CALGARY,
AB, July 4, 2022 /CNW/ - Cathedral Energy
Services Ltd. (TSX: CET) ("Cathedral" or the
"Company" or "CET") today announced that it has entered into
an agreement (the "Agreement") to acquire the directional
drilling services business (the "Acquired Business") of
Altitude Energy Partners, LLC ("Altitude"), a portfolio
company of Black Bay Energy Capital, LLC ("Black Bay"), for a purchase price of
approximately USD $100 million (the
"Acquisition") payable in a combination of cash and common
shares of Cathedral ("Acquisition Shares"). Altitude is a
privately-held, U.S.-based, directional drilling services business
with headquarters in Wyoming,
executive leadership based in Houston, and significant operations in
Texas, most prominently in the
Permian Basin.
The Acquisition is expected to close in early July 2022.
The terms of the Acquisition were negotiated at arm's length.
Benefits of the Acquisition
- Combined US market share among the top service providers
estimated at 7%, with a significant Permian presence
- Immediate presence in the Permian, Haynesville, Bakken,
DJ, Powder River with expansion
into the Marcellus in progress
- Experienced, proven management aligned for future growth
with equity ownership in Cathedral
- Highly accretive deal for Cathedral on every metric
including cash flow per share and free cash flow per share
1
- Cumulative free cash flow 1 generated from the
Acquisition, on a stand-alone basis, is expected to exceed the
purchase price in less than three years
- Significant opportunity to expand Adjusted
EBITDAS1 by replacing third-party-supplied technology
providing additional upside to Cathedral shareholders
- Establishes Cathedral into the US rotary steerable system
("RSS") market with proven Altitude track record
- Highly-complementary asset bases provide for enhanced
scale, utilization, efficiencies and expanded services for our
customers
- Conservative pro forma leverage metrics and visibility to
a very low debt profile within 12-18 months
- Creates a larger scale public entity with increased
capital markets presence
1 - See Non-GAAP
measures
|
"Cathedral has been actively engaged in a North American
strategy to build size and scale and Altitude represents a major
step forward in that plan. Each acquisition to date has brought
Cathedral highly-experienced people, diversity of regional exposure
or in certain cases, technologies that are additive to our
offering." said Tom Connors,
President and CEO of Cathedral. "This transaction with
Altitude represents a transformative step forward by Cathedral,
with a combined US market share of approximately 7%, providing
immediate size and scale and placing us firmly on the road to
becoming a leading independent directional drilling company in both
the US and Canada."
Mr. Connors continued "The cash flow generated by Altitude is
expected to pay back in under three years, similar to our recent
transactions, and is highly accretive to shareholders on every
metric including cash flow per share and free cash flow per share
(see Non-GAAP measures). We also see tremendous opportunity to grow
the business and drive substantial incremental Adjusted EBITDAS
(see Non-GAAP measures) by replacing third-party provided
technology over time with existing Cathedral MWD and drilling
technologies. As we expand our technology platform going forward,
accelerated with the recent addition of Axel Schmidt and LEXA Drilling Technologies,
Altitude will also help provide a wider distribution channel to
grow market share more rapidly in the US."
The company plans to operate under the Altitude name and brand
in the US. Further, the Altitude management team and its people
will lead and operate Cathedral's existing US directional drilling
business. Mr. Lee Harns, the current
President and CEO of Altitude, will remain as President of the
business unit. Joining Mr. Harns, will be Tyler Clark, the current COO, and Alex Bougaieff, the current CFO, along with
several key long-standing employees and the entire Altitude
operational team. Mr. Connors added: "This is a people
business. We were very impressed with the depth, experience,
professionalism, and dedication of the Altitude team as a whole and
are excited about the opportunities our combined strengths will
provide". It is important to note the founding group of investors
and several key employees of Altitude have agreed to accept a large
portion of their transaction consideration in the form of equity
that will be restricted for various periods of time. "We believe
this shows incredible conviction in the growth strategy we have
outlined for the combined businesses", says Mr. Connors.
Altitude owns and deploys 360 downhole high-performance mud
motors and 13 RSS tools, with 3 additional RSS tools expected for
delivery in the back half of this year, across its operations.
Cathedral expects to achieve further deal accretion on real estate
and general and administrative (G&A) synergies, but these are
not included in the forecast or deal valuation. The company expects
operational synergies and expanded capacity with the addition of
Altitude's mud motor technology fleet, which shares the same design
as Cathedral's fleet of mud motors, recently acquired through
Discovery Downhole Services. Cathedral's existing proprietary mud
motor technology can also be deployed by Altitude, to enhance our
capabilities and capacity to pursue opportunities in areas such as
the Marcellus, in the Northeast US.
Lee Harns, President and CEO of
Altitude Energy Partners expanded, "Altitude has always been a
performance and client-driven organization with the mission to
provide our customers with enhanced, customized, directional
drilling solutions, and at the heart of this mission is our people.
We want to thank our resilient and professional team for their hard
work and immense contributions to date. Altitude and Cathedral are
aligned in our core values and we look forward to achieving new
heights as a combined organization. We're proud to have the brand
we've built as Altitude continue on under the Cathedral umbrella
and are confident the addition of Cathedral's, technology, strong
complementary market presence, and public market support will only
help propel our market share further and help us firmly establish
ourselves as one of the pre-eminent independent directional
drillers in the US as well as Canada."
Key Personnel Being Retained
Under the terms of the Agreement, Cathedral will retain key
Altitude personnel under employment and consulting contracts to
ensure a seamless customer service experience, successful
integration and long-term alignment with Cathedral's strategy.
Mr. Lee Harns, the current
President and CEO of Altitude, will enter into an employment
agreement to continue as President of the Altitude business unit
after the Acquisition, and accordingly will become an executive
officer of Cathedral. Following the completion of the Acquisition,
Mr. Harns is expected to exercise control over approximately
13,203,103 Common Shares representing approximately 6.2% of the
issued and outstanding Common Shares.
Mr. J.R. Boyles, a director and founder of Altitude, will be
appointed to Cathedral's board of directors, subject to the
completion of ordinary course due diligence prior to closing of the
Acquisition. Following the completion of the Acquisition, it is
expected that Mr. Boyles will exercise control over approximately
19,449,197 Common Shares, representing approximately 9.1% of the
issued and outstanding Common Shares.
Select Pro Forma Financial Information
The issuance of approximately 67,031,167 Acquisition Shares
under the Agreement to the sellers of the Acquired Business would
represent approximately 45.4% of the issued and outstanding common
shares of Cathedral ("Common Shares") on a non-diluted
basis, prior to the Acquisition (based on 147,559,328 Common Shares
outstanding prior to the Acquisition on a non-diluted basis).
See section below entitled "Consideration" for more details.
Select pro forma financial information appears in the table
below.
Common Shares
Outstanding
|
214 million
|
Market Capitalization
1
|
C$118
million
|
Net Debt 2
(incl Cathedral Lease Liabilities)
|
C$98 million
|
Enterprise Value
3
|
C$216
million
|
1 Based on Cathedral's
closing share price on the TSX as at June 29, 2022
|
2 See Non-GAAP
measures
3 Based on March 31,
2022 financial results
|
|
-
Effect on Control
The Acquisition is not anticipated to materially affect control
of Cathedral. No new control person is created as a result of
the Acquisition.
Consideration
In connection with the Acquisition, the Company expects to pay
the consideration ("Purchase Price") as follows:
- Cash consideration of USD $62,675,000 (the "Cash Consideration")
which will be funded through cash on hand and expanded credit
availability under the Company's term and revolving credit
facilities; and
- the issuance of 67,031,167 Acquisition Shares at a deemed price
of $0.7127 per share, which
represents approximately 45.4% of the Company's outstanding Common
Shares, pre-transaction, on a non-diluted basis; and
The deemed price per share of $0.7127 for the Acquisition Shares issuable
pursuant to the Acquisition would represent an 12.3% premium to the
5-day VWAP of the Common Shares for the 5-day period ended
Monday, June 27, 2022.
Resale Restrictions
- Approximately 41,888,781 Acquisition Shares issued will be
subject to contractual re-sale restrictions which expire as to 1/3
on the dates which are 12 months, 24 months and 36 months following
the date of completion of the Acquisition (the "Closing
Date").
- Approximately 11,673,188 Acquisition Shares issued will be
subject to contractual re-sale restrictions which expire as to 1/3
on the dates which are 4 months, 6 months and 8 months following
the Closing Date, (with such restrictions to be fully or partially
lifted, as the case may be, (i) upon the prior consent of
Cathedral, not to be unreasonably withheld, taking into account
Cathedral's status as a publicly traded company, or (ii) following
the date when the aggregate number of Acquisition Shares subject to
this clause has been reduced, in compliance with the terms and
conditions set forth in the Agreement.
- Approximately 13,469,198 Acquisition Shares will be placed into
escrow (the "Escrow Shares") and released from escrow as to
20% every 12 months for a period of 5 years.
- The escrow restrictions on the Escrow Shares may be lifted
early if the Acquired Business has achieved $150 million USD in Adjusted EBITDAS (see
Non-GAAP measures) within 36 months following the closing
date.
Cash Consideration and Debt Financing
In concert with the Agreement, Cathedral has signed a binding
arrangement with ATB Financial ("ATB") as lead arranger and
administrative agent, and Canadian Western Bank ("CWB") to provide
the Company with committed financing by way of a three-year
$99 million credit facility available
at closing (the "Credit Facility"), comprised of a C$74 million term loan (the "Term Loan"), a
C$15 revolving borrowing base loan
(the "Operating Facility") and a C$10
million revolving line (the "Line Facility"). The Credit
Facility will be utilized to replace and repay Cathedral's existing
term loan and operating facility. As at the close of the
acquisition, we expect net debt (see Non-GAAP measures) to be
C$98 million, inclusive of lease
liabilities. Mr. Connors stated, "With the strong visibility in
activity over the next 18 months and with conservatively projected
cash flow from the combined entity, we anticipate we will have the
capacity to substantially reduce an already conservative debt
profile by the end of 2023."
Other Terms of The Agreement
The Purchase Price assumes that the Acquired Business will be
purchased on a cash-free and debt-free basis and provides for a
purchase price adjustment 90 days after closing based on working
capital.
The Agreement may be terminated by the mutual agreement of the
parties thereto or if the Acquisition is not closed within 30 days
of the date of the Agreement.
Requirements of the TSX
The Acquisition Shares to be issued to the shareholders of
Altitude in partial satisfaction of the Purchase Price will exceed
25% of the issued and outstanding Common Shares of the Company, on
a non-diluted basis, prior to completion of the Acquisition.
Therefore, under Section 611(c) of the rules of the TSX,
shareholder approval of the Acquisition is required. The
Corporation is relying on the exemption in Section 604(d) of
the rules of the TSX, whereby instead of holding a shareholder
meeting, the Corporation has obtained the written consent for the
Acquisition of shareholders of the Corporation holding greater than
50% of the issued and outstanding Common Shares of the
Corporation.
In accordance with TSX policies, the Acquisition will not close
until the date that is five (5) Business Days from the date of this
announcement or shortly thereafter.
Advisors
Peters & Co. Limited is acting as financial advisor to
Cathedral with respect to the Acquisition and has provided its
opinion to the board of directors of Cathedral that, based upon and
subject to the assumptions, limitations and qualifications set
forth therein, the consideration to be paid by Cathedral pursuant
to the Acquisition is fair, from a financial point of view, to
Cathedral.
Acumen Capital Finance Partners Limited has also provided an
opinion to the board of directors of Cathedral that, based upon and
subject to the assumptions, limitations and qualifications set
forth therein, the consideration to be paid by Cathedral pursuant
to the Acquisition is fair, from a financial point of view, to
Cathedral.
ATB Capital Markets, Canaccord Genuity Corp., Cormark Securities
Inc., and Stifel FirstEnergy are acting as strategic advisors to
Cathedral with respect to the Acquisition.
DS Lawyers Canada LLP, Porter Hedges LLP and Gordon Lusky LLP
acted as legal counsel to Cathedral.
Parks Paton Hoepfl & Brown, LLC (PPHB) acted as Altitude and
Black Bay's financial advisor and
investment bank with respect to the Acquisition. Fishman Haygood and Stikeman Elliot acted as
legal counsel to Altitude and Black
Bay.
Certain U.S. Legal Matters
This news release does not constitute an offer to sell or a
solicitation of an offer to sell any of securities in the United States. The securities have not
been and will not be registered under the United States Securities
Act of 1933, as amended (the "U.S. Securities Act") or any
state securities laws and may not be offered or sold within
the United States or to, for the
account or benefit of, U.S. Persons (as such term is defined in
Regulation S under the U.S. Securities Act) unless registered under
the U.S. Securities Act and applicable state securities laws or an
exemption from such registration is available. This news release
shall not constitute an offer to sell or the solicitation of an
offer to buy, nor shall there be any sale of these securities, in
any jurisdiction in which such offer, solicitation or sale would be
unlawful.
ABOUT CATHEDRAL
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
FORWARD-LOOKING INFORMATION
This press release contains statements and information that may
constitute "forward-looking information" within the meaning of
applicable securities legislation, including statements identified
by the use of words such as "will", "expects", "positions",
"believe", "potential" and similar words, including negatives
thereof, or other similar expressions concerning matters that are
not historical facts. Forward-looking information in this news
release includes, but is not limited to, statements regarding: the
anticipated closing of the Acquisition; anticipated successful
integration of the Altitude assets and personnel; anticipated
combined U.S. market share; anticipated levels of indebtedness;
cash flow; free cash flow (see Non-GAAP measures); Adjusted EBITDAS
(see Non-GAAP measures); pay back; operational and G&A
synergies; and Cathedral's business plans and strategies for
growth. Such forward-looking information is based on various
assumptions that may prove to be incorrect, including, but not
limited to, assumptions with respect to: the anticipated timing and
successful closing of the Acquisition in accordance with the terms
of the Agreement; the benefits from the Acquisition; the
integration of the Altitude business into Cathedral's business;
conditions in the oil and gas markets and debt and equity markets
generally; the ability of the Company to successfully implement its
strategic plans and initiatives and whether such strategic plans
and initiatives will yield the expected benefits. Although the
Company believes that such assumptions are reasonable, the Company
can give no assurance that such forward-looking statements will
prove to be correct or that any of the events anticipated by such
forward-looking statements will occur, or if any of them do so,
what benefits the Company will derive there from. Actual results
could differ materially due to a number of factors and risks
including, but not limited to: the failure to close the Acquisition
for any reason, including if the Agreement is terminated for any
reason, the risk that Cathedral will not be able to integrate the
Altitude business as anticipated or at all; the risk that the
Altitude business will not yield operational or financial benefits
as anticipated or at all; the risk that demand for Cathedral's
services will not be as anticipated; conditions in the oil and gas
and financial markets in Canada
and the United States; the ability
of management to execute and fund its business strategy; and the
impact of general economic conditions in Canada and the
United States. Additional information regarding risks and
uncertainties of the Company's business are contained under the
heading "Risk Factors" in the Company's annual information form for
the financial year ended December 31,
2021 and the Company's other public filings which are
available under the Company's profile on SEDAR at www.sedar.com.
The forward-looking information included in this news release is
made as of the date of this news release and the Company does not
undertake an obligation to publicly update such forward-looking
information to reflect new information, future events or otherwise,
except as required by applicable law.
This press release also contains financial outlook information
("FOFI") about prospective results of operations, cash
flows, and projected net debt (see Non-GAAP measures), which are
subject to the same assumptions, risk factors, limitations, and
qualifications as set forth in the above paragraphs. FOFI
contained in this press release was made as of the date of this
press release to provide information about management's current
expectations and plans relating to the future. Readers are
cautioned that such information may not appropriate for any other
purpose. Cathedral disclaims any intention or obligation to
update or revise any FOFI contained in this press release, whether
as a result of new information, future events or otherwise, except
as required by applicable law.
NON-GAAP MEASURES
Cathedral uses certain performance measures in this document
that are not defined under International Financial Reporting
Standards (IFRS). 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 IFRS 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.
"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 non-cash expenses.
"Free cash flow per share" is a non-GAAP measure calculated as
net cash provided by operating activities less purchases of
property and equipment and intangible assets, divided by the number
of issued and outstanding shares of the Corporation. Free
cash flow is considered an indicator of the Corporation's ability
to generate cash flow from operations.
"Net debt" is a non-GAAP measure calculated as short and
long-term debt less cash and cash equivalents. Net debt is
considered an indicator to assess the Corporation's overall
indebtedness and capital structure.
SOURCE Cathedral Energy Services Ltd.