High Arctic Continues Year over Year Revenue and EBITDA Growth

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CALGARY, March 11, 2016 /CNW/ - High Arctic Energy Services Inc. (TSX: HWO) - "High Arctic" or the "Corporation" announces its results for 2015 with growth in in revenue of 22% to $209.9 million and 30% growth in Adjusted EBITDA to $64.0 million.

Tim Braun, High Arctic's Chief Executive Officer, stated: "2015 was a significant year of accomplishments for High Arctic.  In spite of market pressures, we successfully executed on our international growth initiatives commenced in 2014 with excellent up time and safety performance.  In Canada, we continue to manage through the current industry weakness, and proactively managing costs has allowed our Canadian division to remain profitable in a difficult environment.  I am proud of our employees' focus on delivering not only this positive financial performance in 2015, but doing so safely and with consistently high levels of service quality.  I believe this culture will continue to benefit High Arctic as we face higher expectations from customers facing a challenging market in 2016.  I am confident we can meet those expectations and continue to enhance our safety and service quality."

Highlights

A summary of High Arctic's quarterly and annual results follows.  For a complete copy of High Arctic's yearend financial statements and management's discussion and analysis ("MD&A") please visit www.sedar.com.

High Arctic's $95.7 million in capital investments over the last two years, combined with a stronger U.S. dollar and strong operational performance allowed High Arctic to achieve year over year revenue and EBITDA growth.  These positive growth results were achieved in an otherwise challenging global market for the oil and gas industry, which is adapting to an extended low commodity price environment.

Fourth Quarter 2015:

  • Revenue increased 26% to $58.0 million from $46.2 million in the fourth quarter of 2014.
  • First full quarter of revenue contribution from all four heli-portable drilling rigs operated in PNG.  This increased revenue contribution from PNG and a strong U.S. dollar revenue in the quarter offset lower Canadian revenue, which was negatively impacted by lower industry activity levels.
  • Increased revenue and the Corporation's continued focus on improving operational efficiencies and reducing operation costs resulted in a 56% increase in adjusted EBITDA to $20.8 million in the quarter from $13.3 million in the fourth quarter of 2014.

Full Year 2015:

  • Revenue for 2015 was the highest in High Arctic's history totalling $209.9 million (2014 - $171.8 million).
  • Adjusted EBITDA increased 30% to a record $64.0 million from $49.3 million in 2014.
  • Commissioning of High Arctic's two new heli-portable drilling rigs was completed in 2015, with the rigs commencing commercial operations in the first and third quarters.  High Arctic owns or operates four heli-portable drilling rigs in PNG, which currently represents 100% of the active heli-portable rigs operating in the country.
  • Cost reduction initiatives undertaken throughout the year in both PNG and Canada offset contract concessions and lower equipment and rental utilization levels.
  • High Arctic distributed a total of $16.6 million to shareholders in 2015 via $5.7 million in share buybacks under the Corporation's Normal Course Issuer Bid ("NCIB") and $10.9 million in dividends which represent 21% of funds provided from operations for the year.

2015 was a significant year for High Arctic as the Corporation executed on its PNG expansion plans initiated in 2014, which saw a material expansion of its drilling operations and market share in PNG through the purchase of two heli-portable drilling rigs.  These two rigs are two of the most advanced heli-portable rigs currently operating in the world.  In addition, High Arctic invested in additional rental equipment in 2015 to support the two new drilling rigs as well as niche growth opportunities in Canada.

Consistent with the growth in revenue and EBITDA for 2015, adjusted net earnings increased to $31.9 million ($0.58 per share) for the year ended 2015 from $28.2 million ($0.54 per share) in 2014.  For the fourth quarter, adjusted net earnings increased to $9.7 million ($0.18 per share) from $8.5 million ($0.15 per share) in the comparative period.

The Corporation continues to maintain a strong balance sheet with a positive net cash position of $11.5 million at December 31, 2015 and a positive working capital balance of $43.2 million.  Funds provided from operations were a record $19.8 million during the fourth quarter of 2015 and $52.8 million for fiscal 2015, an increase of 60% and 23%, respectively, over the comparative periods in 2014.

High Arctic's prudent fiscal management has placed the Corporation in a strong financial position to maintain the Corporation's existing dividend and share buyback programs in 2016 and provide financial flexibility to execute on potential growth opportunities that may present themselves in the current industry downturn.

Financial Highlights

                 
  Three Months Ended
December 31
  Years Ended
December 31
$ millions (except per share amounts) 2015 2014   2015   2014        2013 
Revenue 58.0 46.2   209.9   171.8   152.7
EBITDA(1) 19.3 13.2   56.2   47.2   42.7
Adjusted EBITDA(1) 20.8 13.3   64.0   49.3   41.5
Adjusted EBITDA % of revenue 36% 29%   30%   29%   27%
Operating earnings 14.5 9.7   45.5   35.3   30.8
Net earnings 9.0 8.5   27.1   28.2   24.6
  per share (basic)(2) 0.17 0.15   0.49   0.54   0.51
  per share (diluted)(2) 0.17 0.15   0.48   0.53   0.50
Adjusted Net earnings(1) 9.7 8.5   31.9   28.2   24.6
  per share (basic)(2) 0.18 0.15   0.58   0.54   0.51
  per share (diluted)(2) 0.18 0.15   0.57   0.53   0.50
Funds provided from operations(1) 19.8 12.4   52.8   42.9   35.3
  per share (diluted)(2) 0.36 0.21   0.96   0.82   0.73
  per share (diluted)(2) 0.36 0.20   0.94   0.80   0.72
Dividends 2.7 2.7   10.9   9.4   7.2
  per share(2) 0.05 0.05   0.20   0.18   0.15
Capital expenditures 0.6 14.7   40.0   55.7   21.9
Working Capital       43.2   41.6   41.9
Total assets       244.1   188.7   137.1
Total non-current financial liabilities       6.6   0.4   6.7
Net cash, end of period (1)       11.5   37.2   27.0
Shareholders' Equity       201.2   165.6   111.8
Shares outstanding - end of period(2)       54.4   55.8   50.0
   
(1) Readers are cautioned that EBITDA, Adjusted EBITDA, Adjusted net earnings, Funds provided from operations, net cash and working capital do not have standardized meanings prescribed by IFRS - see "non IFRS Measures".
(2) The restricted shares held by a trustee under the Executive and Director Incentive Share Plan are included in the shares outstanding.  The number of shares used in calculating the net earnings per share amounts is determined differently as explained in the Financial Statements.
   

Revenue

                                 
  Three Months Ended
December 31
  Year Ended
December 31
($ millions) 2015   2014   Change   %   2015   2014   Change   %
Revenue                              
  PNG 50.1   30.8   19.3   63%   177.8   123.5   54.3   44%
  Canada 7.9   15.4   (7.5)   (49%)   32.1   48.3   (16.2)   (34%)
  Total 58.0   46.2   11.8   26%   209.9   171.8   38.1   22%

Consolidated revenue increased 26% to $58.0 million in the fourth quarter of 2015 from $46.2 million in the fourth quarter of 2014.  This increase was driven by the additional revenue contribution from the two new drilling rigs added to High Arctic's PNG fleet, combined with a 16% increase in the average U.S. dollar to Canadian dollar exchange rate.  The increased revenue contribution was partially offset by a 49% decline in Canadian revenues due to lower industry activity levels in Canada.

On a full year basis, High Arctic generated record revenue of $209.9 million, which was a 22% increase over the $171.8 million in revenue generated in 2014.  Although High Arctic's two new drilling rigs were not available throughout the entire year, their partial year revenue contribution as well as a 16% favorable increase in the average U.S. dollar exchange rate allowed the Corporation's PNG revenue to increase 44% over 2014.  Partially offsetting the increased revenue from PNG was a 34% decline in Canadian revenues due to lower industry activity levels throughout 2015.

Operations in PNG

PNG's large, relatively unexplored resource base, low cost production and proximity to Asian markets, provides PNG with a competitive advantage over other higher cost LNG sources. This competitive advantage has led to the development of large long-term LNG projects in PNG, which has provided for growth in activity levels over the recent years.

In response to customer demand in PNG, High Arctic purchased two heli-portable drilling rigs in 2014 and completed extensive upgrades on the rigs to prepare them for the challenging PNG drilling environment.  These two rigs are contracted to a large independent oil and gas exploration company operating in PNG on two year take-or-pay contracts.  Revenue generation for the rigs commenced on the date each rig cleared customs in PNG and the two year contract term for each rig commences on the date each rig spuds its first well.

Upgrades on the first rig, Rig 115, were completed in the first quarter of 2015 and the rig commenced earning "moving rate" revenue in March 2015, which increased to its higher daily drilling rate in mid-June upon the spudding of its first well.  Upgrades to Rig 116 were completed in the second quarter and Rig 116 commenced earning revenues at a "standby" rate upon clearance of PNG customs in late August.  Rig 116's first well is not anticipated to be spudded until late 2016 or early 2017, at which time its two year contract term will commence.

In addition to the two new rigs owned by High Arctic, the Corporation continues to lease and operate two rigs (Rigs 103 and 104) owned by a customer in PNG.  Both rigs were fully active throughout 2015 and for all but thirteen days in 2014.  These rigs are operating under three year contracts which are due for renewal in June 2016.  Management is currently in discussions with the customer regarding the renewal of these contracts.

The addition of the new rigs, combined with a 16% increase in the average U.S. dollar exchange rate during 2015 resulted in a 65% increase in PNG drilling revenue to $151.8 million for fiscal 2015 versus $92.1 million in 2014.  With the full contribution of all four rigs in the fourth quarter of 2015, PNG drilling revenue increased to $43.2 million in the quarter, which was a 71% increase from the $25.2 million generated in the fourth quarter of 2014.

Partially offsetting the increased drilling revenue was an 18% decline in rental and other services revenue during the year to $25.9 million from $31.4 million in 2014.  The Corporation's rental fleet includes approximately 10,000 Dura-Base® mats, of which approximately 5,700 mats were under contract at the end of 2015.  Additional rental revenues are also generated from heli-portable camps and various trucks, cranes and other oilfield equipment.  On a full year basis, rental revenue from this equipment was lower year over year; however, an increase in equipment associated with the addition of Rigs 115 and 116 resulted in an increase in equipment rental revenue in the fourth quarter to $6.9 million versus $5.7 million in the fourth quarter of 2014.  A portion of the decline for rental revenues is also related to some equipment now being captured under the Corporation's drilling contract revenue.

The increased drilling revenue partially offset by the lower rental revenues resulted in a 44% increase in PNG revenue to $177.8 million for fiscal 2015 versus $123.5 million in 2014.  With the full contribution of all four rigs in the fourth quarter of 2015, PNG revenue increased to $50.1 million, which was a 63% increase from the $30.8 million generated in the fourth quarter of 2014.

Operations in Canada

The sharp decline in world commodity prices in late 2014 and into 2015, combined with infrastructure constraints and regulatory uncertainty, has negatively impacted industry activity levels in Canada, resulting in lower demand and competitive pricing pressure for High Arctic's Canadian services.

As a result of the industry slowdown, the Corporation reduced its fleet of marketed snubbing units in 2015 to 9 units out of the Corporation's total owned fleet of 18 units.  In conjunction with the reduced marketed units, the Corporation also reduced its operating support structure to reflect the reduced operating capacity.  The remaining un-marketed units have been parked and will be reactivated as industry activity improves.  Utilization for High Arctic's marketed snubbing units was 52% and 45% for year and fourth quarter 2015, respectively.  In comparison, the Corporation marketed an average of 18 snubbing rigs in 2014 achieving utilization rates of 37% and 46% for the comparable periods.  Equipment utilization is determined by dividing the number of twelve hour days a unit operates by the total number of days in the relevant period.

The reduced activity levels in 2015, combined with lower average pricing, generated a 34% decline in snubbing revenue to $22.4 million in 2015 versus $33.7 million in 2014.  Similar impacts were seen in the fourth quarter, with revenue declining to $5.2 million from $11.1 million in the fourth quarter of 2014.

Similar to the decline experienced in the snubbing division, revenues for the Corporation's nitrogen and equipment rental services declined 45% for the year to $6.7 million from $12.1 million in 2014.  Fourth quarter revenue declined to $1.8 million from $3.5 million in 2014.  Nitrogen services are often supplied in conjunction with snubbing activities, however, the Corporation has also been pursuing opportunities to provide nitrogen services in conjunction with industrial and pipeline maintenance activities.

The lower snubbing and nitrogen service revenues generated a 34% decline in Canadian revenues in 2015 to $32.1 million from $48.3 million in 2014.  The continued slowdown in the industry throughout 2015 and the further softening of revenue rates resulted in a 49% decline in revenues in the fourth quarter to $7.9 million from $15.4 million in the fourth quarter of 2014.

While these lower activity levels and pricing pressures are anticipated to continue in 2016, the Corporation has experienced higher levels of activity with its deeper capacity snubbing units.  The units are suited for the deep long lateral horizontal wells that are currently being drilled in the industry.

Oilfield Services Expense and Operating Margin

                               
  Three Months Ended
December 31
  Year Ended
December 31
($ millions) 2015   % (1)   2014   % (1)   2015   % (1)   2014   % (1)
Oilfield services expenses                              
Personnel costs 13.6   23%   12.6   27%   53.8   26%   45.8   27%
Drilling rig and other rental costs 9.3   16%   10.2   22%   42.9   20%   37.8   22%
Material and supplies cost 6.8   12%   4.7   10%   25.0   12%   17.5   10%
Equipment operating and maintenance costs 2.5   4%   2.2   5%   7.9   4%   8.7   5%
Other 0.7   1%   0.1   0%   1.5   1%   0.8   0%
Total oilfield services expenses 32.9   57%   29.8   65%   131.1   62%   110.6   64%
Oilfield services operating margin 25.1   43%   16.4   35%   78.8   38%   61.2   36%

(1) Operating costs as a % of total revenue.

Consistent with the growth of High Arctic's PNG operation, oilfield service expense increased for fiscal 2015 and the fourth quarter.  However, as a percentage of revenue, oilfield service expense decreased to 62% for the year and 57% for the fourth quarter, versus 64% and 65% in the comparative periods in 2014.

The primary drivers for the decrease in oilfield service expense as a percentage of revenue were:

  • Economies of scale for fixed operating costs through the growth of the PNG operations.  While fixed operating costs were required to support the growth of the PNG operations, the incremental cost added was smaller than the incremental contribution of the PNG revenue growth;
  • A reduction in drilling rig rental costs as a percentage of revenue as High Arctic has full ownership of the two new heli-portable drilling rigs added in PNG.  Partially offsetting this cost reduction was an increase in material and supplies costs, associated with operating these owned rigs.  Maintenance costs will also be expected to increase; however, because these rigs are new, there was minimal impact to maintenance costs associated with these rigs in 2015;
  • Rig 116 was not operating and was earning standby revenue; therefore, revenue was being generated with minimal operating costs, thus skewing margins higher than they would otherwise be under normal operations;
  • In response to lower activity levels in Canada, management undertook a number of cost reduction initiatives, which have resulted in lower operating costs in the Corporation's Canadian operations. High Arctic maintains a scalable cost infrastructure wherever possible which adjusts to changing activity and provides substantial operating leverage when activity changes.  The impact of the reductions was first seen in the second quarter and continues to be realized.
  • Partially offsetting the positive margin impacts identified above was a reduction in higher margin equipment and matting rental revenue in 2015 versus 2014.

The above factors related to the PNG drilling rigs had a greater impact on High Arctic's fourth quarter results relative to the full year results as the fourth quarter was the first full quarter where both of the new rigs were within High Arctic's operating fleet.  This impact is seen through the further reduction in operating costs as a percentage of revenue to 57% in the fourth quarter versus the 62% incurred for the full fiscal 2015 year.

General and Administration

                       
  Three Months Ended
December 31
    Year Ended
December 31
 
($ millions) 2015   2014   Change     2015 2014 Change  
General and administration 4.3   3.1   1.2     14.8 11.9 2.9  
  Percent of revenue 7%   7%         7% 7%    

General and administration expenses (G&A) for the three months and year ended December 31, 2015 increased over the same periods in 2014 as a result of staffing increases and other outlays made to support both current and expected increased activity in the PNG operations and the initiation of a regional office in Brisbane, Australia.  As a percentage of revenue, G&A costs have remained consistent at 7%.

Loss on short-term investments

Since June, 2015 High Arctic has accumulated short term investments in select publicly traded oilfield service companies at a cost of $16.5 million.  These investments were made by the Corporation as strategic investments while it evaluates potential acquisition opportunities.  Subsequent to purchasing these investments, broad declines in market valuations for oilfield service companies in general have occurred.  As a result of a decline in value in the third quarter, the Corporation recorded a $4.1 million impairment loss on the investments, which was recorded in the Corporation's third quarter net income.  A further decline in value of $1.8 million was incurred in the fourth quarter, of which $0.7 million was recorded as impairment in the income statement, with the remaining $1.1 million recorded in other comprehensive income.  All losses recorded on these investments are unrealized as the Corporation continues to hold the investments.

Amortization

Amortization cost increased to $16.7 million for the year versus $12.8 million in 2014.  The increase in amortization cost is associated with the Corporation's $95.7 million capital expenditures made in 2014 and 2015. The majority of this capital expenditure relates to the two new drilling rigs that commenced operations in 2015, at which time amortization of the capital costs associated with these rigs began.  Amortization cost for the fourth quarter of 2015 was $5.9 million which includes a full quarter of amortization for Rig 116.

Share-based Compensation

The increase in share-based compensation expense to $1.8 million for the year ended December 31, 2015, from $1.4 million in 2014, is attributable to full year impact of the share-based compensation expense for the Corporation's 2014 option grants, the majority of which were granted in the second half of the year.  An additional 0.6 million stock options were granted in 2015.

Foreign Exchange Transactions

The Corporation has exposure to U.S. dollar and other currencies such as the Kina though its operations in PNG.  As a result the Corporation is exposed to foreign exchange gains and losses through the settlement of foreign denominated transactions as well as the conversion of the Corporation's U.S. dollar based subsidiaries into Canadian dollars for financial reporting purposes.

Gains and losses recorded by the Canadian parent on its U.S. denominated cash accounts, receivables, payables and intercompany balances are recognised as a foreign exchange gain or loss in the statement of earnings.

High Arctic is further exposed to foreign currency fluctuations through its net investment in foreign subsidiaries.  The value of these net investments will increase or decrease based on fluctuations in the U.S. dollar relative to the Canadian dollar.  These gains and losses are unrealized until such time that High Arctic divests of its investment in a foreign subsidiary.  These unrealized gains and losses are recorded in other comprehensive income as foreign currency translation gains for foreign operations for both 2015 and 2014.

During the year, the Canadian dollar incurred a significant decline in value relative to the U.S. dollar.  The U.S. dollar exchange rate was 0.86 at December 31, 2014, fell to a low of 0.71 in December, 2015 and closed the year at 0.72.  The average exchange rate for 2015 was 0.78.  Since a significant portion of the Corporation's operations are conducted in U.S. dollars through its PNG operations, a decline in the Canadian dollar relative to the U.S. dollar generally had a positive impact on High Arctic's financial results, as evidenced in the Corporation's fiscal 2015 operating results.

While a weakening in the Canadian dollar relative to the U.S. dollar had a positive impact on High Arctic's 2015 operating results, it negatively impacted High Arctic through the Canadian parent's settlement and conversion of U.S. dollar denominated liabilities.  As a result, the Corporation recorded $0.7 million in foreign exchange losses in net income for fiscal 2015.

Conversely, the weakening Canadian dollar results in an increase in the value of the Corporation's net investment in its U.S. dollar denominated subsidiaries.  As a result, the Corporation recorded a $24.2 million unrealized gain in other comprehensive income related to the Canadian dollar increase in the Corporation's net investment in its U.S. dollar denominated foreign subsidiaries during 2015.

Interest and Finance Expense

While the Corporation has maintained a net consolidated positive cash balance throughout 2015, there are occasions when temporary advances are made on the Corporation's corporate debt facilities to meet Canadian cash needs when foreign funds are not immediately available.  Interest on these temporary borrowings combined with fees associated with the Corporation's debt facilities amounted to $0.4 million for 2015, which is consistent with 2014.  As at December 31, 2015, the Corporation had drawn $4.0 million on its debt facilities, which was fully repaid subsequent to year end.

Income Taxes

                           
    Three Months Ended
December 31
    Year Ended
December 31
($ millions)   2015   2014   Change     2015   2014   Change
Net earnings before income taxes   13.3   9.8   3.5     39.1   34.0   5.1
Current income tax expense   3.1   1.1   2.0     10.8   5.6   5.2
Deferred income tax expense   1.2   0.2   1.0     1.2   0.2   1.0
Total income tax expense   4.3   1.3   3.0     12.0   5.8   6.2
  Percent of net earnings before income taxes   32%   13%         31%   17%    

The Corporation's effective tax rate increased to 31% in 2015 from 17% in the prior year.  This increase was related to higher taxable income generated from PNG.

The Corporation's activities in Canada are not subject to current income taxes due to its ability to utilize various tax pools and losses carried forward from prior years.  As a result of these existing tax pools, the Corporation has not recorded any tax expense for Canada during 2015.  As at December 31, 2015, the Corporation had approximately $113.00 million in total tax pools available for use in Canada, of which the Corporation has only recorded a deferred tax asset value of $5.0 million on the Corporation's balance sheet.

In addition to the statutory income taxes applicable on net earnings generated in the Corporation's subsidiaries, withholding taxes may apply to certain distributions, such as dividends, made from the Corporation's subsidiary companies to the Corporate parent company.  No distributions that are subject to withholding taxes were made in 2015.  As at December 31, 2015, the Corporation's subsidiaries had approximately $81.6 million (2014 - $61.8 million) in undistributed earnings which could be subject to dividend withholding taxes.  The average dividend withholding tax rate is estimated to be 17%.  No provision has been made for withholding and other taxes that would become payable on the distribution of these earnings as the Corporation controls the relevant entities and has no committed plans to repatriate the earnings in the foreseeable future.

Liquidity and Capital Resources

                       
  Three Months Ended
December 31
  Year Ended
December 31
($ millions) 2015   2014   Change   2015   2014   Change
Cash provided by (used in):                      
  Operating activities 5.7   4.1   1.6   45.5   43.8   1.7
  Investing activities (0.6)   (11.5)   10.9   (59.4)   (52.0)   (7.4)
  Financing activities (9.6)   (2.6)   (7.0)   (12.0)   8.8   (20.8)
Effect of exchange rate changes (1.5)   1.2   (2.7)   4.2   2.9   1.3
Increase (decrease) in cash and cash equivalents (6.0)   (8.8)   2.8   (21.7)   3.5   (25.2)
Working capital(1)             43.2   41.6   1.6
  Working capital ratio(1)             2.3:1   2.9:1    
                       
Net cash(1)             11.5   37.2   (25.7)
Undrawn availability under debt facilities             21.5   29.2   (7.7)

(1) See non-IFRS measures

The Corporation manages its capital structure so as to provide the capital resources to meet the requirements of its business and instill confidence in investors, creditors and the capital markets.  For the year ended 2015, the Corporation continued to maintain a strong balance sheet with no outstanding net debt, and significant financial resources available via working capital, cash and undrawn availability under the Corporation's debt facilities.

Management believes High Arctic's current capital resources, plus anticipated cash generated from operating activities in 2016, will be sufficient to meet the Corporation's planned 2016 capital expenditure program of $15.5 million and anticipated dividends and share repurchases under the Corporation's NCIB for 2016.  Management will reassess the Corporation's capital resource needs as changes occur in the Corporation's business operations and as future growth opportunities arise.

Operating Activities

Consistent with the increase in EBITDA for 2015, funds provided from operations increased 23% to $52.8 million for 2015 from $42.9 million in 2014.  After working capital adjustments, net cash generated from operating activities during 2015 was $45.5 million compared to $43.8 million for 2014.  Funds provided from operations for the three months ended December 31, 2015 were $19.8 million (2014 - $12.4 million).  After working capital adjustments, net cash generated from operating activities during the fourth quarter was $5.7 million compared to $4.1 million for 2014.  The $14.1 million variance from funds provided from operations for the quarter relates mainly to a $13.2 million increase in accounts receivable in the quarter due to customer payment delays.  The outstanding accounts have been received subsequent to year end.

Investing Activities

During the year ended December 31, 2015, capital expenditures were $40.0 million (2014 - $55.7 million), which primarily related to the completion of upgrades to the two heli-portable drilling rigs purchased in 2014 as well as the purchase of rental equipment.

During the year, High Arctic also accumulated $16.5 million in short term investments in select publicly traded oilfield service companies.  These investments were made by the Corporation as strategic investments while it evaluates potential acquisition opportunities.

Financing Activities

The $12.0 million in funds used in financing activities during 2015 primarily relates to $10.9 million in dividend payments and $5.7 million in share purchases under the Corporation's NCIB.  These outflows were partially offset by $4.0 million in proceeds from the Corporation's debt facilities, which were repaid subsequent to year end.

Throughout 2015, the Corporation declared a monthly dividend of $0.0165 per share which was an increase over the average monthly dividend paid in 2014 of $0.0150 per share.

During the year, the Corporation purchased 1,569,983 of its common shares under a NCIB at a cost of $5.7 million.

On July 28, 2014, the Corporation completed a public offering of 5,051,000 common shares at a price of $4.95 per share for net proceeds of $24.6 million.  These proceeds were partially offset by $9.1 million in dividends paid in 2014 and $6.7 million debt repayments in the Corporation's financing activities.

Outlook

High Arctic's significant exposure to PNG has been beneficial for the Corporation during the ongoing global low commodity price environment.  The majority of drilling activity in PNG is associated with LNG development, and the country's vast reserves of gas are some of the most competitive globally.  The LNG projects require significant upfront exploration and development, which extends over a long-term period.  A significant portion of High Arctic's drilling activities in PNG are currently focused on exploration and appraisal drilling to support the development of PNG's second LNG facility, Papua LNG, as well as expansion for the existing LNG facility, PNG LNG.  Development of these LNG facilities is led by large global oil and gas companies who have the capital resources necessary to undertake these long-term projects.

PNG is a relatively underexplored and underdeveloped resource base with vast reserves, which positions the country as one of the lowest cost LNG source for Asian markets.  Management believes PNG's competitive position in the LNG market will continue to drive exploration and development activities in the country for the foreseeable future.

Rigs 103 and 104 remain active and are under contract until the end of June 2016.  Rig 103 is currently mobilizing to a well in the Western Province for a new customer and Rig 104 is being prepared to commence drilling in Muruk.  Activity for these rigs is expected to remain steady for 2016 and management continues discussions with its customer for contract renewals.  Given the strong demand for top tier drilling services in the country, management is confident of a positive outcome from the negotiations.

Rig 115 has been fully utilized since entering PNG in the first quarter of 2015.  The rig is currently assigned to the customer's joint venture partner in the Elk/Antelope field and is completing the first well for the joint venture partner. With this assignment, High Arctic continues to expand its customer base in PNG.  Upon completion of this well, the rig will revert back to the original customer under its take or pay contract.

Rig 116 is currently on standby in Port Moresby awaiting assignment for its first well.  Management anticipates that the rig will not be mobilized for its first well until the end of 2016 or early 2017.  The rig is under a take or pay contract and is currently earning standby rates until it spuds its first well.  The contract term will continue until two years after the first well is spudded.

Matting utilization in PNG is expected to be approximately 50% for 2016 as a number of mats came off contracts in the second half of 2015. Management is actively evaluating new markets for expansion and redeployment of its non-contracted mat inventory.  Rental demand for the Corporation's remaining drilling support equipment and camps will continue to coincide with drilling activity in PNG.

In Canada, lower industry activities continue to impact High Arctic's operating results.  However, a large percentage of the Corporation's Canadian activity is with larger exploration and development companies who have maintained a higher level of activity relative to smaller oil and gas companies in the current low industry activity cycle.  Management continues to proactively adjust the Corporation's Canadian operating cost structure and to adapt to the current business environment.  As a result, although equipment utilization levels are down, the Canadian operations have remained profitable.

Looking to 2016, the Corporation's contracted status in Papua New Guinea, continued delivery of high quality service and proactive cost management should result in further EBITDA growth when compared to 2015.  However, a further strengthening of the Canadian dollar relative to the U.S. dollar could soften some of the positive contributions on the Corporation's financial results experienced over the recent quarters due to the favorable U.S. dollar exchange rate. Additionally, further capital budget reductions for the Corporation's customers may result in lower year over year equipment utilization in Canada.

Non-IFRS Measures

This Press Release contains references to certain financial measures that do not have a standardized meaning prescribed by IFRS and may not be comparable to the same or similar measures used by other companies.  High Arctic uses these financial measures to assess performance and believes these measures provide useful supplemental information to shareholders' and investors. These financial measures are computed on a consistent basis for each reporting period and include the following:

EBITDA
Management believes that, in addition to net earnings reported in the consolidated statement of earnings and comprehensive income, EBITDA (earnings before interest, taxes, depreciation and amortization) is a useful supplemental measure of the Corporation's performance prior to consideration of how operations are financed or how results are taxed or how depreciation and amortization affects results.  EBITDA is not intended to represent net earnings calculated in accordance with IFRS.

Adjusted EBITDA
Adjusted EBITDA is calculated based on EBITDA (as referred to above) prior to the effect of loss on short term investments, share-based compensation, gains or losses on sale of assets or investments, excess of insurance proceeds over costs and foreign exchange gains or losses. Management believes the add-back for these items provides a more comparable measure of the Corporation's operational financial performance between periods.  In addition, the add back of the loss on short term investment's reflects the anticipated accounting treatment for such losses under IFRS 9, which the Corporation anticipates adopting effective January 1, 2016. Adjusted EBITDA as presented is not intended to represent net earnings or other measures of financial performance calculated in accordance with IFRS.

The following tables provide a quantitative reconciliation of consolidated net earnings to EBITDA and Adjusted EBITDA for the three months and year ended December 31:

                     
  Three Months Ended
December 31
    Year Ended
   December 31
$ millions 2015 2014   2015   2014   2013
Net earnings for the period 9.0 8.5   27.1   28.2   24.6
Add:                  
Interest and finance expense 0.1 -   0.4   0.4   0.8
Income taxes 4.3 1.3   12.0   5.8   5.0
Amortization 5.9 3.4   16.7   12.8   12.3
EBITDA 19.3 13.2   56.2   47.2   42.7
Add:                  
Loss on short-term investments 0.7 -   4.8   -   -
Share-based compensation 0.4 0.4   1.8   1.4   0.8
Loss (gain) on sale of assets - -   0.5   (0.2)   0.3
Excess of insurance proceeds over costs - -   -   -   (2.7)
Foreign exchange loss (gain) 0.4 (0.3)   0.7   0.9   0.4
Adjusted EBITDA 20.8 13.3   64.0   49.3   41.5

Adjusted Net Earnings
Adjusted net earnings is calculated based on net earnings prior to the effect of the loss on short term investments. Management believes the add back for these losses provides a more comparable measure of the Corporation's operational financial performance between periods.  In addition, the add-back of the loss on short term investment's reflects the anticipated accounting treatment for such losses under IFRS 9, which the Corporation anticipates adopting effective January 1, 2016.    Adjusted net earnings as presented is not intended to represent net earnings or other measures of financial performance calculated in accordance with IFRS.  Adjusted net earnings per share and Adjusted net earnings per share - diluted are calculated as Adjusted net earnings divided by the number of weighted average basic and diluted shares outstanding, respectively.

The following tables provide a quantitative reconciliation of net earnings to Adjusted net earnings for the three months and year ended December 31:

                 
  Three Months Ended
December 31
  Year Ended
December 31
$ millions 2015 2014   2015   2014   2013
Net earnings for the period 9.0 8.5   27.1   28.2   24.6
Add:                
Loss on short term investments, net of tax 0.7 -   4.8   -   -
Adjusted net earnings 9.7 8.5   31.9   28.2   24.6

Oilfield Services Operating Margin
Oilfield services operating margin is used by management to analyze overall operating performance.  Oilfield services operating margin is not intended to represent operating income nor should it be viewed as an alternative to net earnings or other measures of financial performance calculated in accordance with IFRS.  Oilfield services operating margin is calculated as revenue less oilfield services expense.

Oilfield Services Operating Margin %
Oilfield services operating margin % is used by management to analyze overall operating performance.  Oilfield services operating margin % is calculated as oilfield services operating margin divided by revenue.

Percent of Revenue
Certain figures are stated as a percent of revenue and are used by management to analyze individual components of expenses to evaluate the Corporation's performance from prior periods and to compare its performance to other companies.

Funds Provided from Operations
Management believes that, in addition to net cash generated from operating activities as reported in the consolidated statements of cash flows, cash flow from operating activities before working capital adjustments (funds provided from operations) is a useful supplemental measure as it provides an indication of the funds generated by High Arctic's principal business activities prior to consideration of changes in items of working capital.

This measure is used by management to analyze funds provided from operating activities prior to the net effect of changes in items of non-cash working capital, and is not intended to represent net cash generated from operating activities as calculated in accordance with IFRS.

The following tables provide a quantitative reconciliation of net cash generated from operating activities to funds provided from operations for the three months and year ended December 31:

             
  Three Months Ended
December 31
     Year Ended
December 31
$ millions 2015 2014   2015 2014 2013
Net cash generated from operating activities 5.7 4.1   45.5 43.8 36.8
Less:            
Net change in items of non-cash working capital 14.1 8.3   7.3 (0.9) (1.5)
Funds provided from operations 19.8 12.4   52.8 42.9 35.3

Working capital
Working capital is used by management as another measure to analyze the operating liquidity available to the Corporation.  It is defined as current assets less current liabilities.

Net cash
Net cash is used by management to analyze the amount by which cash and cash equivalents exceed the total amount of debt.  The amount, if any, is calculated as cash and cash equivalents less total long-term debt.  The following tables provide a quantitative reconciliation of cash and cash equivalents to net cash as at December 31:

             
    Year ended December 31
$ millions   2015   2014   2013
Cash and cash equivalents   15.5   37.2   33.7
Less:            
Long-term debt   4.0   -   6.7
Net Cash   11.5   37.2   27.0

Risks and Uncertainties

Certain activities of the Corporation are affected by factors that are beyond its control or influence. Additional risks and uncertainties that management may be unaware of, or that they determine to be immaterial may also become important factors which affect the Corporation. Prior to making any investment decision regarding High Arctic, investors should carefully consider, among other things, the risk factors set forth in the Corporation's most recent Annual Information Form which is available under the Corporation's profile at www.sedar.com or by contacting the Corporation.

High Arctic Energy Services Inc.
Consolidated Statements of Financial Position
As at December 31, 2015 and 2014
(Canadian $ Million)
               
        2015      2014  
Assets            
Current assets            
  Cash and cash equivalents     15.5   37.2  
  Accounts receivable     42.4   20.6  
  Short term investments     10.6   -  
  Inventories     8.0   5.0  
  Prepaid expenses     0.9   0.8  
      77.4   63.6  
Non-current assets            
  Property and equipment     161.7   119.9  
  Deferred tax asset     5.0   5.0  
  Loans due from related parties     -   0.2  
             
Total assets     244.1   188.7  
             
Liabilities            
Current liabilities            
  Accounts payable and accrued liabilities     23.6   17.4  
  Current portion of deferred revenue     2.2   0.2  
  Income taxes payable     7.5   3.5  
  Dividend payable     0.9   0.9  
      34.2   22.0  
Non-current liabilities            
  Deferred revenue     2.6   0.4  
  Long-term debt     4.0   -  
  Deferred tax liability     2.1   0.7  
             
Total liabilities     42.9   23.1  
             
Shareholders' equity     201.2   165.6  
             
Total liabilities and shareholders' equity     244.1   188.7  

       
High Arctic Energy Services Inc.
Consolidated Statements of Earnings and Comprehensive Income
For the years ended December 31, 2015 and 2014
(Canadian $ Million, except per share amounts)
     
       
  2015   2014
       
Revenue 209.9   171.8
Expenses      
  Oilfield services 131.1   110.6
  General and administration 14.8   11.9
  Amortization 16.7   12.8
  Share-based compensation 1.8   1.4
  Total expenses 164.4 136.7
Operating earnings 45.5 35.1
       
  Loss on short term investments 4.8   -
  Foreign exchange loss 0.7   0.9
  Loss (gain) on sale of property and equipment 0.5   (0.2)
  Interest and finance expense 0.4   0.4
Net earnings before income taxes 39.1 34.0
       
  Current income tax expense 10.8   5.6
  Deferred income tax expense 1.2   0.2
       
Net earnings for the year 27.1 28.2
       
Earnings per share:      
  Basic 0.49   0.54
  Diluted 0.48   0.53
       
       
  2015   2014
       
Net earnings for the year 27.1   28.2
Other comprehensive income:      
Items that may be reclassified subsequently to net income:      
Foreign currency translation gains for foreign operations 24.2   9.0
Loss on short term investments, net of tax  (1.1)   -
       
Comprehensive income for the year 50.2   37.2

 
High Arctic Energy Services Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2015 and 2014
(Canadian $ Million)
           
          2015   2014
               
Net earnings  for the year       27.1     28.2
Adjustments for:              
  Unrealized loss on short term investments       4.8     -
  Amortization       16.7     12.8
  Share-based compensation       1.8     1.4
  Loss (gain) on sale of property and equipment       0.5     (0.2)
  Foreign exchange loss       0.7     0.5
  Deferred income tax expense       1.2     0.2
        52.8     42.9
Net changes in items of working capital       (7.3)     0.9
Net cash generated from operating activities       45.5     43.8
               
Investing activities              
  Additions of property and equipment       (40.0)
    (55.7)
  Acquisition of short term investments       (16.5)     -
  Disposal of property and equipment       0.2     0.6
Net changes in items of working capital       (3.1)     3.1
Net cash used in investing activities       (59.4)     (52.0)
               
Financing activities              
  Dividend payments       (10.9)     (9.1)
  Issuance of common shares, net of costs       0.4     24.6
  Purchase of common shares for cancellation       (5.7)     -
  Long-term debt proceeds (repayment)       4.0     (6.7)
  Loan receivable receipts       0.2     -
Net cash (used in) provided by financing activities       (12.0)     8.8
Effect of exchange rate changes       4.2     2.9
Net change in cash and cash equivalents       (21.7)     3.5
Cash and cash equivalents - beginning of year       37.2     33.7
Cash and cash equivalents - end of year       15.5     37.2
               
Cash paid for:              
Interest       0.4     0.3
Income taxes       6.8     4.1
           

Forward-Looking Statements

This Press Release contains forward-looking statements.  When used in this document, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "seek", "propose", "estimate", "expect", and similar expressions are intended to identify forward-looking statements.  Such statements reflect the Corporation's current views with respect to future events and are subject to certain risks, uncertainties and assumptions.  Many factors could cause the Corporation's actual results, performance or achievements to vary from those described in this Press Release.  Should one or more of these risks or uncertainties materialize, or should assumptions underlying forward-looking statements prove incorrect, actual results may vary materially from those described in this Press Release as intended, planned, anticipated, believed, estimated or expected. Specific forward-looking statements in this Press Release include, among others, statements pertaining to the following: general economic and business conditions which will, among other things, impact demand for and market prices for the Corporation's services; expectations regarding the Corporation's ability to raise capital and manage its debt obligations; commodity prices and the impact that they have on industry activity; estimated capital expenditure programs for fiscal 2016 and subsequent periods; projections of market prices and costs; factors upon which the Corporation will decide whether or not to undertake a specific course of operational action or expansion; treatment under governmental regulatory regimes and political uncertainty and civil unrest. With respect to forward-looking statements contained in this Press Release, the Corporation has made assumptions regarding, among other things, its ability to: obtain equity and debt financing on satisfactory terms; market successfully to current and new customers; obtain equipment from suppliers; construct property and equipment according to anticipated schedules and budgets; remain competitive in all of its operations; and attract and retain skilled employees.

The Corporation's actual results could differ materially from those anticipated in these forward-looking statements as a result of the risk factors set forth above and elsewhere in this Press Release, along with the risk factors set out in the most recent Annual Information Form filed on SEDAR at www.sedar.com.

The forward-looking statements contained in this Press Release are expressly qualified in their entirety by this cautionary statement.  These statements are given only as of the date of this Press Release.  The Corporation does not assume any obligation to update these forward-looking statements to reflect new information, subsequent events or otherwise, except as required by law.

About High Arctic

High Arctic is a publicly traded company listed on the Toronto Stock Exchange under the symbol "HWO".  The Corporation's principal focus is to provide drilling and specialized well completion services, equipment rentals and other services to the oil and gas industry.

High Arctic's largest operation is in Papua New Guinea where it provides drilling and specialized well completion services and supplies rig matting, camps and drilling support equipment on a rental basis.  The Canadian operation provides snubbing services, nitrogen supplies and equipment on a rental basis to a large number of oil and natural gas exploration and production companies operating in Western Canada.

 

 

SOURCE High Arctic Energy Services Inc.

For further information:

Tim Braun
Chief Executive Officer
Phone: 403-508-7836 ext. 105
Email: tim.braun@haes.ca

Brian Peters
Chief Financial Officer
Phone: 403-508-7836 ext. 103
Email: brian.peters@haes.ca

Organization Profile

High Arctic Energy Services Inc.

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