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