Cathedral Energy Services Reports Results for 2017 Q3

/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

CALGARY, Nov. 9, 2017 /CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) announces its consolidated financial results for the three and nine months ended September 30, 2017 and 2016.  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.

FINANCIAL HIGHLIGHTS
Dollars in 000's except per share amounts

 

2017 Q3 KEY TAKEAWAYS

Q3 revenues increased 85% from $19,489 in 2016 Q3 to $36,015 in 2017 Q3 and year-to-date revenues increased 106% from $52,857 in 2016 to $108,693 in 2017.

Q3 adjusted EBITDAS increased from $2,171 in 2016 Q3 to $3,909 in 2017 Q3, an increase of 80%.  Year-to-date adjusted EBITDAS increased from $2,009 in 2016 to $13,068 in 2017, an increase of 550%.

Q3 net earnings increased from a loss of $(2,126) to net earnings of $1,810.  Year-to-date net earnings increased from $641 in 2016 to $4,577.

As a result of the improved profitability, the Company was able to make equipment additions of $3,518 in 2017 Q3 (2016 - $146) and $7,065 year-to-date (2016 - $484).

OUTLOOK

Key business pressures for Cathedral in 2017 have been continued pricing pressure, escalating input costs, increased equipment repair and maintenance costs and reduced equipment availability due to damages to and loss of equipment.  The latter two issues have been largely due to client drilling practices where directional drilling equipment is getting pushed harder than in the past.  Despite these pressures we are pleased that we have been able to remain firmly cash flow positive, generating positive earnings, maintain a strong balance sheet and continue to commit capital and resources to improve and grow our Company.

As foreshadowed in our 2017 Q2 news release Outlook, we anticipated that our U.S. activity levels would likely remain flat in Q3 compared to Q2 due to equipment capacity constraints.  From the end of Q2 to the end of Q3, the U.S. rig count remained flat at an average 946 rigs (source: Baker Hughes).  However, our U.S. sequential quarter activity days dropped 12% from Q2 to Q3.  This was in part due to the mix in work in the quarter but also due to certain clients using specialized equipment that we were unable to provide.  This was isolated to certain clients and was in part a result of larger oilfield services companies offering specialized equipment to operators at attractive prices.  We started implementing strategies to deal with this in late Q3 and along with new equipment being deployed starting in Q4, we expect our ability to increase market share will improve into 2018.  Anticipated capital expenditures to be realized for 2017 are $13,400 plus any replacement of equipment lost down hole in Q4.  Our capital expenditure pacing has been more backend loaded due to our confidence increasing throughout the year and issues with timing on receiving equipment, components and parts.

Offsetting lower sequential quarter activity day decreases in the U.S. was that we were able to achieve modest price increases.  Our day rates increased 11% from Q2 to Q3. This was a result of demonstrating our performance capabilities to clients and also from improved recoveries on damaged equipment.  Our footage based pricing model in the U.S. also provides higher margins than day-rate work, however, the mix of footage versus day-rate pricing varies from quarter to quarter.

In the second half of 2017 we more aggressively further expand our Drilling Engineering Services offering in the U.S. in an effort to assist our clients with improving drilling practices and to improve and better demonstrate our performance advantages.

In Canada, in 2017 Q3 we experienced significantly improved activity levels following the seasonal Q2 spring break-up in Canada where activity levels are low.  The Canadian industry continues to be challenging from a pricing perspective and we have consciously avoided taking low margin or no margin work.  Margins in the U.S. are significantly better resulting in a bias to deploying equipment in the U.S. rather than Canada.  Pricing in Canada has shown improvement since 2017 Q1.  Similar to the U.S., part of this improvement has also been our ability to recover costs associated with damaged equipment from clients.  We are implementing a number of strategies to improve Canadian market share as we continue to see Canada as a key long-term market for the Company.

Looking forward, since the end of September the U.S. rig count has declined 3% from 940 active rigs at the end of June to 909 active rigs at the end of October.  However, over this same period there has been a significant improvement in WTI compared to the first half of 2017 with prices firming up over $50 USD/bbl.  We believe that this improvement in WTI pricing could result in the North American rig count improving into 2018, however, our expectation is still for flat to moderate industry growth.  For 2017 Q4, activity days available are also typically challenged by downtime resulting from U.S. Thanksgiving and Christmas related slowdowns in the U.S. and Canada.  In Canada, Q4 activity levels may be further impacted by a number of our Clients taking a short break in their drilling programs in October.

In an overall flat to moderate growth drilling activity environment, our growth will be dependent on gaining market share.  With our equipment capacity now increasing due to our 2017 capital expenditures, our focus on providing our clients Better Performance Every Day and continued improvements in operations, sales and technology - we are positive about our prospects going into 2018.

2017 CAPITAL PROGRAM                                                                                                                   

During the nine months ended September 30, 2017 the Company invested $7,065 (2016 - $484) in equipment.  The following table details the current period's net equipment additions:

 

Cathedral's 2017 capital budget ("capex") was originally approved at $10,000 of net equipment additions⁽¹⁾ ("net additions") for the year.  The $10,000 net capex plan for 2017 was comprised of $4,900 of replacement and maintenance capital and $5,100 of growth capital.  While the approved capex remains at $10,000 for net additions, due to delivery lead times some amounts will not be realized until after year-end.  The Company currently estimates its total capital expenditures to the end of December 31, 2017 will be $13,400 plus a portion of additional equipment lost-in-hole replacement occurring in 2017 Q4.  Based on proceeds from disposal of equipment to the end of 2017 Q3, this will result in approximately $7,000 in net additions to December 31, 2017.  On the originally approved capital expenditures, the Company anticipates to having a carry-over of $3,000 in capital expenditures into 2018 Q1 and Q2. 

The replacement and maintenance capital amounts noted above, is expenditures to replace items that have been lost-in-hole over the past two years and for equipment upgrades and replacements to improve the capacity of Cathedral's existing Measurement-While-Drilling ("MWD") and motor fleet. Over the past 2 years, Cathedral deferred replacement and maintenance capital expenditures in the face of low equipment utilization and in order to pay down debt.  Subject to operating results and industry outlook, equipment lost-in-hole will be replaced and funded from the proceeds received.  As such, Cathedral's total capex in any year may exceed the budgeted net additions.   Cathedral intends to finance its 2017 capital budget from cash flow from operations, proceeds from assets lost-in-hole, working capital (cash) and credit facility availability. 

RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30

 

Revenues   2017 Q3 revenues were $36,015, which represented an increase of $16,526 or 85% from 2016 Q3 revenues of $19,489.  Both Canada and U.S. operations had increases due to improvements in overall drilling activity.  In late 2016, due to a limited supply of the Company's proprietary 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 motors on jobs where both equipment and staff are deployed and the cash flow contribution is typically higher.  As a consequence motor rental revenue in both Canada and the U.S. were less in 2017 Q3 compared to 2016 Q3.

Canadian revenues (excluding motor rental revenues) increased to $7,978 in 2017 Q3 from $4,502 in 2016 Q3; a 77% increase.  This increase was the result of: i) a 66% increase in activity days to 1,120 in 2017 Q3 from 673 in 2016 Q3; and ii) a 6% increase in the average day rate to $7,123 in 2017 Q3 from $6,689 in 2016 Q3.  Partially offsetting the revenue increase was a decrease in motor rental revenue to $1,209 in 2017 Q3 from $1,341 in 2016 Q3.

The average active land rig count in Canada was up 68% in 2017 Q3 compared to 2016 Q3 (source: Baker Hughes).  This is in line with the 66% increase in activity days the Company had on a year-over-year basis.  The increases in day rates was primarily due to increased tool damage and repair recoveries from customers.   

U.S. revenues (excluding motor rental revenues) increased to $26,630 in 2017 Q3 from $13,012 in 2016 Q3; a 105% increase.  This increase was the result of: i) a 74% increase in activity days to 2,233 in 2017 Q3 from 1,283 in 2016 Q3; and ii) a 18% increase in the average day rate to $11,926 in 2017 Q3 from $10,141 in 2016 Q3 (when converted to Canadian dollars).  All U.S. operating areas saw increases in activity days.  U.S. motor rental revenues for 2017 Q3 were $198 compared to $634 in 2016 Q3.   

The average active land rig count for the U.S. was up 110% in 2017 Q3 compared to 2016 Q3 (source: Baker Hughes).  The Company experienced a 74% increase in activity days which resulted in a decrease in market share over this period.  The reason for the decreased market share was that the Company was equipment constrained during 2017 Q3 and was not able to add work for certain clients.  In addition, in 2017 Q3 the company was not able to meet client specific equipment requirements on certain jobs resulting in its activity levels on those jobs being decreased.  Day rates in USD increased to $9,520 USD in 2017 Q3 from $7,768 USD in 2016 Q3; a 23% increase.  U.S. day rates were up due to the mix of work performed by the U.S. division, including providing footage drilling services to certain clients, which can result in higher relative day rates. 

Gross margin and adjusted gross margin   Gross margin for 2017 Q3 was 10% compared to 5% in 2016 Q3.  Adjusted gross margin (see Non-GAAP Measurements) for 2017 Q3 was $6,516 or 18% compared to $4,151 or 21% for 2016 Q3.  The adjusted gross margin percentage decrease was primarily due to increases in equipment repairs in order to bring the equipment fleet back to operating condition and increased labour costs.  Additionally, there were higher equipment rentals to service the increased work levels.  These cost increases were offset by a reduction in the fixed component of cost of sales which were 11% lower on a percentage of revenue basis in 2017 Q3 compared to 2016 Q3.  The decrease in the fixed component of cost of sales as a percentage of revenue was mostly attributable to increase in revenues, however there were increases in costs largely related to salaries and other labour related costs.

Depreciation allocated to cost of sales decreased to $2,748 in 2017 Q3 from $3,077 in 2016 Q3.  Depreciation included in cost of sales as a percentage of revenue was 8% for 2017 Q3 and 16% in 2016 Q3.

Selling, general and administrative expenses ("SG&A")   SG&A expenses were $4,602 in 2017 Q3; an increase of $1,061 or 30% compared with $3,541 in 2016 Q3.  As a percentage of revenue, SG&A was 13% in 2017 Q3 compared to 18% in 2016 Q3.  SG&A increased primarily due to U.S. state sales taxes on intercompany equipment rentals.  Cathedral's Canadian entity owns all Cathedral's downhole drilling equipment and rents it to the U.S. entity and is subject to state sales tax on these amounts.

Gain on disposal of equipment   During 2017 Q3, the Company had a gain on disposal of equipment of $1,907 compared to $1,170 in 2016 Q3.  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, which consist of interest expenses on operating loans, loans and borrowings and bank charges, were $129 for 2017 Q3 versus $596 for 2016 Q3.  The decrease in finance costs relate to repayments of loans in 2017 Q1 and decrease in the interest rates. 

Foreign exchange   The Company had a foreign exchange gain of $1,059 in 2017 Q3 compared to a loss of $(159) in 2016 Q3 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 as other comprehensive income 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 2017 Q3 foreign currency gains are unrealized gain of $1,142 (2016 Q3 – loss of $(166)) 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 U.S. subsidiary ("INC").  The Collective Actions alleged that INC employed or contracted 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 ("accelerated FLSA settlement payments") 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.

In 2017 Q1, the Company entered into a confidential settlement agreement 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.

During 2017 Q3, payments on both settlements of $249 (2016 - $570) were made. 

Income tax   For 2017 Q3, the Company had an income tax expense of $173 compared to recovery of $710 in 2016 Q3.  Excluding adjustments to prior years' tax provisions, the effective tax rate was 19% for 2017.  Excluding the non-cash gain on disposal of foreign subsidiary but including the loss from discontinued operations, the effective tax rate was 31% for 2016.  Income tax expense is booked based upon expected annualized effective rates.

Net loss from discontinued operations   In 2016 Q4, the Company made the decision to sell its Flowback and Production Testing ("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 F&PT business have been included in the statements of comprehensive income and statements of cash flows as discontinued operations.  For 2017 Q3, the net loss from discontinued operations was $(7) compared to $(778) net loss for 2016 Q3. 

RESULTS OF OPERATIONS – NINE MONTHS ENDED SEPTEMBER 30

 

Revenues   2017 revenues were $108,693, which represented an increase of $55,836 or 106% from 2016 revenues of $52,857.  Both Canada and U.S. operations had increases due to an improvement in overall drilling activity.  In late 2016, due to a limited supply of the Company's proprietary 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 motors on jobs where both equipment and staff are deployed and the cash flow contribution is typically higher.  As a consequence motor rental revenue in both Canada and the U.S. were less in 2017 compared to 2016.

Canadian revenues (excluding motor rental revenues) increased to $21,428 in 2017 from $9,655 in 2016; a 122% increase.  This increase was the result of: i) a 113% increase in activity days to 3,076 in 2017 from 1,445 in 2016; and ii) a 4% increase in the average day rate to $6,966 in 2017 from $6,682 in 2016.  Partially offsetting the revenue increase was a decrease of in motor rental revenue to $3,139 from 2016 at $5,137.

The average active land rig count in Canada was up 87% in 2017 compared to 2016 (source: Baker Hughes).  The increase in the Company's activity days of 113% relative to the active rigs drilling was a result of sales and marketing efforts and the Company demonstrating performance on client jobs.  The slight increases in day rates was due to the mix of work performed.

U.S. revenues (excluding motor rental revenues) increased to $83,451 in 2017 from $35,420 in 2016; a 136% increase.  This increase was the result of: i) a 126% increase in activity days to 7,329 in 2017 from 3,246 in 2016; and ii) a 4% increase in the average day rate to $11,386 in 2017 from $10,912 in 2016 (when converted to Canadian dollars).  All U.S. operating areas saw increases in activity days.  U.S. motor rental revenues for 2017 were $675 compared to $2,645 in 2016.

The average active land rig count for the U.S. was up 84% in 2017 compared to 2016 (source: Baker Hughes).  The increase of U.S. activity days of 126% relative to the active rigs drilling was due to efforts of sales and marketing staff and performance on client jobs, the Company was able to increase market share compared to 2016.  Day rates in USD increased to $8,707 USD in 2017 from $8,250 USD in 2016; a 6% increase.  U.S. day rates were up due to the mix of work performed by the U.S. division, including providing footage drilling services to certain clients, which can result in higher relative day rates.      

Gross margin and adjusted gross margin   Gross margin for 2017 was 11% compared to 4% in 2016.  Adjusted gross margin (see Non-GAAP Measurements) for 2017 was $20,075 or 18% compared to $11,241 or 21% for 2016.   

Adjusted gross margin percentage decreased due to increases in field labour rates, equipment repairs and higher equipment rentals on a percentage of revenue basis.  These increases were offset by a reduction in the fixed component of cost of sales which were 10% lower on a percentage of revenue basis in 2017 compared to 2016.  The decrease in the fixed component of cost of sales as a percentage of revenue was mostly attributable to increase in revenues, however there were increases in costs largely related to salaries and other labour related costs.

Depreciation allocated to cost of sales decreased to $8,128 in 2017 from $9,285 in 2016.  Depreciation included in cost of sales as a percentage of revenue was 7% for 2017 and 18% in 2016.

Selling, general and administrative expenses ("SG&A")   SG&A expenses were $12,535 in 2017; an increase of $1,207 or 11% compared with $11,328 in 2016.  As a percentage of revenue, SG&A was 12% in 2017 compared to 21% in 2016.  SG&A increased primarily due to increases in sales commissions and U.S. sales tax charges on intercompany equipment rentals, net of a reduction in SG&A from the recovery of a bad debt.   

Gain on disposal of equipment   During 2017, the Company had a gain on disposal of equipment of $5,198 compared to $2,202 in 2016.  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 $527 for 2017 versus $1,382 for 2016.  The decrease in finance costs relate to primarily to repayments of loans in 2017 Q1. 

Foreign exchange   The Company had a foreign exchange gain of $1,976 in 2017 compared to $2,139 in 2016 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 as other comprehensive income 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 2017 foreign currency gains are unrealized gain of $2,016 (2016 –$2,174) related to intercompany balances.

Gain on disposal of foreign subsidiary   During 2016 Q1, the Company completed the sale of its wholly-owned Barbados subsidiary for net proceeds of $nil which resulted in a non-cash gain on sale of $10,865. The subsidiary held the Company's investment in Venezuela and this sale completed Cathedral's exit from carrying on a business in Venezuela. 

Provision for settlement   During 2017, payments on both settlements of $2,073 (2016 - $570) were made.  This amount includes accelerated FLSA settlement payments described previously.

Income tax   For 2017, the Company had an income tax expense of $1,297 compared to recovery of $(3,463) in 2016.  Excluding adjustments to prior years' tax provisions, the effective tax rate was 22% for 2017.  Excluding the non-cash gain on disposal of foreign subsidiary but including the loss from discontinued operations, the effective tax rate was 31% for 2016.  Income tax expense is booked based upon expected annualized effective rates.

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 F&PT business have been included in the statements of comprehensive income and statements of cash flows as discontinued operations.  For 2017, the net loss from discontinued operations was $(142) compared to $(3,193) net loss for 2016. 

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 nine months ended September 30, 2017, the Company had funds from continuing operations (see Non-GAAP Measurements) of $7,553 (2016 – funds used in operations $(1,004)).  The increase in funds related to continuing operations is due to the increase in activity levels. 

During 2017 Q1 the Company completed two major transactions that had a material impact on its outstanding debt.  In January, the Company completed the sale of its F&PT assets for net proceeds of $17,241.  On February 15, 2017, the Company closed a bought deal public offering and insider private placement financing for total gross proceeds of $14,130.  As a result of these transactions, in 2017 Q1 the Company reduced its loans and borrowings by $26,315 which included a complete repayment of revolving term loan of $26,250.  Cash balances as at September 30, 2017 were $4,049. 

Working capital   At September 30, 2017 the Company had working capital of $29,618 (December 31, 2016 - $39,324) and a working capital ratio of 2.9 to 1 (December 31, 2016 – 3.3 to 1).  The decrease in working capital level was primarily due to the sale of F&PT assets held for sale which had been classified as a current asset at December 31 in the amount of $17,241.  Partially offsetting this was an increase in trade receivables of $3,705 from December 31, 2016. 

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 2016 Q1, 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:

 

Additionally, there is a minimum working capital ratio of 1.25:1.

The Seventh Amending Agreement, dated January 16, 2017, reduced the aggregate commitment to $23,000 after $17,200 was repaid upon the sale of F&PT 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. 

Cathedral is currently in compliance with all covenants.  Based on current available information, Cathedral expects to comply with all covenants for the next twelve months.

At September 30, 2017, the Company had cash balances in excess of outstanding letters of credit and capital lease obligations.  As such its funded debt to bank EBITDA ratio ("Funded debt ratio") was negative (i.e. net cash balance).  As such, the Funded debt ratio has been met, but is not meaningful ("NM") for presentation.  For the rolling twelve months ended September 30, 2017 Bank EBITDA was $18,799.

The Company's financial ratios at September 30, 2017 were:

 

Contractual obligations   In the normal course of business, the Company incurs contractual obligations and those obligations are disclosed in the Company's MD&A for the year ended December 31, 2016.  As at September 30, 2017, the Company had a commitment to purchase approximately $611 of equipment.

Share capital   At November 9, 2017, the Company has 48,916,451 common shares and 3,414,500 options outstanding with a weighted average exercise price of $1.34.

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
September 30, 2017 and December 31, 2016
Dollars in '000s
(unaudited)

 

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Three and nine months ended September 30, 2017 and 2016
Dollars in '000s except per share amounts
(unaudited)

 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three and nine months ended September 30, 2017 and 2016
Dollars in '000s
(unaudited)

 

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: anticipated capital expenditures to be realized for 2017 are $12,400 plus any replacement of equipment lost down hole in Q4; improvement in WTI pricing could result in the North American rig count improving into 2018, however, our expectation is still for flat to moderate industry growth; 2017 Q4, activity days available are also typically challenged by downtime resulting from U.S. Thanksgiving and Christmas related slowdowns; Q4 activity levels in Canada may also be further impacted by a number of our Clients taking a short break in their drilling programs in December; growth will be dependent on gaining market share; positive about our prospects going into 2018; projected capital expenditures, commitments and the financing thereof; anticipates to having a carry-over of $4,000 in capital expenditures into 2018 Q1 and Q2; and Cathedral expects to comply with all covenants during 2017.

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 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

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 oil and gas service 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 MD&A 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:

 

 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.

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