Cathedral Energy Services Reports Results for 2016 Q4
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, March 2, 2017 /CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" /TSX: CET) announces its consolidated financial results for the three months and year ended December 31, 2016 and 2015. 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.
PRESENTATION
As the Company entered into a definitive agreement to dispose of its Flowback and Production Testing ("F&PT") assets in December 2016, at December 31, 2016, these assets are classified as held for sale and the related operations are presented as discontinued operations. This news release will focus on the results from the continuing directional drilling related operations.
2016 Q4 KEY TAKEAWAYS
2016 Q4 financial results improved significantly year-over-year and sequentially to 2016 Q3 as a result of improved activity levels and continued focus on expense management and sales and marketing initiatives;
Revenues in 2016 Q4 were $28,009, an increase of $6,848 or 32% from 2015 Q4;
Adjusted EBITDAS from continuing operations was $4,367 in 2016 Q4, an increase of $4,248 from 2015 Q4;
Adjusted gross margin increased to 24% in 2016 Q4 from 18% in 2015 Q4 due to increased revenues, a reduction in fixed costs as a percentage of revenue, reduced equipment repairs and lower field labour rates;
In December, the Company executed a definitive agreement to sell its F&PT assets for net proceeds of $17,241. This sale closed in January 2017; and
In February 2017, the Company closed a bought deal public offering and insider private placement financing for total gross proceeds of $14,130. As a consequence of this financing and the sale of the F&PT assets, the Company currently has no bank debt (excluding letters of credit).
FINANCIAL HIGHLIGHTS
Dollars in 000's except per share amounts
| Three months ended December 31 |
Year ended December 31 |
||||||||
| 2016 |
2015 |
2016 |
2015 |
||||||
| Revenues |
$ |
28,009 |
$ |
21,161 |
$ |
80,866 |
$ |
106,243 |
|
| Adjusted gross margin % (1) |
24% |
18% |
22% |
18% |
|||||
| Adjusted EBITDAS from continuing operations (1) |
$ |
4,367 |
$ |
119 |
$ |
7,459 |
$ |
5,229 |
|
| Diluted per share |
$ |
0.12 |
$ |
- |
$ |
0.21 |
$ |
0.14 |
|
| As % of revenues |
16% |
1% |
9% |
5% |
|||||
| Total Adjusted EBITDAS (1) |
$ |
3,829 |
$ |
(169) |
$ |
5,840 |
$ |
7,699 |
|
| Diluted per share |
$ |
0.11 |
$ |
- |
$ |
0.16 |
$ |
0.21 |
|
| Funds from operations (1) |
$ |
2,036 |
$ |
(1,425) |
$ |
1,031 |
$ |
4,410 |
|
| Diluted per share |
$ |
0.06 |
$ |
(0.04) |
$ |
0.03 |
$ |
0.12 |
|
| Loss before income taxes |
$ |
(1,093) |
$ |
(12,947) |
$ |
(722) |
$ |
(24,894) |
|
| Basic per share |
$ |
(0.03) |
$ |
(0.36) |
$ |
(0.02) |
$ |
(0.69) |
|
| Provision for settlements |
$ |
(421) |
$ |
- |
$ |
(4,217) |
$ |
- |
|
| Gain on disposal of foreign subsidiary |
$ |
- |
$ |
- |
$ |
10,865 |
$ |
- |
|
| Write-down of inventory |
$ |
(277) |
$ |
(3,736) |
$ |
(277) |
$ |
(3,736) |
|
| Write-down of equipment |
$ |
- |
$ |
(3,189) |
$ |
- |
$ |
(3,189) |
|
| Write-down of goodwill |
$ |
- |
$ |
- |
$ |
- |
$ |
(1,624) |
|
| Write-down of deferred taxes related to CRA settlement |
$ |
- |
$ |
422 |
$ |
- |
$ |
(10,346) |
|
| Net loss |
$ |
(6,420) |
$ |
(10,501) |
$ |
(5,779) |
$ |
(35,342) |
|
| Basic per share |
$ |
(0.18) |
$ |
(0.29) |
$ |
(0.16) |
$ |
(0.97) |
|
| Dividends declared per share |
$ |
- |
$ |
- |
$ |
- |
$ |
0.12 |
|
| Property and equipment additions - cash basis |
$ |
415 |
$ |
464 |
$ |
899 |
$ |
6,908 |
|
| Weighted average shares outstanding |
|||||||||
| Basic (000s) |
36,295 |
36,295 |
36,295 |
36,295 |
|||||
| Diluted (000s) |
36,295 |
36,295 |
36,295 |
36,295 |
|||||
| (1) Refer to "NON-GAAP MEASUREMENTS" |
OUTLOOK
Throughout the second half of 2016, we continued to see improvements in the prospects for the energy industry and in particular our activity levels.
After hitting a low of 404 active rigs in May 2016, the U.S. rig count grew to 658 active rigs at the end of December 2016. This improvement in active rigs drilling was largely attributable to improvements in oil and natural gas pricing in the second half of 2016 as a result of anticipation that supply and demand fundamentals were coming into balance. Further confidence in the oil pricing was secured at the end of November with Saudi Arabia and OPEC finally announcing production cuts. Since then, WTI has maintained a price range in the $50/bbl to $55/bbl range. This is the price level we previously anticipated requiring to see an improvement in our activity levels which would in turn provide the job volume to contribute favorably against our fixed cost burden.
The improvement in Cathedral's business prospects starting in 2016 Q4 has been dramatic. Our active job count has doubled since September 2016 and more than tripled since the lows in early 2016. This has presented a completely new set of challenges as we have had to aggressively ramp up our business. Compared to the last two years, these are good challenges to have. The big issue for Cathedral and our industry in this improved environment has been staffing up to meet demand. Attracting workers back to the industry has been a challenge particularly in Canada due to the industry seasonality factors. After being in contraction mode for the past couple years, there are also challenges managing the impact of increasing activity levels on our administration resources and ensuring our people, systems and processes are continuing to delivering quality services. The industry supply chain is also suffering from the same challenges. Lead times on parts and equipment has increased significantly since mid-2016 and we are experiencing cost pressure from vendors.
In addition to labor supply concerns, we are managing our business cautiously with the expectation we will see continued price volatility going forward. With the increased productivity of North American shale wells, the industry now has the capability to ramp up production and inventories quickly which could put pressure on prices. OPEC's adherence to their proposed production cuts has historically always been a wildcard. On the competitive side, there is still an oversupply of equipment in the market and further rationalization of suppliers is required. Competing based on price alone is not a sustainable strategy for our competitors and we are fortunate that we are in a position to compete based on offering verifiable performance improvements to our customers.
We are fortunate that many of the aspects of our business that we focused on in the face of adversity have set us up favorably to capitalize on an upturn in our industry. Many of the strategic initiatives we have been working on over the last two years have been focused on making sure we can ramp up our business effectively. On the sales side, we have strategies to help us secure higher pricing for our services. On the operations side, we are looking at ways to better manage our labor pool, keep our expenses in line and continue to deliver a high quality service. Our technology group continues to make equipment improvements and explore new products aimed at revenue generation and expense and capital cost reductions.
We will continue to explore and execute ways to grow and manage our business in what we hope is an improved business environment going forward compared to the past two years.
ANNUAL MEETING
Cathedral will be holding its Annual Meeting ("Meeting") at 2:00 pm (MDT) on June 7, 2017 at our Head Office 6030 – 3 Street SE, Calgary, Alberta. Business at the meeting will include the election of directors and appointment of auditors.
2016 CAPITAL PROGRAM
During the year ended December 31, 2016 Company invested $899 (2015 - $6,908) in equipment. The following table details the net equipment additions:
| December 31 |
December 31 |
||||
| 2016 |
2015 |
||||
| Property and equipment additions: |
|||||
| Growth capital (1) |
$ |
324 |
$ |
4,571 |
|
| Maintenance capital(1) |
105 |
1,171 |
|||
| Replacement capital (1) |
470 |
510 |
|||
| Infrastructure capital(1) |
- |
656 |
|||
| Total cash additions |
899 |
6,908 |
|||
| Less: proceeds on disposal of property and equipment |
(5,286) |
(4,944) |
|||
| Less: proceeds on disposal of land and buildings |
- |
(6,174) |
|||
| Net property and equipment additions (disposals) (1) |
$ |
(4,387) |
$ |
(4,210) |
|
| (1) See "NON-GAAP MEASUREMENTS" |
The growth additions are primarily for Measurement-While-Drilling ("MWD") system enhancements, replacement capital is primarily to replace items, which have been lost-in-hole, and maintenance capital is required to maintain existing capacity levels. Proceeds from disposal of property and equipment are primarily related to equipment lost-in-hole. At December 31, 2016, the Company had 126 MWD systems (2015 – 140).
2017 CAPITAL PROGRAM
Cathedral's 2017 capital budget reviewed by the Board of Directors in December 2016 was for expenditures of $3,400 with $350 for growth capital and $1,500 for replacement and $1,550 for maintenance capital. The growth additions are primarily for additional MWD systems and motors and the maintenance capital is primarily to replace items that have been lost-in-hole. The 2017 capital budget will be reviewed quarterly and board of directors who have approved capital expenditures for 2017 Q1 of $1,050. The capital program may increase as 2017 progresses based on improving activity levels and improved capital availability achieved through the F&PT sale and the Offering. Cathedral intends to finance its 2017 capital budget from cash flow from operations, proceeds from redundant asset sales or assets lost-in-hole, working capital (cash) and credit facility availability.
RESULTS OF OPERATIONS – THREE MONTHS ENDED DECEMBER 31
| Revenues |
2016 |
2015 |
||
| Canada |
$ |
7,428 |
$ |
7,024 |
| United States |
20,581 |
14,137 |
||
| Total |
$ |
28,009 |
$ |
21,161 |
Revenues 2016 Q4 revenues were $28,009, which represented an increase of $6,848 or 32% from 2015 Q4 revenues of $21,161. Both Canada and U.S. operations had increases due to increase in drilling activity. In late 2016, due to a limited supply of the Company's proprietary CLAW motors, the Company made the decision to reduce the number of rental motors available in both Canada and the U.S. in favor of redirecting CLAW™ motors on jobs where both equipment and staff are deployed and the total cash flow contribution is typically higher.
Canadian revenues (excluding motor rental revenues) increased to $6,509 in 2016 Q4 from $5,086 in 2015 Q4; a 28% increase. This increase was the result of: i) a 48% increase in activity days to 995 in 2016 Q4 from 671 in 2015 Q4; net of ii) a 14% decrease in the average day rate to $6,542 in 2016 Q4 from $7,580 in 2015 Q4. Partially offsetting these increases was a decrease of $1,019 on the rental of motors. Motor rental revenues for 2016 Q4 were $919 (2015 Q4 - $1,938).
The average active land rig count for Canada was down 3% in 2016 Q4 compared to 2015 Q4. The increase in the Company's activity days relative to the active rigs drilling was a result of sales and marketing efforts and the Company's performance on client jobs. The decrease in day rates was in part due to type of work performed, but mainly due to decreases in day rates charged to customers, which were a result of competitive pressure, and pricing concessions provided to customers to secure work.
U.S. Directional Drilling revenues (excluding motor rental revenues) increased to $20,032 in 2016 Q4 from $12,786 in 2015 Q4; a 57% increase. This increase was the result of: i) an 83% increase in activity days to 1,899 in 2016 Q4 from 1,038 in 2015 Q4; net of ii) a 14% decrease in the average day rate to $10,549 in 2016 Q4 from $12,318 in 2015 Q4 (when converted to Canadian dollars). All operating areas saw increases in activity days. The average active land rig count for the U.S. was down 25% in 2016 Q4 compared to 2015 Q4. Again, due to efforts of sales and marketing staff and performance, the Company was able to increase market share compared to 2015 Q4. Rates in USD fell to $7,907 USD in 2016 Q4 from $9,259 USD in 2015 Q4; a 15% decline. U.S. day rate increases were partially tempered by the U.S. division providing footage drilling services to certain clients, which can result in higher relative day rates. U.S. motor rental revenues for 2016 Q4 were $549 compared to $1,351 in 2015 Q4.
Gross margin and adjusted gross margin Gross margin for 2016 Q4 was 13% compared to negative 1% in 2015 Q4. Adjusted gross margin (see Non-GAAP Measurements) for 2016 Q4 was $6,634 or 24% compared to $3,773 or 18% for 2015 Q4.
Even with lower revenue day rates in many districts, the adjusted gross margin improved due to reduced repairs, however, these reductions were offset by increases in field labour and higher equipment rentals on a percentage of revenue basis.
Additionally, there was a reduction in the fixed component of cost of sales of 12% compared with 2015 Q4 amount. These costs were 8% lower on a percentage of revenue basis in 2016 compared to 2015 with the decrease largely attributable to the increase in revenues in the comparable periods.
Depreciation allocated to cost of sales decreased to $3,073 in 2016 Q4 from $4,036 in 2015 Q4. Depreciation included in cost of sales as a percentage of revenue was 11% for 2016 Q4 and 19% in 2015 Q4.
Selling, general and administrative expenses ("SG&A") SG&A expenses were $3,857 in 2016 Q4; a decrease of $784 compared with $4,641 in 2015 Q4. As a percentage of revenue, SG&A was 14% in 2016 Q4 and 22% in 2015 Q4.
Excluding the non-cash items of depreciation and share-based compensation, SG&A was $3,804 in 2016 Q4 compared to $4,550 in 2015 Q4, a decrease of $746 or 16%. SG&A decreased primarily due to work force reductions, wage rollbacks and reductions in variable compensation. SG&A wage rollbacks were implemented February 1, 2015 at a range of 5% to 15% and a further 5% to 9% on January 1, 2016. There were additional reductions to staffing levels in 2016. Staffing costs included in SG&A include executive, sales, accounting, human resources, payroll, safety, technology support and related support staff. As well, there were year-over-year reductions in virtually every other SG&A item due to efforts to reduce expenditures.
Gain on disposal of equipment During 2016 Q4, the Company had a gain on disposal of equipment of $1,010 compared to $377 in 2015 Q4. These gains mainly relate to equipment lost-in-hole. Proceeds from clients on lost-in-hole equipment are based on amounts specified in service agreements and, in most cases; these proceeds exceed the net book value of the equipment and result in a gain. The timing of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter.
Finance costs Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $679 for 2016 Q4 versus $377 for 2015 Q4. The increase in finance costs relate to increases in interest rates partially offset by a decreased utilization of the Company's credit facility.
Foreign exchange loss The Company had a foreign exchange loss of $701 in 2016 Q4 compared to a loss of $1,103 in 2015 Q4 due to the fluctuations of the Canadian dollar relative to the U.S. dollar. The Company's foreign operations are denominated in a currency other than the Canadian dollar and therefore, upon consolidation, gains and losses due to fluctuations in the foreign currency exchange rates are recorded in 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 comprehensive income (loss). Included in the 2016 Q4 foreign currency gains are unrealized loss of $719 (2015 Q4 – loss of $1,188) related to intercompany balances.
Provision for settlement During 2016 Q4, the participation rate related to the FLSA matter was finalized. Additionally in 2017 Q1, the Company entered a settlement with one of its U.S. clients related to an alleged down-hole drilling incident, which impacted two of their wells in December 2013. This settlement is payable based on an initial payment in 2017 Q1 and the remainder in quarterly installments concluding in 2021. As a consequence of the above there was an increase the settlement provision of $421. During Q4, there were payments related to the above matters of $281.
Write-down of equipment Due to the reduction in demand for services, in 2015 Q4, the Company carried out a review of equipment and wrote-down those where there was a significant lack of demand by clients. The result of this review was a write-down of equipment of $3,189.
Write-down of inventory The Company's inventory is used to construct new tools and maintain existing tools. Due to the decrease in operating activities and the reduction in capital build out programs, there was a reduction in inventory turnover. As the prospect of recovery has been further delayed, in 2015 Q4, the Company conducted a review of inventory items and the projected usage for the various lines of inventory and wrote-down the value of inventory by $3,736. $2,607 of this write-down relates to parts for third party, non-Cathedral manufactured motors, which currently have lower utilization and demand from clients.
Net loss from discontinued operations In 2016 Q4, the Company made the decision to sell its F&PT assets and focus its attention and resources fully on the directional drilling business where it believes it has a strong competitive advantage and better future growth prospects. The proceeds from this sale were used to pay down debt. As such, operating results for the years ended December 31, 2016, 2016 Q4 and 2015 Q4 for the F&PT business have been included in the statements of comprehensive income (loss) and retained earnings and statements of cash flows as discontinued operations. For 2016 Q4, the net earnings from discontinued operations was $424 compared to $(952) net loss for 2015 Q4.
Write-down of assets held for sale from discontinued operations, net of tax The F&PT assets have been written down by $5,900 to their net realizable value of approximately $17,241. This write-down of $5,900 was offset by a deferred tax recovery of $1,593.
Income tax For 2016 Q4, the Company had an income tax expense of $1,444 compared to recovery of $3,398 in 2015 Q4. Excluding adjustments to prior years' tax provisions, the effective tax rate was 25% for 2016 Q4 and 26% for 2015 Q4. Income tax expense is booked based upon expected annualized effective rates.
RESULTS OF OPERATIONS – YEAR ENDED DECEMBER 31
| Revenues |
2016 |
2015 |
||
| Canada |
$ |
22,220 |
$ |
38,868 |
| United States |
58,646 |
67,375 |
||
| Total |
$ |
80,866 |
$ |
106,243 |
Revenues 2016 revenues were $80,866, which represented a decrease of $25,377 or 24% from 2015 revenues of $106,243. Both Canadian and U.S. operations experienced decreases due mainly to overall decline in drilling activity because of a reduction in commodity prices. In late 2016, due to a limited supply of motors, the Company made the decision to reduce the number of rental motors available in both Canada and the U.S. in favor of redirecting CLAW™ motors on jobs where both equipment and staff are deployed and the total cash flow contribution is typically higher.
Canadian revenues (excluding motor rental revenues) decreased to $16,164 in 2016 from $33,593 in 2015; a 52% decrease. This decrease was the result of: i) a 35% decrease in activity days to 2,440 in 2016 from 3,766 in 2015; and ii) a 26% decrease in the average day rate to $6,625 in 2016 from $8,920 in 2015. Partially offsetting these declines was an increase of $781 on the rental of motors, particularly Cathedral's CLAW™ motor. Motor rental revenues for 2016 were $6,056 (2015 - $5,275).
The decrease in activity days was mainly due to overall reductions in activity levels in Canada as well as certain of Cathedral's customers reducing their drilling programs. The average active land rig count for Canada was down 34% in 2016 compared to 2015. The decrease in day rates was in part due to the type of work performed, but mainly due to decreases in day rates charged to customers, which were a result of competitive pressure, and pricing concessions provided to customers to secure work.
U.S. Directional Drilling revenues (excluding motor rental revenues) decreased to $55,451 in 2016 from $65,038 in 2015; a 15% decrease. This decrease was the result of: i) a 6% decrease in activity days to 5,145 in 2016 from 5,496 in 2015; and ii) a 9% decrease in the average day rate to $10,778 in 2016 from $11,834 in 2015 (when converted to Canadian dollars). The activity days for the Rocky Mountain and Northeast regions were down, but these were offset by increases in the Texas and Oklahoma operating areas. The average active land rig count for the U.S. was down 46% in 2016 compared to 2015. Rates in USD fell to $8,124 USD in 2016 from $9,323 USD in 2015; a 13% decline. U.S. day rate decreases were partially tempered by the U.S. division providing footage drilling services to certain clients, which can result in higher relative day rates. U.S. motor rental revenues for 2016 were $3,195 compared to $2,337 in 2015.
Gross margin and adjusted gross margin Gross margin for 2016 was 7% compared to 3% in 2015. Adjusted gross margin (see Non-GAAP Measurements) for 2016 was $17,875 or 22% compared to $18,726 or 18% for 2015.
The Company implemented a number of cost reductions throughout 2015 and 2016 including reducing wages for field, support and office staff, implementing work force reductions and reducing other direct cost items. Even with lower revenue day rates in many districts the adjusted gross margin improved due to reduced field labour costs and repairs, however, these reductions were offset by higher equipment rentals and battery costs on a percentage of revenue basis.
Additionally, there was a reduction in the fixed component of cost of sales of 22% compared with 2015 amount. However, on a percentage of revenue basis, fixed cost of sales were greater in 2016 increasing 1% over 2015.
Depreciation allocated to cost of sales decreased to $12,358 in 2016 from $15,189 in 2015. Depreciation included in cost of sales as a percentage of revenue was 15% for 2016 and 14% in 2015.
Selling, general and administrative expenses ("SG&A") SG&A expenses were $15,185 in 2016; a decrease of $2,373 compared with $17,558 in 2015. As a percentage of revenue, SG&A was 19% in 2016 and 17% in 2015.
Excluding the non-cash items of depreciation and share-based compensation, SG&A was $14,921 in 2016 compared to $17,231 in 2015, a decrease of $2,310 or 13%. SG&A decreased primarily due to work force reductions, wage rollbacks and reductions in variable compensation. SG&A wage rollbacks were implemented February 1, 2015 at a range of 5% to 15% and a further 5% to 9% on January 1, 2016. There were additional reductions to staffing levels in 2015 and 2016. Staffing costs included in SG&A include executive, sales, accounting, human resources, payroll, safety, technology support and related support staff. As well there were year-over-year reductions in virtually every other SG&A item due to efforts to reduce expenditures.
Gain on disposal of equipment During 2016, the Company had a gain on disposal of equipment of $3,212 compared to $3,257 in 2015. These gains mainly relate to equipment lost-in-hole. Proceeds from clients on lost-in-hole equipment are based on amounts specified in service agreements and, in most cases, these proceeds exceed the net book value of the equipment and result in a gain. The timing of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter. In 2015 Q1, the Company completed the sale and leaseback of its Oklahoma City operating facility. This resulted in a gain on sale of land and buildings of $456.
Finance costs Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $2,061 for 2016 versus $1,613 for 2015. The increase in finance costs relate to increases in interest rates partially offset by a decreased utilization of the Company's credit facility.
Foreign exchange loss The Company had a foreign exchange gain of $1,438 in 2016 compared to a loss of $(4,374) in 2015 due to the fluctuations of the Canadian dollar relative to the U.S. dollar. The Company's foreign operations are denominated in a currency other than the Canadian dollar and therefore, upon consolidation, gains and losses due to fluctuations in the foreign currency exchange rates are recorded in other comprehensive income ("OCI") on the balance sheet as a component of equity. However, gains and losses in the Canadian entity on U.S. denominated intercompany balances continue to be recognized in the statement of income. Included in the 2016 foreign currency gains are unrealized gains of $1,455 (2015 – loss of $4,191) related to intercompany balances.
Provision for settlement In 2016 Q2, the Company entered into a Settlement Agreement and Release (the "Settlement Agreement") in respect of two wage and hour lawsuits (the "Collective Actions") that were filed against the Company's wholly owned subsidiary, INC. The Collective Actions alleged that INC employed or contracted Measurement While Drilling ("MWD") and Directional Drilling ("DD") operators were entitled to recover unpaid or incorrectly calculated overtime wages under the Fair Labor Standards Act ("FLSA").
The Settlement Agreement resolved all claims from INC employed and contracted MWD and DD operators. Under the terms of the Settlement Agreement, the parties established an initial settlement fund of up to $3,400 USD. The final determination of the settlement fund amount was based on the number of claimants that participated in the settlement at the end of December 2016, which under the terms of the Settlement Agreement is confidential. The settlement fund payments will be paid quarterly by the Company over a three-year period with the final payment due on or before September 2019. The quarterly payments may be accelerated in the event Cathedral meets certain financial targets over the payment period and can be deferred if a scheduled payment would put Cathedral in violation of its credit facility covenants subject to not more than three payments being deferred. Any FLSA settlement fund payments made by Cathedral exceeding $200 USD are subject to the approval of Cathedral's banking syndicate. During 2016, payments of $851 were made.
In 2017 Q1, the Company entered a settlement with one of its U.S. clients related to a down-hole drilling incident, which impacted two of their wells in December 2013. The settlement is payable based on an initial payment in 2017 Q1 and the remainder in quarterly installments concluding in 2021.
Gain on disposal of foreign subsidiary During 2016 Q1, the Company completed the sale of its wholly-owned Barbados subsidiary, Directional Plus International Inc. ("DPI"), for net proceeds of $nil which resulted in a non-cash gain on sale of $10,865. DPI held the Company's investment in Venezuela and this sale completed Cathedral's exit from carrying on a business in Venezuela.
Write-down of goodwill In 2015 Q3 the Company recorded an impairment of goodwill of $5,848. The recoverable amount of each cash generating unit ("CGU") was determined using a value in use calculation based on cash flow projections over the expected life of the assets. The cash flow projections were based on expected outcomes taking into account past experience and management's expectations for future market conditions. $1,624 of the impairment related to the directional drilling CGU and $4,224 related to the flowback and production testing CGU. This impairment represented the total amount of goodwill allocated to each CGU.
Write-down of equipment Due to the reduction in demand for services, in 2015 Q4 the Company carried out a review of equipment and wrote-down those where there was a significant lack of demand by clients. The result of this review was a write-down of equipment of $3,189.
Write-down of inventory The Company's inventory is used to construct new tools and maintain existing tools. Due to the decrease in operating activities and the reduction in capital build out programs, there was a reduction in inventory turn-over. As the prospect of recovery has been further delayed, in 2015 Q4 the Company conducted a review of inventory items and the projected usage for the various lines of inventory and wrote-down the value of inventory by $3,736. $2,607 of this write-down relates to parts for third party, non-Cathedral manufactured motors, which currently have lower utilization and demand from clients. In 2016 Q1, an additional $277 was written-down.
Net loss from discontinued operations In 2016 Q4, the Company made the decision to sell its F&PT assets and focus its attention and resources fully on the directional drilling business where it believes it has a strong competitive advantage and better future growth prospects. The proceeds from this sale were used to pay down debt As such, operating results for the years ended December 31, 2016 and 2015 for the F&PT business have been included in the statements of operations and retained earnings and statements of cash flows as discontinued operations. For 2016, the net loss from discontinued operations was $4,089 compared to $6,501 for 2015.
Write-down of assets held for sale from discontinued operations, net of tax The F&PT assets have been written down by $5,900 to their net realizable value of approximately $17,241. This write-down of $5,900 was offset by a deferred tax recovery of $1,593.
Income tax For 2016, the Company had an income tax recovery of $3,339 compared to an expense of $(3,947) in 2015. Excluding the non-cash gain on disposal of foreign subsidiary, write-down of goodwill and adjustments to prior years' tax provisions, the effective tax rate was 31% for 2016 and 31% for 2015. Income tax expense is booked based upon expected annualized effective rates.
Included in the 2015 Q2 amount is a charge to earnings of $10,346 related to a write-off of a portion of the tax attributes obtained as part of the December 18, 2009 conversion from an income trust to a corporation ("Conversion"). Cathedral elected to enter into the agreement with Canada Revenue Agency ("CRA") as a highly satisfactory solution to avoid potential costly and time consuming legal proceedings and allow management to focus its efforts on business operations and enhancing shareholder value. The CRA agreement did not give rise to any cash outlay by Cathedral for prior taxation years. Cathedral continues to have access to a portion of the tax attributes obtained as part of the Conversion to offset federal and provincial taxes in subsequent taxation years.
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 year ended December 31, 2016, the Company had funds from operations (see Non-GAAP Measurements) of $1,031 (2015 - $4,410). The decrease in funds from operations is due to a reductions in cash from operations due to lower activity levels and reductions in revenue day rates.
Working capital At December 31, 2016 the Company had working capital of $39,324 (2015 - $13,550) and a working capital ratio of 3.3 to 1 (2015 – 1.5 to 1). Included in the December 31, 2016 balance is $17,241 related to Assets held for sale. This amount has previously been classified as equipment and categorized as part of non-current assets. $17,200 of proceeds on this sale were used to repay the secured revolving term loan in January 2017. Excluding Assets held for sale, the December 31, 2016 working capital was $22,083 and the increase in this amount compared to $13,550 at December 31, 2015 was mainly due to an increase in accounts receivable due to the overall increase in revenues in 2016 Q4.
Credit facility The Company has a committed revolving credit facility (the "Facility") that expires in December 2018. The Facility is secured by a general security agreement over all present and future personal property.
The current Facility has been amended seven times. These amendments have certain restrictions, including, but not limited to; paying dividends, utilization of the accordion feature, enhanced lender financial reporting and a cap on any litigation settlement payments without lender approval. As well, effective 2015 Q4, the Company includes lost-in-hole equipment proceeds in the definition of Bank EBITDA (as defined in the credit agreement).
The financial covenants associated with the amended Facility are as follows:
| Quarter ending: |
Maximum Funded Debt to Bank EBITDA |
Minimum Debt Service Ratio |
| December 31, 2016 |
Waived |
Waived |
| March 31, 2017 |
3.50:1 |
2.00:1 |
| June 30, 2017 |
3.50:1 |
2.50:1 |
| September 30, 2017 |
3.50:1 |
3.00:1 |
| December 31, 2017 |
3.25:1 |
3.00:1 |
| March 31, 2018 and thereafter |
3.00:1 |
3.00:1 |
Under the Fourth Amending Agreement dated August 9, 2016, the working capital covenant in the Facility was waived.
Under the Fifth Amending Agreement dated September 2, 2016, Export Development Canada ("EDC") joined Cathedral's lending syndicate resulting in the lending exposure from the prior lending syndicate members being reduced and the Facility increasing by $3,000 from that contained in the Fourth Amendment, and the maturity of the Facility was extended by three months to November 2017. The Fifth Amendment provided for credit availability of $36,000, further reducing to $33,000 by December 31, 2016.
The Sixth Amending Agreement, dated December 22, 2016 the Maturity Date of the facility was extended to February 2018.
The Seventh Amending Agreement, dated January 16, 2017, required a minimum cumulative Bank EBITDA of $2,500 for the three months ended December 31, 2016. In addition, the aggregate commitment was reduced to $23,000 after $17,200 was repaid upon the sale of F&PT CGU assets and the maturity date was extended to December 2018.
After the amendments discussed above, the Facility bears interest at the bank's prime rate plus 0.50% to 5.00% or bankers' acceptance rate plus 1.75% to 6.25% with interest payable monthly. Interest rate spreads for the Facility depend on the level of funded debt to the 12 month trailing Bank EBITDA. The Facility provides a means to lock in a portion of the debt at interest rates through bankers' acceptance ("BA") based on the interest rate spread on the date the BA was entered into.
Based on current available information, Cathedral expects to comply with all covenants for the next twelve months.
The Company's financial ratios in the 2016 Q4 waiver period were:
| Ratio |
Actual |
Required |
| Debt service ratio |
3.34:1 |
Waived |
| Funded debt to Bank EBITDA ratio |
3.83:1 |
Waived |
| Working capital ratio |
3.31:1 |
Waived |
| Minimum Bank EBITDA for the three months ended December 31, 2016 |
$4,522 |
$2,500 |
The following table outlines the drawings on the credit facility and the Company's Net Debt as at December 31, 2016 and 2015:
| December 31 |
December 31 |
|||||||
| 2016 |
2015 |
|||||||
| Total credit facility |
$ |
33,000 |
$ |
60,000 |
||||
| Drawings on credit facility: |
||||||||
| Operating loan |
2,105 |
2,484 |
||||||
| Revolving term loan |
26,250 |
30,000 |
||||||
| Letters of credit |
1,528 |
1,554 |
||||||
| Total drawn facility |
$ |
29,883 |
$ |
34,038 |
||||
| Undrawn portion of credit facility |
$ |
3,117 |
$ |
25,962 |
||||
| Net debt (see NON-GAAP MEASUREMENTS): |
||||||||
| Loans and borrowings, net of current portion |
$ |
26,322 |
$ |
30,477 |
||||
| Working capital: |
||||||||
| Current assets |
$ |
56,368 |
$ |
41,575 |
||||
| Current liabilities |
(17,044) |
(28,025) |
||||||
| Working capital |
$ |
39,324 |
$ |
13,550 |
||||
| Net debt |
$ |
(13,002) |
$ |
16,927 |
||||
Contractual obligations In the normal course of business, the Company incurs contractual obligations and those obligations are disclosed below. As at December 31, 2016, the Company had a commitment to purchase equipment of approximately $384. Cathedral anticipates expending these funds 2017 Q1.
The Company has issued three standby letters of credit, two of which relate to property leases and renew annually to landlords. The first letter of credit is $700 CAD for the first ten years of the lease and then reduces to $500 for the last five years of the lease. The second letter of credit is for $542 USD and increases annually based upon annual changes in rent. The final letter of credit is for $75 USD issued in relation to U.S. WCB coverage.
Subsequent events In January 2017, the Company completed the Seventh Amendment to its credit facility. The Seventh Amending Agreement reduced the aggregate commitment to $23,000 after $17,200 was repaid upon the sale of F&PT assets and extended the expiry to December 2018.
The sale of F&PT assets closed in January 2017 for net proceeds of $17,241.
In February 2017, the Company closed a bought deal public offering of 11,500,000 common shares of the Company at a price of $1.12 per share, which includes 1,500,000 common shares pursuant to the exercise in full of the over-allotment option, for gross proceeds of $12,880 (the "Offering"). Concurrent with the closing of the Offering, certain directors and officers of Cathedral purchased 1,116,071 common shares at a price of $1.12 per share on a private placement basis for gross proceeds of approximately $1,250 (the "Concurrent Private Placement"). The gross proceeds from the Offering and Concurrent Private Placement totaled approximately $14,130.
Share capital At March 2, 2017, the Company has 48,916,451 common shares and 2,470,083 options outstanding with a weighted average exercise price of $1.52.
In 2016, the Company issued 30,000 stock options to employees with an exercise price of $0.43 per option. In January 2017, the Company issued 1,141,250 options to staff and directors with an exercise price of $1.13 per option.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
December 31, 2016 and 2015
Dollars in '000s
(unaudited)
| December 31 |
December 31 |
||||
| 2016 |
2015 |
||||
| Assets |
|||||
| Current assets: |
|||||
| Cash and cash equivalents |
$ |
1,898 |
$ |
1,426 |
|
| Trade receivables |
26,245 |
23,107 |
|||
| Current taxes recoverable |
1,336 |
2,962 |
|||
| Prepaid expenses and deposits |
1,611 |
1,988 |
|||
| Inventories |
8,037 |
12,092 |
|||
| Assets held for sale |
17,241 |
- |
|||
| Total current assets |
56,368 |
41,575 |
|||
| Equipment |
68,158 |
108,918 |
|||
| Intangible assets |
1,978 |
2,006 |
|||
| Deferred tax assets |
9,513 |
3,111 |
|||
| Total non-current assets |
79,649 |
114,035 |
|||
| Total assets |
$ |
136,017 |
$ |
155,610 |
|
| Liabilities and Shareholders' Equity |
|||||
| Current liabilities: |
|||||
| Operating loans |
$ |
2,105 |
$ |
2,484 |
|
| Trade and other payables |
12,837 |
20,198 |
|||
| Loans and borrowings |
459 |
686 |
|||
| Provision for settlements |
1,643 |
- |
|||
| Deferred revenue |
- |
4,657 |
|||
| Total current liabilities |
17,044 |
28,025 |
|||
| Loans and borrowings |
26,322 |
30,477 |
|||
| Provision for settlement |
1,879 |
- |
|||
| Deferred tax liabilities |
- |
501 |
|||
| Total non-current liabilities |
28,201 |
30,978 |
|||
| Total liabilities |
45,245 |
59,003 |
|||
| Shareholders' equity: |
|||||
| Share capital |
74,481 |
74,481 |
|||
| Contributed surplus |
9,620 |
9,470 |
|||
| Accumulated other comprehensive income |
11,371 |
11,577 |
|||
| Retained earnings (deficit) |
(4,700) |
1,079 |
|||
| Total shareholders' equity |
90,772 |
96,607 |
|||
| Total liabilities and shareholders' equity |
$ |
136,017 |
$ |
155,610 |
|
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
Three months and year ended December 31, 2016 and 2015
Dollars in '000s except per share amounts
(unaudited)
| Three months ended December 31 |
Year ended December 31 |
||||||||
| 2016 |
2015 |
2016 |
2015 |
||||||
| Revenues |
$ |
28,009 |
$ |
21,161 |
$ |
80,866 |
$ |
106,243 |
|
| Cost of sales: |
|||||||||
| Direct costs |
(21,375) |
(17,388) |
(62,991) |
(87,517) |
|||||
| Depreciation |
(3,073) |
(4,036) |
(12,358) |
(15,189) |
|||||
| Share-based compensation |
(6) |
(15) |
(14) |
(50) |
|||||
| Total cost of sales |
(24,454) |
(21,439) |
(75,363) |
(102,756) |
|||||
| Gross margin |
3,555 |
(278) |
5,503 |
3,487 |
|||||
| Selling, general and administrative expenses: |
|||||||||
| Direct costs |
(3,804) |
(4,550) |
(14,921) |
(17,231) |
|||||
| Depreciation |
(34) |
(45) |
(134) |
(177) |
|||||
| Share-based compensation |
(19) |
(46) |
(130) |
(150) |
|||||
| Total selling, general and administrative expenses |
(3,857) |
(4,641) |
(15,185) |
(17,558) |
|||||
| (302) |
(4,919) |
(9,682) |
(14,071) |
||||||
| Gain on disposal of property and equipment |
1,010 |
377 |
3,212 |
3,257 |
|||||
| Gain on disposal of land and buildings |
- |
- |
- |
456 |
|||||
| Earnings (loss) from operating activities |
708 |
(4,542) |
(6,470) |
(10,358) |
|||||
| Finance costs |
(679) |
(377) |
(2,061) |
(1,613) |
|||||
| Foreign exchange gain (loss) |
(701) |
(1,103) |
1,438 |
(4,374) |
|||||
| Provision for settlements |
(421) |
- |
(4,217) |
- |
|||||
| Gain on disposal of foreign subsidiary |
- |
- |
10,865 |
- |
|||||
| Write-down of inventory |
- |
(3,736) |
(277) |
(3,736) |
|||||
| Write-down of equipment |
- |
(3,189) |
- |
(3,189) |
|||||
| Write-down of goodwill |
- |
- |
- |
(1,624) |
|||||
| Loss before income taxes |
(1,093) |
(12,947) |
(722) |
(24,894) |
|||||
| Income tax recovery (expense): |
|||||||||
| Current |
(332) |
(707) |
(106) |
734 |
|||||
| Deferred current year |
(1,112) |
3,384 |
3,445 |
5,430 |
|||||
| Deferred adjustment to prior years |
- |
721 |
- |
(10,111) |
|||||
| Total income tax recovery (expense) |
(1,444) |
3,398 |
3,339 |
(3,947) |
|||||
| Net earnings (loss) from continuing operations |
(2,537) |
(9,549) |
2,617 |
(28,841) |
|||||
| Net earnings (loss) from discontinued operations |
424 |
(952) |
(4,089) |
(6,501) |
|||||
| Write-down of assets held for sale from discontinued |
(4,307) |
- |
(4,307) |
- |
|||||
| Net loss |
(6,420) |
(10,501) |
(5,779) |
(35,342) |
|||||
| Other comprehensive income (loss): |
|||||||||
| Foreign currency translation gain on disposal of foreign |
- |
- |
1,348 |
- |
|||||
| Foreign currency translation differences for foreign |
(4,248) |
1,492 |
(1,554) |
7,727 |
|||||
| Total comprehensive loss |
$ |
(10,668) |
$ |
(9,009) |
$ |
(5,985) |
$ |
(27,615) |
|
| Net earnings (loss) from continuing operations per share |
|||||||||
| Basic and diluted |
$ |
(0.07) |
$ |
(0.26) |
$ |
0.07 |
$ |
(0.79) |
|
| Net loss from discontinued operations per share |
|||||||||
| Basic |
$ |
(0.11) |
$ |
(0.03) |
$ |
(0.23) |
$ |
(0.18) |
|
| Net loss per share |
|||||||||
| Basic |
$ |
(0.18) |
$ |
(0.29) |
$ |
(0.16) |
$ |
(0.97) |
|
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three months and year ended December 31, 2016 and 2015
Dollars in '000s
(unaudited)
| Three months ended December 31 |
Year ended December 31 |
|||||||||
| 2016 |
2015 |
2016 |
2015 |
|||||||
| Cash provided by (used in): |
||||||||||
| Operating activities: |
||||||||||
| Net earnings (loss) from continuing operations |
$ |
(2,537) |
$ |
(9,549) |
$ |
2,617 |
$ |
(28,841) |
||
| Items not involving cash: |
||||||||||
| Depreciation |
3,107 |
4,081 |
12,492 |
15,366 |
||||||
| Share-based compensation |
25 |
61 |
144 |
200 |
||||||
| Income tax expense (recovery) |
1,444 |
(3,398) |
(3,339) |
3,947 |
||||||
| Gain on disposal of equipment |
(1,010) |
(377) |
(3,212) |
(3,257) |
||||||
| Gain on disposal of land and building |
- |
- |
- |
(456) |
||||||
| Finance costs |
679 |
377 |
2,061 |
1,613 |
||||||
| Unrealized foreign exchange loss on intercompany balances |
719 |
1,188 |
(1,455) |
4,191 |
||||||
| Provision for settlements |
421 |
- |
4,217 |
- |
||||||
| Gain on disposal of foreign subsidiaries |
- |
- |
(10,865) |
- |
||||||
| Write-down of inventory |
- |
3,736 |
277 |
3,736 |
||||||
| Write-down of equipment |
- |
3,189 |
- |
3,189 |
||||||
| Write-down of goodwill |
- |
- |
- |
1,624 |
||||||
| Cash flow from (used in) continuing operations |
2,848 |
(692) |
2,937 |
1,312 |
||||||
| Cash flow from (used in) discontinued operations |
(383) |
(26) |
(1,800) |
2,364 |
||||||
| Changes in non-cash operating working capital |
(2,537) |
2,790 |
1,570 |
25,794 |
||||||
| Income taxes paid |
(407) |
(278) |
1,433 |
(3,539) |
||||||
| Cash flow from (used in) operating activities |
(479) |
1,794 |
4,140 |
25,931 |
||||||
| Investing activities: |
||||||||||
| Property and equipment additions |
(415) |
(464) |
(899) |
(6,908) |
||||||
| Intangible asset additions |
(47) |
(13) |
(160) |
(289) |
||||||
| Proceeds on disposal of property and equipment |
1,536 |
791 |
5,286 |
4,944 |
||||||
| Proceeds on disposal of land and buildings |
- |
- |
- |
6,174 |
||||||
| Changes in non-cash investing working capital |
(772) |
1,195 |
(762) |
(1,012) |
||||||
| Cash flow from investing activities |
302 |
1,509 |
3,465 |
2,909 |
||||||
| Financing activities: |
||||||||||
| Change in operating loan |
1,145 |
659 |
(388) |
1,448 |
||||||
| Interest paid |
(551) |
(686) |
(1,605) |
(1,989) |
||||||
| Advances on loans and borrowings |
1,250 |
- |
1,250 |
- |
||||||
| Repayments of loans and borrowings |
(94) |
(2,245) |
(5,499) |
(25,626) |
||||||
| Payments on settlements |
(281) |
- |
(851) |
- |
||||||
| Dividends paid |
- |
(1,452) |
- |
(7,350) |
||||||
| Cash flow from (used for) financing activities |
1,469 |
(3,724) |
(7,093) |
(33,517) |
||||||
| Effect of exchange rate on changes in cash and cash equivalents |
36 |
211 |
(40) |
994 |
||||||
| Change in cash and cash equivalents |
1,328 |
(210) |
472 |
(3,683) |
||||||
| Cash and cash equivalents, beginning of period |
570 |
1,636 |
1,426 |
5,109 |
||||||
| Cash and cash equivalents, end of period |
$ |
1,898 |
$ |
1,426 |
$ |
1,898 |
$ |
1,426 |
||
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: expectation we will see continued price volatility going forward; favorably to capitalize on an upturn in our industry; explore and execute ways to grow and manage our business in what we hope is an improved business environment going forward compared to the past two years; projected capital expenditures and commitments and the financing thereof; anticipate that we will not reinstate dividend payments until industry conditions and operating cash flow improves; Cathedral expects to comply with all covenants during 2016; and long-term intent of the Company to pay quarterly dividends to shareholders.
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 and reliance on major customers;
- risks associated with technology development and intellectual property rights;
- the ability of Cathedral to maintain safety performance;
- the ability of Cathedral to obtain timely financing on acceptable terms;
- the ability to obtain sufficient insurance coverage to mitigate operational risks;
- currency exchange and interest rates;
- risks associated with foreign operations;
- risks associated with acquisitions and business development efforts;
- environmental risks;
- changes under governmental regulatory regimes and tax, environmental and other laws in Canada and U.S.; and
- competitive risks.
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 the Company's Management Discussion and Analysis for the year ended December 31, 2016 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 which has been filed with Canadian provincial securities commissions and is available on www.sedar.com.
NON-GAAP MEASUREMENTS
Cathedral uses certain performance measures throughout this document that are not defined under GAAP. Management believes that these measures provide supplemental financial information that is useful in the evaluation of Cathedral's operations and are commonly used by other oilfield companies. Investors should be cautioned, however, that these measures should not be construed as alternatives to measures determined in accordance with GAAP as an indicator of Cathedral's performance. Cathedral's method of calculating these measures may differ from that of other organizations, and accordingly, may not be comparable.
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) "Total Adjusted EBITDAS" - defined as earnings before share of income/loss from associate, write-down/recovery on investment in 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 equipment (see non-GAAP measurement), depreciation, write-down of goodwill, write-down of equipment, write-down of inventory and share-based compensation; is considered an indicator of the Company's ability to generate funds flow from operations prior to consideration of how activities are financed, how the results are taxed and measured and non-cash expenses (see tabular calculation). This measure includes both discontinued F&PT operations and continuing Directional Drilling operations;
iv) "Adjusted EBITDAS from discontinued operations" – Total Adjusted EBITDAS as calculated above from discontinued F&PT operations only;
v) "Adjusted EBITDAS from continuing operations" – Total Adjusted EBITDAS as calculated above for ongoing Directional Drilling as well as corporate administrative costs;
vi) "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);
vii) "Growth equipment additions" or "Growth capital" – is capital spending which is intended to result in incremental revenues or decreased operating costs. Growth capital is considered to be a key measure as it represents the total expenditures on equipment expected to add incremental revenues and funds flow to the Company;
viii) "Maintenance equipment additions" or "Maintenance capital" – is capital spending incurred in order to refurbish or replace previously acquired other than "replacement equipment additions" described below. 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;
ix) "Replacement 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 equipment additions is considered important as such additions are financed by way of proceeds on disposal of equipment (see discussion within the news release on "gain on disposal of equipment);
x) "Infrastructure 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;
xi) "Non-recurring gains and losses on disposal of equipment" – are disposals of 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;
xii) "Net equipment additions" – is equipment additions expenditures less proceeds on the regular disposal of equipment (the proceeds on sale of land and buildings have been excluded). Cathedral uses net equipment additions to assess net cash flows related to the financing of Cathedral's equipment additions; and
xiii) "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 December 31 |
Year ended December 31 |
||||||||
| 2016 |
2015 |
2016 |
2015 |
||||||
| Gross margin |
$ |
3,555 |
$ |
(278) |
$ |
5,503 |
$ |
3,487 |
|
| Add non-cash items included in cost of sales: |
|||||||||
| Depreciation |
3,073 |
4,036 |
12,358 |
15,189 |
|||||
| Share-based compensation |
6 |
15 |
14 |
50 |
|||||
| Adjusted gross margin |
$ |
6,634 |
$ |
3,773 |
$ |
17,875 |
$ |
18,726 |
|
| Adjusted gross margin % |
24% |
18% |
22% |
18% |
|||||
Total Adjusted EBITDAS
| Three months ended December 31 |
Year ended December 31 |
||||||||
| 2016 |
2015 |
2016 |
2015 |
||||||
| Earnings (loss) before income taxes |
$ |
(1,093) |
$ |
(12,947) |
$ |
(722) |
$ |
(24,894) |
|
| Add: |
|||||||||
| Depreciation included in cost of sales |
3,073 |
4,036 |
12,358 |
15,189 |
|||||
| Depreciation included in selling, general and administrative expenses |
34 |
45 |
134 |
177 |
|||||
| Share-based compensation included in cost of sales |
6 |
15 |
14 |
50 |
|||||
| Share-based compensation included in selling, general and administrative expenses |
19 |
46 |
130 |
150 |
|||||
| Finance costs |
679 |
377 |
2,061 |
1,613 |
|||||
| Subtotal |
2,718 |
(8,428) |
13,975 |
(7,715) |
|||||
| Unrealized foreign exchange (gain) loss on intercompany balances |
719 |
1,188 |
(1,455) |
4,191 |
|||||
| Write-down of goodwill |
- |
- |
- |
1,624 |
|||||
| Write-down of property and equipment |
- |
3,189 |
- |
3,189 |
|||||
| Write-down of inventory |
- |
3,736 |
277 |
3,736 |
|||||
| Provision for settlement |
421 |
- |
4,217 |
- |
|||||
| Gain on disposal of foreign subsidiary |
- |
- |
(10,865) |
- |
|||||
| Non-recurring expenses |
509 |
434 |
1,310 |
660 |
|||||
| Non-recurring gain on disposal of land and building |
- |
- |
- |
(456) |
|||||
| Adjusted EBITDAS from continuing operations |
4,367 |
119 |
7,459 |
5,229 |
|||||
| Adjusted EBITDAS from discontinued operations |
(538) |
(288) |
(1,619) |
2,470 |
|||||
| Total Adjusted EBITDAS |
$ |
3,829 |
$ |
(169) |
$ |
5,840 |
$ |
7,699 |
|
Funds from operations
|
Three months ended December 31 |
Year ended December 31 |
||||||||
| 2016 |
2015 |
2016 |
2015 |
||||||
| Cash flow from operating activities |
$ |
(479) |
$ |
1,794 |
$ |
4,140 |
$ |
25,931 |
|
| Add (deduct): |
|||||||||
| Changes in non-cash operating working capital |
2,537 |
(2,790) |
(1,570) |
(25,794) |
|||||
| Income taxes paid (recovered) |
407 |
278 |
(1,433) |
3,539 |
|||||
| Current tax recovery (expense) |
(429) |
(707) |
(106) |
734 |
|||||
| Funds from (used in) operations |
$ |
2,036 |
$ |
(1,425) |
$ |
1,031 |
$ |
4,410 |
|
Cathedral Energy Services Ltd. (the "Company" or "Cathedral"), based in Calgary, Alberta is incorporated under the Business Corporations Act (Alberta) and operates in the U.S. under Cathedral Energy Services Inc. The Company is publicly traded on the Toronto Stock Exchange under the symbol "CET". Cathedral, is a trusted partner to North American energy companies requiring high performance directional drilling services. We work in partnership with our customers to tailor our equipment and expertise to meet their specific geographical and technical needs. Our experience, technologies and responsive personnel enable our customers to achieve higher efficiencies and lower project costs. For more information, visit www.cathedralenergyservices.com.
SOURCE Cathedral Energy Services Ltd.
Requests for further information should be directed to: P. Scott MacFarlane, President and Chief Executive Officer, Michael F. Hill, Chief Financial Officer or Randy Pustanyk, Executive Vice President, Product Line Management, 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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