Cathedral Energy Services Ltd. Reports Results for 2012 Q3 and 2012 Q4 Dividend
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, Nov. 6, 2012 /CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" /TSX: CET) is pleased to report its results for 2012 Q3 and 2012 Q4 dividend.
| FINANCIAL HIGHLIGHTS | ||||||||||
| Dollars in 000's except per share amounts | ||||||||||
| Three months ended September 30 | Nine months ended September 30 | |||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||
| Revenues | $ | 49,830 | $ | 63,409 | $ | 158,358 | $ | 150,004 | ||
| Adjusted gross margin % (1) | 28.0% | 34.9% | 28.3% | 31.3% | ||||||
| EBITDAS (1) | $ | 10,538 | $ | 17,666 | $ | 34,562 | $ | 35,117 | ||
| Diluted per share | $ | 0.28 | $ | 0.47 | $ | 0.91 | $ | 0.92 | ||
| EBITDAS (1) as % of revenues | 21.1% | 27.9% | 21.8% | 23.4% | ||||||
| Funds from continuing operations (1) | $ | 8,039 | $ | 16,701 | $ | 26,684 | $ | 32,197 | ||
| Diluted per share | $ | 0.21 | $ | 0.44 | $ | 0.70 | $ | 0.85 | ||
| Net earnings | $ | 3,813 | $ | 8,575 | $ | 13,219 | $ | 15,083 | ||
| Basic per share | $ | 0.10 | $ | 0.23 | $ | 0.35 | $ | 0.41 | ||
| Diluted per share | $ | 0.10 | $ | 0.23 | $ | 0.35 | $ | 0.40 | ||
| Dividends declared per share | $ | 0.075 | $ | 0.060 | $ | 0.225 | $ | 0.180 | ||
| Property and equipment additions | $ | 5,229 | $ | 11,774 | $ | 23,716 | $ | 37,341 | ||
| Weighted average shares outstanding | ||||||||||
| Basic (000s) | 37,455 | 37,119 | 37,432 | 37,009 | ||||||
| Diluted (000s) | 37,721 | 37,877 | 37,861 | 38,073 | ||||||
| September 30 | December 31 | |||||||||
| 2012 | 2011 | |||||||||
| Working capital | $ | 35,546 | $ | 40,052 | ||||||
| Total assets | $ | 231,387 | $ | 231,923 | ||||||
| Loans and borrowings excluding current portion | $ | 45,986 | $ | 50,694 | ||||||
| Total shareholders' equity | $ | 141,106 | $ | 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; Cathedral expects to add 11 MWD systems and 7 production testing units in 2012; introduction of new technologies; significant increase in activity levels in Northeast, Houston and Oklahoma 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 September 30 | Nine months ended September 30 | |||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||
| Gross margin | $ | 9,299 | $ | 17,946 | $ | 31,190 | $ | 35,597 | ||
| Add non-cash items included in cost of sales: | ||||||||||
| Depreciation | 4,614 | 4,105 | 13,408 | 11,172 | ||||||
| Share-based compensation | 44 | 82 | 215 | 245 | ||||||
| Adjusted gross margin | $ | 13,957 | $ | 22,133 | $ | 44,813 | $ | 47,014 | ||
| Adjusted gross margin % | 28.0% | 34.9% | 28.3% | 31.3% | ||||||
| EBITDAS | |||||||||||
| Three months ended September 30 | Nine months ended September 30 | ||||||||||
| 2012 | 2011 | 2012 | 2011 | ||||||||
| Earnings from continuing operations before income taxes | $ | 5,348 | $ | 11,741 | $ | 18,347 | $ | 20,446 | |||
| Add (deduct): | |||||||||||
| Gain on dispoal of property and equipment from discontinued operations | - | - | - | 449 | |||||||
| Depreciation included in cost of sales | 4,614 | 4,105 | 13,408 | 11,172 | |||||||
| Depreciation included in selling, general and administrative expenses | 163 | 41 | 478 | 118 | |||||||
| Share-based compensation included in cost of sales | 44 | 82 | 215 | 245 | |||||||
| Share-based compensation included in selling, general and administrative expenses | 256 | 357 | 770 | 1,105 | |||||||
| Unrealized foreign exchange (gain) loss on intercompany balances | (378) | 868 | (233) | 294 | |||||||
| Finance costs | 491 | 472 | 1,577 | 1,288 | |||||||
| EBITDAS | $ | 10,538 | $ | 17,666 | $ | 34,562 | $ | 35,117 | |||
| Funds from continuing operations | |||||||||||
| Three months ended September 30 | Nine months ended September 30 | ||||||||||
| 2012 | 2011 | 2012 | 2011 | ||||||||
| Cash flow from operating activities | $ | (2,512) | $ | (2,596) | $ | 56,717 | $ | 18,170 | |||
| Add (deduct): | |||||||||||
| Changes in non-cash operating working capital | 11,532 | 19,030 | (30,418) | 12,987 | |||||||
| Income taxes paid | (214) | 520 | 2,799 | 1,191 | |||||||
| Current tax expense | (767) | (253) | (2,414) | (151) | |||||||
| Funds from continuing operations | $ | 8,039 | $ | 16,701 | $ | 26,684 | $ | 32,197 | |||
OVERVIEW
The Company completed 2012 Q3 with quarterly revenues of $49,830 and year-to-date revenues of $158,358 compared to 2011 Q3 revenues of $63,409 and 2011 year-to-date revenues of $150,004. Year-to-date revenues have increased 6% from 2011. The 2012 Q3 revenues were comprised of 72% (2011 Q3 - 75%) from the directional drilling division; 24% (2011 Q3 - 25%) from the production testing division; and 4% (2011 Q3 - 0%) from international resale and rentals.
2012 Q3 EBITDAS was $10,538 ($0.28 per share diluted) which represents a $7,128 decrease or 40% decrease from 2011 Q3 EBITDAS of $17,666 ($0.47 per share diluted). For the three months ended September 30, 2012, the Company's net earnings were $3,813 ($0.10 per share diluted) as compared to $8,575 ($0.23 per share diluted) in 2011.
2012 year-to-date EBITDAS was $34,562 ($0.91 per share diluted) which represents a $555 or 2% decrease from $35,117 ($0.92 per share diluted) in 2011. On a 2012 year-to-date basis, the Company's net income was $13,219 ($0.35 per share diluted) as compared to a $15,083 ($0.40 per share diluted) in 2011.
| RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2012 | |||||||||||||||
| Three months ended September 30, 2012 | Three months ended September 30, 2011 | ||||||||||||||
| Directional | Production | Resale and | Directional | Production | |||||||||||
| Revenues | drilling | testing | rental | Total | drilling | testing | Total | ||||||||
| Canada | $ | 21,621 | $ | 5,272 | $ | - | $ | 26,893 | $ | 34,732 | $ | 8,837 | $ | 43,569 | |
| United States | 13,926 | 6,793 | - | 20,719 | 13,125 | 6,715 | 19,840 | ||||||||
| International | - | - | 2,218 | 2,218 | - | - | - | ||||||||
| Total | $ | 35,547 | $ | 12,065 | $ | 2,218 | $ | 49,830 | $ | 47,857 | $ | 15,552 | $ | 63,409 | |
Revenues and gross margin 2012 Q3 revenues were $49,830 which represented a decrease of $13,579 or 21% from 2011 Q3 revenues of $63,409. The decrease was primarily attributed to slow down of drilling and completions work in the Canadian market.
The directional drilling division revenues have decreased from $47,857 in 2011 Q3 to $35,547 in 2012 Q3. This decrease was the result of a net: i) 28% decrease in activity days from 4,543 in 2011 Q3 to 3,255 in 2012 Q3; and ii) 4% increase in the average day rate from $10,534 in 2011 Q3 to $10,921 in 2012 Q3. On a year-over-year basis, Canadian day rates have increased 6% 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 4% when converted to Canadian dollars mainly due to the change in types of drilling work performed. Canadian activity days decreased from 3,200 to 1,885 and U.S. activity days increased from 1,343 to 1,370. Canadian activity days were negatively affected by the annual "spring breakup" in 2012 which was extended due to wet weather into July, as well as lower rig counts and the reduction of drilling activity in 2012 Q3 after breakup. The U.S. activity days increased in the northeast and in Texas, but this was offset by modest declines in the Rocky Mountain region.
The Company's production testing division contributed $12,065 in revenues during 2012 Q3 which was a 22% decrease from 2011 revenues of $15,552. This decrease is attributable to the decline in the level of well completions in 2012 Q3.
The gross margin for 2012 Q3 was 18.7% compared to 28.3% in 2011 Q3. Cost of sales includes the non-cash expenses for a portion of depreciation and share-based compensation and these non-cash expenses total $4,658 for 2012 Q3 and $4,187 for 2011 Q3. The adjusted gross margin (which excludes non-cash expenses) was $13,957 (28.0%) for 2012 Q3 compared to $22,133 (34.9%) for 2011 Q3. The gross margin for 2012 Q3 includes equipment purchased for resale in the international market and the margin on these goods was lower than for drilling and production testing services. The remaining decline in adjusted gross margin is mainly the result of costs for non-field staff that are fixed in nature, which combined with the decline in revenues results in a lower gross margin and adjusted gross margin. The Company expects operating levels to rebound in 2013 and therefore has maintained its non-field staff levels to meet those expected demands. These increases were offset by declines in variable compensation and rent.
Depreciation allocated to cost of sales increased from $4,105 in 2011 Q3 to $4,614 in 2012 Q3 due to capital additions in the period from 2011 Q3 to 2012 Q3. Depreciation included in cost of sales as a percentage of revenue was 9% for 2012 Q3 and 6% for 2011 Q3.
For 2012 Q3 the Company had share-based compensation included in cost of sales of $75 compared to $82 recognized in 2011 Q3. The fair value of the related options is being amortized against income over the three-year vesting periods.
Selling, general and administrative expenses ("SG&A") SG&A expenses were $5,651 in 2012 Q3; a decrease of $139 compared with $5,790 in 2011 Q3. As a percentage of revenue, these costs were 11% in 2012 Q3 and 9% in 2011 Q3. SG&A includes the non-cash expenses for a portion of depreciation and share-based compensation. These non-cash expenses total $419 for 2012 Q3 and $398 for 2011 Q3. SG&A net of these non-cash items were $5,232 in 2012 Q3 and $5,392 in 2011 Q3, a decrease of $160. Staffing costs had a net decrease of $108; this net change was primarily related to decreases in variable compensation which was offset by staff positions added to accommodate growth that occurred in 2011 Q4 and 2012 Q1 and wage increases for existing staff. 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 SG&A expenses resulted in a net decrease of $52 and relate to various net changes none of which are individually significant.
Depreciation allocated to SG&A increased from $41 in 2011 Q3 to $163 in 2012 Q3 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 Q3 the Company had share-based compensation included in SG&A of $256 compared to $357 recognized in 2011 Q3. The fair value of the related options is being amortized against income over the three-year vesting periods.
Gain on disposal of property and equipment During 2012 Q3 the Company had a gain on disposal of property and equipment of $1,732, compared to $712 in 2011 Q3. 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 changed from a loss of $655 in 2011 Q3 to a gain of $459 in 2012 Q3 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 Q3 foreign currency gain are unrealized gains of $378 (2011 Q3 - $868 loss) related to intercompany balances.
Finance costs Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $491 for 2012 Q3 versus $472 for 2011 Q3. 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 the Company's operating loans, due to a decline in utilization.
Income tax For 2012 Q3, the Company had an income tax expense of $1,535 compared to $3,171 in 2011 Q3. The 2012 Q3 provision consists of current tax expense of $767 (2011 Q3 - $253) and a deferred tax expense of $768 (2011 Q3 - $2,918). The effective tax rate was 29% for 2012 Q3 and 27% 2011 Q3.
| RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2012 | |||||||||||||||
| Nine months ended September 30, 2012 | Nine months ended September 30, 2011 | ||||||||||||||
| Directional | Production | Resale and | Directional | Production | |||||||||||
| Revenues | drilling | testing | rental | Total | drilling | testing | Total | ||||||||
| Canada | $ | 65,655 | $ | 24,025 | $ | - | $ | 89,680 | $ | 75,794 | $ | 21,291 | $ | 97,085 | |
| United States | 44,821 | 21,639 | - | 66,460 | 35,635 | 17,284 | 52,919 | ||||||||
| International | - | - | 2,218 | 2,218 | - | - | - | ||||||||
| Total | $ | 110,476 | $ | 45,664 | $ | 2,218 | $ | 158,358 | $ | 111,429 | $ | 38,575 | $ | 150,004 | |
Revenues and gross margin 2012 revenues were $158,358 which represented an increase of 8,354 or 6% from 2011 revenues of $150,004. The net increase was due to a number of factors including, the first international equipment sales, the robust drilling activity in 2012 Q1, expansion of operating bases in the U.S. and day rate pricing increases for all divisions.
The directional drilling division revenues have decreased from $111,429 in 2011 to $110,476 in 2012. This decrease is the result of: i) a 9% decrease in activity days from 10,652 in 2011 to 9,685 in 2012; net of ii) an 9% increase in the average day rate from $10,461 in 2011 to $11,407 in 2012. On a year-over-year basis, Canadian day rates have increased 12% due to general rate increases. U.S. day rates have increased 8% when converted to Canadian dollars. The U.S. day rates have increased 5% in U.S. dollars, mainly due to the change in types of drilling work performed in 2012. Canadian activity days decreased from 6,980 in 2011 to 5,400 in 2012 and U.S. activity days increased from 3,672 in 2011 to 4,285 in 2012. Canadian activity days were negatively affected by the annual "spring breakup" in 2012 which started earlier than on average and was extended due to wet weather into July and the reduction of drilling activity in 2012 Q3 as customers reduced their capital programs. U.S. activity days were up in all of the Company's U.S. operating areas.
The Company's production testing division contributed $45,664 in revenues during 2012 which is an 18% increase over 2011 revenues of $38,575. This increase is attributable to the overall increase in testing units from an average of 57 in 2011 Q3 to 65 for 2012 Q3, increased equipment utilization, expansion of the customer base and further expansion into the North Dakota Bakken oil play.
The gross margin for 2012 was 19.7% compared to 23.7% 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 $13,623 for 2012 and $11,417 for 2011. Adjusted gross margin for 2012 is $44,813 (28.3%) compared to $47,014 (31.3%) for 2011. The gross margin for 2012 includes equipment purchased for resale in the international market and the margin on these goods was lower than for drilling and production testing services. The remaining decline in adjusted gross margin is a result of higher costs for accommodation and non-field staff salaries. Despite Cathedral's highly variable field cost structure, non-field salaries are of a fixed nature and therefore when the Company's revenue declines, such costs become a higher percentage of revenues. These increases were offset by declines in variable compensation and rent.
Depreciation allocated to cost of sales increased from 11,172 in 2011 to $13,408 in 2012 due to capital additions. Depreciation included in cost of sales as a percentage of revenue was 8% in 2012 and 7% in 2011.
For 2012 the Company had share-based compensation included in cost of sales of $246 compared to $245 recognized in 2011. The value of the related options is being amortized against income over the three-year vesting periods.
Selling, general and administrative expenses ("SG&A") SG&A were $17,135 in 2012; an increase of $973 compared with $16,162 in 2011. As a percentage of revenue, these costs were 11% in both 2012 and 2011. SG&A includes the non-cash expenses for a portion of depreciation and share-based compensation. These non-cash expenses total $1,248 for 2012 and $1,223 for 2011. SG&A net of these non-cash items were $15,887 for 2012 and $14,939 for 2011, an increase of $948. Staffing costs increased $798; this increase was primarily related to staff positions added to accommodate growth that occur in 2011 Q4 and 2012 Q1, wage increases for existing staff as well as decreases 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 $190 primarily related to higher coverage levels compared to 2011. These increases were offset by a decrease in office rent of $230 due to the move of most of Calgary operations to the 6030 Campus and reductions in rents in other locations. The remaining increase of $190 relates to several items, none of which was significant individually.
Depreciation allocated to SG&A increased from $118 in 2011 to $478 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 $770 compared to $1,105 recognized in 2011. The value of the related 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 $5,464 compared to $2,320 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 was a loss of $21 in 2011 compared to a gain of $405 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 gains of $233 (2011 - $294 loss) related to intercompany balances.
Finance costs Finance costs which consist of interest expenses on operating loan, loans and borrowings and bank charges were $1,577 for 2012 and $1,288 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 $5,128 as compared to $5,692 in 2011. The 2012 provision consists of current tax expense of $2,414 (2011 - $151) and a deferred tax expense of $2,714 (2011 - $5,541). The effective tax rate is 28% for both 2012 and 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 September 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 $841 (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 $45,000 was drawn as at September 30, 2012 (December 31, 2011 - $50,000). In addition, at September 30, 2012, the Company had finance lease liabilities of $1,676 (December 31, 2011 - $1,492) and other long-term debt of $nil (December 31, 2011 - $5).
Operating activities For the nine months ended September 30, 2012, cash flows from operating activities were $56,717 as compared to $18,170 for the comparative 2011 period, which was an increase of $38,547 or 212%. Cash flow from operating activities for the nine months ended September 30, 2012 includes $30,418 source of funds (2011 - $12,987 use of funds) related to changes in non-cash working capital. The Company had a working capital position at September 30, 2012 of $35,546 compared to $40,052 at December 31, 2011. Included in the $16,288 of cash and cash equivalents is $14,063 from international subsidiaries. The cash related to international subsidiaries relates mainly to cash received for international equipment purchases which is classified as deferred revenue.
Funds from continuing operations (see Non-GAAP Measurements) for the nine months ended September 30, 2012 were $26,684 compared to $32,197 for the same period in 2011, which was a decrease of $5,513. This decrease was caused mainly by the decrease in earnings (excluding non-cash items).
Investing activities Cash used in investing activities for the nine months ended September 30, 2012 amounted to $16,690 compared to $27,781 for the 2011 comparative period. During 2012 the Company invested an additional $24,393 (2011 - $37,341) in property and equipment and intangible assets. The main 2012 Q3 year-to-date additions were 7 MWD systems, replacement of downhole tools that were lost-in-hole, 7 production testing units, auxiliary production testing equipment and maintenance capital of $5,700. 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 $9,958 during the nine months ended September 30, 2012 (2011 - $7,631 including proceeds on assets held for sale). The Company had a cash investment in an equity accounted investee of $2,472 for the nine months ended September 30, 2012 (2011 - $nil). For the nine months ended September 30, 2012 Cathedral had a source of funds by way of non-cash investing working capital in the amount of $217 (2011 - $1,929); 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:
| September 30 | December 31 | September 30 | |
| 2012 | 2011 | 2011 | |
| Directional drilling - MWD systems (1) | 132 | 125 | 123 |
| Production testing units | 69 | 62 | 62 |
| (1) Net of 10 systems that have been removed from service. |
Financing activities Cash used by financing activities for the nine months ended September 30, 2012 amounted to $26,476 as compared to a source of funds of $9,285 during the 2011 comparative period. During the nine months ended September 30, 2012 the Company made interest payments of $1,601 compared to $1,559 in 2011. Repayments on operating loans for the same period in 2012 were $12,128 (2011 - advances of $8,794). The Company received $nil advances of long-term debt (2011 - $7,000). Cathedral made payments on loans and borrowings of $5,376 during the nine months ended September 30, 2012 (2011 - $446). The Company made payments of dividends of $7,861 for the nine months ended September 30, 2012 (2011 - $6,653). Increased dividend payments relate to the increase in the quarterly dividend from $0.06 per share to $0.075 per share effective 2012 Q1. During the same period the Company received proceeds on the exercise of share options of $1,074 (2011 - $2,149) and made repurchases of 107,115 (2011- nil) of its own shares under its normal course issuer bid of $584 (2011 - $nil). As at September 30, 2012, the Company was in compliance with all covenants under its credit facility. At November 6, 2012, the Company has 37,522,503 common shares and 3,096,736 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 news release for the year ended December 31, 2011. As at September 30, 2012, the Company had a commitment to purchase approximately $4,063 of property and equipment and equipment for resale. Cathedral anticipates expending these funds in 2012 Q4 and 2013 Q1.
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) 11 MWD and related mud motors and collars to complement the increased job capability; ii) 7 frac-flowback production testing units and auxiliary production testing equipment to complement the overall fleet; and iii) $7,900 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 September 30, 2012, Cathedral has spent or committed to spend approximately $24,000 of its capital budget. 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 Q4 dividend in the amount of $0.075 per share which will have a date of record of December 31, 2012 and a payment date of January 15, 2013.
OUTLOOK
The Canadian operations of oilfield service companies, including Cathedral, were affected by a weak third quarter. The reduction in Q3 Canadian activity levels can be attributed a "spring breakup" that extended in July due to wet weather and the June decline in commodity prices that resulted in producers suspending and/or cutting back their capital programs as they reviewed their cash flows and balance sheets. Despite recovering oil prices and, to a degree, natural gas prices, activity levels in the Canadian market have been significantly reduced from levels of 2011 Q3 and Q4. Producers remain focused on their balance sheets with many limiting capital expenditures to their cash flows. In addition, producers have had limited access to the capital markets to fund their capital programs.
The Company's U.S. activity levels have been less affected than those in Canada due to market share gains in the Marcellus region of the U.S. Cathedral has had success in growing this region due to the performance of its technologies. Cathedral is expecting Canadian activity levels to grow significantly in Q1 2013 over 2012 Q3 and Q4 levels as customers have replenished capital budgets. Cathedral has recently expanded its marketing teams in both Canada and U.S. and expects to see results of this to begin showing in 2013.
Cathedral has set up an operations base in Oklahoma City and to date we have hired sales and operating staff. Our first field activity in this area began in 2012 Q3 and is expected to grow in 2012 Q4. The Company continues to see significant upside in the U.S. market for both operating divisions; in particular in the Texas and Oklahoma regions.
The Company continues its rollout of its proprietary "CAT downhole mud motor". After over 150 runs on the proprietary motor design, the Company is extremely pleased as performance has exceeded expectations. Operating costs to date have been in line with expectations and should result in significant cost savings as the motor fleet is converted over to the in-house design.
The Company continues to move forward with the startup of its Venezuela operations. With the near completion of the final agreements and the movement of equipment into the country, Cathedral continues to focus on being prepared for its first field operations.
| CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION | ||||||
| September 30, 2012 and December 31, 2011 Dollars in '000s (unaudited) |
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| September 30 | December 31 | |||||
| 2012 | 2011 | |||||
| Assets | ||||||
| Current assets: | ||||||
| Cash and cash equivalents | $ | 16,288 | $ | 2,902 | ||
| Trade receivables | 40,263 | 65,568 | ||||
| Prepaid expenses | 7,945 | 2,217 | ||||
| Inventories | 13,828 | 13,278 | ||||
| Current taxes recoverable | 371 | - | ||||
| Total current assets | 78,695 | 83,965 | ||||
| Property and equipment | 133,133 | 129,929 | ||||
| Intangible assets | 729 | 230 | ||||
| Deferred tax assets | 9,213 | 11,951 | ||||
| Investment in equity accounted investee | 3,769 | - | ||||
| Goodwill | 5,848 | 5,848 | ||||
| Total non-current assets | 152,692 | 147,958 | ||||
| Total assets | $ | 231,387 | $ | 231,923 | ||
| Liabilities and shareholders' equity | ||||||
| Current liabilities: | ||||||
| Operating loan | $ | 841 | $ | 12,797 | ||
| Trade and other payables | 23,823 | 28,046 | ||||
| Dividends payable | 2,810 | 2,238 | ||||
| Loans and borrowings | 690 | 803 | ||||
| Deferred revenue | 14,985 | - | ||||
| Current taxes payable | - | 29 | ||||
| Total current liabilities | 43,149 | 43,913 | ||||
| Loans and borrowings | 45,986 | 50,694 | ||||
| Deferred tax liabilities | 1,146 | 1,209 | ||||
| Total non-current liabilities | 47,132 | 51,903 | ||||
| Shareholders' equity: | ||||||
| Share capital | 75,321 | 74,208 | ||||
| Contributed surplus | 8,576 | 7,845 | ||||
| Accumulated other comprehensive loss | (3,403) | (2,141) | ||||
| Retained earnings | 60,612 | 56,195 | ||||
| Total shareholders' equity | 141,106 | 136,107 | ||||
| Total liabilities and shareholders' equity | $ | 231,387 | $ | 231,923 | ||
| CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME | |||||||||||
| Three and nine months ended September 30, 2012 and 2011 Dollars in '000s except per share amounts (unaudited) |
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| Three months ended September 30 | Nine months ended September 30 | ||||||||||
| 2012 | 2011 | 2012 | 2011 | ||||||||
| Revenues | $ | 49,830 | $ | 63,409 | $ | 158,358 | $ | 150,004 | |||
| Cost of sales: | |||||||||||
| Direct costs | (35,842) | (41,276) | (113,514) | (102,990) | |||||||
| Depreciation | (4,614) | (4,105) | (13,408) | (11,172) | |||||||
| Share-based compensation | (75) | (82) | (246) | (245) | |||||||
| Total cost of sales | (40,531) | (45,463) | (127,168) | (114,407) | |||||||
| Gross margin | 9,299 | 17,946 | 31,190 | 35,597 | |||||||
| Selling, general and administrative expenses: | |||||||||||
| Direct costs | (5,232) | (5,392) | (15,887) | (14,939) | |||||||
| Depreciation | (163) | (41) | (478) | (118) | |||||||
| Share-based compensation | (256) | (357) | (770) | (1,105) | |||||||
| Total selling, general and administrative expenses | (5,651) | (5,790) | (17,135) | (16,162) | |||||||
| 3,648 | 12,156 | 14,055 | 19,435 | ||||||||
| Gain on disposal of property and equipment | 1,732 | 712 | 5,464 | 2,320 | |||||||
| Earnings from operating activities | 5,380 | 12,868 | 19,519 | 21,755 | |||||||
| Foreign exchange gain (loss) | 459 | (655) | 405 | (21) | |||||||
| Finance costs | (491) | (472) | (1,577) | (1,288) | |||||||
| Earnings from continuing operations before income taxes | 5,348 | 11,741 | 18,347 | 20,446 | |||||||
| Income tax expense: | |||||||||||
| Current | (767) | (253) | (2,414) | (151) | |||||||
| Deferred | (768) | (2,918) | (2,714) | (5,541) | |||||||
| Total income tax expense | (1,535) | (3,171) | (5,128) | (5,692) | |||||||
| Net earnings from continuing operations | 3,813 | 8,570 | 13,219 | 14,754 | |||||||
| Net earnings from discontinued operations | - | 5 | - | 329 | |||||||
| Net earnings | 3,813 | 8,575 | 13,219 | 15,083 | |||||||
| Other comprehensive income (loss): | |||||||||||
| Foreign currency translation differences for foreign operations | (1,555) | 2,030 | (1,262) | 927 | |||||||
| Total comprehensive income | $ | 2,258 | $ | 10,605 | $ | 11,957 | $ | 16,010 | |||
| Net earnings from continuing operations per share | |||||||||||
| Basic | $ | 0.10 | $ | 0.23 | $ | 0.35 | $ | 0.40 | |||
| Diluted | $ | 0.10 | $ | 0.23 | $ | 0.35 | $ | 0.39 | |||
| Net earnings from discontinued operations per share | |||||||||||
| Basic and diluted | $ | - | $ | - | $ | - | $ | 0.01 | |||
| Net earnings | |||||||||||
| Basic | $ | 0.10 | $ | 0.23 | $ | 0.35 | $ | 0.41 | |||
| Diluted | $ | 0.10 | $ | 0.23 | $ | 0.35 | $ | 0.40 | |||
| CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS | ||||||
| Nine months ended September 30, 2012 and 2011 Dollars in '000s (unaudited) |
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| 2012 | 2011 | |||||
| Cash provided by (used in): | ||||||
| Operating activities: | ||||||
| Net earnings from continuing operations | $ | 13,219 | $ | 14,754 | ||
| Items not involving cash: | ||||||
| Depreciation | 13,886 | 11,290 | ||||
| Total income tax expense | 5,128 | 5,692 | ||||
| Unrealized foreign exchange (gain) loss on intercompany balances | (233) | 294 | ||||
| Finance costs | 1,577 | 1,288 | ||||
| Share-based compensation | 985 | 1,350 | ||||
| Gain on disposal of property and equipment | (5,464) | (2,320) | ||||
| Cash flow from continuing operations | 29,098 | 32,348 | ||||
| Changes in non-cash operating working capital | 30,418 | (12,987) | ||||
| Income taxes paid | (2,799) | (1,191) | ||||
| Cash flow from operating activities | 56,717 | 18,170 | ||||
| Investing activities: | ||||||
| Property and equipment additions | (23,716) | (37,341) | ||||
| Intangible asset additions | (677) | - | ||||
| Proceeds on disposal of property and equipment | 9,958 | 3,838 | ||||
| Proceeds on disposal of assets held for sale | - | 3,793 | ||||
| Investment in equity accounted investee | (2,472) | - | ||||
| Changes in non-cash investing working capital | 217 | 1,929 | ||||
| Cash flow from investing activities | (16,690) | (27,781) | ||||
| Financing activities: | ||||||
| Change in operating loan | (12,128) | 8,794 | ||||
| Interest paid | (1,601) | (1,559) | ||||
| Advances of loans and borrowings | - | 7,000 | ||||
| Repayments on loans and borrowings | (5,376) | (446) | ||||
| Proceeds on exercise of share options | 1,074 | 2,149 | ||||
| Repurchase of common shares | (584) | - | ||||
| Dividends paid | (7,861) | (6,653) | ||||
| Cash flow from financing activities | (26,476) | 9,285 | ||||
| Effect of exchange rate on changes in cash and cash equivalents | (165) | 376 | ||||
| Change in cash and cash equivalents | 13,386 | 50 | ||||
| Cash and cash equivalents, beginning of period | 2,902 | 1,740 | ||||
| Cash and cash equivalents, end of period | $ | 16,288 | $ | 1,790 | ||
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: 403.265.2560 Fax: 403.262.4682 www.cathedralenergyservices.com
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