Cathedral Energy Services Ltd. Reports Results for 2011 Q3 and 2011 Q4 Dividend

/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

CALGARY, Nov. 2, 2011 /CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) is pleased to report its results for 2011 Q3 and 2011 Q4 dividend.

Dollars are in '000's except for day rates and per share amounts

FINANCIAL HIGHLIGHTS

                   
    Three months ended September 30   Nine months ended September 30
    2011   2010   2011   2010
Revenues  $ 63,409  $ 42,022  $   150,004  $   106,720
Adjusted gross margin % (1)   35%   35%   31%   34%
EBITDAS from continuing operations (1)  $ 17,666  $ 12,206  $ 34,668  $ 26,777
  Diluted per share  $ 0.47  $ 0.33  $ 0.91  $ 0.73
EBITDAS (1)  $ 17,666  $ 12,216  $ 35,117  $ 25,006
  Diluted per share  $ 0.47  $ 0.33  $ 0.92  $ 0.68
Funds from continuing operations (1)  $ 16,701  $ 10,566  $ 32,197  $ 23,191
  Diluted per share  $ 0.44  $ 0.29  $ 0.85  $ 0.63
Earnings (loss) from continuing operations before income taxes  $ 11,741  $ 8,349  $ 20,446  $ 15,950
Net earnings (loss)  $ 8,575  $ 6,084  $ 15,083  $ 9,556
  Basic per share  $ 0.23  $ 0.17  $ 0.41  $ 0.26
  Diluted per share  $ 0.23  $ 0.16  $ 0.40  $ 0.26
Dividends declared per share  $ 0.06  $ 0.06  $ 0.18  $ 0.18
Property and equipment additions  $ 11,774  $ 8,757  $ 37,341  $ 24,929
Weighted average shares outstanding            
  Basic (000s)   37,119   36,423   37,009   36,411
  Diluted (000s)   37,877   36,915   38,073   36,889
                 
            September 30   December 31
            2011   2010
Working capital        $ 21,465  $ 19,516
Loans and borrowings excluding current portion      $ 42,544  $ 35,435
Total shareholders' equity      $   125,023  $   112,191
                 
(1) Refer to "NON-IFRS MEASUREMENTS"                

Effective January 1, 2011, Cathedral began reporting its results in accordance with International Financial Reporting Standards ("IFRS)".  Prior year comparative amounts have been restated to reflect results as if the Company had always prepared its financial results using IFRS.  This news release for the three and six months ended June 30, 2011 should be read in conjunction with the disclosures made in the March 31, 2011 Management's Discussion and Analysis related to the transition to IFRS and notes 3, 4 and 15 for the three months ended March 31, 2011 which discuss the transition to IFRS.

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: access to capital; projected capital expenditures and commitments and the financing thereof; areas of further growth; customer commitments; financial results; activity levels; U.S. expansion; expected increased utilization and dividends.  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 the Company's businesses, including current business and economic trends;
  • oil and natural gas commodity prices and production levels;
  • capital expenditure programs and other expenditures by the Company and its customers;
  • the ability of the Company to retain and hire qualified personnel;
  • the ability of the Company to obtain parts, consumables, equipment, technology, and supplies in a timely manner to carry out its activities;
  • the ability of the Company to maintain good working relationships with key suppliers;
  • the ability of the Company to market its services successfully to existing and new customers;
  • the ability of the Company to obtain timely financing on acceptable terms;
  • currency exchange and interest rates;
  • risks associated with foreign operations including Venezuela;
  • the ability of the Company to realize the benefit of its conversion from an income trust to a corporation;
  • risks associated with finalizing ancillary joint venture agreements that are required prior to the commencement of operations of the Venezuela joint venture;
  • risks associated with Venezuela joint venture company being awarded work by the Venezuela state run oil and natural gas corporation;
  • changes under governmental regulatory regimes and tax, environmental and other laws in Canada, United States ("U.S.") and Venezuela; and
  • a stable competitive environment.

Forward-looking statements are not a guarantee of future performance and involve a number of risks and uncertainties some of which are described herein.  Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause the Company's actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements.  These risks and uncertainties include, but are not limited to, the risks identified in this news release and in the Company's Annual Information Form under the heading "Risk Factors".  Any forward-looking statements are made as of the date hereof and, except as required by law, the Company assumes no obligation to publicly update or revise such statements to reflect new information, subsequent or otherwise.

All forward-looking statements contained in this news release are expressly qualified by this cautionary statement. Further information about the factors affecting forward-looking statements is available in the Company's current Annual Information Form and Annual Report which have been filed with Canadian provincial securities commissions and are available on www.sedar.com.

NON-IFRS MEASUREMENTS

This news release refers to certain non-IFRS measurements that do not have any standardized meaning within IFRS and therefore may not be comparable to similar measures provided by other companies.  Management utilizes these non-IFRS measurements to evaluate Cathedral's performance.

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 on the following page);

ii) "Adjusted gross margin %" - calculated as adjusted gross margin divided by revenues; is considered a primary indicator of operating performance (see tabular calculation on the following page);

iii) "EBITDAS" - defined as earnings before finance costs, unrealized foreign exchange on intercompany balances, unrealized foreign exchange due to hyper-inflation accounting, taxes, depreciation 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 on the following page);

iv)  "EBITDAS from continuing operations" - defined as earnings before finance costs, unrealized foreign exchange on intercompany balances, unrealized foreign exchange due to hyper-inflation accounting, taxes, depreciation and share-based compensation excluding the portion due from discontinued operations in each component of the calculation; 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 on the following page);

v)  "EBITDAS from discontinued operations" - defined as earnings before finance costs, unrealized foreign exchange on intercompany balances, unrealized foreign exchange due to hyper-inflation accounting, taxes, depreciation and share-based compensation from discontinued operations of the Company's former wireline division in each component of the calculation;

vi) "Maintenance capital expenditures" - refers to capital expenditures required to maintain existing levels of service but excludes replacement cost of lost-in-hole equipment to the extent the replacement equipment is financed from the proceeds on disposal of the equipment lost-in-hole; and

vii) "Funds from continuing operations" - calculated as cash provided by operating activities before changes in non-cash working capital, cash flow from discontinued operations 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 on the following page).

The following tables provide reconciliations from IFRS measurements to non-IFRS measurements referred to in this news release:

Adjusted gross margin

                   
    Three months ended September 30 Nine months ended September 30
      2011   2010   2011   2010
Gross margin $ 17,946 $ 11,699 $ 35,597 $ 28,030
Add non-cash items included in cost of sales:                
  Depreciation   4,105   3,043   11,172   7,905
  Share-based compensation   82   79   245   232
                   
Adjusted gross margin $ 22,133 $ 14,821 $ 47,014 $ 36,167
                   
Adjusted gross margin %   35%   35%   31%   34%
EBITDAS                
    Three months ended September 30 Nine months ended September 30
      2011   2010   2011   2010
Earnings (loss) from continuing operations before income taxes $ 11,741 $ 8,349 $ 20,446 $ 15,950
Add (deduct):                
  Depreciation included in cost of sales   4,105   3,043   11,172   7,905
  Depreciation included in selling, general and administrative                
  expenses   41   85   118   248
  Share-based compensation included in cost of sales   82   79   245   232
  Share-based compensation included in selling, general                
  and administrative expenses   357   640   1,105   1,901
  Unrealized foreign exchange (gain) loss on intercompany                
  balances   868   (464)   294   (231)
  Unrealized foreign exchange gain due to hyper-inflation                
  accounting   -   -   -   (510)
  Finance costs   472   474   1,288   1,282
                   
EBITDAS from continuing operations   17,666   12,206   34,668   26,777
EBITDAS from discontinued operations   -   10   449   (1,771)
                   
EBITDAS $ 17,666 $ 12,216 $ 35,117 $ 25,006
Funds from continuing operations                
            Nine months ended September 30
              2011   2010
Cash flow from operating activities         $ 18,170 $ 16,126
Add (deduct):                
  Cash flow from discontinued operations           -   1,694
  Changes in non-cash operating working capital           12,987   5,343
  Income taxes paid           1,191   1,005
  Current tax recovery (expense)           (151)   (977)
                   
Funds from continuing operations         $ 32,197 $ 23,191

OVERVIEW

The Company completed 2011 Q3 with quarterly revenues of $63,409 and year-to-date revenues of $150,004 compared to 2010 Q3 revenues of $42,022 and 2010 year-to-date revenues of $106,720.  Year-to-date revenues have increased 41% from 2010.  The 2011 Q3 revenues were comprised of 75% (2010 Q3 - 79%) from the directional drilling division and 25% (2010 Q3 - 21%) from the production testing division.

2011 Q3 EBITDAS were $17,666 ($0.47 per share diluted) which represents a $5,450 increase from 2010 Q3 EBITDAS of $12,216 ($0.33 per share diluted).  For the three months ended September 30, 2011, the Company's net earnings were $8,575 ($0.23 per share diluted) as compared to a $6,084 ($0.16 per share diluted) in 2010.

2011 year-to-date EBITDAS were $35,117 ($0.92 per share diluted) which represents a $10,111 or 40% increase from $25,006 ($0.68 per share diluted) in 2010.  On a 2011 year-to-date basis, the Company's net earnings were $15,083 ($0.40 per share diluted) as compared to a $9,556 ($0.26 per share diluted) in 2010.  The increase in revenues and EBITDAS was a result of a combination of increased activity associated with the use of horizontal, multi-stage fracturing technology to complete conventional and unconventional resource plays in both Canada and the U.S., pricing increases and additional equipment over the prior year.

RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30

                         
    Nine months ended September 30, 2011 Nine months ended September 30, 2010
    Directional   Production       Directional   Production    
Revenues   drilling   testing   Total   drilling   testing   Total
Canada $ 34,732 $ 8,837 $ 43,569 22,257 $ 4,075 $ 26,332
United States   13,125   6,715   19,840   11,050   4,640   15,690
                         
Total $ 47,857 $ 15,552 $ 63,409 33,307 $ 8,715 $ 42,022

 

 

Revenues and gross margin      2011 Q3 revenues were $63,409 which represented an increase of $21,387 or 51% from 2010 Q3 revenues of $42,022.  The increase was due to increased drilling activity, additions to major equipment in the last 12 months and day rate pricing increases.

The directional drilling division revenues have increased from $33,307 in 2010 Q3 to $47,857 in 2011 Q3.  This increase was the result of: i) a 33% increase in activity days from 3,340 in 2010 to 4,443 in 2011; and ii) an 9% increase in the average day rate from $9,842 in 2010 Q3 to $10,683 in 2011 Q3.  For comparison, the 2011 Q2 average day rate was $10,348.  On year-over-year basis, Canadian day rates have increased 10% and this increase was attributable to a combination of passing on increased field labour rates to customers and general rate increases.  U.S. day rates have increased 3% when converted to Canadian dollars.   The U.S. day rates have increased 9% in U.S. dollars, mainly due to the change in types of drilling work performed in 2011.  The day rates disclosed in this news release reflect revenue as classified under IFRS - see notes to financial statements for explanation of changes in revenue classifications.  Canadian activity days increased from 2,179 to 3,100 and U.S. activity days increased from 1,161 to 1,343.

The Company's production testing division contributed $15,552 in revenues during 2011 Q3 which was a 78% increase over 2010 revenues of $8,715.  This increase is attributable to the overall increase in testing units from 51 at the end of 2010 Q3 to 62 at the end of 2011 Q3, plus an increase in oilfield service activities on a year-over-year basis.  There were 9 units included in the 2010 Q3 number that were purchased prior to September 30, 2010, but which were not in service until 2010 Q4.

The gross margin was 28% for both 2011 and 2010 Q3.  Under IFRS, cost of sales includes the non-cash expenses for a portion of depreciation and share-based compensation and these non-cash expenses total $4,187 for 2011 Q3 and $3,122 for 2010 Q3.  Adjusted gross margin for 2011 Q3 was $22,133 (35%) compared to $14,821 (35%) for 2010 Q3.  There were no significant changes between the quarters in the components of cost of sales.

Depreciation allocated to cost of sales increased from $3,043 in 2010 Q3 to $4,105 in 2011 Q3 due to capital additions in the period from 2010 Q3 to 2011 Q3.  Depreciation included in cost of sales as a percentage of revenue was 6% in 2011 Q3 and 7% in 2010 Q3.

For 2011 Q3 the Company had share-based compensation included in cost of sales of $82 compared to $79 recognized in 2010 Q3.  The fair value of the options is being amortized against income over the three-year vesting periods.

Selling, general and administrative expenses ("SG&A")     SG&A expenses were $5,790 in 2011 Q3; an increase of $745 compared with $5,045 in 2010 Q3.  As a percentage of revenue, these costs were 9% in 2011 Q3 and 12% in 2010 Q3.  Under IFRS, SG&A includes the non-cash expenses for a portion of depreciation and share-based compensation.  These non-cash expenses total $398 for 2011 Q3 and $725 for 2010 Q3.  SG&A net of these non-cash items were $5,392 in 2011 Q3 and $4,320 in 2010 Q3, an increase of $1,072.  Staffing costs increased $1,070; this increase was primarily related to staff additions for research and development department, staff positions added to accommodate growth, wage increases for existing staff as well as changes in variable compensation.  The staffing costs included in SG&A relate to executives, sales, accounting, human resources, payroll, safety, research and development and related support staff.  The remaining net increase of $2 relates to several items, none of which were significant individually.

Depreciation allocated to SG&A decreased from $85 in 2010 Q3 to $41 in 2011 Q3 due to aging assets and less depreciation under the declining balance method of depreciation.

For 2011 Q3 the Company had share-based compensation included in SG&A of $357 compared to $640 recognized in 2010 Q3.  The fair value of the options is being amortized against income over the three-year vesting periods.

Gain on disposal of property and equipment     During 2011 Q3 the Company had a gain on disposal of property and equipment of $712, compared to $1,397 in 2010 Q3.  The Company's gains are mainly due to recoveries of lost-in-hole equipment costs including previously expensed depreciation on the related assets.  The timing of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter.

Foreign exchange gain (loss)     The Company's foreign exchange changed from a gain of $772 in 2010 Q3 to a loss of $655 in 2011 Q3 due to the fluctuations in the Canadian dollar compared to U.S. dollars and Venezuelan bolivars.  Upon consolidation the Company's foreign operations are considered to be self-sustaining and therefore 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 2011 Q3 foreign currency gain are unrealized losses of $868 (2010 Q3 - $464 gain) related to intercompany balances.

Finance costs     Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $472 for 2011 Q3 versus $474 for 2010 Q3.  As expected, there were no significant changes in these expenses.

Income tax     For 2011 Q3, the Company had an income tax expense of $3,171 as compared to a $2,277 in 2010 Q3.  The 2011 Q3 provision consists of current tax expense of $253 (2010 - $243) and a deferred tax expense of $2,918 (2010 - $2,034).  The effective tax rate is 27% for both 2011 Q3 and 2010 Q3.  The current tax provision is lower than otherwise would be anticipated due to utilization of tax pools in Canada.

RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30

                         
    Nine months ended September 30, 2011 Nine months ended September 30, 2010
    Directional   Production       Directional   Production    
Revenues   drilling   testing   Total   drilling   testing   Total
Canada $ 75,794 $ 21,291 $ 97,085 52,921 $ 11,812 $ 64,733
United States   35,635   17,284   52,919   30,552   11,435   41,987
                         
Total $ 111,429 $ 38,575 $ 150,004 83,473 $ 23,247 $ 106,720

 

Revenues and gross margin      2011 revenues were $150,004 which represented an increase of $43,284 or 41% from 2010 revenues of $106,720.  The increase was primarily attributed to the focus on horizontal, multi-stage fracturing technology to complete conventional and unconventional resource plays in both Canada and the U.S. which allowed for continued strength in activity levels for the oilfield services sector.   Demand for Cathedral's services has also been driven by both oil and liquids-rich natural gas plays.

The directional drilling division revenues have increased from $83,474 in 2010 to $111,429 in 2011.  This increase was the result of: i) a 23% increase in activity days from 8,555 in 2010 to 10,553 in 2011; and ii) an 9% increase in the average day rate from $9,365 in 2010 to $10,440 in 2011.  On year-over-year basis, Canadian day rates have increased 12% and this increase was attributable to a combination of passing on increased field labour rates to customers and general rate increases.  U.S. day rates have increased 2% when converted to Canadian dollars.   The U.S. day rates have increased 8% in U.S. dollars, mainly due to the change in types of drilling work performed in 2011.  The day rates disclosed in this news release reflect revenue as classified under IFRS - see notes to financial statements for explanation of changes in revenue classifications.  Canadian activity days increased from 5,359 to 6,881 and U.S. activity days increased from 3,196 to 3,672.

The Company's production testing division contributed $38,575 in revenues during 2011 which was a 66% increase over 2010 revenues of $23,247.  This increase was attributable to the overall increase in testing units from 35 at the start of 2010 to 62 at the end of 2011 Q3, plus an increase in oilfield service activities on a year-over-year basis.

The gross margin for 2011 was 24% compared to 26% in 2010.  Under IFRS, cost of sales includes the non-cash expenses for a portion of depreciation and share-based compensation and these non-cash expenses total $11,417 for 2011 and $8,137 for 2010.  Adjusted gross margin for 2011 was $47,014 (31%) compared to $36,167 (34%) for 2010.

The decline in adjusted gross margin of 3% was primarily attributed to an increase in labour costs including variable compensation.  Field labour rates have increased and such increases have not been fully compensated for by revenue increases for the entire year.  Startup costs have been incurred with respect to Houston operations facility and training of field staff for future Venezuela operations.  Additional operating administrative staff positions were added to accommodate growth.  In addition there has been a slight increase in field consumables for the U.S. production testing division.

Depreciation allocated to cost of sales increased from $7,905 in 2010 to $11,172 in 2011 due to capital additions in 2011.  Depreciation included in cost of sales as a percentage of revenue was 7% for both 2011 and 2010.

For 2011 the Company had share-based compensation included in cost of sales of $245 compared to $232 recognized in 2010.  The fair value of the options is being amortized against income over the three-year vesting periods.

Selling, general and administrative expenses     SG&A expenses were $16,162 in 2011; an increase of $1,920 compared with $14,242 in 2010.  As a percentage of revenue, these costs were 11% in 2011 and 13% in 2010.  Under IFRS, SG&A includes the non-cash expenses for a portion of depreciation and share-based compensation.  These non-cash expenses totaled $1,223 in 2011 and $2,149 in 2010.  SG&A net of these non-cash items were $14,939 for 2011 and $12,093 for 2010, an increase of $2,846.  Staffing costs increased $2,521; this increase was primarily related to staff additions for research and development department, staff positions added to accommodate growth, wage increases for existing staff as well as changes in variable compensation.  The staffing costs included in SG&A relate to executives, sales, accounting, human resources, payroll, safety, research and development and related support staff.  There was an increase in audit and accounting services of $185 primarily related to audit of IFRS balances.  The remaining increase of $140 relates to several items, none of which were significant individually.

Depreciation allocated to SG&A decreased from $248 in 2010 to $118 in 2011 due to aging assets and less depreciation under the declining balance method of depreciation.

For 2011 the Company had share-based compensation included in SG&A of $1,105 compared to $1,901 recognized in 2010.  The fair value of the options is being amortized against income over the three-year vesting periods.

Gain on disposal of property and equipment     During 2011 the Company had a gain on disposal of property and equipment of $2,320 which compares to $2,609 in 2010.  The Company's gains are mainly due to recoveries of lost-in-hole equipment costs including previously expensed depreciation on the related assets.  The timing of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter.

Foreign exchange gain (loss)     The Company's foreign exchange gain was $835 in 2010 compared with a loss of $21 in 2011 due to the fluctuations in the Canadian dollar compared to U.S. dollars and Venezuelan bolivars.  Upon consolidation the Company's foreign operations are considered to be self-sustaining and therefore 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 income.  Included in the 2011 foreign currency gain are unrealized losses of $294 (2010 - $231 gain) related to intercompany balances.

Finance costs     Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $1,288 for 2011 and $1,282 for 2010.  As expected, there were no significant changes in these expenses.

Income tax     The Company recorded a 2011 income tax expense of $5,692 as compared to $4,685 in 2010.  The 2011 provision consists of current tax expense of $151 (2010 - $977) and a deferred tax expense of $5,541 (2010 - $3,708).  The effective tax rate for 2011 is 28% compared to 29% in 2010.  The current tax provision is lower than otherwise would be anticipated due to utilization of tax pools in Canada.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal source of liquidity is cash generated from operations.  The Company also has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity.  At September 30, 2011, the Company had an operating loan with a major Canadian bank in the amount of $20,000 (December 31, 2010 - $20,000) of which $17,833 (December 31, 2010 - $8,765) was drawn.  In addition, the Company has a non-reducing revolving term loan facility in the amount of $45,000 (December 31, 2010 - $45,000) of which $42,500 was drawn as at September 30, 2011 (December 31, 2010 - $34,500.)  In addition, at September 30, 2011, the Company had finance lease liabilities of $1,657 (December 31, 2010 - $1,580) and other long-term debt of $2 (December 31, 2010 - $29).

Operating activities     For the nine months ended September 30, 2011, cash flows from operating activities were $18,170 as compared to $16,126 for the comparative 2010 period, which was an increase of $2,044 or 13%.  Cash flow from operating activities for the nine months ended September 30, 2011 net of a $12,987 (2010 - $5,343) use of funds related to increase in non-cash working capital was a result of increased activities levels.  The Company had a working capital position at September 30, 2011 of $21,465 compared to $19,516 at December 31, 2010.

Funds from continuing operations (see Non-IFRS Measurements) for the nine months ended September 30, 2011 were $32,197 compared to $23,191 for the same period in 2010, which were an increase of $9,006.  This increase was caused mainly by the increase in earnings (excluding non-cash items) due to increased activity levels.

Investing activities     Cash used in investing activities for the nine months ended September 30, 2011 amounted to $27,781 compared to $15,923 for the 2010 comparative period.  During 2011 the Company invested an additional $37,341 (2010 - $24,929) in property and equipment and intangible assets.  The main 2011 additions were 31 MWD systems, $3,216 in maintenance capital for retro-fit, upgrades and replacement of downhole tools, progress payments for the Calgary operations facility which is currently under construction, six high pressure production testing units and related auxiliary production testing equipment.  The Company received proceeds on disposal of property and equipment and assets held for sale of $7,631 during the nine months ended September 30, 2011 (2010 - $9,233).  For the nine months ended September 30, 2011 Cathedral had a use of funds by way of non-cash investing working capital in the amount of $1,929 (2010 - use of funds of $227); fluctuations in non-cash working capital related to investing activities are a function of when proceeds on disposal of property and equipment are received and when payments for property and equipment are made.

The following is a summary of major equipment owned by the Company:

       
  September 30 December 31 September 30
  2011 2010 2010
Directional drilling - MWD systems (1) 123 102 99
Production testing units 62 56 51
(1) September 30, 2011 MWD systems are net of 10 systems that are held for sale.      

 

Financing activities     Cash provided by financing activities for the nine months ended September 30, 2011 amounted to $9,285 as compared to $857 during the 2010 comparative period.  During the nine months ended September 30, 2011 the Company made interest payments of $1,559 compared to $1,622 in 2010.   Advances on operating loans for the same period in 2011 were $8,794 (2010 - $12,185).  The Company received advances of long-term debt in the amount of $7,000 (2010 - $nil), the proceeds of which were used to finance property and equipment additions.  Cathedral made payments on loans and borrowings of $446 during the nine months ended September 20, 2011 (2010 - $5,553).  The Company made payments of dividends of $6,653 for the nine months ended September 30, 2011 (2010 - $4,369).  During the same period the Company received proceeds on the exercise of share options of $2,149 (2010 - $216).  As at September 30, 2011, the Company was in compliance with all covenants under its credit facility.  At November 2, 2011, the Company has 37,167,651 common shares and 3,028,676 share options outstanding.

Contractual obligations     In the normal course of business, the Company incurs contractual obligations and those obligations are disclosed in the Company's news release for the year ended December 31, 2010.  As at September 30, 2011, the Company had a commitment to purchase approximately $3,627 of property and equipment.  Cathedral anticipates expending these funds in 2011 Q4 and 2012 Q1.

2011 CAPITAL PROGRAM

Cathedral's 2011 capital budget increased from $40,000 to $42,500.  The increase mainly relates to amounts for lost-in-hole tool replacements and the Calgary head office and operations facility.  In summary, the major items within the 2011 capital budget are: thirty-three MWD systems (including seven carried forward from the 2010 capital budget) and related mud motors and collars to complement the increased job capability, LWD (resistivity) equipment, six high pressure production testing units and auxiliary production testing equipment to complement the overall fleet, $6,500 allocated to the new head office and operations facility in Calgary and $3,500 of maintenance capital.  The maintenance capital includes the retro-fit, upgrades and replacement of downhole tools.  These capital expenditures are expected to be financed by way of cash flow from operations, the Company's credit facility and proceeds from disposition of capital assets.

DIVIDENDS

It is the intent of the Company to pay quarterly dividends to shareholders.  The Board of Directors will review the amount of dividends on a quarterly basis with due consideration to current performance, historical and future trends in the business, the expected sustainability of those trends and enacted tax legislation which will affect future taxes payable as well as required long-term debt repayments, maintenance capital expenditures required to sustain performance and future growth capital expenditures.  The Directors have approved a 2011 Q4 dividend in the amount of $0.06 per share which will have a date of record of December 31, 2011 and a payment date of January 16, 2012.

OUTLOOK

Field activity levels in Q3 responded as expected with a record amount of activity.  Cathedral expects the market to continue to expand with the Company furthering its presence in all of its operating regions and in both business lines.  This is despite a weakening outlook for the global economy which has been influenced by the potential fallout from the European debt crisis.

Canadian activity levels remain extremely robust with both divisions expected to operate at capacity through to spring break-up next year. Early indications from Cathedral's customers is that 2012 activity levels should be higher than 2011.

U.S. activity levels continue to expand with growth in all regions.  The Marcellus region has added several significant customers who have potential to add multiple drilling programs.  In the Gulf Coast, the Company is operating on several ongoing projects and expects activity levels to increase further before year-end.

The Production Testing division (frac-flow back), has now received all equipment from its 2011 capital build program and all of its equipment is deployed.  The division continues to see high demand for its services and is currently operating at record levels.

Cathedral continues to focus on the hiring and training of new field personnel. With the expansion of qualified field personnel, the Company will be able to meet its growth expectations.

Cathedral will be moving into its new Calgary Head Office/Operations Center in early November.  This new facility will allow the Company to increase capacity and efficiencies in its manufacturing of equipment and repair capability as well as improving overall communications.

Cathedral continues to move forward with the preparation of various ancillary joint venture agreements that are required prior to the joint venture company commencing directional drilling operations in Venezuela.

The Company is currently reviewing its 2012 capital budget and expects to issue a news release on this prior to year end.  The Company is well positioned to capitalize on strategic opportunities.

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
September 30, 2011 and December 31, 2010
Dollars in '000s
(unaudited)
       September 30     December 31 
       2011     2010 
Assets         
           
Current assets:         
  Cash and cash equivalents  $ 1,790 $ 1,740
  Trade receivables    57,620   37,794
  Current tax assets    996   -
  Prepaid expenses    3,107   1,980
  Inventories    11,973   7,663
  Assets held for sale    1,475   3,344
           
Total current assets    76,961   52,521
Property and equipment    126,377   102,546
Intangible assets    264   387
Deferred tax assets    14,686   19,499
Goodwill    5,848   5,848
           
Total non-current assets    147,175   128,280
Total assets  $ 224,136 $ 180,801
           
Liabilities and Shareholders' Equity         
Current liabilities:         
  Operating loan  $ 17,833 $ 8,765
  Trade and other payables    34,819   21,309
  Dividends payable    2,229   2,204
  Loans and borrowings    615   674
  Current taxes payable    -   53
           
Total current liabilities    55,496   33,005
Loans and borrowings    42,544   35,435
Deferred tax liabilities    1,073   170
           
Total non-current liabilities    43,617   35,605
           
Shareholders' equity:         
  Share capital    73,476   70,753
  Contributed surplus    7,551   6,775
  Accumulated other comprehensive loss    (1,887)   (2,814)
  Retained earnings    45,883   37,477
           
Total shareholders' equity    125,023   112,191
Total liabilities and shareholders' equity  $ 224,136 $ 180,801

 

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Three and nine months ended September 30, 2011 and 2010
Dollars in '000s except per share amounts
(unaudited)
       Three months ended September 30     Nine months ended September 30 
       2011     2010     2011     2010 
Revenues  $ 63,409 $ 42,022 $ 150,004 $ 106,720
Cost of sales:                 
  Direct costs    (41,276)   (27,201)   (102,990)   (70,553)
  Depreciation    (4,105)   (3,043)   (11,172)   (7,905)
  Share-based compensation    (82)   (79)   (245)   (232)
Total cost of sales    (45,463)   (30,323)   (114,407)   (78,690)
Gross margin    17,946   11,699   35,597   28,030
Selling, general and administrative expenses:                 
  Direct costs    (5,392)   (4,320)   (14,939)   (12,093)
  Depreciation    (41)   (85)   (118)   (248)
  Share-based compensation    (357)   (640)   (1,105)   (1,901)
Total selling, general and administrative expenses    (5,790)   (5,045)   (16,162)   (14,242)
      12,156   6,654   19,435   13,788
Gain on disposal of property and equipment    712   1,397   2,320   2,609
Earnings from operating activities    12,868   8,051   21,755   16,397
Foreign exchange gain (loss)    (655)   772   (21)   835
Finance costs    (472)   (474)   (1,288)   (1,282)
Earnings from continuing operations before income taxes    11,741   8,349   20,446   15,950
Income tax expense:                 
  Current    (253)   (243)   (151)   (977)
  Deferred    (2,918)   (2,034)   (5,541)   (3,708)
Total income tax expense    (3,171)   (2,277)   (5,692)   (4,685)
Net earnings from continuing operations    8,570   6,072   14,754   11,265
Net earnings (loss) from discontinued operations    5   12   329   (1,709)
Net earnings    8,575   6,084   15,083   9,556
Other comprehensive income (loss):                 
  Foreign currency translation differences for foreign operations    2,030   (894)   927   (1,562)
Total comprehensive income  $ 10,605 $ 5,190 $ 16,010 $ 7,994
                   
Net earnings from continuing operations per share                 
  Basic  $ 0.23 $ 0.17 $ 0.40 $ 0.31
  Diluted  $ 0.23 $ 0.16 $ 0.39 $ 0.31
Net earnings (loss) from discontinued operations per share                 
  Basic and diluted  $ 0.00 $ 0.00 $ 0.01 $ (0.05)
Net earnings                 
  Basic  $ 0.23 $ 0.17 $ 0.41 $ 0.26
  Diluted  $  0.23 $ 0.16 $ 0.40 $ 0.26

 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months ended September 30, 2011 and 2010
Dollars in '000s
(unaudited)
        2011   2010
Cash provided by (used in):         
             
Operating activities:         
  Net earnings from continuing operations  $ 14,754 $ 11,265
  Items not involving cash:         
    Depreciation    11,290   8,153
    Total income tax expense    5,692   4,685
    Unrealized foreign exchange (gain) loss on intercompany balances    294   (231)
    Unrealized foreign exchange gain due to hyper-inflation accounting    -   (510)
    Finance costs    1,288   1,282
    Share-based compensation    1,350   2,133
    Gain on disposal of property and equipment    (2,320)   (2,609)
             
  Cash flow from continuing operations    32,348   24,168
  Cash flow from discontinuing operations    -   (1,694)
  Changes in non-cash operating working capital    (12,987)   (5,343)
  Income taxes paid    (1,191)   (1,005)
             
Cash flow from operating activities    18,170   16,126
             
Investing activities:         
  Property and equipment additions    (37,341)   (24,929)
  Proceeds on disposal of property and equipment    3,838   3,732
  Proceeds on disposal of assets held for sale    3,793   5,501
  Changes in non-cash investing working capital    1,929   (227)
             
Cash flow from investing activities    (27,781)   (15,923)
             
Financing activities:         
  Change in operating loan    8,794   12,185
  Interest paid    (1,559)   (1,622)
  Advances of loans and borrowings    7,000   -
  Repayments on loans and borrowings    (446)   (5,553)
  Proceeds on exercise of share options    2,149   216
  Dividends paid    (6,653)   (4,369)
             
Cash flow from financing activities    9,285   857
Effect of exchange rate on changes in cash and cash equivalents    376   (116)
Change in cash and cash equivalents    50   944
Cash and cash equivalents, beginning of period    1,740   491
Cash and cash equivalents, end of period  $ 1,790 $ 1,435

 

Cathedral Energy Services Ltd. (the "Company"/"Cathedral") and its wholly owned subsidiary, Cathedral Energy Services Inc., are engaged in the business of providing selected oilfield services to oil and natural gas companies in western Canada and selected oil and natural gas basins in the United States.  The Company is in the process of establishing operations in Venezuela for providing directional drilling services through its wholly owned subsidiaries Directional Plus International Ltd. and Directional Plus de Venezuela, C.A.  The Company's operating activities are divided into directional drilling and production testing business units.  The Company's shares trade on the TSX under the symbol: CET.  For more information, visit www.cathedralenergyservices.com.


 

For further information:

Requests for further information should be directed to:

Mark L. Bentsen, President and Chief Executive Officer or P. Scott MacFarlane, Chief Financial Officer

Cathedral Energy Services Ltd., 1700, 715 - 5th Avenue S.W., Calgary, Alberta T2P 2X6

Telephone:  403.265.2560 Fax:  403.262.4682   www.cathedralenergyservices.com


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