Cathedral Energy Services Ltd. reports results for 2014 Q1 and 2014 Q2 dividend
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, May 7, 2014 /CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" /TSX: CET) announces its consolidated financial results for the three months ended March 31, 2014 and 2013. Dollars in 000's except per share amounts.
This news release contains "forward-looking statements" within the meaning of applicable Canadian securities laws. For a full disclosure of forward-looking statements and the risks to which they are subject, see "Forward-Looking Statements" later in this news release.
2014 Q1 KEY TAKEAWAYS
- 26% increase in consolidated revenues from 2013 Q1 to 2014 Q1;
- Market share gains by Canadian and U.S. directional drilling divisions with the U.S. division achieving record quarterly revenues; and
- 19% increase in net earnings.
2014 Q1 FINANCIAL SUMMARY
| Three months ended March 31 | |||||||
| 2014 | 2013 | ||||||
| Revenues | $ | 68,020 | $ | 54,074 | |||
| Adjusted gross margin % (1) | 20.6% | 24.7% | |||||
| EBITDAS (1) | $ | 8,581 | $ | 8,592 | |||
| Diluted per share | $ | 0.24 | $ | 0.23 | |||
| EBITDAS (1) as % of revenues | 12.6% | 15.9% | |||||
| Funds from operations (1) | $ | 8,120 | $ | 7,507 | |||
| Diluted per share | $ | 0.22 | $ | 0.20 | |||
| Net earnings | $ | 2,449 | $ | 2,059 | |||
| Basic per share | $ | 0.07 | $ | 0.06 | |||
| Diluted per share | $ | 0.07 | $ | 0.06 | |||
| Dividends declared per share | $ | 0.0825 | $ | 0.0750 | |||
| Property and equipment additions (cash) | $ | 9,917 | $ | 6,698 | |||
| Weighted average shares outstanding | |||||||
| Basic (000s) | 36,186 | 36,765 | |||||
| Diluted (000s) | 36,219 | 36,826 | |||||
| March 31 | December 31 | ||||||
| 2014 | 2013 | ||||||
| Working capital | $ | 27,518 | $ | 26,031 | |||
| Total assets | $ | 222,325 | $ | 205,375 | |||
| Loans and borrowings excluding current portion | $ | 43,608 | $ | 38,462 | |||
| Total shareholders' equity | $ | 126,689 | $ | 126,612 | |||
| (1) See "NON-GAAP MEASUREMENTS" |
OUTLOOK
Within the Canadian market, many factors, including improved natural gas prices, unprecedented natural gas storage withdrawals in both Canada and the U.S., a narrowing of the Canadian differentials for both oil and natural gas and a stronger U.S. dollar, have industry analysts expecting improved cash flow for oil and natural gas producers as we progress through 2014. That combined with improved access to equity markets has better positioned producers with balance sheets enabling them to accelerate capital programs. On a longer term basis, there is potential for a significant increase in spending in western Canada as producers realize higher netbacks from a combination of enhanced refining capacity, increased shipment of crude by rail, new and expanded oil pipelines together with development of proposed west coast liquefied natural gas terminals.
Based upon feedback from customers and activity levels as projected by industry analysts, post "spring breakup" we are expecting continued strong activity levels within the Canadian market. Cathedral is active in the key resource plays including the Montney, Bakken, Cardium and Viking plays.
Within the U.S. market industry analysts are expecting a year-over-year increase in capital spending with producers directing capital to oil and liquids targets. U.S. producers are expected to continue to expand the use of horizontal, multi-stage fracturing to complete conventional and unconventional oil and natural gas plays.
2014 Q1 activity for our U.S. directional drilling division was lower than anticipated but as we proceed further into 2014 we are expecting operating levels to increase as additional market share is achieved. Market share gains and margin improvements are expected in all operating areas. Cathedral's current activity is focused in the Permian, Eagle Ford, DJ Basin, Mississippian Lime, San Juan, Utica and Marcellus plays with additional work in Bakken, Woodford Shale, Granite Wash and Piceance Basin plays. Over the past 2 years Cathedral has expanded its U.S. physical and personnel infrastructure and is now expecting to leverage that infrastructure into improved financial results.
Cathedral's "Claw" series of the nDurance mud motor line has been introduced to the market and has been well received. The "Claw" is designed to operate at higher flow rates and has superior torque output than conventional power sections. This motor has significantly increased drilling rate of penetration ("ROP") which leads to reduced drilling time and costs for Cathedral's customers. In addition to including this motor as part of Cathedral's directional drilling service package, due to requests from customers, Cathedral has rented the "Claw" on a standalone basis. Cathedral's 2014 capital program includes further expansion of the fleet of "Claw" motors. At the end of 2014 Q1 Cathedral had 30 "Claw" motors and is building an additional 45 units in 2014 Q2.
For 2014, Cathedral's focus will remain on: i) increasing market share in both operating divisions and geographic areas; ii) enhancing profitability through managing costs; and iii) continued investment in research and development of proprietary technologies.
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 2014 Q2 dividend in the amount of $0.0825 per share which will have a date of record of June 30, 2014 and a payment date of July 15, 2014.
2014 CAPITAL PROGRAM
During 2014 Q1 the Company invested $9,917 (2013 Q1 - $6,698) in property and equipment. The following table details the current period's net property and equipment additions:
| Three months ended | ||||
| March 31, 2014 | ||||
| Property and equipment additions: | ||||
| Growth capital (1) | $ | 5,241 | ||
| Maintenance capital (1) | 3,410 | |||
| Replacement capital (1) | 436 | |||
| Infrastructure capital (1) | 830 | |||
| Total cash additions | 9,917 | |||
| Less: proceeds on disposal of property and equipment | (1,106) | |||
| Net property and equipment additions (1) | $ | 8,811 | ||
(1)See "NON-GAAP MEASUREMENTS"
The major additions for growth capital were $3,693 for additional drilling motors and related equipment for specific job requirements and $1,548 for additional ancillary production testing equipment to reduce future rental costs. Infrastructure capital relates to the construction of a new shop in Oklahoma which is expected to be operational in early 2015.
Cathedral's 2014 capital budget remains at $24,000 which includes $12,000 of growth capital, $8,000 of maintenance capital and $4,000 of infrastructure expenditures.
Cathedral intends to finance its 2014 capital budget from cash flow from operations and, if necessary, its existing credit facility.
The following is a summary of major equipment owned by the Company:
| March 31 | December 31 | March 31 | |
| 2014 | 2013 | 2013 | |
| Directional drilling - MWD systems (1) | 139 | 139 | 136 |
| Production testing units | 72 | 72 | 69 |
| (1) The Company has 10 Geolink MWD systems that have been excluded from the above figures as they are held for sale. |
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31
| Three months ended March 31, 2014 | Three months ended March 31, 2013 | ||||||||||||
| Directional | Production | Directional | Production | ||||||||||
| Revenues | drilling | testing | Total | drilling | testing | Total | |||||||
| Canada | $ | 28,790 | $ | 8,578 | $ | 37,368 | $ | 23,594 | $ | 7,766 | $ | 31,360 | |
| United States | 23,672 | 6,980 | 30,652 | 14,509 | 8,205 | 22,714 | |||||||
| Total | $ | 52,462 | $ | 15,558 | $ | 68,020 | $ | 38,103 | $ | 15,971 | $ | 54,074 | |
Revenues 2014 Q1 revenues were $68,020 which represented an increase of $13,946 or 26% from 2013 Q1 revenues of $54,074. All areas, other than U.S. production testing were up on a year-over-year basis.
Canadian directional drilling revenues increased from $23,594 in 2013 Q1 to $28,790 in 2014 Q1; a 22% increase. This increase was the result of: i) a 26% increase in activity days from 2,102 in 2013 Q1 to 2,649 in 2014 Q1; net of ii) a 3% decrease in the average day rate from $11,224 in 2013 Q1 to $10,868 in 2014 Q1. While overall industry activity levels increased marginally, Cathedral's was able to increase its activity levels by 26% due to market share gains. Such market share gains were the result of additional work for existing customers and the addition of new customers.
U.S. directional drilling revenues increased from $14,509 in 2013 Q1 to $23,672 in 2014 Q1; a 63% increase. This increase was the result of: i) a 41% increase in activity days from 1,329 in 2013 Q1 to 1,880 in 2014 Q1; and ii) a 15% increase in the average day rate from $10,917 in 2013 Q1 to $12,591 in 2014 Q1. The increase in U.S. activity days were due to further expansion in the Texas and Oklahoma markets, offset by reduced drilling in the U.S. northeast area within the existing customer base. The increased average day rate was due to a stronger U.S. dollar and higher rates that were achieved in the Rocky Mountain and Texas regions on jobs where the pricing was tied to performance. On a sequential basis, U.S. directional drilling revenues for 2014 Q1 are slightly over 2013 Q4 revenues of $23,536. U.S activity days are down on a sequential basis (2014 Q1 - 1,800 versus 2013 Q4 - 2,027) due to customers deferring the ramp up of their drilling programs.
Canadian production testing revenues increased from $7,766 in 2013 Q1 to $8,578 in 2014 Q1; a 10% increase. The Canadian operating days were up 10% compared to 2013 Q1, while rates were unchanged. 2013 Q1 activity levels were negatively affected by customers deferring work to later periods.
U.S. production testing revenues decreased from $8,205 in 2013 Q1 to $6,980 in 2014 Q1; a 15% decrease. This decrease is attributable a 20% decline in operating days, net of an increase in the average day rate of 7%. The average day rate increase is mainly attributed to a strengthening U.S. dollar. The year-over-year decline in revenue is attributable to a significant customer shifting work to a competitor in early 2013 Q4. There was work for new customers, but they did not make up for the lost customer.
Gross margin and adjusted gross margin The gross margin for 2014 Q1 was 14.0% compared to 15.9% in 2013 Q1. Adjusted gross margin (excludes non-cash expenses) for 2014 Q1 was $14,017 (20.6%) compared to $13,358 (24.7%) for 2013 Q1. The decrease in adjusted gross margin of 4.1% was primarily due to increase in equipment rentals and transportation costs in the U.S. in addition to increased MWD repairs on Canadian drilling operations.
Depreciation allocated to cost of sales decreased from $4,665 in 2013 Q1 to $4,464 in 2014 Q1. Depreciation included in cost of sales as a percentage of revenue was 6.6% for 2014 Q1 and 8.6% in 2013 Q1.
Selling, general and administrative expenses ("SG&A") SG&A expenses were $6,270 in 2014 Q1 which represents an increase of $699 when compared with $5,571 in 2013 Q1. As a percentage of revenue, these costs were 9% in 2014 Q1 and 10% in 2013 Q1. Non-cash expenses (depreciation and share-based compensation) total $143 for 2014 Q1 and $368 for 2013 Q1. Additionally 2013 Q1 SG&A included non-recurring items related to severance costs and a recovery of prior period SG&A related to Venezuelan operations. Excluding these non-cash and non-recurring items SG&A increased $324 ("adjusted SG&A").
Adjusted SG&A increased primarily due to wages, benefits and variable compensation. These increases relate to increased sales commissions, additions to sales staff to accommodate current and future U.S. growth and additions to research and development personnel. 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 in adjusted SG&A is attributable to i) increased rent due to the sale and leaseback of Alberta properties which closed in 2013 Q3; ii) consulting fees; iii) office, promotion and safety costs associated with expansion within our operating areas; net of iv) reductions in SG&A due to the wind up of activity in Venezuela.
Gain on disposal of property and equipment During 2014 Q1 the Company had a gain on disposal of property and equipment of $734 compared to $505 in 2013 Q1. 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 loss The Company had foreign exchange loss of $497 in 2014 Q1 compared to $280 in 2013 Q1 due to the fluctuations in the Canadian dollar compared to U.S. dollars. 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 2014 Q1 foreign currency loss are unrealized losses of $454 (2013 Q1 - $212) related to intercompany balances.
Finance costs Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $596 for 2014 Q1 versus $480 for 2013 Q1. The increase in finance costs relate mainly to an increased utilization of the Company's operating loan and to a lesser extent increases in interest rates.
Income tax For 2014 Q1, the Company had an income tax expense of $427 compared to $728 in 2013 Q1. The effective tax rate was 15% for 2014 Q1 and 26% for 2013 Q1. Income tax expense is booked based upon expected annualized effective rates.
LIQUIDITY AND CAPITAL RESOURCES
Overview On an annualized basis the Company's principal source of liquidity is cash generated from operations. In addition, the Company has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity. For the three months ended March 31, 2014, the Company had funds from operations of $8,120 (2013 Q1 - $7,507), property and equipment additions of $9,917 (2013 Q1 - $6,698), increase to operating loan of $5,425 (2013 Q1 - $15,796), advances on loans and borrowings of $5,000 (2013 Q1 - $nil) and payment of dividends of $2,984 (2013 Q1 - $2,768).
Working capital At March 31, 2014 the Company had a working capital position of $27,518 (December 31, 2013 - $26,031) and a working capital ratio of 1.54 to 1 (December 31, 2013 - 1.66 to 1).
Credit facility The Company has a $20,000 demand operating line of credit with a major Canadian bank that bears interest, at the Company's option, at the bank's prime rate plus 0.50% to 2.00% or bankers' acceptance rate plus 1.75% to 3.25% with interest payable monthly and is secured as described in note 14 of the audited consolidated financial statements. Interest rates spreads for the credit facility will depend on the level of funded debt to EBITDA (earnings before interest on long-term debt, taxes, depreciation, amortization and non-cash compensation expense - as defined in the credit agreement).
The Company also has a secured revolving term loan with a major Canadian bank at an authorized amount of $55,000, bearing interest at the bank's prime rate plus 0.50% to 2.00% or bankers' acceptance rate plus 1.75% to 3.25%, without repayment terms, maturing June 30, 2014 subject to an annual extension upon agreement between the borrower and the bank for a further one-year period. Interest rates spreads for the credit facility will depend on the level of funded debt to EBITDA (earnings before interest on long-term debt, taxes, depreciation, amortization and non-cash compensation expense - as defined in the credit agreement). Prior to maturity the borrower may convert its revolving term loan to a non-revolving term loan repayable monthly over 36 months with interest only for the first 12 months. The Company's credit facility includes a $35,000 accordion feature which is subject to approval of the Company's bank.
The credit facility is secured by a general security agreement over all present and future personal property and is subject to certain covenants regarding the payment of dividends and the maintenance of certain financial ratios. As at December 31, 2013, the Company is in compliance with all covenants under its credit facility.
The following table outlines the current credit facility:
| March 31 | December 31 | |||||||
| 2014 | 2013 | |||||||
| Available credit facility | $ | 75,000 | $ | 75,000 | ||||
| Drawings on credit facility: | ||||||||
| Operating loan | 15,506 | 10,119 | ||||||
| Revolving term loan | 42,000 | 37,000 | ||||||
| Letter of credit | 700 | 700 | ||||||
| Total drawn facility | $ | 58,206 | $ | 47,819 | ||||
| Borrowing capacity (see NON-GAAP MEASUREMENTS) | $ | 16,794 | $ | 27,181 | ||||
| Net debt (see NON-GAAP MEASUREMENTS): | ||||||||
| Loans and borrowings, net of current portion | $ | 43,608 | $ | 38,462 | ||||
| Working capital: | ||||||||
| Current assets | $ | 78,634 | $ | 65,409 | ||||
| Current liabilities | (51,116) | (39,378) | ||||||
| Working capital | $ | 27,518 | $ | 26,031 | ||||
| Net debt | $ | 16,090 | $ | 12,431 | ||||
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, 2013. As at March 31, 2014, the Company had a commitment to purchase approximately $3,168 of equipment. Cathedral anticipates expending these funds in 2014 Q2 and Q3.
Share capital At May 7, 2014, the Company has 36,252,380 common shares and 1,246,529 share options outstanding with a weighted average exercise price of $7.07.
The Normal Course Issuer Bid was renewed on July 8, 2013 and has an expiry date of July 7, 2014. For the three months ended March 31, 2014, the Company did not repurchase and cancel common shares.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
March 31, 2014 and 2013
Dollars in '000s
(unaudited)
| March 31 | December 31 | ||||
| 2014 | 2013 | ||||
| Assets | |||||
| Current assets: | |||||
| Cash and cash equivalents | $ | 738 | $ | 289 | |
| Trade receivables | 58,723 | 46,400 | |||
| Current taxes recoverable | 1,746 | 1,473 | |||
| Prepaid expenses | 2,616 | 3,334 | |||
| Inventories | 14,811 | 13,913 | |||
| Total current assets | 78,634 | 65,409 | |||
| Property and equipment | 127,961 | 123,487 | |||
| Intangible assets | 1,472 | 1,474 | |||
| Deferred tax assets | 8,410 | 9,157 | |||
| Goodwill | 5,848 | 5,848 | |||
| Total non-current assets | 143,691 | 139,966 | |||
| Total assets | $ | 222,325 | $ | 205,375 | |
| Liabilities and Shareholders' Equity | |||||
| Current liabilities: | |||||
| Operating loan | $ | 15,506 | $ | 10,119 | |
| Trade and other payables | 28,434 | 22,236 | |||
| Dividends payable | 2,985 | 2,984 | |||
| Loans and borrowings | 744 | 722 | |||
| Deferred revenue | 3,447 | 3,317 | |||
| Total current liabilities | 51,116 | 39,378 | |||
| Loans and borrowings | 43,608 | 38,462 | |||
| Deferred tax liabilities | 912 | 923 | |||
| Total non-current liabilities | 44,520 | 39,385 | |||
| Total liabilities | 95,636 | 78,763 | |||
| Shareholders' equity: | |||||
| Share capital | 73,974 | 73,850 | |||
| Contributed surplus | 9,171 | 9,065 | |||
| Accumulated other comprehensive income | 1,622 | 1,239 | |||
| Retained earnings | 41,922 | 42,458 | |||
| Total shareholders' equity | 126,689 | 126,612 | |||
| Total liabilities and shareholders' equity | $ | 222,325 | $ | 205,375 | |
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Three months ended March 31, 2014 and 2013
Dollars in '000s except per share amounts
(unaudited)
| Three months ended March 31 | |||||||
| 2014 | 2013 | ||||||
| Revenues | $ | 68,020 | $ | 54,074 | |||
| Cost of sales: | |||||||
| Direct costs | (54,003) | (40,716) | |||||
| Depreciation | (4,464) | (4,665) | |||||
| Share-based compensation | (48) | (76) | |||||
| Total cost of sales | (58,515) | (45,457) | |||||
| Gross margin | 9,505 | 8,617 | |||||
| Selling, general and administrative expenses: | |||||||
| Direct costs | (6,127) | (5,203) | |||||
| Depreciation | (61) | (157) | |||||
| Share-based compensation | (82) | (211) | |||||
| Total selling, general and administrative expenses | (6,270) | (5,571) | |||||
| 3,235 | 3,046 | ||||||
| Gain on disposal of property and equipment | 734 | 505 | |||||
| Earnings from operating activities | 3,969 | 3,551 | |||||
| Foreign exchange loss | (497) | (280) | |||||
| Finance costs | (596) | (480) | |||||
| Share of loss of associate | - | (4) | |||||
| Earnings before income taxes | 2,876 | 2,787 | |||||
| Income tax recovery (expense): | |||||||
| Current | 273 | (580) | |||||
| Deferred | (700) | (148) | |||||
| Total income tax expense | (427) | (728) | |||||
| Net earnings | 2,449 | 2,059 | |||||
| Other comprehensive income: | |||||||
| Foreign currency translation differences for foreign operations | 383 | 705 | |||||
| Total comprehensive income | $ | 2,832 | $ | 2,764 | |||
| Net earnings per share | |||||||
| Basic | $ | 0.07 | $ | 0.06 | |||
| Diluted | $ | 0.07 | $ | 0.06 | |||
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three months ended March 31, 2014 and 2013
Dollars in '000s
(unaudited)
| Three months ended March 31 | ||||||
| 2014 | 2013 | |||||
| Cash provided by (used in): | ||||||
| Operating activities: | ||||||
| Net earnings | $ | 2,449 | $ | 2,059 | ||
| Items not involving cash: | ||||||
| Depreciation | 4,525 | 4,822 | ||||
| Total income tax expense | 427 | 728 | ||||
| Unrealized foreign exchange loss on intercompany balances | 454 | 212 | ||||
| Finance costs | 596 | 480 | ||||
| Share-based compensation | 130 | 287 | ||||
| Gain on disposal of property and equipment | (734) | (505) | ||||
| Share of loss from associate | - | 4 | ||||
| Cash flow from continuing operations | 7,847 | 8,087 | ||||
| Changes in non-cash operating working capital | (6,313) | (12,641) | ||||
| Income taxes paid | 60 | (187) | ||||
| Cash flow from (used for) operating activities | 1,594 | (4,741) | ||||
| Investing activities: | ||||||
| Property and equipment additions | (9,917) | (6,698) | ||||
| Intangible asset additions | (51) | - | ||||
| Proceeds on disposal of property and equipment | 1,106 | 960 | ||||
| Investment in associate | - | (377) | ||||
| Changes in non-cash investing working capital | 887 | (354) | ||||
| Cash flow used for investing activities | (7,975) | (6,469) | ||||
| Financing activities: | ||||||
| Change in operating loan | 5,425 | 15,796 | ||||
| Advances on loans and borrowings | 5,000 | - | ||||
| Repayments on loans and borrowings | (167) | (133) | ||||
| Interest paid | (578) | (579) | ||||
| Proceeds on exercise of share options | 100 | 25 | ||||
| Repurchase of common shares | - | (2,704) | ||||
| Dividends paid | (2,984) | (2,768) | ||||
| Cash flow from financing activities | 6,796 | 9,637 | ||||
| Effect of exchange rate on changes in cash and cash equivalents | 34 | 302 | ||||
| Change in cash and cash equivalents | 449 | (1,271) | ||||
| Cash and cash equivalents, beginning of period | 289 | 8,470 | ||||
| Cash and cash equivalents, end of period | $ | 738 | $ | 7,199 | ||
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: activity levels; market share gains and margin improvements in all operating areas; increasing market share in both operating divisions and geographic areas; timing of expenditures on purchase commitments; a new shop in Oklahoma to be operational in early 2015; improved cash flow for oil and natural gas producers; oil and natural gas producers accelerate capital programs; potential for a significant increase in spending in western Canada; post "spring breakup" high activity levels within the Canadian market; a year-over-year increase in capital spending in the U.S. market; U.S. producers to continue to expand the use of horizontal, multi-stage fracturing to complete conventional and unconventional oil and natural gas plays; further expansion of the fleet of "Claw" motors; continued investment in research and development of proprietary technologies; 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. 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 Cathedral's businesses, including current business and economic trends;
- oil and natural gas commodity prices and production levels;
- capital expenditure programs and other expenditures by Cathedral and its customers:
- the ability of Cathedral to retain and hire qualified personnel;
- the ability of Cathedral to obtain parts, consumables, equipment, technology, and supplies in a timely manner to carry out its activities;
- the ability of Cathedral to maintain good working relationships with key suppliers;
- the ability of Cathedral to market its services successfully to existing and new customers;
- the ability of Cathedral to obtain timely financing on acceptable terms;
- currency exchange and interest rates;
- risks associated with foreign operations;
- the ability of Cathedral to realize the benefits of its conversion from an income trust to a corporation;
- risks associated with winding up operations in Venezuela, including the ability to sell Cathedral's interest in the Venezuela joint venture;
- 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);
ii) "Adjusted gross margin %" - calculated as adjusted gross margin divided by revenues; is considered a primary indicator of operating performance (see tabular calculation);
iii) "EBITDAS" - defined as earnings before share of income/loss from associate, finance costs, unrealized foreign exchange on intercompany balances, unrealized foreign exchange due to hyper-inflation accounting, taxes, non-recurring gains and losses on disposal of property and equipment (see non-GAAP measurement), depreciation and share-based compensation plus dividends from associate; is considered an indicator of the Company's ability to generate funds flow from operations prior to consideration of how activities are financed, how the results are taxed and measured and non-cash expenses (see tabular calculation);
iv) "Funds from operations" - calculated as cash provided by operating activities before changes in non-cash working capital 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);
v) "Growth property and equipment additions" or "Growth capital" - is capital spending which is intended to result in incremental revenues. Growth capital is considered to be a key measure as it represents the total expenditures on property and equipment expected to add incremental revenues and funds flow to the Company;
vi) "Maintenance property and equipment additions" or "Maintenance capital" - is capital spending incurred in order to refurbish or replace previously acquired other than "replacement property and equipment additions" (see non-GAAP measurement). Such additions do not provide incremental revenues. Maintenance capital is a key component in understanding the sustainability of the Company's business as cash resources retained within Cathedral must be sufficient to meet maintenance capital needs to replenish the assets for future cash generation;
vii) "Replacement property and equipment additions" or "Replacement capital" - is capital spending incurred in order to replace equipment that is lost downhole. Cathedral recovers lost-in-hole costs including previously expensed depreciation on the related assets from customers. Such additions do not provide incremental revenues. The identification of replacement property and equipment additions is considered important as such additions are financed by way of proceeds on disposal of property and equipment (see discussion within the news release on "gain on disposal of property and equipment);
viii) "Infrastructure property and equipment additions" or "Infrastructure capital" - is capital spending incurred on land, buildings and leasehold improvements. Infrastructure capital is a component in understanding the sustainability of the Company's business as cash resources retained within Cathedral must be sufficient to meet maintenance capital needs
ix) "Non-recurring gains and losses on disposal of property and equipment" - are disposals of property and equipment that do not occur on a regular or periodic basis. Unlike the lost-in-hole recoveries the proceeds from these gains are not used on equivalent replacement property. These are often on non-field equipment such as land and buildings;
x) "Net property and equipment additions" - is property and equipment additions expenditures less proceeds on the regular disposal of property and equipment (the proceeds on sale of land and buildings have been excluded). Cathedral uses net property and equipment additions to assess net cash flows related to the financing of Cathedral's property and equipment additions;
xi) "Borrowing capacity" - is total available credit facility less drawings on credit facilities; and
xii) "Net debt" - is loans and borrowing less working capital. Management uses net debt as a metric to shows the Company's overall debt level.
The following tables provide reconciliations from GAAP measurements to non-GAAP measurements referred to in this news release:
Adjusted gross margin
| Three months ended March 31 | |||||||
| 2014 | 2013 | ||||||
| Gross margin | $ | 9,505 | $ | 8,617 | |||
| Add non-cash items included in cost of sales: | |||||||
| Depreciation | 4,464 | 4,665 | |||||
| Share-based compensation | 48 | 76 | |||||
| Adjusted gross margin | $ | 14,017 | $ | 13,358 | |||
| Adjusted gross margin % | 20.6% | 24.7% | |||||
EBITDAS
| Three months ended March 31 | |||||||
| 2014 | 2013 | ||||||
| Earnings before income taxes | $ | 2,876 | $ | 2,787 | |||
| Add: | |||||||
| Depreciation included in cost of sales | 4,464 | 4,665 | |||||
| Depreciation included in selling, general and administrative expenses | 61 | 157 | |||||
| Share-based compensation included in cost of sales | 48 | 76 | |||||
| Share-based compensation included in selling, general and administrative expenses | 82 | 211 | |||||
| Unrealized foreign exchange loss on intercompany balances | 454 | 212 | |||||
| Finance costs | 596 | 480 | |||||
| Share of loss from associate | - | 4 | |||||
| EBITDAS | $ | 8,581 | $ | 8,592 | |||
Funds from operations
| Three months ended March 31 | |||||
| 2014 | 2013 | ||||
| Cash flow from operating activities | $ | 1,594 | $ | (4,741) | |
| Add (deduct): | |||||
| Changes in non-cash operating working capital | 6,313 | 12,641 | |||
| Income taxes (recovered) paid | (60) | 187 | |||
| Current tax recovery (expense) | 273 | (580) | |||
| Funds from operations | $ | 8,120 | $ | 7,507 | |
Cathedral Energy Services Ltd. (the "Company" or "Cathedral") is incorporated under the Business Corporations Act (Alberta). 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. During 2014 Q1, Cathedral decided to discontinue operations in Venezuela. The Company strives to provide its customers 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:
P. Scott MacFarlane, President, Chief Executive Officer and Interim Chief Financial Officer or Randy Pustanyk, Executive Vice President and Chief Operating 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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