The Company completed 2012 Q2 with quarterly revenues of $40,699 and year-to-date revenues of $108,528 compared to 2011 Q2 revenues of $31,746 and 2011 year-to-date revenues of $86,595.  Year-to-date revenues have increased 25% from 2011.  The 2012 Q2 revenues were comprised of 65% (2011 Q2 - 69%) from the directional drilling division and 35% (2011 Q2 - 31%) from the production testing division.

2012 Q2 EBITDAS was $2,068 ($0.05 per share diluted) which represents a $575 decrease from 2011 Q2 EBITDAS of $2,643 ($0.07 per share diluted).  For the three months ended June 30, 2012, the Company's loss was $3,222 (($0.09) per share diluted) as compared to a $1,609 loss (($0.04) per share diluted) in 2011.

2012 year-to-date EBITDAS was $24,024 ($0.63 per share diluted) which represents a $6,573 or 38% increase from $17,451 ($0.46 per share diluted) in 2011.  On a 2012 year-to-date basis, the Company's net income was $9,406 ($0.25 per share diluted) as compared to a $6,508 ($0.17 per share diluted) in 2011.

RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30

	Three months ended June 30, 2012							Three months ended June 30, 2011
		Directional		Production					Directional		Production
Revenues		drilling		testing		Total			drilling		testing		Total
Canada	$	10,522	$	6,368	$	16,890		$	10,059	$	3,685	$	13,744
United States		15,988		7,821		23,809			11,940		6,062		18,002
Total	$	26,510	$	14,189	$	40,699		$	21,999	$	9,747	$	31,746

 

Revenues and gross margin      2012 Q2 revenues were $40,699 which represented an increase of $8,953 or 28% from 2011 Q2 revenues of $31,746.  The increase was primarily attributed to the focus on horizontal, multi-stage fracturing technology to complete conventional and unconventional resource plays in both Canada and the U.S. which has allowed for continued strength in activity levels for the oilfield services sector.   In addition, the increase was due to increased utilization, additions to major equipment in the last 12 months and day rate pricing increases.

The directional drilling division revenues have increased from $21,999 in 2011 Q2 to $26,510 in 2012 Q2.  This increase was the result of: i) a 10% increase in activity days from 2,084 in 2011 Q2 to 2,294 in 2012 Q2; and ii) a 9% increase in the average day rate from $10,558 in 2011 Q2 to $11,557 in 2012 Q2.  For comparison, the 2012 Q1 average day rate was $11,707.  On year-over-year basis, Canadian day rates have increased 17% and this increase was attributable to rate adjustments related to increases in the Company's operating costs and general rate increases.  U.S. day rates have increased 7% when converted to Canadian dollars mainly due to the change in types of drilling work performed.   Canadian activity days decreased from 893 to 801 and U.S. activity days increased from 1,191 to 1,493.  Canadian activity days were negatively affected by a "spring breakup" period that was extended due to wet weather in June.  U.S. activity days were up in all of the Company's U.S. operating areas.

The Company's production testing division contributed $14,189 in revenues during 2012 Q2 which was a 46% increase over 2011 revenues of $9,747.  This increase is attributable to the overall increase in testing units from an average of 58 in 2011 Q2 to 66 for 2012 Q2, increased equipment utilization, expansion of the customer base and further expansion into the North Dakota Bakken oil play.

The gross margin for 2012 Q2 was 7.8% compared to 8.7% in 2011 Q2.  Cost of sales includes the non-cash expenses for a portion of depreciation and share-based compensation and these non-cash expenses total $4,599 for 2012 Q2 and $3,787 for 2011 Q2.  Adjusted gross margin (which excludes non-cash expenses) for 2012 Q2 was $7,792 (19.1%) compared to $6,539 (20.6%) for 2011 Q2.  The decrease in adjusted gross margin is a result of higher costs for accommodation, subsistence and field labour as a percentage of revenues in 2012 Q2.

Depreciation allocated to cost of sales increased from $3,688 in 2011 Q2 to $4,530 in 2012 Q2 due to capital additions in the period from 2011 Q2 to 2012 Q2.  Depreciation included in cost of sales as a percentage of revenue was 11% for 2012 Q2 and 12% for 2011 Q2.

For 2012 Q2 the Company had share-based compensation included in cost of sales of $69 compared to $99 recognized in 2011 Q2.  The fair value of the options is being amortized against income over the three-year vesting periods.

Selling, general and administrative expenses ("SG&A")     SG&A expenses were $6,043 in 2012 Q2; an increase of $863 compared with $5,180 in 2011 Q2.  As a percentage of revenue, these costs were 15% in 2012 Q2 and 16% in 2011 Q2.  SG&A includes the non-cash expenses for a portion of depreciation and share-based compensation.  These non-cash expenses total $405 for 2012 Q2 and $398 for 2011 Q2.  SG&A net of these non-cash items were $5,638 in 2012 Q2 and $4,782 in 2011 Q2, an increase of $856.  Staffing costs increased $766; this increase was primarily related to staff positions added to accommodate growth, wage increases for existing staff as well as changes in variable compensation.  The staffing costs included in SG&A relate to executives, sales, accounting, human resources, payroll, safety, research and development and related support staff. The remaining increase of $90 relates to various net changes none of which are individually significant.

Depreciation allocated to SG&A increased from $28 in 2011 Q2 to $159 in 2012 Q2 which has mainly increased due to the depreciation of the new head office location which was not depreciated until it was available-for-use in 2011 Q4.

For 2012 Q2 the Company had share-based compensation included in SG&A of $246 compared to $370 recognized in 2011 Q2.  The fair value of the options is being amortized against income over the three-year vesting periods.

Gain on disposal of property and equipment     During 2012 Q2 the Company had a gain on disposal of property and equipment of $28, compared to $677 in 2011 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.

Foreign exchange gain (loss)     The Company's foreign exchange decreased from a gain of $146 in 2011 Q2 to a loss $315 in 2012 Q2 due to the fluctuations in the Canadian dollar compared to U.S. dollars and Venezuelan bolivars.  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 2012 Q2 foreign currency gain are unrealized losses of $201 (2011 Q2 - $103 gain) related to intercompany balances.

Finance costs     Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $513 for 2012 Q2 versus $381 for 2011 Q2.  The net increase in finance costs mainly relate to an increase in the outstanding balance for the secured revolving term loan and due to the capitalization of interest in 2011 related to the construction of the 6030 Campus.  These increases were partially offset by a decrease in the interest on outstanding balance on the Company's operating loans, the value of which were reduced to $nil at June 30, 2012.

Income tax     For 2012 Q2, the Company had an income tax recovery of $428 compared to $258 in 2011 Q2.  The 2012 Q2 provision consists of current tax expense of $892 (2011 Q2 - $237) and a deferred tax recovery of $1,320 (2011 Q2 - $495 recovery).  The effective tax rate was 11% for 2012 Q2 and 13% 2011 Q2.

RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2012

	Six months ended June 30, 2012							Six months ended June 30, 2011
		Directional		Production					Directional		Production
Revenues		drilling		testing		Total			drilling		testing		Total
Canada	$	44,034	$	18,753	$	62,787		$	41,062	$	12,454	$	53,516
United States		30,895		14,846		45,741			22,510		10,569		33,079
Total	$	74,929	$	33,599	$	108,528		$	63,572	$	23,023	$	86,595

Revenues and gross margin      2012 revenues were $108,528 which represented an increase of $21,933 or 25% from 2011 revenues of $86,595.  The increase was primarily attributed to the focus on horizontal, multi-stage fracturing technology to complete conventional and unconventional resource plays in both Canada and the U.S. which has allowed for continued strength in activity levels for the oilfield services sector.   In addition, the increase was due to increased utilization, additions to major equipment in the last 12 months and day rate pricing increases.

The directional drilling division revenues have increased from $63,572 in 2011 to $74,929 in 2012.  This increase is the result of: i) a 5% increase in activity days from 6,109 in 2011 to 6,430 in 2012; and ii) an 12% increase in the average day rate from $10,407 in 2011 to $11,653 in 2012.  On year-over-year basis, Canadian day rates have increased 15% and this increase is attributable to a combination of passing on increased field cost to customers and general rate increases.  U.S. day rates have increased 10% when converted to Canadian dollars.   The U.S. day rates have increased 6% in U.S. dollars, mainly due to the change in types of drilling work performed in 2012.  Canadian activity days decreased from 3,781 in 2011 to 3,515 in 2012 and U.S. activity days increased from 2,329 in 2011 to 2,915 in 2012.  Canadian activity days were negatively affected by a "spring breakup" in 2012 which started earlier than on average and was extended due to wet weather in June.  U.S. activity days were up in all of the Company's U.S. operating areas.

The Company's production testing division contributed $33,599 in revenues during 2012 which is a 46% increase over 2011 revenues of $23,023.  This increase is attributable to the overall increase in testing units from an average of 57 in 2011 Q2 to 65 for 2012 Q2, increased equipment utilization, expansion of the customer base and further expansion into the North Dakota Bakken oil play.

The gross margin for 2012 was 20.2% compared to 20.4% in 2011.  Cost of sales includes the non-cash expenses for a portion of depreciation and share-based compensation and these non-cash expenses total $8,965 for 2012 and $7,230 for 2011.  Adjusted gross margin for 2012 is $30,856 (28.4%) compared to $24,881 (28.7%) for 2011 which is an insignificant change none of which are individually significant.

Depreciation allocated to cost of sales increased from $7,067 in 2011 to $8,794 in 2012 due to capital additions.  Depreciation included in cost of sales as a percentage of revenue was 8% in both 2012 and 2011.

For 2012 the Company had share-based compensation included in cost of sales of $171 compared to $163 recognized in 2011.  The value of the options is being amortized against income over the three-year vesting periods.

Selling, general and administrative expenses ("SG&A")     SG&A were $11,484 in 2012; an increase of $1,112 compared with $10,372 in 2011.  As a percentage of revenue, these costs were 11% in 2012 and 12% in 2011.  SG&A includes the non-cash expenses for a portion of depreciation and share-based compensation.  These non-cash expenses total $829 for 2012 and $825 for 2011.  SG&A net of these non-cash items were $10,655 for 2012 and $9,547 for 2011, an increase of $1,108.  Staffing costs increased $906; this increase was primarily related to staff additions for research and development department, staff positions added to accommodate growth, wage increases for existing staff as well as changes in variable compensation.  The staffing costs included in SG&A relate to executives, sales, accounting, human resources, payroll, safety, research and development and related support staff.  There was an increase in insurance of $140 primarily related to higher coverage levels compared to 2011.  The remaining increase of $62 relates to several items, none of which was significant individually.

Depreciation allocated to SG&A increased from $77 in 2011 to $315 in 2012 mainly due to the depreciation of the new head office location which was not depreciated until it was available-for-use in 2011 Q4.

For 2012 the Company had share-based compensation included in SG&A of $514 compared to $748 recognized in 2011.  The value of the options is being amortized against income over the three-year vesting periods.

Gain on disposal of property and equipment     During 2012 the Company had a gain on disposal of property and equipment of $3,732 compared to $1,608 in 2011.  Included in the 2012 gain is $2,034 related to the sale of property and equipment by Cathedral's subsidiaries to Vencana Servicios Petroleros, S.A. ("Vencana") of which Cathedral owns 40%.  The Vencana related portion of the gain includes the portion of the gain related to the joint venture partner's share.  The Company's remaining 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.

Foreign exchange gain (loss)     The Company's foreign exchange gain was $634 in 2011 compared to a loss of $54 in 2012 due to the fluctuations in the Canadian dollar compared to U.S. dollars and Venezuelan bolivars.  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 2012 foreign currency gain are unrealized losses of $145 (2011 - $574 gain) related to intercompany balances.

Finance costs     Finance costs which consist of interest expenses on operating loan, loans and borrowings and bank charges were $1,086 for 2012 and $816 for 2011. The increase in finance costs relate to the increase in the outstanding balance on the Company's secured revolving term loan and due to the capitalization of interest in 2011 related to the construction of the 6030 Campus.

Income tax     For 2012, the Company had an income tax expense of $3,593 as compared to $2,521 in 2011.  The 2012 provision consists of current tax expense of $1,647 (2011 - recovery of $102) and a deferred tax expense of $1,946 (2011 - $2,623).  The effective tax rate for 2012 is 28% compared to 29% in 2011.

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, 2012, the Company had an operating loan facility with a major Canadian bank in the amount of $20,000 (December 31, 2011 - $20,000) of which $Nil (December 31, 2011 - $12,797) was drawn.  In addition, the Company has a non-reducing revolving term loan facility in the amount of $55,000 (December 31, 2011 - $55,000) of which $50,000 was drawn as at June 30, 2012 (December 31, 2011 - $50,000).  In addition, at June 30, 2012, the Company had finance lease liabilities of $1,503 (December 31, 2011 - $1,492) and other long-term debt of $nil (December 31, 2011 - $5).

Operating activities     For the six months ended June 30, 2012, cash flows from operating activities were $59,229 as compared to $20,766 for the comparative 2011 period, which was an increase of $38,463 or 185%.  Cash flow from operating activities for the six months ended June 30, 2012 includes $41,950 source of funds (2011 - $6,043) related to changes in non-cash working capital.  The Company had a working capital position at June 30, 2012 of $40,742 compared to $40,052 at December 31, 2011.  Included in the $31,457 of cash and cash equivalents is $21,456 from international subsidiaries.  This includes $18,064 of cash received for international equipment purchases which is classified as deferred revenue.

Funds from continuing operations (see Non-GAAP Measurements) for the six months ended June 30, 2012 were $18,645 compared to $15,496 for the same period in 2011, which was an increase of $3,149.  This increase was caused mainly by the increase in earnings (excluding non-cash items).

Investing activities     Cash used in investing activities for the six months ended June 30, 2012 amounted to $12,273 compared to $20,654 for the 2011 comparative period.  During 2012 the Company invested an additional $19,164 (2011 - $25,567) in property and equipment and intangible assets.  The main 2012 Q2 year-to-date additions were 4 MWD systems, replacement of downhole tools that were lost-in-hole, 5 production testing units, auxiliary production testing equipment and maintenance capital of $4,500.  Maintenance capital includes: i) costs incurred on conversion of the Company's mud motor fleet to its proprietary designed mud motor; ii) upgrading of EM-MWD systems to the Company's Fusion MWD platform; and iii) expansion of  mud motor power section fleet to meet customers' requests for specific configuration.   The Company received proceeds on disposal of property and equipment of $6,388 during the six months ended June 30, 2012 (2011 - $6,349 including proceeds on assets held for sale).  For the six months ended June 30, 2012 Cathedral had a source of funds by way of non-cash investing working capital in the amount of $503 (2011 - use of funds of $1,436); fluctuations in non-cash working capital related to investing activities are a function of when proceeds on disposal of property and equipment are received and when payments for property and equipment are made.

The following is a summary of major equipment owned by the Company:

	June 30	December 31	June 30
	2012	2011	2011
Directional drilling - MWD systems ^(1)	129	125	117
Production testing units	67	62	59
^(1) Net of 10 systems that have been removed from service.

 

Financing activities     Cash used by financing activities for the six months ended June 30, 2012 amounted to $18,545 as compared to $805 during the 2011 comparative period.  During the six months ended June 30, 2012 the Company made interest payments of $1,094 compared to $663 in 2011.   Repayments on operating loans for the same period in 2012 were $12,888 (2011 - $2,420).  The Company received $nil advances of long-term debt (2011 - $5,000).  Cathedral made payments on loans and borrowings of $251 during the six months ended June 30, 2012 (2011 - $287).  The Company made payments of dividends of $5,048 for the six months ended June 30, 2012 (2011 - $4,426).  During the same period the Company received proceeds on the exercise of share options of $786 (2011 - $1,991) and made repurchases of 10,000 (2011- nil) of its own shares under its normal course issuer bid of $50 (2011 - $nil).  Since June 30, 2012 the Company has repurchased an additional 30,149 shares under its normal course issuer bid.  As at June 30, 2012, the Company was in compliance with all covenants under its credit facility.  At August 9, 2012, the Company has 37,465,134 common shares and 3,233,071 share options outstanding.

Contractual obligations     In the normal course of business, the Company incurs contractual obligations and those obligations are disclosed in the Company's Management's Discussion & Analysis ("MD&A") for the year ended December 31, 2011.  As at June 30, 2012, the Company had a commitment to purchase approximately $1,425 of property and equipment.  Cathedral anticipates expending these funds in 2012 Q3.

2012 CAPITAL PROGRAM

Cathedral's 2012 capital budget remains at the previously disclosed amount of $28,000.  In summary, the major items within the annual 2012 capital budget are: i) 14 MWD and related mud motors and collars to complement the increased job capability; ii) 9 frac-flowback production testing units and auxiliary production testing equipment to complement the overall fleet; and iii) $6,600 of maintenance capital.  Maintenance capital includes: i) costs incurred on conversion of the Company's mud motor fleet to its proprietary designed mud motor; ii) upgrading of EM-MWD systems to the Company's Fusion MWD platform; and iii) expansion of mud motor power section fleet to meet customers' requests for specific configuration.  To June 30, 2012, Cathedral has spent or committed to spend approximately $20,000 of its capital budget.  Cathedral expects to expend the entire $28,000, but is currently reviewing the uncommitted portion to ensure it is allocated to the areas that provide the most potential for growth or operating cost savings.  These capital expenditures are expected to be financed by way of cash flow from operations 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 2012 Q3 dividend in the amount of $0.075 per share which will have a date of record of September 30, 2012 and a payment date of October 15, 2012.

OUTLOOK

Overall Cathedral's operating divisions continue to benefit from the focus by operators on drilling horizontal wells and completing such wells with multi-stage fracturing.  The combination of continuing weak, but improving, natural gas prices and ongoing volatility in crude oil prices provides a backdrop for the back half of 2012 that is expected to see a North America wide reduction in drilling activity as operators cash flows are negatively impacted.   Under these circumstances, within the Canadian market Cathedral expects to maintain its current market share in terms of activity levels but with some reduction on directional drilling day rates. In response to this decrease in day rates, the Company has focused on initiatives to reduce its cost structure.  In the U.S. market Cathedral expects its market share to increase as it focuses its efforts on expanding into all U.S. regions where there is significant amount of drilling and completions activity including expansion in its operations in the Northeast.  Cathedral expects a larger percentage of its year-over-year growth in revenues to be from the U.S. market. Cathedral is seeing an increase in activity levels from its Northeast and Houston operations and is currently reviewing other operating areas for further expansion.

In 2012 Q2, Cathedral saw the first significant deployment of the new proprietary mud motor design.  Management continues to be encouraged with the operating results of its mud motor.  Although it is early in the deployment of the motor, the Company is experiencing the expected significant reduction in operating costs as well as increased durability.

Through Cathedral's continuous enhancement program, several new features will be added to the MWD Fusion platform. In 2012 Q2, Cathedral completed testing on its new rotary pulser and as a result commenced commercial production of this pulser in 2012 Q3.  Going forward, the MWD research and development group will commence testing of new technologies such as at-bit-inclination, at-bit-gamma and a high temperature MWD system.  With "at-bit" inclination and gamma, sensors are placed closer to the drill bit and this allows for improved geosteering and optimum well placement.  Cathedral continues to develop and introduce new technologies to allow us to lead the market with innovative products to enhance performance and customer satisfaction.

Subsequent to the end of 2012 Q2, Cathedral has commenced shipments of equipment and parts to its Venezuela joint venture, Vencana Servicios Petroleros, S.A. ("Vencana").   Cathedral and its joint venture partner continue to work in the execution of ancillary agreements and the coordination of personnel and equipment.

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
June 30, 2012 and December 31, 2011
Dollars in '000s
(unaudited)

				June 30		December 31
				2012		2011
Assets
Current assets:
		Cash and cash equivalents	$	31,457	$	2,902
		Trade receivables		38,048		65,568
		Prepaid expenses		3,628		2,217
		Inventories		12,412		13,278
		Current taxes recoverable		173		-
Total current assets				85,718		83,965
Property and equipment				134,794		129,929
Intangible assets				796		230
Deferred tax assets				10,006		11,951
Investment in equity accounted investee				1,390		-
Goodwill				5,848		5,848
Total non-current assets				152,834		147,958
Total assets			$	238,552	$	231,923
Liabilities and shareholders' equity
Current liabilities:
		Operating loan	$	-	$	12,797
		Trade and other payables		23,364		28,046
		Dividends payable		2,813		2,238
		Loans and borrowings		735		803
		Deferred revenue		18,064		-
		Current taxes payable		-		29
Total current liabilities				44,976		43,913
Loans and borrowings				50,768		50,694
Deferred tax liabilities				1,212		1,209
Total non-current liabilities				51,980		51,903
Shareholders' equity:
		Share capital		75,160		74,208
		Contributed surplus		8,335		7,845
		Accumulated other comprehensive loss		(1,848)		(2,141)
		Retained earnings		59,949		56,195
Total shareholders' equity				141,596		136,107
Total liabilities and shareholders' equity			$	238,552	$	231,923

 

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Three and six months ended June 30, 2012 and 2011
Dollars in '000s except per share amounts
(unaudited)

			Three months ended June 30				Six months ended June 30
				2012		2011		2012		2011
Revenues			$	40,699	$	31,746	$	108,528	$	86,595
Cost of sales:
	Direct costs			(32,907)		(25,207)		(77,672)		(61,714)
	Depreciation			(4,530)		(3,688)		(8,794)		(7,067)
	Share-based compensation			(69)		(99)		(171)		(163)
Total cost of sales				(37,506)		(28,994)		(86,637)		(68,944)
Gross margin				3,193		2,752		21,891		17,651
Selling, general and administrative expenses:
	Direct costs			(5,638)		(4,782)		(10,655)		(9,547)
	Depreciation			(159)		(28)		(315)		(77)
	Share-based compensation			(246)		(370)		(514)		(748)
Total selling, general and administrative expenses				(6,043)		(5,180)		(11,484)		(10,372)
				(2,850)		(2,428)		10,407		7,279
Gain on disposal of property and equipment				28		677		3,732		1,608
Earnings (loss) from operating activities				(2,822)		(1,751)		14,139		8,887
Foreign exchange gain (loss)				(315)		146		(54)		634
Finance costs				(513)		(381)		(1,086)		(816)
Earnings (loss) from continuing operations before income taxes				(3,650)		(1,986)		12,999		8,705
Income tax recovery (expense):
	Current			(892)		(237)		(1,647)		102
	Deferred			1,320		495		(1,946)		(2,623)
Total income tax recovery (expense)				428		258		(3,593)		(2,521)
Net earnings (loss) from continuing operations				(3,222)		(1,728)		9,406		6,184
Net earnings from discontinued operations				-		119		-		324
Net earnings (loss)				(3,222)		(1,609)		9,406		6,508
Other comprehensive income (loss):
	Foreign currency translation differences for foreign
		operations		940		(395)		293		(1,103)
Total comprehensive income (loss)			$	(2,282)	$	(2,004)	$	9,699	$	5,405
Net earnings (loss) from continuing operations per share
	Basic		$	(0.09)	$	(0.05)	$	0.25	$	0.17
	Diluted		$	(0.09)	$	(0.05)	$	0.25	$	0.16
Net earnings from discontinued operations per share
	Basic and diluted		$	-	$	-	$	-	$	0.01
Net earnings (loss)
	Basic		$	(0.09)	$	(0.04)	$	0.25	$	0.18
	Diluted		$	(0.09)	$	(0.04)	$	0.25	$	0.17

 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended June 30, 2012 and 2011
Dollars in '000s
(unaudited)

				2012		2011
Cash provided by (used in):
Operating activities:
	Net earnings from continuing operations		$	9,406	$	6,184
	Items not involving cash:
		Depreciation		9,109		7,144
		Total income tax expense		3,593		2,521
		Unrealized foreign exchange (gain) loss on intercompany balances		145		(574)
		Finance costs		1,086		816
		Share-based compensation		685		911
		Gain on disposal of property and equipment		(3,732)		(1,608)
	Cash flow from continuing operations			20,292		15,394
	Changes in non-cash operating working capital			41,950		6,043
	Income taxes paid			(3,013)		(671)
Cash flow from operating activities				59,229		20,766
Investing activities:
	Property and equipment additions			(18,487)		(25,567)
	Intangible asset additions			(677)		-
	Proceeds on disposal of property and equipment			6,388		2,556
	Proceeds on disposal of assets held for sale			-		3,793
	Changes in non-cash investing working capital			503		(1,436)
Cash flow from investing activities				(12,273)		(20,654)
Financing activities:
	Change in operating loan			(12,888)		(2,420)
	Interest paid			(1,094)		(663)
	Advances of loans and borrowings			-		5,000
	Repayments on loans and borrowings			(251)		(287)
	Proceeds on exercise of share options			786		1,991
	Repurchase of common shares			(50)		-
	Dividends paid			(5,048)		(4,426)
Cash flow from financing activities				(18,545)		(805)
Effect of exchange rate on changes in cash and cash equivalents				144		(20)
Change in cash and cash equivalents				28,555		(713)
Cash and cash equivalents, beginning of period				2,902		1,740
Cash and cash equivalents, end of period			$	31,457	$	1,027

 

Cathedral Energy Services Ltd. (the "Company" or "Cathedral") is incorporated under the Business Corporations Act (Alberta) (the "Act").  The Company is publicly traded on the Toronto Stock Exchange under the symbol "CET".  The Company together with its wholly owned subsidiary, Cathedral Energy Services Inc., is 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 U.S.  The Company is in the process of establishing operations in Venezuela for providing directional drilling services through a joint venture with Petroleros de Venezuela, S.A. ("PDVSA"), the state owned oil and gas corporation of the Bolivarian Republic of Venezuela.  The Company strives to provide its clients with value added technologies and solutions to meet their drilling and production testing requirements.  For more information, visit www.cathedralenergyservices.com.

 

SOURCE: Cathedral Energy Services Ltd.

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., 6030 3 Street S.E., Calgary, Alberta T2H 1K2

Telephone:  [phone] Fax:  [phone]   www.cathedralenergyservices.com