/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, Aug. 9, 2016 /CNW/ - Cathedral Energy
Services Ltd. (the "Company" or "Cathedral" / TSX: CET) announces
its consolidated financial results for the three and six months
ended June 30, 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.
FINANCIAL HIGHLIGHTS
Dollars in 000's except per share
amounts
|
|
|
|
Three months ended June
30
|
Six months ended June
30
|
|
2016
|
2015
|
2016
|
2015
|
Revenues
|
$
|
15,587
|
$
|
29,679
|
$
|
36,682
|
$
|
79,756
|
Adjusted gross margin %
(1)
|
13%
|
11%
|
19%
|
17%
|
Adjusted EBITDAS
(1)
|
$
|
(1,638)
|
$
|
(1,237)
|
$
|
(162)
|
$
|
4,549
|
|
Diluted per
share
|
$
|
(0.05)
|
$
|
(0.03)
|
$
|
-
|
$
|
0.13
|
|
As % of
revenues
|
-11%
|
-4%
|
0%
|
6%
|
Funds from (used in) operations
(1)
|
$
|
(1,798)
|
$
|
(853)
|
$
|
(1,631)
|
$
|
3,112
|
|
Diluted per
share
|
$
|
(0.05)
|
$
|
(0.02)
|
$
|
(0.04)
|
$
|
0.09
|
Earnings (loss) before income
taxes
|
$
|
(10,222)
|
$
|
(6,342)
|
$
|
(1,051)
|
$
|
(7,137)
|
|
Basic per
share
|
$
|
(0.28)
|
$
|
(0.17)
|
$
|
(0.03)
|
$
|
(0.20)
|
|
Diluted per
share
|
$
|
(0.28)
|
$
|
(0.17)
|
$
|
(0.03)
|
$
|
(0.20)
|
Gain on disposal of foreign
subsidiary
|
$
|
-
|
$
|
-
|
$
|
10,865
|
$
|
-
|
Provision for
settlement
|
$
|
(3,796)
|
$
|
-
|
$
|
(3,796)
|
$
|
-
|
Write-down of deferred taxes related to CRA
settlement
|
$
|
-
|
$
|
(10,768)
|
$
|
-
|
$
|
(10,768)
|
Net earnings
(loss)
|
$
|
(6,916)
|
$
|
(15,266)
|
$
|
2,767
|
$
|
(15,990)
|
|
Basic per
share
|
$
|
(0.19)
|
$
|
(0.42)
|
$
|
0.08
|
$
|
(0.44)
|
|
Diluted per
share
|
$
|
(0.19)
|
$
|
(0.42)
|
$
|
0.08
|
$
|
(0.44)
|
Dividends declared per
share
|
$
|
-
|
$
|
0.04
|
$
|
-
|
$
|
0.08
|
Property and equipment additions - cash
basis
|
$
|
70
|
$
|
1,845
|
$
|
338
|
$
|
6,148
|
Weighted average shares
outstanding
|
|
|
|
|
|
Basic
(000s)
|
36,295
|
36,295
|
36,295
|
36,295
|
|
Diluted
(000s)
|
36,295
|
36,295
|
36,295
|
36,295
|
|
|
|
|
|
|
|
|
June
30
|
December
31
|
|
|
|
2016
|
2015
|
Working
capital
|
|
|
$
|
17,210
|
$
|
13,550
|
Total
assets
|
|
|
$
|
137,002
|
$
|
155,610
|
Loans and borrowings excluding current
portion
|
|
|
$
|
25,298
|
$
|
30,477
|
Shareholders'
equity
|
|
|
$
|
97,724
|
$
|
96,607
|
(1) Refer to "NON-GAAP
MEASUREMENTS"
|
|
|
|
|
|
2016 Q2 KEY TAKEAWAYS
Negotiated a settlement of our collective action wage and hour
lawsuits in the United States
("U.S.");
Adjusted gross margin improved to 13% in 2016 Q2 from 11% in
2015 Q2;
Loans and borrowings were reduced by $5,317 compared to December 31, 2015 including a reduction of the
revolving term loan of $5,000 to
$25,000;
Revenues and profitability were significantly affected by
reduced industry activity and pricing pressures resulting from
continued decline in commodity prices in early 2016;
Revenues of $15,587 in 2016 Q2
compared to $29,679 in 2015 Q2, a 47%
decline and Adjusted EBITDAS loss of $(1,638) in 2016 Q2 compared to $(1,237) loss in 2015 Q2; and
Management continues to focus on initiatives to manage costs,
improve margins, improve revenue through enhanced focus on our
sales and marketing capabilities and manage Cathedral's financial
obligations and liquidity.
OUTLOOK
2016 Q2 continued to be challenging for the oilfield services
sector, particularly for those companies tied to drilling and well
completion activity. The impact of commodity price declines
in the first quarter further impacted activity levels in Q2 due to
exploration and production companies continuing to cut their
drilling and completions budgets.
The U.S. rig count declined 42% from January 1, 2016 to a low of 404 active rigs in
May – down from an average rig count of 807 for the second half of
2015. Canada suffered
similar activity declines which were further exacerbated by energy
companies curtailing activities due to an early and extended spring
breakup. In Canada there was an
average of 48 rigs operating in 2016 Q2 compared to 98 rigs in the
comparable quarter in 2015. The bright light in the
first half of 2016 is that our market share continued to increase
in the U.S. as measured by the number of rigs we provided services
on and in July our U.S. directional drilling job count continued to
increase.
Optimism for the sector started to improve in June as WTI prices
moved into the $45/bbl U.S. dollars
("USD") to $50/bbl USD range.
Supporting our previous assertion that WTI pricing needs to be in
the $50/bbl USD range for activity
levels to improve we saw a significant pickup in our sales
prospects in June and July through requests for proposals and
customer indications for work in the second half of the year.
However, it is not clear how the recent WTI price retreat into the
$40/bbl USD range will impact this,
however, we suspect the prior customer enthusiasm may wane in the
short term as a consequence.
A key accomplishment in the quarter was negotiating a settlement
of our collective action wage and hour lawsuits in the U.S. (see
"Provision for settlement" under "Results of Operations"). We
employed an innovative approach to dealing with this challenge and
the outcome is something we believe is manageable within our
current financial constraints. It was also important to deal
with this liability as it was creating significant uncertainty in
the market and consuming a large amount of management's time and
energy.
Although the industry, analysts and other commentators continue
to believe prospects will improve and signs of this are being
demonstrated, our banking syndicate has taken a more conservative
view. As such, the syndicate is requiring we further reduce
our credit facility to $30 million by
December 31, 2016 and to $25 million by March
31, 2017. As at the date hereof, our total drawn
facility was $27.3 million and we had
cash balances of $2.2
million. The bank has indicated they want to see
Cathedral's debt levels come within more typical industry averages
based on cash flow the business has been able to generate in this
current environment. In this context, management and
the board are investigating alternatives to achieve the banks
objectives and maximize shareholder value. These alternatives
may include alternative forms of financing and looking at potential
corporate partnerships and transactions.
We still view Cathedral's business prospects very
favorably. We continue to focus on ways to better
manage our business in this environment and are actively
implementing initiatives to make our business stronger.
DIVIDENDS
In 2015 Q4, the Board of Directors made the decision to suspend
the payment of Cathedral's quarterly dividend until industry
conditions improve. This decision was based on the reductions
in commodity prices and uncertainties around expected drilling and
completion activity in 2016. Additionally, this allows the
Company to preserve cash, to manage liquidity, invest selectively
in capital asset additions and pursue operational initiatives to
better position the Company for economic turn-around. The Board of
Directors will review dividend distributions on a quarterly basis
giving consideration to current performance, historical and future
trends in the business, the expected sustainability of those trends
as well as required long-term debt repayments, maintenance capital
expenditures required to sustain performance. It is the
long-term intent of the Company to pay quarterly dividends to
shareholders.
2016 CAPITAL PROGRAM
During the six months ended June 30,
2016 Company invested $338
(2015 - $6,148) in property and
equipment. The following table details the current period's
net property and equipment additions:
|
|
Six months
ended
|
|
|
June 30,
2016
|
Property and equipment
additions:
|
|
|
|
Growth capital
(1)
|
|
$
|
122
|
|
Maintenance
capital(1)
|
|
28
|
|
Replacement capital
(1)
|
|
188
|
|
Infrastructure
capital(1)
|
|
-
|
Total cash
additions
|
|
338
|
Less: proceeds on disposal
of property and
equipment
|
|
(2,030)
|
Net property and equipment
additions
(1)
|
|
$
|
(1,692)
|
(1)See "NON-GAAP
MEASUREMENTS"
|
|
|
Cathedral's 2016 capital budget remains at $1,000 with $200
for growth capital and $800 for
replacement or maintenance capital. The growth additions are
primarily for MWD system enhancements and maintenance capital is
primarily to replace items which have been lost-in-hole or are
required to maintain existing capacity levels. Proceeds from
disposal of property and equipment are primarily related to
equipment lost-in-hole. The capital budget will be reviewed
quarterly.
The following is a summary of major equipment owned by the
Company:
|
June
30
|
December
31
|
June
30
|
|
2016
|
2015
|
2015
|
Directional Drilling - MWD
systems
|
140
|
140
|
140
|
Flowback and Production
Testing ("F&PT")
units
|
66
|
66
|
66
|
RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 30
|
Three months ended June 30,
2016
|
|
Three months ended June 30,
2015
|
|
|
Flowback
and
|
|
|
|
Flowback
and
|
|
|
Directional
|
production
|
|
|
Directional
|
production
|
|
Revenues
|
drilling
|
testing
|
Total
|
|
drilling
|
testing
|
Total
|
Canada
|
$
|
3,286
|
$
|
913
|
$
|
4,199
|
|
$
|
6,629
|
$
|
2,936
|
$
|
9,565
|
United
States
|
11,339
|
49
|
11,388
|
|
15,290
|
4,824
|
20,114
|
|
|
|
|
|
|
|
|
Total
|
$
|
14,625
|
$
|
962
|
$
|
15,587
|
|
$
|
21,919
|
$
|
7,760
|
$
|
29,679
|
Revenues 2016 Q2 revenues were
$15,587 which represented a decrease
of 14,093 or 48% from 2015 Q2 revenues of $29,679. All divisions experienced revenue
decreases compared to 2015 Q2 due to reduced activity levels
resulting from customer reactions to decreases in commodity prices
and day rate decreases primarily related to competitive pressure
and pricing concessions requested by customers due to market
conditions.
Canadian Directional Drilling revenues (excluding motor rental
revenues) decreased to $1,799 in 2016
Q2 from $5,413 in 2015 Q2; a 67%
decrease. This decrease was the result of: i) a 51% decrease
in activity days to 271 in 2016 Q2 from 552 in 2015 Q2; and ii) a
32% decrease in the average day rate to $6,638 in 2016 Q2 from $9,806 in 2015 Q2.
The decrease in activity days was mainly due to overall
reductions in activity levels in Canada as well as certain Cathedral customers
reducing their drilling programs and others who stopped drilling
during the period. The average active land rig count for
Canada was down 53% in 2016 Q2
compared to 2015 Q2 and was down 68% from 2016 Q1. 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.
Partially offsetting these declines was an increase of
$271 on the rental of motors,
particularly Cathedral's CLAW™ motor. Motor rental revenues
for 2016 Q2 were $1,487 (2015 Q2 -
$1,216).
U.S. Directional Drilling revenues (excluding motor rental
revenues) decreased to $10,431 in
2016 Q2 from $15,075 in 2015 Q2; a
31% decrease. This decrease was the result of: i) a 27%
decrease in activity days to 984 in 2016 Q2 from 1,349 in 2015 Q2;
and ii) a 5% decrease in the average day rate to $10,601 in 2016 Q2 from $11,175 in 2015 Q2 (when converted to Canadian
dollars). All U.S. districts experienced a decrease in
activity levels. The average active land rig count for U.S.
was down 53% in 2016 Q2 compared to 2015 Q2 and was down 25% from
2016 Q1. Rates in USD fell to $8,228
USD in 2016 Q2 from $9,095 USD
in 2015 Q2, a 10% 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 Q2 were
$908 compared to $215 in 2015 Q2.
Canadian F&PT revenues decreased to $913 in 2016 Q2 from $2,936 in 2015 Q2; a 69% decrease. The
decrease was due to the reduction in activity levels due to the
industry downturn as well as a 27% decline in pricing. Wells
completed in Canada fell
approximately 43% in 2016 Q2 compared to 2015 Q2.
U.S. F&PT revenues decreased to $49 in 2016 Q2 from $4,824 in 2015 Q2, a 99% decrease. In Q1
2016, the company made the decision to scale down the operations of
its U.S. F&PT division to reflect current industry activity
levels and mitigate losses. Business development
activities have continued in order to enable the business to secure
work where it makes economic sense. As industry activity
levels improve, management's intention is to further ramp up
operations commensurately.
Gross margin and adjusted gross
margin Gross margin
for 2016 Q2 was negative (14%) compared to negative (6%) in 2015
Q2. Adjusted gross margin (see Non-GAAP Measurements) for
2016 Q2 was $1,980 or 13% compared to
$3,355 or 11% for 2015
Q2.
The Company has 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 divisions the adjusted gross margin improved due to
reduced field labour costs, however, these reductions were offset
by higher repairs on percentage of revenue basis.
Additionally, there was a reduction in the fixed component of
cost of sales of 36% compared with 2015 Q2 amount. However,
on a percentage of revenue basis, these costs were greater in 2016
Q2 increasing 5% over 2015 Q2.
Depreciation allocated to cost of sales decreased to
$4,195 in 2016 Q2 from $5,134 in 2015 Q2. Depreciation included in
cost of sales as a percentage of revenue was 27% for 2016 Q2 and
17% in 2015 Q2.
Selling, general and administrative expenses
("SG&A") SG&A expenses were
$3,947 in 2016 Q2; a decrease of
$777 compared with $4,724 in 2015 Q2. As a percentage of
revenue, SG&A was 25% in 2016 Q2 and 16% in 2015 Q2.
Excluding the non-cash items of depreciation and share-based
compensation, SG&A was $3,881 in
2016 Q2 compared to $4,639 in 2015
Q2, a decrease of $758 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 have
been 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 Q2, the Company had a gain on disposal of equipment of
$194 compared to $135 in 2015 Q2. 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.
Foreign exchange loss The Company
had a foreign exchange loss of $(55)
in 2016 Q2 compared to a gain of $543
in 2015 Q2 due to the fluctuations in 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 Q2 foreign
currency gains are unrealized losses of $27 (2015 Q2 – gain of $647) related to intercompany balances.
Finance costs Finance costs
consist of interest expenses on operating loans, loans and
borrowings and bank charges of $411
for 2016 Q2 versus $446 for 2015
Q2. The decrease in finance costs relate to a decreased
utilization of the Company's credit facility.
Provision for settlement
Subsequent to June
30, 2016, 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
Company's wholly-owned subsidiary, Cathedral Energy Services Inc.
("INC"). The first collective action lawsuit, Wallace vs.
Cathedral Energy Services Inc. ("Wallace"), was filed on
November 6, 2014, in the United
States District Court for the Southern District of Texas, Houston Division (the "Houston Court") alleging that INC employed or
contracted Measurement While Drilling ("MWD") and Directional
Drilling ("DD") operators were entitled to recover unpaid overtime
wages under the Fair Labor Standards Act ("FLSA"). The second
collective action lawsuit, Price vs. Cathedral Energy Services
Inc., was filed on April 9, 2015, in
the United States District Court District of Colorado, Denver Division (and subsequently
transferred to Houston Court)
alleging that the Company incorrectly calculated the overtime pay
for certain hourly paid operators in violation of the
FLSA. Legal actions involving similar alleged FLSA violations
have been filed in the United
States against a number of other oilfield service
companies. Cathedral has denied the allegations, and
vigorously defended the litigation leading up to entering into the
Settlement Agreement.
The Settlement Agreement provides a mechanism for finally
resolving and releasing the claims for all INC employed and
contracted MWD and DD operators. Under the terms of the
Settlement Agreement, the parties will establish a settlement fund
of up to $3,400 USD. The final
determination of the settlement fund amount will be based on the
number of claimants that participate in the settlement and
Cathedral estimates the final settlement amount will be in the
$2,900 USD range. The
settlement fund payments will be paid quarterly by the Corporation
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.
All claims in both Collective actions have been settled and the
Houston Court, approved the
settlement of the Wallace claim on August
8, 2016. Any settlement fund payments made by
Cathedral are subject to the approval of Cathedral's banking
syndicate.
Income tax For 2016 Q2, the
Company had an income tax recovery of $3,306 compared to expense of $(8,924) in 2015 Q2. Excluding the non-cash
gain on disposal of foreign subsidiary and adjustment to prior
years' tax provisions, the effective tax rate was 31% for 2016 Q2
and 29% for 2015 Q2. Income tax expense is booked based upon
expected annualized effective rates.
Included in the 2015 Q2 amount is a charge to earnings of
$10,768 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.
RESULTS OF OPERATIONS – SIX MONTHS ENDED JUNE 30
|
|
|
|
|
Six months ended June 30,
2016
|
|
Six months ended June 30,
2015
|
|
|
Flowback
and
|
|
|
|
Flowback
and
|
|
|
Directional
|
production
|
|
|
Directional
|
production
|
|
Revenues
|
drilling
|
testing
|
Total
|
|
drilling
|
testing
|
Total
|
Canada
|
$
|
8,949
|
$
|
2,777
|
$
|
11,726
|
|
$
|
21,673
|
$
|
7,934
|
$
|
29,607
|
United
States
|
24,421
|
535
|
24,956
|
|
37,043
|
13,106
|
50,149
|
|
|
|
|
|
|
|
|
Total
|
$
|
33,370
|
$
|
3,312
|
$
|
36,682
|
|
$
|
58,716
|
$
|
21,040
|
$
|
79,756
|
Revenues
2016 revenues were $36,682 which
represented a decrease of $43,074 or
54% from 2015 revenues of $79,756. All divisions experienced revenue
decreases compared to 2015 due to reduced activity levels resulting
from customer reactions to decreases in commodity prices and day
rate decreases primarily related to competitive pressure and
pricing concessions requested by customers due to market
conditions.
Canadian Directional Drilling revenues (excluding motor rental
revenues) decreased to $5,153 in 2016
from $20,205 in 2015; a 74%
decrease. This decrease was the result of: i) a 63% decrease
in activity days to 772 in 2016 from 2,059 in 2015; and ii) a 32%
decrease in the average day rate to $6,675 in 2016 from $9,813 in 2015.
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 and some who stopped
drilling during the period. The average active land rig count
for Canada was down 50% in 2016
compared to 2015. 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.
Partially offsetting these declines was an increase of
$2,328 on the rental of motors,
particularly Cathedral's CLAW™ motor. Motor rental revenues
for 2016 were $3,796 (2015 -
$1,468).
U.S. Directional Drilling revenues (excluding motor rental
revenues) decreased to $22,408 in
2016 from $36,545 in 2015; a 39%
decrease. This decrease was the result of: i) a 38% decrease
in activity days to 1,963 in 2016 from 3,180 in 2015; and ii) a 1%
decrease in the average day rate to $11,415 in 2016 from $11,492 in 2015 (when converted to Canadian
dollars). All U.S. districts experienced a decrease in
activity levels. The average active land rig count for U.S.
was down 56% in 2016 compared to 2015. Rates in USD fell to
$8,566 USD in 2016 from $9,320 USD in 2015, an 8% 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 $2,013
compared to $498 in 2015.
Canadian F&PT revenues decreased to $2,777 in 2016 from $7,934 in 2015; a 65% decrease. The
decrease was due to the reduction in activity levels due to the
industry downturn as well as a 30% decline in pricing. Wells
completed in Canada fell
approximately 58% in 2016 compared to 2015.
U.S. F&PT revenues decreased to $535 in 2016 Q2 from $13,106 in 2015 Q2, a 96% decrease. In Q1
2016, the company made the decision to scale down the operations of
its U.S. F&PT division to reflect current industry activity
levels and mitigate losses. Business development
activities have continued in order to enable the business to secure
work where it makes economic sense. As industry activity
levels improve, management's intention is to further ramp up
operations commensurately.
Gross margin and adjusted gross
margin Gross margin
for 2016 was negative (4%) compared to 4% in 2015. Adjusted
gross margin (see Non-GAAP Measurements) for 2016 was $6,885 or 19% compared to $13,475 or 17% for 2015.
The Company has 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 divisions the adjusted gross margin improved due to
reduced field labour costs, however, these reductions were offset
by higher repairs on percentage of revenue basis.
Additionally, there was a reduction in the fixed component of
cost of sales of 32% compared with 2015 amount. However, on a
percentage of revenue basis, these costs were greater in 2016
increasing 8% over 2015.
Depreciation allocated to cost of sales decreased to
$8,428 in 2016 from $10,225 in 2015. Depreciation included in
cost of sales as a percentage of revenue was 23% for 2016 and 13%
in 2015.
Selling, general and administrative expenses
("SG&A") SG&A expenses were
$8,885 in 2016; a decrease of
$1,432 compared with $10,317 in 2015. As a percentage of
revenue, SG&A was 24% in 2016 and 13% in 2015.
Excluding the non-cash items of depreciation and share-based
compensation, SG&A was $8,735 in
2016 compared to $10,161 in 2015, a
decrease of $1,426 or 14%.
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 have
been 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
$1,086 compared to $1,304 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.
Foreign exchange loss The Company
had a foreign exchange gain of $2,299
in 2016 compared to a loss of $(883)
in 2015 due to the fluctuations in 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 $2,340 (2015 – loss of $629) related to intercompany balances.
Finance costs Finance costs
consist of interest expenses on operating loans, loans and
borrowings and bank charges of $798
for 2016 versus $913 for 2015.
The decrease in finance costs relate to a decreased utilization of
the Company's credit facility.
Provision for settlement
Subsequent to June
30, 2016, 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
Company's wholly-owned subsidiary, Cathedral Energy Services Inc.
("INC"). The first collective action lawsuit, Wallace vs.
Cathedral Energy Services Inc. ("Wallace"), was filed on
November 6, 2014, in the United
States District Court for the Southern District of Texas, Houston Division (the "Houston Court") alleging that INC employed or
contracted Measurement While Drilling ("MWD") and Directional
Drilling ("DD") operators were entitled to recover unpaid overtime
wages under the Fair Labor Standards Act ("FLSA"). The second
collective action lawsuit, Price vs. Cathedral Energy Services
Inc., was filed on April 9, 2015, in
the United States District Court District of Colorado, Denver Division (and subsequently
transferred to Houston Court)
alleging that the Company incorrectly calculated the overtime pay
for certain hourly paid operators in violation of the
FLSA. Legal actions involving similar alleged FLSA violations
have been filed in the United
States against a number of other oilfield service
companies. Cathedral has denied the allegations, and
vigorously defended the litigation leading up to entering into the
Settlement Agreement.
The Settlement Agreement provides a mechanism for finally
resolving and releasing the claims for all INC employed and
contracted MWD and DD operators. Under the terms of the
Settlement Agreement, the parties will establish a settlement fund
of up to $3,400 USD. The final
determination of the settlement fund amount will be based on the
number of claimants that participate in the settlement and
Cathedral estimates the final settlement amount will be in the
$2,900 USD range. The
settlement fund payments will be paid quarterly by the Corporation
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.
All claims in both Collective actions have been settled and the
Houston Court, approved the
settlement of the Wallace claim on August
8, 2016. Any settlement fund payments made by
Cathedral are subject to the approval of Cathedral's banking
syndicate.
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 completes
Cathedral's exit from carrying on a business in Venezuela.
Income tax For 2016, the Company
had an income tax recovery of $3,818
compared to expense of $(8,853) in
2015. Excluding the non-cash gain on disposal of foreign
subsidiary and adjustments to prior years' tax provisions, the
effective tax rate was 37% for 2016 and 25% 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
$10,768 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 six
months ended June 30, 2016, the
Company had funds from continuing operations (see Non-GAAP
Measurements) of $(1,950) (2015 -
$3,112). The decrease in funds
from continuing operations is due to lower activity levels and
reductions in day rates. In 2016 the Company reduced its bank
loans by $5,317 which included a
reduction in the revolving term loan of $5,000. Cash balances as at June 30, 2016 were $2,244.
Working capital At June 30, 2016 the Company had working capital of
$17,210 (December 31, 2015 - $13,550) and a working capital ratio of 2.5 to 1
(December 31, 2015 – 1.5 to 1).
The increase in working capital level was primarily due to the sale
of DPI which had the effect of reducing certain payables
recorded.
Credit facility The Company has a
3 year committed revolving credit facility (the "Facility") that
expires in August 2017. The Facility is secured by a general
security agreement over all present and future personal
property.
The Facility was amended on June 12,
2015 (the "First Amendment"); in January 2016, the Company negotiated further
amendments to the Facility ("Second Amendment") and further
amendments occurred in June 2016
("Third Amendment").
The Second and Third Amendments have less restrictive financial
covenants than the prior Facility terms. The Third Amendment
provides for credit availability of $35,000, representing a $25,000 decrease from the First
Amendment. The First Amendment increased the accordion
feature to $35,000 and this was
unchanged in the Second and Third Amendments. The Second and Third
Amendments mature in August, 2017, consistent with the duration of
the original Facility. The 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.
Effective 2015 Q4 the Company includes lost-in-hole equipment
proceeds in the definition of EBITDA per credit agreement.
During the waiver period associated with the Third Amendment
there is a minimum cumulative EBITDA per credit agreement for the
two quarters ending June 30, 2016 of
$100. The applicable cumulative
EBITDA per credit agreement for the lending agreement in 2016 Q1
and Q2 was $230 compared with the
required minimum EBITDA of $100. As such, the Company currently is in
compliance with each of the financial covenants under the Third
Amendment.
On August 9, 2016, the Company
completed negotiations on the Fourth Amending Agreement. The Fourth
Amendment provides for credit availability of $33,000, further reducing to $30,000 by December 31,
2016 and $25,000 by
March 31, 2017. The
Fourth Amendment matures in August, 2017, consistent with the
duration of the original Facility.
The financial covenants associated with the Amendments are as
follows:
Quarter
ending:
|
Maximum Funded Debt to EBITDA
per credit agreement
Ratio
|
Minimum Debt Service
Ratio
|
June 30,
2016
|
Waived
|
Waived
|
September 30,
2016
|
Waived
|
Waived
|
December 31,
2016
|
Waived
|
Waived
|
March 31,
2017
|
Waived
|
Waived
|
June 30,
2017
|
Waived
|
Waived
|
September 30, 2017 and
thereafter
|
3.00
|
1.75
|
Under the Fourth Amendment the working capital covenant in the
Facility was also waived.
The Fourth Amendment has the following required minimum
cumulative EBITDA per the credit agreement:
|
Three months ended September 30,
2016
|
|
|
|
|
|
|
|
$1,100
|
|
Six months ended December 31,
2016
|
|
|
|
|
|
|
|
$2,500
|
|
Nine months ended March 31,
2017
|
|
|
|
|
|
|
|
$4,900
|
|
Twelve months ended June 30,
2017
|
|
|
|
|
|
|
|
$5,000
|
Under the Fourth Amendment the lending syndicate has required
the Company provide its plan by September
15, 2016 to get Cathedral's Facility within more typical
industry covenant levels based on cash flow the business is able to
generate in this current environment. This plan will be
considered in the context of extending the maturity of the
Company's current Facility beyond August
2017 or entering into a new credit Facility agreement with a
term extending beyond August 2017. There is no guarantee the
lending syndicate will either extend the existing Facility beyond
August 2017 or enter into a new
Facility with a later maturity date. As such the entire
Facility may be come due and payable within 12 months of August
2016. The Company will continue to work with the existing
lenders or seek other alternatives in respect of the maturity of
its existing Facility.
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 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. The
Company has historically maximized the use of this option thereby
lowering its interest costs, however, the ability to achieve these
lower rates will be impacted in the future based on current rates
which increase based on the Company's funded debt to EBITDA per
credit agreement.
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 Q2 waiver period
were:
|
Ratio
|
|
|
|
June 30, 2016
value
|
|
Debt service
ratio
|
|
|
|
2.49:1
|
|
Funded debt to EBITDA per credit
agreement
|
|
|
|
6.44:1
|
|
Working capital
ratio
|
|
|
|
2:49:1
|
|
Cumulative minimum
EBITDA
|
|
|
|
$230
|
In light of the current volatility in oil and gas prices and
uncertainty regarding the timing for recovery in such prices,
management's ability to forecast activity levels is
challenging. As a consequence the Company could breach the
covenants included in the Fourth Amendment in 2016 and 2017. An
actual breach would constitute an event of default under the
Facility, which provides the lenders several alternatives including
a waiver of the breach, an amendment to the Facility to reset the
covenant or, in the unlikely event, a requirement to repay the
borrowings.
In the event the Company believes it could be in breach of its
loan covenants it will first enter into discussions on amendments
to the financial covenants in the Facility to avoid such a
breach.
The following table outlines the current credit Facility:
|
|
|
|
|
|
|
June
30
|
|
December
31
|
|
|
2016
|
|
2015
|
Total credit
facility
|
$
|
35,000
|
$
|
60,000
|
Drawings on credit
facility:
|
|
|
|
|
|
Operating
loan
|
|
785
|
|
2,484
|
|
Revolving term
loan
|
|
25,000
|
|
30,000
|
|
Letters of
credit
|
|
1,503
|
|
1,554
|
Total drawn
facility
|
$
|
27,288
|
$
|
34,038
|
Undrawn portion of credit
facility
|
$
|
7,712
|
$
|
25,962
|
Net debt (see NON-GAAP
MEASUREMENTS):
|
|
|
|
|
|
Loans and borrowings, net
of current
portion
|
$
|
25,298
|
$
|
30,477
|
|
Working
capital:
|
|
|
|
|
|
|
Current
assets
|
$
|
28,783
|
$
|
41,575
|
|
|
Current
liabilities
|
|
(11,573)
|
|
(28,025)
|
|
Working
capital
|
$
|
17,210
|
$
|
13,550
|
Net
debt
|
$
|
8,088
|
$
|
16,927
|
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, 2015. As at June 30,
2016, the Company had a commitment to purchase approximately
$nil of equipment.
Contingency On
October 29, 2014 Cathedral received a
letter from one of its U.S. clients ("the Complainant") alleging a
down-hole drilling incident which impacted two of their wells in
December 2013. The Complainant had indicated potential
damages of $3,000 USD and in 2015 Q3
increased this indication to $3,700
USD. Cathedral does not carry insurance for this type
of incident. In January 2016,
the Complainant filed a formal complaint in Pennsylvania court initiating a formal legal
process related to their claim. On June 17, 2016, the Complainant initiated the
"Discovery/Interrogatory" process (which is a normal part of the
litigation process) where they are requesting Cathedral provide
certain information and documents related to the case.
Cathedral is currently preparing responses to these interrogatories
and has filed a list of interrogatories for the Complainant.
On July 12, 2016, Cathedral, with its
legal counsel, filed a formal response to the complaint. Due
to the uncertainty around what amount, if any, and the means of
settlement, the Company has made no provision in the financial
statements for this incident.
Share capital At August 9, 2016, the Company has 36,295,380 common
shares and 1,589,499 options outstanding with a weighted average
exercise price of $2.28.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL
POSITION
June 30, 2016
and December 31, 2015
Dollars
in '000s
(unaudited)
|
June
30
|
December
31
|
|
2016
|
2015
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
$
|
2,244
|
$
|
1,426
|
|
Trade
receivables
|
13,191
|
23,107
|
|
Current taxes
recoverable
|
2,891
|
2,962
|
|
Prepaid
expenses
|
1,474
|
1,988
|
|
Inventories
|
8,983
|
12,092
|
|
|
|
Total current
assets
|
28,783
|
41,575
|
Equipment
|
100,001
|
108,918
|
Intangible
assets
|
2,008
|
2,006
|
Deferred tax
assets
|
6,210
|
3,111
|
|
|
|
Total non-current
assets
|
108,219
|
114,035
|
Total
assets
|
$
|
137,002
|
$
|
155,610
|
|
|
|
Liabilities and
Shareholders'
Equity
|
|
|
Current
liabilities:
|
|
|
|
Operating
loan
|
$
|
785
|
$
|
2,484
|
|
Trade and other
payables
|
8,978
|
20,198
|
|
Loans and
borrowings
|
388
|
686
|
|
Provision for settlement,
current
|
1,422
|
-
|
|
Deferred
revenue
|
-
|
4,657
|
|
|
|
Total current
liabilities
|
11,573
|
28,025
|
Loans and
borrowings
|
25,298
|
30,477
|
Provision for
settlement,
long-term
|
2,407
|
-
|
Deferred tax
liabilities
|
-
|
501
|
|
|
|
Total non-current
liabilities
|
27,705
|
30,978
|
Total
liabilities
|
39,278
|
59,003
|
|
|
|
Shareholders'
equity:
|
|
|
|
Share
capital
|
74,481
|
74,481
|
|
Contributed
surplus
|
9,554
|
9,470
|
|
Accumulated other
comprehensive
income
|
9,843
|
11,577
|
|
Retained
earnings
|
3,846
|
1,079
|
|
|
|
Total shareholders'
equity
|
97,724
|
96,607
|
Total liabilities and
shareholders'
equity
|
$
|
137,002
|
$
|
155,610
|
CONDENSED CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME (LOSS)
Three and six months
ended June 30, 2016 and
2015
Dollars in '000s except per share amounts
(unaudited)
|
Three months ended
June
30
|
Six months ended June
30
|
|
2016
|
2015
|
2016
|
2015
|
Revenues
|
$
|
15,587
|
$
|
29,679
|
$
|
36,682
|
$
|
79,756
|
Cost of
sales:
|
|
|
|
|
|
Direct
costs
|
(13,607)
|
(26,324)
|
(29,797)
|
(66,281)
|
|
Depreciation
|
(4,195)
|
(5,134)
|
(8,428)
|
(10,225)
|
|
Share-based
compensation
|
8
|
(19)
|
(2)
|
(34)
|
Total cost of
sales
|
(17,794)
|
(31,477)
|
(38,227)
|
(76,540)
|
Gross
margin
|
(2,207)
|
(1,798)
|
(1,545)
|
3,216
|
Selling, general and
administrative
expenses:
|
|
|
|
|
|
Direct
costs
|
(3,881)
|
(4,639)
|
(8,735)
|
(10,161)
|
|
Depreciation
|
(34)
|
(44)
|
(68)
|
(88)
|
|
Share-based
compensation
|
(32)
|
(41)
|
(82)
|
(68)
|
Total selling, general and
administrative
expenses
|
(3,947)
|
(4,724)
|
(8,885)
|
(10,317)
|
|
(6,154)
|
(6,522)
|
(10,430)
|
(7,101)
|
Gain on disposal of
equipment
|
194
|
135
|
1,086
|
1,304
|
Gain (loss) on disposal of
land and
buildings
|
-
|
(52)
|
-
|
456
|
Loss from operating
activities
|
(5,960)
|
(6,439)
|
(9,344)
|
(5,341)
|
Finance
costs
|
(411)
|
(446)
|
(798)
|
(913)
|
Foreign exchange gain
(loss)
|
(55)
|
543
|
2,299
|
(883)
|
Write-down of
inventory
|
-
|
-
|
(277)
|
-
|
Provision for
settlement
|
(3,796)
|
-
|
(3,796)
|
-
|
Gain on disposal of foreign
subisidiary
|
-
|
-
|
10,865
|
-
|
Earnings (loss) before
income
taxes
|
(10,222)
|
(6,342)
|
(1,051)
|
(7,137)
|
Income tax recovery
(expense):
|
|
|
|
|
|
Current
|
134
|
535
|
260
|
52
|
|
Deferred current
year
|
3,261
|
1,210
|
3,647
|
1,764
|
|
Deferred adjustment to
prior
years
|
(89)
|
(10,669)
|
(89)
|
(10,669)
|
Total income tax recovery
(expense)
|
3,306
|
(8,924)
|
3,818
|
(8,853)
|
Net earnings
(loss)
|
(6,916)
|
(15,266)
|
2,767
|
(15,990)
|
Other comprehensive income
(loss):
|
|
|
|
|
|
Foreign currency
translation gain on disposal of foreign
subsidiary
|
-
|
-
|
1,348
|
-
|
|
Foreign currency
translation differences for foreign
operations
|
123
|
(742)
|
(3,082)
|
3,064
|
Total comprehensive income
(loss)
|
$
|
(6,793)
|
$
|
(16,008)
|
$
|
1,033
|
$
|
(12,926)
|
|
|
|
|
|
Net earnings (loss) per
share
|
|
|
|
|
|
Basic
|
$
|
(0.19)
|
$
|
(0.42)
|
$
|
0.08
|
$
|
(0.44)
|
|
Diluted
|
$
|
(0.19)
|
$
|
(0.42)
|
$
|
0.08
|
$
|
(0.44)
|
CONDENSED CONSOLIDATED STATEMENT OF CASH
FLOWS
Three and six months ended June 30, 2016 and 2015
Dollars in
'000s
(unaudited)
|
Three months ended June
30
|
Six months ended June
30
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Cash provided by (used
in):
|
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
|
|
|
|
Net earnings
(loss)
|
$
|
(6,916)
|
$
|
(15,266)
|
$
|
2,767
|
$
|
(15,990)
|
|
Items not involving
cash:
|
|
|
|
|
|
|
Depreciation
|
4,229
|
5,178
|
8,496
|
10,313
|
|
|
Total income tax (recovery)
expense
|
(3,306)
|
8,924
|
(3,818)
|
8,853
|
|
|
Unrealized foreign exchange
loss on intercompany
balances
|
24
|
(647)
|
(2,340)
|
629
|
|
|
Finance
costs
|
411
|
446
|
798
|
913
|
|
|
Share-based
compensation
|
24
|
60
|
84
|
102
|
|
|
Gain on disposal of
equipment
|
(194)
|
(135)
|
(1,086)
|
(1,304)
|
|
|
Gain on disposal of land
and
building
|
-
|
52
|
-
|
(456)
|
|
|
Write-down of
inventory
|
-
|
-
|
277
|
-
|
|
|
Provision for
settlement
|
3,796
|
-
|
3,796
|
-
|
|
|
Gain on disposal of foreign
subsidiary
|
-
|
-
|
(10,865)
|
-
|
|
Cash flow from
operations
|
(1,932)
|
(1,388)
|
(1,891)
|
3,060
|
|
Changes in non-cash
operating working
capital
|
4,615
|
2,143
|
8,850
|
20,954
|
|
Income taxes recovered
(paid)
|
259
|
(258)
|
139
|
(1,585)
|
Cash flow from operating
activities
|
2,942
|
497
|
7,098
|
22,429
|
Investing
activities:
|
|
|
|
|
|
Equipment
additions
|
(70)
|
(1,845)
|
(338)
|
(6,148)
|
|
Intangible asset
additions
|
(50)
|
(39)
|
(95)
|
(189)
|
|
Proceeds on disposal of
equipment
|
506
|
479
|
1,711
|
2,151
|
|
Proceeds on disposal of
land and
buildings
|
-
|
-
|
-
|
6,174
|
|
Changes in non-cash
investing working
capital
|
(635)
|
(498)
|
11
|
(93)
|
Cash flow from (used for)
investing
activities
|
(249)
|
(1,903)
|
1,289
|
1,895
|
Financing
activities:
|
|
|
|
|
|
Change in
operating
loan
|
380
|
881
|
(1,708)
|
(155)
|
|
Repayments on loans and
borrowings
|
(2,714)
|
(3,160)
|
(5,317)
|
(23,340)
|
|
Interest
paid
|
(320)
|
(774)
|
(454)
|
(1,129)
|
|
Dividends
paid
|
-
|
(1,452)
|
-
|
(4,446)
|
Cash flow from (used for)
financing
activities
|
(2,654)
|
(4,505)
|
(7,479)
|
(29,070)
|
Effect of exchange rate on
changes in cash and cash
equivalents
|
5
|
(99)
|
(90)
|
348
|
Change in cash and cash
equivalents
|
44
|
(6,010)
|
818
|
(4,398)
|
Cash and cash equivalents,
beginning of
period
|
2,200
|
6,721
|
1,426
|
5,109
|
Cash and cash equivalents,
end of
period
|
$
|
2,244
|
$
|
711
|
$
|
2,244
|
$
|
711
|
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: WTI
pricing needs to be in the $50 USD
range for activity levels to improve; it is not clear how the
recent WTI price retreat into the $40
USD bbl range will impact sales prospects; customer
enthusiasm may wane in the short term as a consequence of recent
WTI price retreat; we still view our business prospects very
favorably; 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; the Company could breach the covenants included in the
Amended Credit Facility; Cathedral expects to comply with all
covenants during 2016; and long-term intent of the Company to pay
quarterly dividends to shareholders.
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;
- the number of claimants that participate in the FLSA
settlement;
- 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) "Adjusted EBITDAS" - defined as earnings
before finance costs, unrealized foreign exchange on intercompany
balances, taxes, non-recurring gains and losses on disposal of
property and equipment (see non-GAAP measurement), depreciation,
non-recurring expenses (including severance), write-down of
inventory, gain on disposal of foreign subsidiary, provision for
settlement 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);
iv) "EBITDA per credit agreement" – defined in
the Company's credit agreement as Adjusted EBITDAS less gains on
disposal of equipment not previously excluded, less any unusual or
non-recurring cash expenses approved by the Lenders (excluding
non-recurring compensation previously deducted from Adjusted
EBITDAS" and plus lost-in-hole equipment proceeds. EBITDA per
credit agreement is used in calculation of banking covenants;
v) "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);
vi) "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;
vii) "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;
viii) "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);
ix) "Non-recurring gains and losses on
disposal of property and equipment" – are disposals of property and
equipment that do not occur on a regular or periodic basis.
Unlike the lost-in-hole recoveries the proceeds from these gains
are not used on equivalent replacement property. These are
often on non-field equipment such as land and buildings;
x) "Net 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
xi) "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 June
30
|
Six months ended June
30
|
|
2016
|
2015
|
2016
|
2015
|
Gross
margin
|
$
|
(2,207)
|
$
|
(1,798)
|
$
|
(1,545)
|
$
|
3,216
|
Add non-cash items included
in cost of
sales:
|
|
|
|
|
|
Depreciation
|
4,195
|
5,134
|
8,428
|
10,225
|
|
Share-based
compensation
|
(8)
|
19
|
2
|
34
|
|
|
|
|
|
Adjusted gross
margin
|
$
|
1,980
|
$
|
3,355
|
$
|
6,885
|
$
|
13,475
|
|
|
|
|
|
Adjusted gross margin
%
|
13%
|
11%
|
19%
|
17%
|
|
|
|
|
|
Adjusted
EBITDAS
|
|
|
|
Three months ended June
30
|
Six months ended June
30
|
|
2016
|
2015
|
2016
|
2015
|
Earnings (loss) before
income
taxes
|
$
|
(10,222)
|
$
|
(6,342)
|
$
|
(1,051)
|
$
|
(7,137)
|
Add:
|
|
|
|
|
|
Depreciation included in
cost of
sales
|
4,195
|
5,134
|
8,428
|
10,225
|
|
Depreciation included in
selling, general and administrative
expenses
|
34
|
44
|
68
|
88
|
|
Share-based compensation
included in cost of
sales
|
(8)
|
19
|
2
|
34
|
|
Share-based compensation
included in selling, general and administrative
expenses
|
32
|
41
|
82
|
68
|
|
Finance
costs
|
411
|
446
|
798
|
913
|
|
|
|
|
|
EBITDAS
|
(5,558)
|
(658)
|
8,327
|
4,191
|
|
Unrealized foreign exchange
(gain) loss on intercompany
balances
|
24
|
(647)
|
(2,340)
|
629
|
|
Non-recurring
expenses
|
100
|
16
|
643
|
185
|
|
Non-recurring gain on
disposal of land and
building
|
-
|
52
|
-
|
(456)
|
|
Write-down of
inventory
|
-
|
-
|
277
|
-
|
|
Provision for
settlement
|
3,796
|
-
|
3,796
|
-
|
|
Gain on disposal of foreign
subsidiary
|
-
|
-
|
(10,865)
|
-
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDAS
|
$
|
(1,638)
|
$
|
(1,237)
|
$
|
(162)
|
$
|
4,549
|
|
|
|
Funds from
operations
|
|
|
|
Three months ended June
30
|
Six months ended June
30
|
|
2016
|
2015
|
2016
|
2015
|
Cash flow from operating
activities
|
$
|
2,942
|
$
|
497
|
$
|
7,098
|
$
|
22,429
|
Add
(deduct):
|
|
|
|
|
|
Changes in non-cash
operating working
capital
|
(4,615)
|
(2,143)
|
(8,850)
|
(20,954)
|
|
Income taxes
paid
|
(259)
|
258
|
(139)
|
1,585
|
|
Current tax recovery
(expense)
|
134
|
535
|
260
|
52
|
|
|
|
|
|
Funds from
operations
|
$
|
(1,798)
|
$
|
(853)
|
$
|
(1,631)
|
$
|
3,112
|
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 and
dependable flowback and production testing solutions. 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.