/NOT FOR DISSEMINATION IN THE
UNITED STATES OF AMERICA/
CALGARY, AB, March 10, 2022 /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, 2021 and 2020.
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. This news release contains references
to Adjusted gross margin (gross margin plus non-cash items of
depreciation and share-based compensation), Adjusted gross margin %
(adjusted gross margin divided by revenues) and Adjusted EBITDA
(earnings before finance costs, unrealized foreign exchange on
intercompany balances, taxes, depreciation, non-recurring costs
(including severance and non-cash provision for bad debts),
write-down of equipment, write-down of inventory and share-based
compensation). These terms do not have standardized meanings
prescribed under International Financial Reporting Standards (IFRS)
and may not be comparable to similar measures used by other
companies, see "Non-GAAP Measures" later in this news
release.
2021 Q4 KEY TAKEAWAYS
- Grew Canadian market share in 2021 to 1;8.1% from 8.5% at the
end of 2020;
- Completed a transformation of the executive leadership and US
sales group in the second half of the year;
- Executed two acquisitions in Q3 as part of Cathedral's
fundamental strategy of Consolidation
- o In July 2021 the Company
completed the acquisition of Precision's Canadian-based directional
drilling business for a purchase price of $6,350 which included a $3,000 cash investment by Precision to further
grow Cathedral technology
-
- The transaction also includes a marketing alliance focused on
producing new U.S. and Canadian customer opportunities as well as
potential integrated service offerings and technology
initiatives
- Finally, Shuja Goraya, Precision
Drilling's Chief Technology Officer, joined the Cathedral Board of
Directors
- In September 2021 Cathedral
acquired the assets of Valiant Energy Services for $1,500 which help solidify Cathedral's position
as one of the top three directional drilling contractors in
Canada by job count
- These numerous initiatives translated into material financial
results for H2-2021 vs H1-2021 as revenues were 135% higher,
Adjusted Gross Margin was 471% higher, and Adjusted Gross Margin %
improved to 21% from 9%
-
- Q4 Adjusted Gross Margin % was lower than Q3 primarily due to
non-recurring rental expenses;
- Cathedral remained committed to another core strategy of
technology deployment through the introduction of the REACT motor
and ongoing build-out of the Company's RapidFire
Measurement-While-Drilling systems which will see 18 systems
deployed by 2022 Q2;
- Strengthened the Company's financial flexibility and security
via:
-
- A successful non-brokered Private Placement in Q1 for
$3,164 in proceeds
- An amendment in Q2 to its credit facility that extends the
facility to June 30, 2023, which also
returned the facility to full $12,000
availability and added $1,000 in
HASCAP financing.
- February 11, 2022 acquired
Discovery Downhole Services for $20.8
million. Discovery is a U.S.-based, high-performance
mud motor technology rental business with operations in
North Dakota, Texas, and Wyoming. Discovery represents
our initial step in expanding the US operations
PRESIDENT'S MESSAGE
Comments from President & CEO Tom
Connors:
2021 has been a year of significant transformation for both our
industry and Cathedral. While industry activity increased versus
the prior year due to rising commodity prices, improving cash flow
projections, and expanded capital expenditure programs for many oil
and gas producers, Cathedral's new management team and the
completion of two key acquisitions in the last half of the year
helped the Company outpace the overall sector recovery.
During 2021, our commitment to high-quality, reliable service
with industry-leading technology paid off as customers increasingly
turned to Cathedral for their directional drilling needs. Our
market share grew significantly with Cathedral exiting 2021 among
the highest performers in the industry at 18.1% of the Canadian
market, up from 8.5% at the end of 2020.
Conditions were constructive in the fourth quarter of 2021, with
Cathedral recording increased activity levels and day rates in our
Canadian and the US operations over both the fourth quarter last
year, and the third quarter of 2021.Our improved operating
performance drove solid financial results in the quarter, with
revenue more than tripling, and Adjusted EBITDAS growing almost
400% to $1.2 million, from the same
quarter last year. Gross margins were lower in quarter versus 2021
Q3 due to differences in revenue mix related to the timing of our
customers' winter drilling programs and a supply related delay in
replacing short-term rental items and expenses related to our
recent acquisitions. We anticipate gross margins will return to
higher levels in 2022 Q1 as we replace the backlog of third-party
rental equipment with Cathedral technology in the quarter.
During the fourth quarter, our integration of the recent
acquisitions continued smoothly, both of which significantly
contributed to a strong expansion of our market share,
complementary technology offerings, and additional experienced
personnel in a tight labour market. We believe that further
consolidation in the directional drilling industry is needed to
create a sustainable, efficient sector that can thrive in the
future, and we see numerous opportunities to add value for
customers and shareholders in both Canada and the US. Already in 2022, we have
successfully completed the acquisition of Discovery Downhole
Services, providing us with strategic growth in the US motor
technology rental business. We will continue to carefully evaluate
prospects as they arise, selectively looking for ways to add value
through accretive acquisitions that help us grow strategically
while not placing undo pressure on our capital structure.
The combination of low levels of industry investment, an
economic resurgence from the COVID-19 pandemic, further exacerbated
by geopolitical events in Europe
certainly appear to support a sustained period of higher commodity
prices than we have witnessed for several years. While E&P
Companies remain disciplined and spend smaller portions of their
capital budgets on drilling programs versus historical norms, the
higher levels of cash flow for the industry should ultimately
translate to improved levels of oilfield service activity and
pricing. While we expect industry conditions to remain strong in
the near-to-medium term and anticipate increased demand for our
services, Cathedral will continue to proceed with conservative
price assumptions and a disciplined approach to spending. To meet
the increased needs of our customers, we are re-investing in our
business with a capital expenditure plan for 2022 of approximately
$14.9 million, focused largely on
adding new mud motors, and the completion of the 18
RapidFireTM Measurement-While-Drilling ("MWD") systems
from our 2021 build program. We are pleased with the initial
response from our Canadian customers to the introduction of our new
REACT motor, which places the sensor readings closer the drill bit,
and anticipate strong demand for the technology in specific areas
such as the Clearwater and Viking
formations as we go forward.
Cathedral remains well positioned to take advantage of robust
industry conditions with a conservative balance sheet, high-quality
assets and strong customer relationships, we look forward to the
continued expansion of our market share in 2022 in Canada and the US through both organic growth
and acquisitions. We are executing on our strategic plan of
increasing size and scale through organic growth and accretive
acquisitions focused on shareholder returns and increasing earnings
per share.
FINANCIAL HIGHLIGHTS
|
|
|
|
Three months ended
December 31
|
Year ended December
31
|
|
2021
|
2020
|
2021
|
2020
|
Revenues
|
$
|
23,710
|
$
|
7,448
|
$
|
62,524
|
$
|
40,574
|
Adjusted gross margin
% (1)
|
17%
|
16%
|
18%
|
12%
|
Adjusted EBITDAS
(1)
|
$
|
1,273
|
$
|
(435)
|
$
|
4,520
|
$
|
(116)
|
Cash flow - operating
activities
|
$
|
601
|
$
|
231
|
$
|
(3,499)
|
$
|
1,191
|
Reversals of
Impairments (Impairments and direct write-offs)
|
$
|
614
|
$
|
172
|
$
|
614
|
$
|
(6,822)
|
Loss
|
$
|
(1,097)
|
$
|
(6,684)
|
$
|
(8,626)
|
$
|
(27,731)
|
Basic per
share
|
$
|
(0.01)
|
$
|
(0.14)
|
$
|
(0.13)
|
$
|
(0.56)
|
Equipment additions -
cash basis
|
$
|
1,275
|
$
|
184
|
$
|
3,553
|
$
|
2,603
|
Weighted average
shares outstanding
|
|
|
|
|
Basic
(000s)
|
80,197
|
49,468
|
65,031
|
49,468
|
Diluted
(000s)
|
81,425
|
49,468
|
65,740
|
49,468
|
|
|
|
|
|
|
|
|
December
31
2021
|
December
31
2020
|
|
|
|
Working
capital
|
|
|
$
|
14,117
|
$
|
7,680
|
Total
assets
|
|
|
$
|
75,423
|
$
|
64,280
|
Loans and borrowings
excluding current portion
|
|
|
$
|
5,035
|
$
|
1,560
|
Shareholders'
equity
|
|
|
$
|
42,504
|
$
|
39,974
|
|
|
|
|
|
(1) Refer to
"NON-GAAP MEASUREMENTS"
|
|
RESULTS OF OPERATIONS – THREE MONTHS ENDED DECEMBER 31
Revenues
|
2021 Q4
|
2020 Q4
|
Canada
|
$
|
18,535
|
$
|
4,042
|
United
States
|
5,175
|
3,406
|
Total
|
$
|
23,710
|
$
|
7,448
|
|
|
|
Revenues 2021 Q4
revenues were $23,710, which
represented an increase of $16,262 or
218% from 2020 Q4 revenues of $7,448.
Canadian revenues (excluding motor rental revenues) increased to
$17,637 in 2021 Q4 from $3,740 in 2020 Q4; a 372% increase. This
increase was the result of: i) a 310% increase in activity days to
2,269 in 2021 Q4 from 553 in 2020 Q4 and ii) a 15% increase in the
average day rate to $7,773 in 2021 Q4
from $6,764 in 2020 Q4.
Based on publicly disclosed Canadian drilling and directional
drilling days, Cathedral's market share for 2021 Q4 was 18.1%
compared to 7.7% in 2020 Q4. Day rates increased due to
certain ancillary revenues along with overall change in client
mix.
U.S. revenues (excluding motor rental revenues) increased 49% to
$4,765 in 2021 Q4 from $3,201 in 2020 Q4. This increase was the
result of: i) a 28% increase in activity days to 459 in 2021 Q4
from 359 in 2020 Q4; and ii) a 16% increase in the average day rate
to $10,381 in 2021 Q4 from
$8,915 in 2020 Q4 (when converted to
Canadian dollars).
The average active land rig count for the U.S. was up 84% in
2021 Q4 compared to 2020 Q4 (source: Baker Hughes). The
Company experienced a 28% increase in activity resulting in a
decrease in market share compared to 2020 Q4. Day rates in
USD increased 21% to $8,256 USD in
2021 Q4 from $6,843 USD in 2020
Q4. Revenue day rates increased due to an increase in
revenues from providing RSS services which are rented from a 3rd
party.
Motor rentals increased in both Canada and the U.S. Combined rental
revenues increased to $1,308 in 2021
Q4 compared to $507 in 2020 Q4.
Rentals were up due to the industry increase in drilling
activity.
Government grants The Company did not qualify for
CEWS and CERS claims in Q4 of 2021 due to the increase in revenues
for the quarter.
In Q4 of 2020 the Company recognized $399 of CEWS benefits which reduced salary
expenses as follows:
- Cost of sales $187;
- Selling, general and administrative expenses $154; and
- Technology group expenses $58.
In Q4 of 2020 , the Company recognized the benefit from the CERS
program of $280 which reduced cost of
sales $221 and selling, general and
administrative $59.
Gross margin and adjusted gross
margin Gross margin for 2021 Q4 was 3%
compared to -32% in 2020 Q4. Adjusted gross margin (see
Non-GAAP Measurements) for 2021 Q4 was $4,047 or 17% compared to $1,199 or 16% for 2020 Q4.
Adjusted gross margin, as a percentage of revenue, increased due
to lower repairs and a reduction in fixed costs as percentage of
revenue, partially offset by increases in field labour expenses and
rentals.
Depreciation of equipment allocated to cost of sales decreased
to $3,323 in 2021 Q4 from
$3,560 in 2020 Q4 due to the aging of
the assets as the Company uses a declining-balance depreciation for
most items. Depreciation included in cost of sales as a
percentage of revenue was 14% for 2021 Q4 and 48% in 2020 Q4.
Selling, general and administrative ("SG&A")
expenses
SG&A expenses were $2,804 in 2021
Q4; an increase of $732 compared with
$2,072 in 2020 Q4. There were
increases in SG&A wages, commissions and reduced CEWS grants
partially offset by recovery of bad debts in 2021 Q4 compared to
expense in 2020 Q4. As a percentage of revenue, SG&A was
12% in 2021 Q4 compared to 28% in 2020 Q4.
Technology group expenses
Technology group expenses were $214
in 2021 Q4; an increase of $74
compared with $140 in 2020 Q4.
Technology group expenses are related to new product development
and supporting and upgrading existing technology. Technology group
expenses consist of salaries and related benefits and burdens as
well as shop supplies.
Gain (loss) on disposal of
equipment During 2021 Q4, the Company
had a gain on disposal of equipment of $664 compared to a loss of ($183) in 2020 Q4. These gains are mainly
related to equipment lost-in-hole. Proceeds from clients on
lost-in-hole equipment are based on amounts specified in service
agreements. 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 2021 Q4, the
Company received proceeds on disposal of equipment of $1,275 (2020 Q4 - $184).
Finance costs Finance costs
consisting of interest expenses on loans and borrowings and bank
charges net of interest charged on past due accounts receivable
were a net revenue of ($53) for 2021
Q4 versus expense of $60 for 2020
Q4. Included in 2021 Q4 amount was interest revenue of
$172 (2020 Q4 - $nil).
Finance costs lease liability The
lease liability interest decreased slightly to $189 from $218.
Foreign exchange The Company had
a foreign exchange gain of $78 in
2021 Q4 compared to $1,686 in 2020 Q4
due to the fluctuations of the Canadian dollar relative to the U.S.
dollar. The Company's foreign operations are denominated in
USD and therefore, upon consolidation, gains and losses due to
fluctuations in the foreign currency exchange rates are recorded as
other comprehensive income on the balance sheet as a component of
equity. However, gains and losses in the Canadian entity on
U.S. denominated intercompany balances continue to be recognized in
the statement of comprehensive income (loss). Included in the
2021 Q4 foreign currency loss are unrealized gain of $136 (2020 Q4 –$1,678) related to intercompany
balances.
Impairment and direct write-downs In 2021 there was
a reversal on a U.S. right of use asset that was subleased in the
amount of $768 which was partially
offset by write-down of inventory of $154 for a net reversal of $664. The inventory write-down relates to
parts that are unlikely to be used to repair the Company's
tools.
In 2020 Q4, the Company entered into a sub-lease for one of the
properties previously written down and reversed $549 equal to the sublease asset.
Additionally, in 2020 Q4 there was a write-down on slow moving
inventory of $377 for a net reversal
of $172.
Income tax Previously, Cathedral
derecognized deferred tax assets due to a recent history of tax
losses within both of Cathedral's legal entities.
Income tax expense is booked based upon expected annualized
rates using the statutory rates of 25.5% for Canada and 23% for the U.S.
RESULTS OF OPERATIONS – YEAR ENDED DECEMBER 31
Revenues
|
2021
|
2020
|
Canada
|
$
|
45,961
|
$
|
13,837
|
United
States
|
16,563
|
26,737
|
Total
|
$
|
62,524
|
$
|
40,574
|
Revenues 2021 revenues were
$62,524, which represented an
increase of $21,950 or 54% from 2020
revenues of $40,574.
Canadian revenues (excluding motor rental revenues) increased to
$43,300 in 2021 from $11,104 in 2020; a 290% increase. This
increase was the result of: i) a 282% increase in activity days to
5,952 in 2021 from 1,558 in 2020 and ii) a 2% increase in the
average day rate to $7,275 in 2021
from $7,127 in 2020.
Based on publicly disclosed Canadian drilling and directional
drilling days, Cathedral's market share for 2021 was 14.3% compared
to 5.5% in 2020. The increase in day rates was due to an
increase in day rates to compensate for escalating operating costs,
including field labour rates.
U.S. revenues (excluding motor rental revenues) decreased 45% to
$14,211 in 2021 from $25,662 in 2020. This decrease was the
result of: i) 31% decrease in activity days to 1,526 in 2021 from
2,197 in 2020; and ii) a 20% decrease in the average day rate to
$9,312 in 2021 from $11,680 in 2020 (when converted to Canadian
dollars).
Cathedral's U.S. business pre-COIVID was primarily concentrated
in Oklahoma in the Anadarko basin and this region experienced a
disproportionately severe down-turn due the COVID-19
pandemic. In response, the Company made the strategic
decision to reposition its business in Houston to focus on Texas and the Permian basin. This
required a new management and sales team which was in place by 2021
Q3. While Cathedral U.S. recovery has lagged the industry as
a result of these significant changes, 2021 second half revenues
increased by 30% over the first six month of the year.
The average active land rig count for the U.S. was up 10% in
2021 compared to 2020 (source: Baker Hughes). The Company
experienced a 34% decline in activity resulting in a decrease in
market share compared to 2020. Day rates in USD decreased 14%
to $7,439 USD in 2021 from
$8,654 USD in 2020. The 2021
rate is down due to a decrease in revenues from providing rotary
steerable system (RSS) services which are rented from a 3rd party
and a reduction in certain ancillary
revenues.
Motor rentals for Canada were
roughly at the same level as 2020, but this was augmented by
increases in the U.S. Combined rental revenues increased to
$5,014 in 2021 compared to
$3,808 in 2020. U.S. rental
revenues have increased due to a focus on increasing sales for this
business line.
Government grants The Company recognized the
benefit from the Canadian Emergency Wage Subsidy ("CEWS") program
of $916 (2020 - $1,776) and $nil (2020 - $992) from U.S. Paycheck Protection Program
("PPP") which reduced salary expenses as follows:
- Cost of sales $544 (2020 -
$1,665);
- Selling, general and administrative expenses $298 (2020 - $812);
and
- Technology group expenses $74
(2020 - $291).
Additionally, the Company received $518 (2020 - $280)
from Canadian Emergency Rent Subsidy ("CERS"), which reduced cost
of sales $424 (2020 - $221) and selling, general and administrative
$94 (2020 - $59).
The 2021 CEWS claims were at reduced levels due to the increase
in revenues in 2021.
Gross margin and adjusted gross
margin Gross margin for 2021 was -2%
compared to -25% in 2020. Adjusted gross margin (see Non-GAAP
Measurements) for 2021 was $11,059 or
18% compared to $4,869 or 12% for
2020.
Adjusted gross margin improved due to a decrease in the fixed
portion of cost of sales as a percentage of revenue partially
offset by increases repairs and field labour
expenses.
Depreciation of equipment allocated to cost of sales decreased
to $12,372 in 2021 from $14,996 in 2020 due to the aging of the assets as
the Company uses a declining-balance depreciation for most
items. Depreciation included in cost of sales as a percentage
of revenue was 20% for 2021 and 37% in 2020.
Selling, general and administrative ("SG&A")
expenses
SG&A expenses were $9,059 in
2021; an increase of $164 compared
with $8,895 in 2020. This
increase was primarily due to a reduction/recovery of bad debts in
2021 offset by increased wages and lower wage assistance received
in 2021. As a percentage of revenue, SG&A was 14% in 2021
compared to 22% in 2020.
Technology group expenses
Technology group expenses were $747
in 2021; a decrease of $205 compared
with $952 in 2020. Technology
group expenses are related to new product development and
supporting and upgrading existing technology. Technology group
expenses consist of salaries and related benefits and burdens as
well as shop supplies.
Gain on disposal of equipment
During 2021, the Company had a gain on disposal of equipment of
$2,681 compared to $1,680 in 2020. These gains mainly related
to equipment lost-in-hole. Proceeds from clients on
lost-in-hole equipment are based on amounts specified in service
agreements. 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 2021, the Company
received proceeds on disposal of equipment of $3,553 (2020 - $2,603).
Finance costs Finance costs
consisting of interest expenses on loans and borrowings and bank
charges net of interest charged on past due accounts receivable
were $196 for 2021 versus
$291 for 2020. Included in 2021
amount was interest revenue of $173
(2020 - $nil).
Finance costs lease liability The
lease liability interest decreased slightly to $794 from $918.
Foreign exchange The Company had
a foreign exchange gain of $277 in
2021 compared to $971 in 2020 due to
the fluctuations of the Canadian dollar relative to the U.S.
dollar. The Company's foreign operations are denominated in
USD and therefore, upon consolidation, gains and losses due to
fluctuations in the foreign currency exchange rates are recorded as
other comprehensive income on the balance sheet as a component of
equity. However, gains and losses in the Canadian entity on
U.S. denominated intercompany balances continue to be recognized in
the statement of comprehensive income (loss). Included in the
2021 foreign currency gains are unrealized gains of $366 (2020 - $929)
related to intercompany balances.
Impairment and direct write-downs In 2021 there was
a reversal on a U.S. right of use asset that was subleased in the
amount of $768 and partially offset
by write-down of inventory of $154
for a net reversal of $664. The
inventory write-down relates to parts that are unlikely to be used
to repair the Company's tools.
In the prior year, due to the decline in projected drilling
activity in 2020 the Company determined that indicators of
impairment existed. . In Q1, the Company, as a result of the
impairment test wrote-down our assets in the amount of $6,994. The write- down was associated with
our right of use assets ($6,834) and
intangibles ($160). As part of
the Company's response to changes in drilling activity, the
decision was made to consolidate its repair activities and close or
significantly reduce activities at certain locations. The
right of use asset for these locations was written down to
$nil. There were $160
intangible projects in progress where it was uncertain when or if
staff resources would be available to bring the projects to
commercialization. As such these projects were written down
to $nil.
Income tax Previously, Cathedral
derecognized deferred tax assets due to a recent history of tax
losses within both of Cathedral's legal entities.
Income tax expense is booked based upon expected annualized
rates using the statutory rates of 25.5% for Canada and 23% for the U.S.
LIQUIDITY AND CAPITAL RESOURCES
Overview On an annualized basis,
the Company's principal source of liquidity is cash generated from
operations and proceeds from equipment lost-in-hole. In
addition, the Company has the ability to fund liquidity
requirements through its credit facility and the issuance of debt
and/or equity. Cash flow - operations in 2021 decreased
to a use of cash of ($3,499) compared
to a source of cash of $1,991 in
2020. The decrease in 2021 was primarily due to fund the 84%
increase in working capital resulting from the improvement in North
American oilfield service activity, partially offset by increases
in cash flow from improved drilling activity in 2021 and
Cathedral's increase in Canadian market share.
Working capital At December 31, 2021, the Company had working
capital of $14,117 (December 31, 2020 - $7,680).
Credit facility
Bank facility
The Company's bank credit facility
(the "Facility") consists of a $12,000 extendible revolving credit facility with
a single lender which was amended and extended in 2021 Q2 to expire
June 30, 2023. The Facility is
secured by a general security agreement over all present and future
personal property. The Facility provides a definition of
EBITDA ("Credit Agreement EBITDA") to be used in calculation of
financial covenants. The Facility bears interest at the
financial institution's prime rate plus 1.75% to 3.25% or bankers'
acceptance rate plus 3.00% to 4.25% with interest payable
monthly. Interest rate spreads for the Facility depend on the
level of funded debt compared to the 12 month trailing Credit
Agreement EBITDA. The Facility provides a means to lock in a
portion of the debt at interest rates through bankers' acceptances
("BA") based on the interest rate spread on the date the BA was
entered into.
In June
2021, the Company amended and extended its Facility.
Commencing with the fiscal period ending September 30, 2021 ("2021 Q3") and ending with
the fiscal period ending March 31,
2022 ("2022 Q1"), the definition of Credit Agreement EBITDA
will be based on pro-rating Credit Agreement EBITDA to a 12-month
equivalent ("Consolidated EBITDA Annualization Period"). The
calculations are as follows:
- For the fiscal period ending 2021 Q3, the Credit Agreement
EBITDA is the calculated amount for the 3 months of 2021 Q3 times
four;
- For the fiscal period ending December
31, 2021 ("2021 Q4"), the Credit Agreement EBITDA is the
calculated amount for the 3 months of 2021 Q3 plus the 3 months of
2021 Q4 times two;
- For the fiscal period ending 2022 Q1, the Credit Agreement
EBITDA is the calculated amount for the 3 months of 2021 Q3 plus
the 3 months of 2021 Q4 plus the 3 months of 2022 Q1 divided by 3
and then times 4;
- During the Consolidated EBITDA Annualization Period, the
Facility will bear interest at the maximum rates for the ranges
noted;
- The Company, at its one-time option, can choose to exit the
Consolidated EBITDA Annualization Period and revert back to the
original definition of Credit Agreement EBITDA and the Facility
will bear interest at the applicable rates. For the fiscal period
ending June 30, 2022 ("2022 Q2"), the
Credit Agreement EBITDA will revert back to the trailing 12-month
calculation.
The Facility also features the
following amendments:
- There is no cap in place and the Company has access to the full
$12,000 Facility;
- Aggregate capital expenditures (excluding non-cash utilization
of existing inventory) for the fiscal year ended December 31, 2021, are not to exceed $9,000; and
- Consolidated funded debt to tangible net worth ("TNW") ratio
will no longer be tested after 2021 Q2.
- The financial covenants associated with the Facility that will
be tested commencing 2021 Q3 are:
- Consolidated funded debt to consolidated Credit Agreement
EBITDA ratio shall not exceed 3.0:1; and
- Consolidated Credit Agreement EBITDA to consolidated interest
ratio shall not be less than 2.5:1.
Compliance with Facility
covenants
At December
31, 2021, the Company had drawn $5,035 of its bank facility and had $2,898 in cash. The Company was in
compliance with all covenants at December
31, 2021.
Current facility - Highly
Affected Sectors Credit Availability Program ("HASCAP")
In conjunction with the credit
amendment and extension referenced above, the Company applied for
and received a further $1,000 of
liquidity from HASCAP. The incremental $1,000 non-revolving loan is fully drawn and
further augments Cathedral's liquidity to $13,000 in combination with the Company's ability
to access the full $12,000
Facility. The demand loan has an interest rate of 4% and is
amortized over a ten-year period. Repayment terms are interest only
for the first year, and principal plus interest for the remaining
nine years, payable on a monthly basis. The HASCAP Loan is
secured by a general security interest over all present and after
acquired personal property of the Company granted in favour of
ATB.
Contractual obligations In the
normal course of business, the Company incurs contractual
obligations and those obligations are disclosed in the Company's
annual financial statements for the year ended December 31, 2021.
As at December 31, 2021, the
Company's has a commitment to purchase equipment of $362 which is expected to be incurred in 2022
Q1.
The Company has issued the following six letters of credit
("LOC"):
- three securing rent payments on property leases and renew
annually with the landlords. Two LOCs total $700 CAD for the first ten years of the lease and
then reduce to $500 for the last five
years of the leases. The third LOC is currently for $630 USD and increases annually based upon annual
changes in rent;
- two securing the Company's corporate credit cards in the
amounts of $75 CAD and $175 USD; and
one in lieu of cash deposit for utilities in the amounts of
$55 CAD.
Subsequent events On February 11, the Company announced the closing of
its acquisition of the operating assets of Discovery Downhole
Services ("Discovery") for a purchase price of $20,800 (the "Discovery Transaction"). The
Discovery Transaction was funded by:
- the issuance of 5,254,112 common shares of Cathedral (the
"Acquisition Shares") to Discovery;
- a non-brokered private placement of 14,659,000 common shares of
Cathedral ("Private Placement Shares") at a price of $0.44 per share for gross proceeds of
$6,450 (the "Private
Placement");
- $11,710 cash financed by a term
loan from Cathedral's existing primary bank lender ATB (the "Term
Loan") as part of the Company's amended and restated credit
agreement (the "Credit Agreement") entered into by the Company and
ATB concurrently with the closing of the Discovery Transaction.
This is in addition to existing $12,000 Facility; and
- Additionally, Cathedral will pay customary fees and expenses at
prevailing market rates to ATB as a condition of the Term Loan and
the Credit Agreement.
Cathedral has retained key Discovery personnel under employment
and consulting contracts to ensure a seamless customer service
experience, successful integration and long-term alignment with
Cathedral's strategy.
The Acquisition Shares and Private Placement Shares will be
subject to a four-month statutory hold period under applicable
Canadian securities laws, in addition to such other restrictions as
may apply under applicable securities laws of jurisdictions outside
of Canada. The Acquisition Shares will be subject to further
contractual restrictions on resale as follows: 25% are restricted
until February 10, 2023; a further
25% of are restricted until August 10,
2023; and a further 50% are restricted until February 10, 2024, subject to certain
exceptions.
While the Term Loan will be amortized over five years it has a
maturity of June 2023 as with the
existing Facility. The amortization will be based on a
variable interest rate consistent with the Company's existing
credit facility interest rates with required monthly payments of
principal and interest. Cathedral will be subject to a
quarterly fixed charge coverage ratio as defined in the Credit
Agreement which shall not be less than 1.25. The consolidated
interest coverage ratio will no longer be tested after 2021 Q4 and
the limit on aggregate capital expenditures has been eliminated for
2022 and beyond. The Credit Agreement also includes the
granting of a security interest over the assets acquired in the
Discovery Transaction. At closing of the Discovery
Transaction, Cathedral is in compliance with the terms and
conditions of the Term Loan and Credit Agreement.
Share capital At March 10, 2022, the Company has 100,135,265
common shares, 2,575,000 common share purchase warrants and
6,638,700 options outstanding with a weighted average exercise
price of $0.35.
2021 CAPITAL PROGRAM
During the year ended December 31,
2021 the Company invested $5,617 (2020 - $2,474) in equipment (excluding non-cash
additions).
The following table details the current period's net equipment
additions:
|
Year ended
|
|
December 31,
2021
|
Equipment
additions:
|
|
Motors and related
equipment
|
$
|
3,495
|
MWD and related
equipment
|
2,107
|
Other
|
15
|
|
|
Total cash
additions
|
$
|
5,617
|
The additions of $5,617 were
partially funded by proceeds on disposal of equipment of
$3,553.
2022 CAPITAL PROGRAM
The Company's estimated 2022 gross capital plan is approximately
$14,900, excluding any potential
acquisitions. The primary additions under the 2022 capital
plan will be approximately $9,500 for
new mud motors and related parts with the remaining $5,400 on MWD and ancillary assets..
OUTLOOK
Industry fundamentals continue to signal a positive North
American oilfield services market for 2022.
Rig count figures for Canada at
the end of 2021 were directly in line with the five-year pre-COVID
average for that time of year. Analysts are consistently
modifying their 2022 projections upwards with consensus now close
to 57,000 activity days for the Western Canadian Sedimentary Basin
("WCSB"), a better than 27% increase over 2021. While most
basins in the U.S. are just now reaching pre-COVID rig count
ranges, the Permian has matched and the Haynesville has surpassed
their five-year pre-COVID averages. These two plays have
driven the U.S. land rig count in 2021 and projections for 2022
have also been adjusted higher. Consensus now sees an average
active U.S. land rig count of almost 640 rigs for the coming year
vs. the 2021 count of 464 rigs, a 37% year-over-year improvement.
(source: ATB Capital Markets, Baker Hughes Company, BMO Capital
Markets, Peters & Co Limited, Raymond James Ltd., Stifel Canada
and TD Securities Inc.)
Although recent North American headlines regarding inflation and
the Russian invasion of the Ukraine have increased the volatility of the
hydrocarbon indexes, most are trading at 5-7 year highs.
These commodity prices are bolstering the balance sheets of the
energy producers globally including the Companys customers in both
Canada and the U.S. To date,
they have used the free cash flow generated by these price levels
to prioritize debt reduction and the return of proceeds to
shareholders. However, growing rig counts and analyst
estimates appear to indicate that Cathedral's customers will start
to direct a greater share of these funds to capital spending in
2022.
Labour continues to be the primary bottleneck for the service
sector, as oilfield service companies are challenged to crew all
the equipment they presently have demand for. This scenario
could persist for much of the coming year. As noted
previously, the ongoing combination of improved sector activity and
stronger commodity prices coupled with constrained labour and
supply chains, should translate to a constructive pricing
environment for service businesses in 2022.
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:
industry fundamentals continue to signal a positive North American
oilfield services market for 2022; analysts are consistently
modifying their 2022 projections upwards with consensus now close
to 57,000 activity days for the Western Canadian Sedimentary Basin
("WCSB"), a better than 27% increase over 2021; projections
for 2022 U.S. land rig count have also been adjusted higher;
consensus now sees an average active U.S. land rig count of almost
640 rigs for the coming year vs. the 2021 count of 464 rigs, a 37%
year-over-year ; growing rig counts and analyst estimates appear to
indicate that E&Ps will start to direct a greater share of
these funds to capital spending in 2022; the ongoing combination of
improved sector activity and stronger commodity prices coupled with
constrained labour and supply chains, should translate to a
constructive pricing environment for service businesses in 2022;
industry conditions and valuations continue to support acquisitions
and we believe additional consolidation opportunities for Cathedral
exist; we are optimistic for improved performance in 2022; we will
continue to advance our growth plans, with targeted market share in
Canada of 18% or more, and a more
significant market share ranging in 5-10% in the U.S. in the next
one to two years; commitments; 2022 capital program and financing
of the program.
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 MD&A 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 business
- impact of economic and social trends;
- oil and natural gas commodity prices and production
levels;
- the ongoing impact of the global health crisis and
COVID-19;
- 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 retain customers, market its
services successfully to existing and new customers and reliance on
major customers;
- risks associated with technology development and intellectual
property rights;
- obsolesce of Cathedral's equipment and/or technology;
- the ability of Cathedral to maintain safety performance;
- the ability of Cathedral to obtain adequate and timely
financing on acceptable terms;
- the ability of Cathedral to comply with the terms and
conditions of its credit facility;
- the ability to obtain sufficient insurance coverage to mitigate
operational risks;
- currency exchange and interest rates;
- risks associated with future foreign operations;
- the ability of Cathedral to integrate its transactions and the
benefits of any acquisitions, dispositions and business development
efforts;
- environmental risks;
- business risks resulting from weather, disasters and related to
information technology;
- changes under governmental regulatory regimes and tax,
environmental, climate and other laws in Canada and the 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 that
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 Canadian Generally Accepted
Accounting Principles ("GAAP"). These measures are Adjusted
gross margin, Adjusted gross margin % and Adjusted EBITDAS.
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
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);
and
iii) "Adjusted EBITDAS" - defined as earnings before
finance costs, unrealized foreign exchange on intercompany
balances, taxes, depreciation, non-recurring costs (including
severance and non-cash provision for bad debts), 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).
The following tables provide reconciliations from GAAP
measurements to non-GAAP measurements referred to in this
MD&A:
Adjusted gross margin
|
Three months ended
December 31
|
Year ended December
31
|
|
2021
|
2020
|
2021
|
2020
|
Gross
margin
|
$
|
701
|
$
|
(2,368)
|
$
|
(1,402)
|
$
|
(10,190)
|
Add non-cash items
included in cost of sales:
|
|
|
|
|
Depreciation
|
3,323
|
3,560
|
12,372
|
14,996
|
Share-based
compensation
|
23
|
7
|
89
|
63
|
|
|
|
|
|
Adjusted gross
margin
|
$
|
4,047
|
$
|
1,199
|
$
|
11,059
|
$
|
4,869
|
|
|
|
|
|
Adjusted gross margin
%
|
17%
|
16%
|
18%
|
12%
|
Adjusted EBITDAS
|
Three months ended
December 31
|
Year ended December
31
|
|
2021
|
2020
|
2021
|
2020
|
Loss before income
taxes
|
$
|
(1,097)
|
$
|
(3,183)
|
$
|
(8,626)
|
$
|
(25,417)
|
Add:
|
|
|
|
|
Depreciation included
in cost of sales
|
3,323
|
3,560
|
12,372
|
14,996
|
Depreciation included
in selling, general and administrative expenses
|
134
|
146
|
535
|
572
|
Share-based
compensation included in cost of sales
|
23
|
7
|
89
|
63
|
Share-based
compensation included in selling, general and administrative
expenses
|
51
|
15
|
152
|
144
|
Finance
costs
|
(53)
|
60
|
196
|
291
|
Finance costs lease
liabilities
|
189
|
218
|
794
|
918
|
|
|
|
|
|
Subtotal
|
2,570
|
823
|
5,512
|
(8,433)
|
Impairments and
direct write-downs
|
(614)
|
(172)
|
(614)
|
6,822
|
Unrealized foreign
exchange (gain) loss on intercompany balances
|
(78)
|
(1,678)
|
(366)
|
(929)
|
Non-recurring
expenses
|
(605)
|
592
|
(12)
|
2,424
|
|
|
|
|
|
Adjusted
EBITDAS
|
$
|
1,273
|
$
|
(435)
|
$
|
4,520
|
$
|
(116)
|
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL
POSITION
December 31,
2021 and 2020
Dollars in '000s
(unaudited)
|
December
31
|
December
31
|
|
2021
|
2020
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
Cash
|
$
|
2,898
|
$
|
1,034
|
Trade
receivables
|
15,609
|
4,784
|
Prepaid
expenses
|
1,438
|
709
|
Inventories
|
8,423
|
8,118
|
|
|
|
Total current
assets
|
28,368
|
14,645
|
Equipment
|
35,044
|
35,620
|
Intangible
assets
|
1,491
|
2,244
|
Right of use
assets
|
10,520
|
11,771
|
|
|
|
Total non-current
assets
|
47,055
|
49,635
|
Total
assets
|
$
|
75,423
|
$
|
64,280
|
|
|
|
Liabilities and
Shareholders' Equity
|
|
|
Current
liabilities:
|
|
|
Trade and other
payables
|
$
|
11,069
|
$
|
4,425
|
Current taxes
payable
|
55
|
140
|
Loans and borrowings,
current
|
1,000
|
-
|
Lease liabilities,
current portion
|
2,127
|
2,247
|
Liability for
settlements, current
|
-
|
153
|
|
|
|
Total current
liabilities
|
14,251
|
6,965
|
Loans and
borrowings
|
5,035
|
1,560
|
Lease liabilities,
long-term
|
13,633
|
15,781
|
|
|
|
Total non-current
liabilities
|
18,668
|
17,341
|
Total
liabilities
|
32,919
|
24,306
|
|
|
|
Shareholders'
equity:
|
|
|
Share
capital
|
98,918
|
88,155
|
Contributed
surplus
|
11,793
|
11,071
|
Accumulated other
comprehensive income
|
9,011
|
9,340
|
Deficit
|
(77,218)
|
(68,592)
|
|
|
|
Total shareholders'
equity
|
42,504
|
39,974
|
Total liabilities and
shareholders' equity
|
$
|
75,423
|
$
|
64,280
|
|
|
|
CONDENSED CONSOLIDATED STATEMENT OF
COMPREHENSIVE LOSS
Three months and year ended
December 31, 2021 and
2020
Dollars in '000s except per share amounts
(unaudited)
|
Three months ended
December 31
|
Year ended
December 31
|
|
2021
|
2020
|
2021
|
2020
|
Revenues
|
$
|
23,710
|
$
|
7,448
|
$
|
62,524
|
$
|
40,574
|
Cost of
sales:
|
|
|
|
|
Direct
costs
|
(19,663)
|
(6,249)
|
(51,465)
|
(35,705)
|
Depreciation
|
(3,323)
|
(3,560)
|
(12,372)
|
(14,996)
|
Share-based
compensation
|
(23)
|
(7)
|
(89)
|
(63)
|
Total cost of
sales
|
(23,009)
|
(9,816)
|
(63,926)
|
(50,764)
|
Gross
margin
|
701
|
(2,368)
|
(1,402)
|
(10,190)
|
Selling, general and
administrative expenses:
|
|
|
|
|
Direct
costs
|
(2,619)
|
(1,911)
|
(8,372)
|
(8,179)
|
Depreciation
|
(134)
|
(146)
|
(535)
|
(572)
|
Share-based
compensation
|
(51)
|
(15)
|
(152)
|
(144)
|
Total selling,
general and administrative expenses
|
(2,804)
|
(2,072)
|
(9,059)
|
(8,895)
|
Technology group
expenses
|
(214)
|
(140)
|
(747)
|
(952)
|
Gain (loss) on
disposal of equipment
|
664
|
(183)
|
2,681
|
1,680
|
Loss from operating
activities
|
(1,653)
|
(4,763)
|
(8,527)
|
(18,357)
|
Finance
costs
|
53
|
(60)
|
(196)
|
(291)
|
Finance costs lease
liabilities
|
(189)
|
(218)
|
(794)
|
(918)
|
Foreign exchange
gain
|
78
|
1,686
|
277
|
971
|
Reversals of
impairments (impairments and direct write-downs)
|
614
|
172
|
614
|
(6,822)
|
|
|
|
|
|
Loss before income
taxes
|
(1,097)
|
(3,183)
|
(8,626)
|
(25,417)
|
Income tax recovery
(expense):
|
|
|
|
|
Current
|
-
|
(854)
|
-
|
333
|
Derecognition of
deferred tax asset
|
-
|
(2,647)
|
-
|
(2,647)
|
Total income tax
recovery (expense)
|
-
|
(3,501)
|
-
|
(2,314)
|
Loss
|
(1,097)
|
(6,684)
|
(8,626)
|
(27,731)
|
Other comprehensive
loss:
|
|
|
|
|
Foreign currency
translation differences for foreign operations
|
(123)
|
(1,835)
|
(329)
|
(594)
|
Total comprehensive
loss
|
$
|
(1,220)
|
$
|
(8,519)
|
$
|
(8,955)
|
$
|
(28,325)
|
|
|
|
|
|
Loss per
share
|
|
|
|
|
Basic
|
$
|
(0.01)
|
$
|
(0.14)
|
$
|
(0.13)
|
$
|
(0.56)
|
CONDENSED CONSOLIDATED STATEMENT OF CASH
FLOWS
Three months and year ended December 31, 2021 and 2020
Dollars in
'000s
(unaudited)
|
Three months ended
December 31
|
Year ended December
31
|
|
2021
|
2020
|
2021
|
2020
|
Cash provided by
(used in):
|
|
|
|
|
Operating
activities:
|
|
|
|
|
Loss
|
$
|
(1,097)
|
$
|
(6,312)
|
$
|
(8,626)
|
$
|
(27,731)
|
Items not involving
cash
|
|
|
|
|
Depreciation
|
3,457
|
3,706
|
12,907
|
15,568
|
Share-based
compensation
|
74
|
22
|
241
|
207
|
Income tax (recovery)
expense
|
-
|
3,129
|
-
|
2,314
|
Gain on disposal of
equipment
|
(664)
|
183
|
(2,681)
|
(1,680)
|
Finance
costs
|
(53)
|
60
|
196
|
291
|
Finance costs lease
liabilities
|
189
|
218
|
794
|
918
|
(Reversals of
impairments) impairments and direct write-downs
|
(614)
|
(172)
|
(614)
|
6,822
|
Unrealized foreign
exchange gain on intercompany balances
|
(136)
|
(1,678)
|
(366)
|
(929)
|
|
|
|
|
|
Cash flow -
continuing operations
|
1,156
|
(844)
|
1,851
|
(4,220)
|
Changes in non-cash
operating working capital
|
(558)
|
907
|
(5,263)
|
5,343
|
Income taxes
paid
|
3
|
168
|
(87)
|
68
|
|
|
|
|
|
Cash flow - operating
activities
|
601
|
231
|
(3,499)
|
1,191
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
Equipment
additions
|
(2,818)
|
(1,149)
|
(5,617)
|
(2,474)
|
Intangible asset
additions
|
-
|
(39)
|
-
|
(251)
|
Cash received related
to acquisition
|
3,000
|
-
|
3,000
|
-
|
Proceeds on disposal
of equipment
|
1,275
|
184
|
3,553
|
2,603
|
Changes in non-cash
investing working capital
|
590
|
1,131
|
(59)
|
768
|
|
|
|
|
|
Cash flow - investing
activities
|
2,047
|
127
|
877
|
646
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
Proceeds on share
issue
|
(3,013)
|
-
|
3,394
|
-
|
Repayments on lease
liabilities
|
(610)
|
(548)
|
(2,234)
|
(2,110)
|
Payment on
settlements
|
(38)
|
(51)
|
(151)
|
(173)
|
Interest
paid
|
(136)
|
(278)
|
(990)
|
(1,209)
|
Advances of loans and
borrowings
|
2,395
|
946
|
8,399
|
946
|
Repayments on loans
and borrowings
|
(790)
|
-
|
(3,924)
|
(5,386)
|
|
|
|
|
|
Cash flow - financing
activities
|
(2,192)
|
69
|
4,494
|
(7,932)
|
Effect of exchange
rate on changes on cash
|
(4)
|
(211)
|
(8)
|
(94)
|
Change in cash and
cash equivalents
|
452
|
216
|
1,864
|
(6,189)
|
Cash, beginning of
period
|
2,446
|
818
|
1,034
|
7,223
|
Cash, end of
period
|
$
|
2,898
|
$
|
1,034
|
$
|
2,898
|
$
|
1,034
|
Cathedral Energy Services Ltd., based in Calgary, Alberta is incorporated under the
Business Corporations Act (Alberta) and operates in the U.S. under
Cathedral Energy Services Inc. Cathedral 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.