Cathedral Energy Services reports results for 2016 Q1

/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

CALGARY, May 10, 2016 /CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) announces its consolidated financial results for the three months ended March 31, 2016 and 2015.  Dollars in 000's except per share amounts.

This news release contains "forward-looking statements" within the meaning of applicable Canadian securities laws.  For a full disclosure of forward-looking statements and the risks to which they are subject, see "Forward-Looking Statements" later in this news release.

2016 Q1 KEY TAKEAWAYS

Revenues and profitability were significantly affected by reduced industry activity and pricing pressures resulting from continued decline in commodity prices;

Revenues of $21,095 in 2016 Q1 compared to $50,077 in 2015 Q1, a 58% decline and Adjusted EBITDAS of $1,476 in 2016 Q1 compared to $5,786 in 2015 Q1;

Adjusted gross margin improved to 23.3% in 2016 Q1 from 20.2% in 2015 Q1;

Bank loans were reduced by $4,579 compared to December 31, 2015 including a reduction of the revolving term loan of $2,500 to $27,500;

During 2016 Q1, the Company completed the sale of its wholly-owned Barbados subsidiary, Directional Plus International Ltd. ("DPI"), for net proceeds of $nil which resulted in a non-cash gain on sale of $10,865. DPI held the Company's investment in Venezuela and this sale completes Cathedral's exit from carrying on a business in Venezuela; and

Management continues to focus on initiatives to reduce costs, improve margins and improve revenue through enhanced focus on our sales and marketing capabilities.

FINANCIAL HIGHLIGHTS

Dollars in 000's except per share amounts




Three months ended March 31




2016

2015

Revenues



$

21,095

$

50,077

Adjusted gross margin % (1)




23.3%

20.2%

Adjusted EBITDAS (1)



$

1,476

$

5,786


Diluted per share



$

0.04

$

0.16


As % of revenues




7%

12%

Funds from continuing operations (1)



$

167

$

3,965


Diluted per share



$

-

$

0.11

Earnings (loss) before income taxes



$

9,171

$

(795)


Basic per share



$

0.25

$

(0.02)


Diluted per share



$

0.25

$

(0.02)

Net earnings (loss)



$

9,683

$

(724)


Basic per share



$

0.27

$

(0.02)


Diluted per share



$

0.27

$

(0.02)

Dividends declared per share



$

-

$

0.04

Equipment additions - cash basis



$

268

$

4,303

Weighted average shares outstanding






Basic (000s)



36,295

36,295


Diluted (000s)



36,295

36,295









March 31

December 31




2016

2015

Working capital



$

22,892

$

13,550

Total assets



$

141,608

$

155,610

Loans and borrowings excluding current portion



$

27,848

$

30,477

Shareholders' equity



$

104,493

$

96,607

(1) Refer "NON-GAAP MEASUREMENTS"










OUTLOOK

2016 Q1 was challenging for the oilfield services sector, particularly for those companies tied to drilling and well completion activity.  During the quarter oil prices (WTI) slid into the $30/bbl U.S. dollar ("USD") range hitting lows of $26/bbl USD in January due to worldwide supply-demand imbalances.  The price of natural gas was also weak, again due to oversupply issues related to a warm winter in the U.S. and Canada.  These low pricing levels had a dramatic impact on oilfield service activity levels as exploration and production companies continued to cut their drilling and completions budgets in light of their reduced cash flow. 

As a result of the weak commodity pricing, both the U.S. and Canadian rig counts declined significantly in the first quarter.  The U.S. rig count declined 36% from January 1, 2016 to 450 active rigs as at April 1 – down from an average rig count of 807 for the second half of 2015.  Canada suffered similar activity declines which were further exacerbated by energy companies curtailing activities in the quarter due to warm weather causing an early spring breakup. In Canada there was an average of 165 rigs operating in 2016 Q1 compared to 313 rigs in the comparable quarter in 2015.   There were 49 rigs operating in Canada on April 1, 2016 a decline of 74% from the January average.  The Canadian rig count has declined further since April 1.

Oil prices have recently firmed up into the $40/bbl USD range and there are indications pricing may continue to improve into the back half of 2016 based on supply and demand fundamentals improving.  However, for any meaningful increase in industry activity levels we believe oil prices have to move firmly into the $50 plus USD range.  We also expect to see oilfield service activity levels lag energy price increases based on companies having to rebuild their balance sheets before they can commit to increased capital spending.  In short, we expect the remainder of 2016 to be challenging for Cathedral and the energy industry in general. 

Throughout the quarter we continued to focus on our key strategic initiatives as outlined in our year-end report.   From a cost containment perspective we undertook further staff reductions in Canada to counter the low activity levels we experienced in Q1 and anticipated for Q2.  These reductions followed wage rollbacks which were implemented in Canada and the U.S. in early Q1.  Despite the low activity and related revenue challenges in the quarter, we generated positive Adjusted EBITDAS and cash flow and reduced our bank debt.  Our EBITDA per credit agreement well exceeded the minimum EBITDA per credit agreement required under our banking covenants for the first quarter.

We recently made the decision to centralize our Canadian Flowback and Production Testing ("F&PT") operations in Grande Prairie, Alberta to further rationalize costs and gain operating efficiencies.  To ensure we are still responsive to customer geographical needs, we have put in place a strategy to stage our equipment in additional key locations in Western Canada including out of our Nisku facility.  In the U.S. we are in the process of restructuring our F&PT division having made the decision to change this division's leadership team.  We are now better using our U.S. Directional Drilling sales resources to expand our U.S. F&PT business development prospects and have recalibrated this division's cost base to better align with lower activity levels expected for the next couple of quarters. Despite the current low activity levels in our F&PT divisions, we still believe this will be the first area of our business to benefit from an activity level rebound as this service offering is tied more directly to generating short-term cash flow for producers.

Our business prospects in the U.S. directional drilling are trending favorably based on the shift we made in our sales strategy in late 2015.   Our success in the U.S. is also a result of having differentiated technology in this market and having an active presence and growing reputation in the key U.S. basins such as the Permian.  We are currently implementing new sales strategies and processes in Canada to ensure we are favorably positioned with a tailored product and services suite specific to each targeted basin (e.g. Montney).  Our drilling motors continue to be recognized in the market as best-in-breed resulting in our motor rental business continuing to grow both in the U.S. and Canada.   Our continuing efforts to ruggedize and advance our proprietary Measurement-While-Drilling ("MWD") equipment to improve reliability in ever-demanding downhole environments stands to position us favorably in the future from a competitive perspective. 

We recognize our business and industry has experienced transformational changes and the way things were done in the past will not be the way things will work tomorrow.   We recognize the future will demand different ways of doing business and that we need to adapt and innovate to ensure that we are on the forefront of these changes.   The many challenges we have faced, and the significant changes we have made to our business as a result, have made Cathedral a much stronger company and positioned us favorably for when industry activity levels improve.

DIVIDENDS

In 2015 Q4, the Board of Directors made the decision to suspend the payment of Cathedral's quarterly dividend until industry conditions improve.  This decision was based on the reductions in commodity prices and uncertainties around expected drilling and completion activity in 2016.  Additionally, this allows the Company to preserve cash, to manage liquidity, invest selectively in capital asset additions and pursue operational initiatives to better position the Company for economic turn-around. The Board of Directors will review dividend distributions on a quarterly basis giving consideration to current performance, historical and future trends in the business, the expected sustainability of those trends as well as required long-term debt repayments, maintenance capital expenditures required to sustain performance.  It is the long-term intent of the Company to pay quarterly dividends to shareholders. 

ANNUAL MEETING

Cathedral will be holding its Annual Meeting ("Meeting") at 2:00 pm (MDT) on May 12, 2016 at our Head Office 6030 – 3 Street SE, Calgary, Alberta. Business at the meeting will include the election of directors and appointment of auditors.  Effective the date of the Meeting, Mr. Robert (Bob) L. Chaisson will be retiring from Cathedral's Board of Directors after 10 years of service.  The Board of Directors and management would like to acknowledge Bob's contribution including his wealth of knowledge as a seasoned and successful energy industry executive and customer.   We wish Bob well in his future endeavors.

2016 CAPITAL PROGRAM

During 2016 Q1 the Company invested $268 (2015 Q1 - $4,303) in equipment.  The following table details the current period's net equipment additions:






Three months ended



March 31, 2016

Equipment additions:




Growth capital (1)


$                         74


Maintenance capital(1)


6


Replacement capital (1)


188

Total cash additions


268

Less: proceeds on disposal of equipment


(1,205)




Net equipment additions (1)


$                     (937)

(1)See "NON-GAAP MEASUREMENTS"






The growth capital additions were $74 for MWD system enhancement.  Replacement capital relates to ancillary motor equipment.

Cathedral's 2016 capital budget remains at $1,000 with $200 for growth capital and $800 for replacement or maintenance capital.  The growth additions are primarily for MWD system enhancements and maintenance capital is primarily to replace items which have been lost-in-hole, that are required to maintain existing capacity levels.  The capital budget will be reviewed quarterly. 

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






March 31

December 31

March 31


2016

2015

2015

Directional Drilling - MWD systems

140

140

140

F&PT units

66

66

66









RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH 31 






Three months ended March 31, 2016


Three months ended March 31, 2015


Directional




Directional



Revenues

Drilling (1)

F&PT

Total


Drilling (1)

F&PT

Total

Canada

$

5,663

$

1,864

$

7,527


$

15,044

$

4,998

$

20,042

United States

13,082

486

13,568


21,753

8,282

30,035









Total

$

18,745

$

2,350

$

21,095


$

36,797

$

13,280

$

50,077

(1) Includes motor rental revenue
















Revenues

2016 Q1 revenues were $21,095 which represented a decrease of $28,982 or 58% from 2015 Q1 revenues of $50,077.  All divisions experienced revenue decreases compared to 2015 Q1 due to reductions in commodity prices and day rate decreases directly related to pricing concessions requested by customers due to market conditions.  The active land rig count for Canada and U.S. was down 47% and 60% respectively in 2016 Q1 compared to 2015 Q1.  Canadian wells completed fell approximately 62% in 2016 Q1 compared to 2015 Q1. 

Canadian Directional Drilling revenues (excluding motor rental revenues) decreased to $3,354 in 2016 Q1 from $14,792 in 2015 Q1; a 77% decrease.  This decrease was the result of: i) a 67% decrease in activity days to 501 in 2016 Q1 from 1,507 in 2015 Q1; and ii) a 32% decrease in the average day rate to $6,695 in 2016 Q1 from $9,816 in 2015 Q1. 

The decrease in activity days was mainly due to overall reductions in activity levels in Canada as well as certain of Cathedral's customers reducing their drilling programs more than industry average and some who stopped drilling.  The decrease in rates was in part due to type of work performed, but mainly due to decreases in day rates charged to customers which were a result of competitive pressure.

Partially offsetting these declines was an increase of $2,057 on the rental of motors, particularly Cathedral's CLAW™ motor.  Motor rental revenues for 2016 Q1 were $2,309 (2015 Q1 - $252).

U.S. Directional Drilling revenues (excluding motor rental revenues) decreased to $11,977 in 2016 Q1 from $21,470 in 2015 Q1; a 44% decrease.  This decrease was the net result of: i) a 47% decrease in activity days to 979 in 2016 Q1 from 1,831 in 2015 Q1; and ii) a 4% increase in the average day rate to $12,234 in 2016 Q1 from $11,726 in 2015 Q1 (when converted to Canadian dollars).  All U.S. districts experienced a decrease in activity levels.  The U.S. average day rate in Canadian dollars increased due to the stronger U.S. dollar.  Rates in USD fell to $8,906 USD in 2016 Q1 from $9,486 USD in 2015 Q1, a 6% decline.  U.S. day rate decreases were partially tempered by the U.S. division providing footage drilling services to certain clients which can result in higher relative day rates.  U.S. motor rental revenues for 2016 Q1 were $1,105 compared to $283 in 2015 Q1.

Canadian F&PT revenues decreased to $1,864 in 2016 Q1 from $4,998 in 2015 Q1; a 63% decrease.  The decrease was due to the reduction in activity levels due to the industry downturn as well as a 32% decline in pricing.

U.S. F&PT revenues decreased to $486 in 2016 Q1 from $8,282 in 2015 Q1, a 94% decrease.  The decrease was due to a number of Cathedral's key customers ceased completion activity and work lost when work went through rebid process.  In Q1 2016, the company made the decision to restructure its U.S. F&PT division to position it better for the current industry dynamics. 

Gross margin and adjusted gross margin  Gross margin for 2016 Q1 was 3.1% compared to 10.0% in 2015 Q1.  Adjusted gross margin (see Non-GAAP Measurements) for 2016 Q1 was $4,905 or 23.3% compared to $10,120 or 20.2% for 2015 Q1.   

The Company initiated a number of cost reductions throughout 2015 and into 2016 Q1 including reducing wages for field, support and office staff, implementing work force reductions and reducing other direct cost items.  Even with lower day rates in many divisions the adjusted gross margin improved due to reduced field labour costs, which were offset by higher repairs on percentage of revenue basis.

Additionally, there was a reduction in the fixed component of direct cost of sales of 28.6% compared with 2015 Q1 amount.  However, the percentage of revenue for these costs was greater in 2016 Q1 due to the reduction in revenues.  On a percentage of revenue basis, the fixed costs increased 10.2% from 2015 Q1.  

Depreciation allocated to cost of sales decreased to $4,233 in 2016 Q1 from $5,091 in 2015 Q1.  Depreciation included in cost of sales as a percentage of revenue was 20.1% for 2016 Q1 and 10.2% in 2015 Q1.

Selling, general and administrative expenses ("SG&A")  SG&A expenses were $4,938 in 2016 Q1; a decrease of $655 compared with $5,593 in 2015 Q1.  As a percentage of revenue, SG&A was 23% in 2016 Q1 and 11% in 2015 Q1.  Included in 2016 Q1 amounts are $364 of severance costs compared to $134 in 2015 Q1

Excluding the non-cash items of depreciation and share-based compensation and severance, SG&A was $4,490 in 2016 Q1 compared to $5,388 in 2015 Q1, a decrease of $898 or 17%.  SG&A decreased primarily due to work force reductions, wage rollbacks and reductions in variable compensation.  SG&A wage rollbacks were implemented February 1, 2015 at a range of 5% to 15% and a further 5% to 9% on January 1, 2016.  There have been additional reductions to staffing levels in 2015 and 2016.  Staffing costs included in SG&A include executive, sales, accounting, human resources, payroll, safety, research and development and related support staff.   

Gain on disposal of equipment  During 2016 Q1, the Company had a gain on disposal of equipment of $892 compared to $1,169 in 2015 Q1.  These gains mainly relate to equipment lost-in-hole.  Proceeds from clients on lost-in-hole equipment are based on amounts specified in service agreements and in most cases these proceeds exceed the net book value of the equipment and result in a gain.  The timing of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter.  In 2015 Q1 the Company completed the previously discussed sale and leaseback of its Oklahoma City operating facility.  This resulted in a gain on sale of land and buildings of $508.

Gain on disposal of foreign subsidiary  During 2016 Q1, the Company completed the sale of its wholly-owned Barbados subsidiary, DPI, for net proceeds of $nil which resulted in a non-cash gain on sale of $10,865. DPI held the Company's investment in Venezuela and this sale completes Cathedral's exit from carrying on a business in Venezuela.

Foreign exchange loss  The Company had foreign exchange gain of $2,354 in 2016 Q1 compared to a loss of $1,426 in 2015 Q1 due to the fluctuations in the Canadian dollar relative to the U.S. dollar.  The Company's foreign operations are denominated in a currency other than the Canadian dollar and therefore, upon consolidation, gains and losses due to fluctuations in the foreign currency exchange rates are recorded in other comprehensive income ("OCI") on the balance sheet as a component of equity.  However, gains and losses in the Canadian entity on U.S. denominated intercompany balances continue to be recognized in the statement of income.  Included in the 2016 Q1 foreign currency gains are unrealized gains of $2,364 (2015 Q1 – loss of $1,276) related to intercompany balances.

Finance costs  Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $387 for 2016 Q1 versus $467 for 2015 Q1.  The decrease in finance costs relate to a decreased utilization of the Company's credit facility.

Income tax  For 2016 Q1, the Company had an income tax recovery of $512 compared to recovery of $71 in 2015 Q1.  Excluding the non-cash gain on disposal of foreign subsidiary, the effective tax rate was 30% for 2016 Q1 and 9% for 2015 Q1.  Income tax expense is booked based upon expected annualized effective rates.  The 2015 Q1 tax rate was lower than anticipated due to losses in Canada recorded at effective rate of 23.25% and income in U.S. recorded at effective rate of 42.5%.

LIQUIDITY AND CAPITAL RESOURCES

Overview  On an annualized basis the Company's principal source of liquidity is cash generated from operations.    In addition, the Company has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity.   For the period ended March 31, 2016, the Company had funds from continuing operations (see Non-GAAP Measurements) of $167 (2015 - $3,965).  The decrease in funds from continuing operations is due to lower activity levels and reductions in revenue day rates.  In 2016 Q1 the Company reduced its bank loans by $4,579 which included a reduction in the revolving term loan of $2,500.  Cash balances as at March 31, 2016 were $2,200.

Working capital  At March 31, 2016 the Company had working capital of $22,892 (December 31, 2015 - $13,550) and a working capital ratio of 3.6 to 1 (December 31, 2015 – 1.5 to 1).  The increase working capital level was primarily due to the sale of DPI.

Credit facility  The Company has a 3 year committed revolving credit facility (the "Facility") that expires in August 2017.  The Facility was amended on June 12, 2015 (the "First Amendment").  In January 2016, the Company negotiated further amendments to the Facility were negotiated ("Second Amendment").

The Second Amendment has less restrictive financial covenants than the prior Facility terms.  The Second Amendment provides for credit availability of $45,000, representing a $15,000 decrease from the First Amendment.   The First Amendment increased the accordion feature to $35,000 (previously $25,000) and this was unchanged in the Second Amendment. The Second Amendment matures in August, 2017, consistent with the duration of the original Facility.

After the First and Second Amendment discussed above, the Facility bears interest at the bank's prime rate plus 0.50% to 5.00% or bankers' acceptance rate plus 1.75% to 6.25% with interest payable monthly.  Interest rate spreads for the Facility depends on the level of funded debt to the 12 month trailing EBITDA per credit agreement.  The Facility provides a means to lock in a portion of the debt at interest rates through bankers' acceptance ("BA") based on the interest rate spread on the date the BA was entered into.  The Company has historically maximized the use of this option thereby lowering its interest costs, however, the ability to achieve these lower rates will be impacted in the future based on current rates which increase based on the Company's funded debt to EBITDA per credit agreement.

The financial covenants associated with the First and Second Amendments are as follows:

Quarter ending:

Maximum Funded Debt to EBITDA per

credit agreement Ratio

Minimum Debt Service Ratio

March 31, 2016

Waived

1.25

June 30, 2016

Waived

1.25

September 30, 2016

5.50

1.75

December 31, 2016

5.00

1.75

March 31, 2017                    

4.50

1.75

June 30, 2017

4.00

1.75

September 30, 2017 and thereafter

3.00

1.75

 

The Facility is secured by a general security agreement over all present and future personal property.

During the waiver period of the Second Amendment there is a requirement for minimum EBITDA per credit agreement for the quarter ended March 31, 2016 of $850 and minimum cumulative EBITDA per credit agreement for the two quarters ending June 30, 2016 of $1,600.  The First and Second Amendments have certain restrictions, including, but not limited to; paying dividends, utilization of the accordion feature, enhanced lender financial reporting and a cap on any litigation settlement payments without lender approval.

Effective 2015 Q4 the Company includes lost-in-hole equipment proceeds in the definition of EBITDA per credit agreement.  The applicable EBITDA per credit agreement for the lending agreement in 2016 Q1 was $1,761.

The Company currently is in compliance with each of the financial covenants under the Second Amendment.  Based on current available information, Cathedral expects to comply with all covenants for the next twelve months.

The Company's financial ratios in the 2016 Q1 waiver period were:















Ratio

March 31, 2016 value











Debt service ratio

2.29:1











Funded debt to EBITDA per credit agreement

6.51:1





















In light of the current volatility in oil and gas prices and uncertainty regarding the timing for recovery in such prices, management's ability to prepare financial forecasts is challenging.  As a consequence the Company could breach the covenants included in the Second Amendment in 2016 and 2017. An actual breach would constitute an event of default under the Facility, which provides the lenders several alternatives including a waiver of the breach, an amendment to the Facility to reset the covenant or, in the unlikely event, a requirement to repay the borrowings.

In the event the Company believes it could be in breach of its loan covenants it will first enter into discussions on amendments to the financial covenants in the Facility to avoid such a breach. Based on successfully negotiating amendments to the Facility in 2015 and 2016, management expects to be able to successfully negotiate acceptable Facility amendments however, there is no guarantee this will occur.

The following table outlines the current credit facility:





March 31


December 31





2016


2015

Total credit facility



$

45,000

$

60,000

Drawings on credit facility:





Operating loan



405

2,484


Revolving term loan



27,500

30,000


Letters of credit



1,500

1,554

Total drawn facility



$

29,405

$

34,038

Undrawn portion of credit facility



$

15,595

$

25,962

Net debt (see NON-GAAP MEASUREMENTS):





Loans and borrowings, net of current portion



$

27,848

$

30,477


Working capital:







Current assets



$

31,782

$

41,575



Current liabilities



(8,890)

(28,025)


Working capital



$

22,892

$

13,550

Net debt



$

4,956

$

16,927









Contractual obligations  In the normal course of business, the Company incurs contractual obligations and those obligations are disclosed in the Company's MD&A for the year ended December 31, 2015.  As at March 31, 2016, the Company had a commitment to purchase approximately $nil of equipment. 

Contingencies  On October 29, 2014 Cathedral received a letter from one of its U.S. clients ("the Complainant") alleging a down-hole drilling incident which impacted two of their wells in December 2013.  The Complainant had indicated potential damages of $3,000 USD and in 2015 Q3 increased this indication to $3,700 USD.  Cathedral does not carry insurance for this type of incident.  In January 2016, the Complainant filed a formal complaint in Pennsylvania court initiating a formal legal process related to their claim.  Cathedral, with its legal counsel is responding to the complaint and intends to vigorously defend this action.  Due to the uncertainty around what amount, if any, and the means of settlement, the Company has made no provision in the financial statements for this incident.

The Company's wholly-owned subsidiary, Cathedral Energy Services Inc. ("INC"), has been named in a legal action in Houston, Texas commenced by a former employee.  INC has also been named in a second legal action in Denver, Colorado by a former employee.  In both these legal actions the employees and consultants (collectively "Claimants") allege that they were improperly classified as exempt under the Fair Labour Standards Act and therefore entitled to unpaid overtime or additional compensation for improperly calculated overtime.  Subsequently, six additional claimants have joined the first action and five additional claimants have joined the second action.  Legal actions involving similar alleged violations have been filed in the United States against a number of other oilfield service companies. The Claimants assert that they will seek to have the action certified as a collective action which may result in additional employees, former employees or consultants of INC joining the actions. INC has filed defenses for both actions and is currently reviewing its settlement and legal options. The Company believes that the potential impact of this matter is indeterminable

Share capital   At May 10, 2016, the Company has 36,295,380 common shares and 1,705,165 options outstanding with a weighted average exercise price of $2.32.

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
March 31, 2016 and 2015
Dollars in '000s
(unaudited)





 March 31 

 December 31 


2016

2015

 Assets 






 Current assets: 




Cash and cash equivalents

$

2,200

$

1,426


Trade receivables

15,494

23,107


Current taxes recoverable

3,017

2,962


Prepaid expenses

1,451

1,988


Inventories

9,620

12,092




 Total current assets 

31,782

41,575

 Equipment  

104,419

108,918

 Intangible assets 

2,005

2,006

 Deferred tax assets 

3,402

3,111




 Total non-current assets 

109,826

114,035

 Total assets 

$

141,608

$

155,610




 Liabilities and Shareholders' Equity 



 Current liabilities: 




Operating loan

$

405

$

2,484


Trade and other payables

7,843

20,198


Loans and borrowings

642

686


Deferred revenue

-

4,657




 Total current liabilities 

8,890

28,025

 Loans and borrowings  

27,848

30,477

 Deferred tax liabilities 

377

501




 Total non-current liabilities 

28,225

30,978

 Total liabilities 

37,115

59,003




 Shareholders' equity: 




Share capital

74,481

74,481


Contributed surplus

9,530

9,470


Accumulated other comprehensive income

9,720

11,577


Retained earnings

10,762

1,079




 Total shareholders' equity 

104,493

96,607

 Total liabilities and shareholders' equity 

$

141,608

$

155,610




CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Three months ended March 31, 2016 and 2015
Dollars in '000s except per share amounts
(unaudited)









 Three months ended March 31 




2016

2015








 Revenues 



$

21,095

$

50,077

 Cost of sales: 






Direct costs



(16,190)

(39,957)


Depreciation



(4,233)

(5,091)


Share-based compensation



(10)

(15)

 Total cost of sales 



(20,433)

(45,063)

 Gross margin 



662

5,014

 Selling, general and administrative expenses: 






Direct costs



(4,854)

(5,522)


Depreciation



(34)

(44)


Share-based compensation



(50)

(27)

 Total selling, general and administrative expenses 



(4,938)

(5,593)




(4,276)

(579)

 Gain on disposal of equipment 



892

1,169

 Gain on disposal of land and buildings 



-

508

 Earnings (loss) from operating activities 



(3,384)

1,098

 Finance costs 



(387)

(467)

 Foreign exchange gain (loss) 



2,354

(1,426)

 Write-down of inventory 



(277)

-

 Gain on disposal of foreign subsidiary 



10,865

-

 Earnings (loss) before income taxes 



9,171

(795)

 Income tax recovery (expense): 






Current



126

(483)


Deferred



386

554

 Total income tax recovery 



512

71

 Net earnings (loss) 



9,683

(724)

 Other comprehensive income (loss): 






Foreign currency translation differences for foreign operations



(3,205)

3,806

 Total comprehensive income 



$

6,478

$

3,082






 Net earnings (loss) per share 






Basic



$

0.27

$

(0.02)


Diluted



$

0.27

$

(0.02)






CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three months ended March 31, 2016 and 2015
Dollars in '000s
(unaudited)




Three months ended March 31


2016

2015

Cash provided by (used in):






Operating activities:




Net earnings (loss)

$

9,683

$

(724)


Items not involving cash:




Depreciation


4,267

5,135


Total income tax recovery


(512)

(71)


Unrealized foreign exchange (gain) loss on intercompany balances


(2,364)

1,276


Finance costs


387

467


Share-based compensation


60

42


Gain on disposal of equipment


(892)

(1,169)


Gain on disposal of land and building


-

(508)


Write-down of inventory


277

-


Gain on disposal of foreign subsidiary


(10,865)

-





Cash flow from continuing operations

41

4,448


Changes in non-cash operating working capital

4,235

18,811


Income taxes (paid) recovered

(120)

(1,327)




Cash flow from operating activities

4,156

21,932




Investing activities:




Equipment additions

(268)

(4,303)


Intangible asset additions

(45)

(150)


Proceeds on disposal of equipment

1,205

1,672


Proceeds on disposal of land and buildings

-

6,174


Changes in non-cash investing working capital

646

405




Cash flow from (used for) investing activities

1,538

3,798




Financing activities:




Change in operating loan

(2,088)

(1,036)


Repayments on loans and borrowings

(2,603)

(20,180)


Interest paid

(134)

(355)


Dividends paid

-

(2,994)




Cash flow from (used for) financing activities

(4,825)

(24,565)

Effect of exchange rate on changes in cash and cash equivalents

(95)

447

Change in cash and cash equivalents

774

1,612

Cash and cash equivalents, beginning of period

1,426

5,109

Cash and cash equivalents, end of period

$

2,200

$

6,721




 

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: indications pricing may continue to improve into the back half of 2016 based on supply and demand fundamentals improving; for any meaningful increase in industry activity levels we believe oil prices have to move firmly into the $50 plus USD range; expect to see oilfield service activity levels lag energy price increases based on companies having to rebuild their balance sheets before they can commit to increased capital spending; expect the remainder of 2016 to be challenging; believe F&PT will be the first area of our business to benefit from an activity level rebound; continuing efforts to ruggedize and advance our proprietary MWD equipment to improve reliability in ever-demanding downhole environments stands to position us favorably in the future from a competitive perspective; need to adapt and innovate to ensure that we are on the forefront of these changes; changes have positioned Cathedral favorably for when industry activity levels improve; projected capital expenditures and commitments and the financing thereof; anticipate that we will not reinstate dividend payments until industry conditions and operating cash flow improves; the Company could breach the covenants included in the Second Amended Credit Facility; management expects to be able to successfully negotiate acceptable Agreement amendments however, there is no guarantee this will occur; Cathedral expects to comply with all covenants during 2016; and long-term intent of the Company to pay quarterly dividends to shareholders.

Various material factors and assumptions are typically applied in drawing conclusions or making the forecasts or projections set out in forward-looking statements.  Those material factors and assumptions are based on information currently available to the Company, including information obtained from third party industry analysts and other third party sources.  In some instances, material assumptions and material factors are presented elsewhere in this news release in connection with the forward-looking statements.  You are cautioned that the following list of material factors and assumptions is not exhaustive.  Specific material factors and assumptions include, but are not limited to:

  • the performance of Cathedral's businesses, including current business and economic trends;
  • oil and natural gas commodity prices and production levels;
  • capital expenditure programs and other expenditures by Cathedral and its customers;
  • the ability of Cathedral to retain and hire qualified personnel;
  • the ability of Cathedral to obtain parts, consumables, equipment, technology, and supplies in a timely manner to carry out its activities;
  • the ability of Cathedral to maintain good working relationships with key suppliers;
  • the ability of Cathedral to market its services successfully to existing and new customers and reliance on major customers;
  • risks associated with technology development and intellectual property rights;
  • the ability of Cathedral to maintain safety performance;
  • the ability of Cathedral to obtain timely financing on acceptable terms;
  • the ability to obtain sufficient insurance coverage to mitigate operational risks;
  • currency exchange and interest rates;
  • risks associated with foreign operations;
  • risks associated with acquisitions and business development efforts;
  • environmental risks;
  • changes under governmental regulatory regimes and tax, environmental and other laws in Canada and U.S.; and
  • competitive risks.

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

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

NON-GAAP MEASUREMENTS

Cathedral uses certain performance measures throughout this document that are not defined under GAAP. Management believes that these measures provide supplemental financial information that is useful in the evaluation of Cathedral's operations and are commonly used by other oil and gas service companies. Investors should be cautioned, however, that these measures should not be construed as alternatives to measures determined in accordance with GAAP as an indicator of Cathedral's performance. Cathedral's method of calculating these measures may differ from that of other organizations, and accordingly, may not be comparable.

The specific measures being referred to include the following:

i) "Adjusted gross margin" - calculated as gross margin plus non-cash items (depreciation and share-based compensation); is considered a primary indicator of operating performance (see tabular calculation);

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

iii) "Adjusted EBITDAS" - defined as earnings before finance costs, unrealized foreign exchange on intercompany balances, taxes, non-recurring gains and losses on disposal of property and equipment (see non-GAAP measurement), depreciation, non-recurring compensation, write-down of inventory, gain on disposal of foreign subsidiary and share-based compensation; is considered an indicator of the Company's ability to generate funds flow from operations prior to consideration of how activities are financed, how the results are taxed and measured and non-cash expenses (see tabular calculation);

iv) "EBITDA per credit agreement" – defined in the Company's credit agreement as Adjusted EBITDAS less gains on disposal of equipment not previously excluded, less any unusual or non-recurring cash expenses approved by the Lenders (excluding non-recurring compensation previously deducted from Adjusted EBITDAS" and plus lost-in-hole equipment proceeds.  EBITDA per credit agreement is used in calculation of banking covenants;

v) "Funds from operations" - calculated as cash provided by operating activities before changes in non-cash working capital and income taxes paid less current tax expense; is considered an indicator of the Company's ability to generate funds flow from operations on an after tax basis but excluding changes in non-cash working capital which is financed using the Company's operating loan (see tabular calculation);

vi) "Growth equipment additions" or "Growth capital" – is capital spending which is intended to result in incremental revenues or decreased operating costs.  Growth capital is considered to be a key measure as it represents the total expenditures on equipment expected to add incremental revenues and funds flow to the Company;

vii) "Maintenance equipment additions" or "Maintenance capital" – is capital spending incurred in order to refurbish or replace previously acquired other than "replacement equipment additions" described below. Such additions do not provide incremental revenues. Maintenance capital is a key component in understanding the sustainability of the Company's business as cash resources retained within Cathedral must be sufficient to meet maintenance capital needs to replenish the assets for future cash generation;

viii) "Replacement equipment additions" or "Replacement capital" – is capital spending incurred in order to replace equipment that is lost downhole.  Cathedral recovers lost-in-hole costs including previously expensed depreciation on the related assets from customers.  Such additions do not provide incremental revenues.  The identification of replacement equipment additions is considered important as such additions are financed by way of proceeds on disposal of equipment (see discussion within the news release on "gain on disposal of equipment);

ix) "Non-recurring gains and losses on disposal of property and equipment" – are disposals of property and equipment that do not occur on a regular or periodic basis.  Unlike the lost-in-hole recoveries the proceeds from these gains are not used on equivalent replacement property.  These are often on non-field equipment such as land and buildings;

x) "Net equipment additions" – is equipment additions expenditures less proceeds on the regular disposal of equipment (the proceeds on sale of land and buildings have been excluded).  Cathedral uses net equipment additions to assess net cash flows related to the financing of Cathedral's equipment additions; and

xi) "Net debt" – is loans and borrowing less working capital.  Management uses net debt as a metric to shows the Company's overall debt level.

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

Adjusted gross margin








Three months ended March 31




2016

2015

Gross margin



$

662

$

5,014

Add non-cash items included in cost of sales:






Depreciation



4,233

5,091


Share-based compensation



10

15






Adjusted gross margin



$

4,905

$

10,120






Adjusted gross margin %



23.3%

20.2%











Adjusted EBITDAS








Three months ended March 31




2016

2015

Earnings (loss) before income taxes



$

9,171

$

(795)

Add:






Depreciation included in cost of sales



4,233

5,091


Depreciation included in selling, general and administrative expenses



34

44


Share-based compensation included in cost of sales



10

15


Share-based compensation included in selling, general and administrative expenses



50

27


Finance costs



387

467






EBITDAS



13,885

4,849

Unrealized foreign exchange (gain) loss on intercompany balances



(2,364)

1,276

Non-recurring compensation



543

169

Non-recurring gain on disposal of land and building



-

(508)

Write-down of inventory



277

-

Gain on disposal of foreign subsidiary



(10,865)

-






Adjusted EBITDAS



$

1,476

$

5,786











Funds from operations








Three months ended March 31




2016

2015

Cash flow from operating activities



$

4,156

$

21,932

Add (deduct):






Changes in non-cash operating working capital



(4,235)

(18,811)


Income taxes paid (recovered)



120

1,327


Current tax recovery (expense)



126

(483)






Funds from operations



$

167

$

3,965






Cathedral Energy Services Ltd. (the "Company" or "Cathedral"), based in Calgary, Alberta is incorporated under the Business Corporations Act (Alberta) and operates in the U.S. under Cathedral Energy Services Inc.  The Company is publicly traded on the Toronto Stock Exchange under the symbol "CET".  Cathedral, is a trusted partner to North American energy companies requiring high performance directional drilling services and dependable flowback and production testing solutions. We work in partnership with our customers to tailor our equipment and expertise to meet their specific geographical and technical needs.  Our experience, technologies and responsive personnel enable our customers to achieve higher efficiencies and lower project costs.  For more information, visit www.cathedralenergyservices.com.

SOURCE Cathedral Energy Services Ltd.

For further information: Requests for further information should be directed to: P. Scott MacFarlane, President and Chief Executive Officer, Michael F. Hill, Chief Financial Officer or Randy Pustanyk, Executive Vice President and Chief Operating Officer, Cathedral Energy Services Ltd., 6030 3 Street S.E., Calgary, Alberta T2H 1K2, Telephone: 403.265.2560, Fax: 403.262.4682, www.cathedralenergyservices.com

RELATED LINKS
http://www.cathedralenergyservices.com

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