World News: 05:41 GMT Friday 15th March 2019. [High Arctic Energy Services Inc. via Globe Newswire via SPi World News]
CALGARY, Alberta, March 15, 2019 (GLOBE NEWSWIRE) -- High Arctic Energy Services Inc. (TSX: HWO) – “High Arctic” or the “Corporation” is pleased to announce its 2018 fourth quarter and year end results.
Mr. J. Cameron Bailey, High Arctic’s CEO stated: “Notwithstanding the slow down of Canadian industry activity in the fourth quarter due to low domestic oil prices caused by the surplus of oil production in Western Canada and ongoing pipeline constraints, High Arctic finished the year with renewed strategic focus. We recognize the unique challenges faced by the industry and our clients and will continue to focus on providing the highest quality of service delivered with industry leading safety standards at fair and reasonable prices.”
High Arctic’s Canadian well servicing operations and the Corporation’s PNG business operations offset reduced activity in the Corporation’s Canadian snubbing operations which continue to face headwinds in light of prolonged low natural gas pricing in the WCSB. Through the two business acquisitions completed in the third quarter of 2018, the Corporation has expanded its snubbing and service rig fleet and its geographic footprint entering the US market through the Powerstroke acquisition. The Corporation continues to seek opportunities to leverage its financial position to pursue additional growth and diversification opportunities to further strengthen High Arctic’s business operations. As previously announced, the Corporation secured a three-year contract renewal for its primary contracts of personnel and rental equipment to support drilling operations effective August 1, 2018 and worked closely with clients supporting earthquake recovery efforts during the course of the year generating increased ancillary services revenue.
The following is a summary of select financial information of the Corporation.
Headquartered in Calgary, Alberta, Canada, High Arctic provides oilfield services to exploration and production companies operating in Canada, the United States and Papua New Guinea (“PNG”). High Arctic is a publicly traded company listed on the Toronto Stock Exchange under the symbol “HWO”.
High Arctic conducts its business operations in three separate operating segments: Drilling Services; Production Services; and Ancillary Services.
The Corporation owns two heli-portable drilling rigs (Rigs 115 and 116) and operates two rigs (Rigs 103 and 104) on behalf of a major oil and gas exploration company in PNG. In the fourth quarter of 2017, High Arctic added a fast-moving land-based rig, Rig 405, to its PNG drilling fleet to complete a short-term drilling project. Due to the duration of this project, the rig was leased from a non-PNG third-party contractor. Following damage to the well site from the earthquake in February 2018, the customer decided to terminate operations and Rig 405 was returned to Australia during the third quarter of 2018.
Drilling Services revenue decreased 16% in the quarter to $20.8 million from $24.9 million in the fourth quarter of 2018. This decrease was due to lower drilling activity in the quarter.
Rig 103 continued operations at IST-3 until December 12 and then mobilized to IDT-21 for its next well. Rig 104 spud its well at Muruk 2 in early November and continued drilling through year end. Rig 115 and Rig 116 were cold stacked during the quarter with Rig 116 completing its take-or-pay contract in early November.
Consistent with the fourth quarter results, lower drilling activity combined with reduced contribution from take-or-pay contracted revenue from both Rig 115 and Rig 116 has contributed to a 12% decline in Drilling Services revenue to $93.0 million in 2018 versus $105.1 million generated in 2017. The lower drilling activity in 2018 is a result of the major earthquake in the first quarter and resultant delays in drilling programs compared to the same period in 2017 when Rig 115 was under take-or-pay until June, Rig 116 was on standby for the full period and Rig 104 was actively drilling.
Operating margin as a percentage of revenue decreased slightly to 40% in 2018 versus 41% in 2017.
High Arctic’s well servicing and snubbing operations are provided through its Production Services segment. These operations are primarily conducted in the WCSB and United States through High Arctic’s fleet of well servicing rigs, operating as Concord Well Servicing, and its fleet of stand-alone and rig assist snubbing units.
The Production Services segment also provides heli-portable workover services in PNG through Rig 102. The net book value of Rig 102 is not material and no workover services were provided in PNG during 2017 or 2018 and as such no revenue was generated or costs have been incurred associated with this rig during the periods presented.
Decreased quarter over quarter activity for High Arctic’s Concord Well Servicing rigs was offset by higher activity from the Corporation’s snubbing operations in the quarter resulting in a 2% increase in revenue for the Production Services segment to $21.4 million in the quarter versus $20.9 million in the fourth quarter of 2017. Operating hours for the Concord rigs decreased 5% to 27,161 hours in the quarter from 28,509 hours in the fourth quarter of 2017. Consistent with prior quarters, the Concord rigs achieved above industry utilization of 51% versus the 37% utilization generated by the industry’s registered well servicing rigs in the quarter (source: CAODC). Pricing remains competitive but with an increased exposure to higher rate operating areas this allowed the average revenue per hour for the Concord rigs to increase to $616 per hour in the quarter from $611 per hour in the comparative quarter in 2017.
The positive contribution from the Powerstroke Acquisition resulted in an increase in the Production Services snubbing operations which saw revenue increase to $5.9 million in the quarter versus the $3.4 million generated in the fourth quarter of 2017. Operating hours for the snubbing rigs in the quarter were 4,792 versus 2,344 hours in the fourth quarter of 2017. Activity for the Corporation’s snubbing operations continues to be hampered over recent quarters due to prolonged low natural gas prices which is curtailing snubbing activity on natural gas completions for the Corporation’s customers.
Operating margin decreased 24% to 0% compared to the same quarter in 2017. The decrease in margin is primarily due to start up costs amounting to $2 million incurred in the quarter related to expansion into the US as part of the Powerstroke acquisition and other associated operating costs.
The Production Services segment revenue increased to $84.9 million in 2018 from $81.0 million in 2017. Year to date the Concord rigs have generated 117,395 operating hours for a 56% utilization of the Corporation’s 58 average CAODC registered service rigs versus 57% utilization achieved in 2017 for the industry’s registered service rig fleet (source: CAODC). In 2018 the Concord rigs have generated an average revenue rate of $616 per hour compared to an average revenue rate of $596 per hour in 2017.
Activity for the Corporation’s snubbing rigs has declined 3% in 2018 versus 2017. This decline in activity was due to the Corporation’s core snubbing customers directing their efforts towards completing fracturing programs during the period.
Operating margin decreased to $11.6 million in 2018 from $16.2 million in 2017. Operating margins as a percentage of revenue decreased to 14% in 2018 from 20% in 2017. The primary factor contributing to this decrease is lower field operating margins in the snubbing segment.
During the fourth quarter, the Corporation sold its Blackfalds facility after re-locating those operations to its Acheson facility. The assets were sold on October 19, 2018 for net proceeds of $2.5 million.
Growth in the segment’s PNG rental operations was offset by decreases in Canadian rental operations, nitrogen services and engineering activity during the quarter. The increase in PNG rental activity was due to an increase in equipment being utilized in support of drilling activity, particularly for the remote exploration and appraisal work.
Operating margin as a percentage of revenue increased to 69% in the quarter versus 50% in the fourth quarter of 2017. This increase was due to the increased contribution from the PNG rental division partially offset by a decline in the operating margin from the nitrogen services division compared to the fourth quarter of 2017.
Increased rentals associated with both higher activity for the Corporation’s Concord Well Servicing and higher equipment rental activity in PNG, offset lower nitrogen services and engineering in 2018. The higher equipment rental activity was due to increased drilling activity experienced in 2018 versus 2017 as well as increased rentals in PNG associated with recovery work after the February earthquake.
Operating margin as a percentage of revenue increased to 66% in 2018 from 58% in 2017. Higher margin rental divisions in PNG and Canada made up a greater proportion of revenue in 2018, which helped offset the decline in operating margin from the nitrogen services division.
Relative to the fourth quarter in 2017, general and administrative costs have increased in the fourth quarter and were flat on a year to year basis. General and administrative costs increased $0.4 million to $4.4 million in the fourth quarter mainly as a result of an increase in accrued bonuses and Workers’ Compensation Board expenses of $129K and $57K respectively. For the year, general and administrative costs decreased $0.1 million to $17.0 million in 2018. General and administrative costs as a percentage of revenue increased by 1% to 9% this quarter as compared to the fourth quarter of 2017 and remained consistent at 8% for the year 2018 versus 2017.
Depreciation expense decreased slightly to $6.4 million in the quarter from $6.6 million in the fourth quarter of 2017. The Corporation incurred a full quarter of depreciation associated with the $13.3 million in operating assets added through completion of the Powerstroke and Saddle Well Services acquisitions that added $12.1 million and $1.2 million, respectively, of operating assets. For the year, depreciation was flat.
The increase in share-based compensation to $1.4 million in 2018 from $0.5 million from $0.7 million in 2017 is a result of a higher number of awards granted.
The Corporation has exposure to the U.S. dollar and other currencies such as the PNG Kina through its international operations. As a result, the Corporation is exposed to foreign exchange gains and losses through the settlement of foreign currency 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 its investment in a foreign subsidiary and are recorded in other comprehensive income as foreign currency translation gains or losses for foreign operations.
The U.S. dollar remained strong relative to the Canadian dollar, as it increased during the third quarter compared to the first half of 2018, with an average exchange rate of $1.3214 during the fourth quarter of 2018 (2017 – $1.2715). The stronger U.S. dollar benefits the Corporation as the majority of the Corporation’s PNG business is conducted in U.S. dollars.
As at December 31, 2018, the U.S. dollar exchange rate was 1.3642 versus 1.2545 as at December 31, 2017. This strengthening of the U.S. dollar has resulted in a translation gain of $12.0 million recorded in other comprehensive income for the year ended December 31, 2018 ($7.1 million gain for the three months ended December 31, 2018).
The fluctuation in exchange rates for the year also resulted in a $0.3 million foreign exchange loss being recorded on various foreign exchange transactions (2017 - $0.7 million gain). The Corporation does not currently hedge its foreign exchange transactions or exposure.
For the three months ended December 31, 2018 the Corporation incurred no interest costs. On a year to date basis, the Corporation had an average debt balance outstanding of $2.4 million, resulting in $0.6 million being incurred in interest costs.
The Corporation’s effective tax rate increased to 49% in 2018 from 35% in 2017. The increase in effective tax rate is largely due to an increase in year to date tax expense associated with tax withholdings on dividend payments from PNG offset by higher deferred tax recovery in 2018.
As discussed above under Foreign Exchange Transactions, the Corporation recorded a $12.0 million foreign currency translation gain in other comprehensive income year to date due to the weakening of the Canadian dollar, as compared to the US dollar, at December 31, 2018 relative to December 31, 2017.
During the year ended December 31, 2018, the Corporation recognized a $1.4 million unrealized loss on its strategic investments, which increased $0.7 million during the three months ended December 31, 2018 due to fluctuations in investment share prices. The Corporation also recognized a realized loss on its strategic investments in December 2018 through the sale of a portion of the owned shares.
As at December 31, 2018, the Corporation had $nil outstanding on its debt facilities and $31.5 million in cash.
The Bank of PNG policy continues to encourage the use of the local market currency (Kina). Due to High Arctic’s requirement to transact with international suppliers and customers, High Arctic has received approval from the Bank of PNG to maintain its U.S. dollar account within the conditions of the Bank of PNG currency regulations. The Corporation has taken steps to increase its use of PNG Kina for local transactions when practical. Included in the Bank of PNG’s conditions is for future PNG drilling contracts to be settled in PNG Kina, unless otherwise approved by the Bank of PNG for the contracts to be settled in U.S. dollars. The Corporation has received such approval for its existing contracts with its key customers in PNG. The Corporation will continue to seek Bank of PNG approval for future customer contracts to be settled in U.S. Dollars on a contract by contract basis, however, there is no assurance the Bank of PNG will continue to grant these approvals.
If such approvals are not received in future, the Corporation’s PNG drilling contracts will be settled in PNG Kina which would expose the Corporation to exchange rate fluctuations related to the PNG Kina. In addition, this may delay the Corporation’s ability to receive U.S. Dollars which may impact the Corporation’s ability to settle U.S. Dollar denominated liabilities and repatriate funds from PNG on a timely basis. The Corporation also requires the approval from the PNG Internal Revenue Commission (“IRC”) to repatriate funds from PNG and make payments to non-resident PNG suppliers and service providers. While delays can be experienced for the IRC approvals, such approvals have been received in the past.
The available amount under the $45.0 million revolving loan facility is limited to 60% of the net book value of the Canadian fixed assets plus 75% of acceptable accounts receivable (85% for investment grade receivables), plus 90% of insured receivables, less priority payables as defined in the loan agreement. As at December 31, 2018, there was no amount drawn on the facility and total credit available to draw was $45.0 million.
Industry activity in the fourth quarter was significantly muted due to low domestic oil prices caused from the surplus of oil production in Western Canada relative to the takeaway capacity caused by pipeline constraints requiring the intervention by the Alberta Government to introduce apportionment of oil production in the province. The uncertainties this has created within the Canadian industry are ongoing and will continue until new pipeline capacity is added. The wide differential pricing for Canadian crude oil caused many operators to voluntarily shut-in production followed by regulated apportionment introduced by the Alberta Government has resulted in a decrease of well servicing activity. Canadian oil and gas companies are being very cautious with 2019 capital expenditure programs.
High Arctic recognizes the unique challenges faced by the industry and our clients and will continue to focus on providing the highest quality of service delivered with industry leading safety standards at fair and reasonable prices.
Activity for the Corporation’s Concord well servicing operations continues to show strength with year to date operating hours for the Concord service rigs approximately 6% above the hours generated in the same period in 2017. This increase in hours demonstrates the strength of High Arctic’s customer base and exposure to certain operating areas where High Arctic service rigs are particularly suited to the working environment.
Similar to prior quarters, attraction and retention of sufficient field staff to meet demand continues to remain an industry challenge and has resulted in the Corporation implementing various compensation initiatives in an effort to attract and retain staff. The compensation programs introduced throughout 2018 have resulted in markedly reduced field staff turnover rates and have improved High Arctic’s ability to respond to activity demands while retaining High Arctic’s strong safety and operational performance. As seen in the third and fourth quarter results, these compensation programs have added additional costs to the Corporation’s Canadian operations, however management believes this investment in enhanced field compensation plans is a net positive to the operating results.
While activity levels for the Corporation’s well servicing operations remain strong, low natural gas prices and oil price differentials continue to hamper activity for the Corporation’s snubbing and N2 operations. We expect market conditions in Canada to remain challenging for both organic growth and consolidation opportunities.
The acquisition of Powerstroke has opened a new market for snubbing and well services in the United States and management looks forward to exploring growth opportunities. High Arctic continues to pursue opportunities to move under utilized assets in Canada to redeploy into the United States where there is better utilization and day rates.
In Papua New Guinea, we see strong potential for increasing activity depending on the specific timing of the expansion of LNG export capacity. The announcement made by Prime Minister Peter O’Neil that a Memorandum of Understanding was signed setting key terms and conditions for a Gas Agreement with the Papua LNG project consortium and indicating a fully-termed LNG Gas Agreement may be signed by the end of March 2019 is very encouraging. Combined with the parallel project of co-habited PNG-LNG expansion train, the proposed facility is expected to double LNG export capacity in PNG and project partners have indicated target timing for commencement of LNG shipments from expansion production in 2024. Based on exploration license commitments and increased optimism ahead of the LNG expansion, we expect drilling activity to increase in PNG later in 2019.
Following the three-year contract renewal in Q3 in PNG, Rigs 103 and 104 remained active through the quarter. Rig 103 completed its operations at the IST3 well site and moved to the IDT21 well site in mid December and, subsequent to year end, Rig 103 completed preliminary works on the IDT21 well and “walked” over to IHT1 well on the same drilling pad and conducted works, Rig 103 will continue with infield well works for most of 2019. Rig 104 completed its move and rig up at the Muruk 2 appraisal well site and was drilling at year end, Rig 104 is currently conducting works in the Muruk 2 well bore to assist our customer and their partners with obtaining well and reservoir technical data, Rig 104 will continue working on Muruk 2 with possible additional delineation works to be undertaken before commencing work to fly the rig and associated equipment off the well site. The take-or-pay contract for Rig 116 expired on November 2 and the rig is currently stacked in Port Moresby. Rig 115 was demobilised during the third quarter and is also cold stacked in Port Moresby, both Rig 115 and 116 are being offered for services both within PNG and abroad.
In addition to the financial risks discussed above under “Financial Risk Management”, below under “Forward Looking Statements” and elsewhere in this MD&A, High Arctic is exposed to a number of business risks and uncertainties that could have a material impact on the Corporation. Readers of the Corporation’s MD&A should carefully consider the risks described under the heading “Risk Factors” in the Corporation’s recently filed AIF for the year ended December 31, 2018, which are specifically incorporated by reference herein. The AIF is available on SEDAR at , a copy of which can be obtained on request, without charge, from the Corporation.
This MD&A 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:
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:
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:
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 2019 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; the Corporation’s ongoing relationship with major customers; treatment under governmental regulatory regimes and political uncertainty and civil unrest; the Corporation’s ability to maintain a U.S. dollar bank account and conduct its business in U.S. dollars in PNG; and the Corporation’s ability to repatriate excess funds from PNG as approval is received from the Bank of PNG and the PNG Internal Revenue Commission.
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; the general continuance of current or, where applicable assumed industry conditions; activity and pricing; assumptions regarding commodity prices, in particular oil and gas; the Corporation’s primary objectives, and the methods of achieving those objectives; 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 .
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.
High Arctic is a market leader providing drilling and specialized well completion services and supplies rig matting, camps and drilling support equipment on a rental basis in Papua New Guinea. The Canadian and US operations provides well servicing, well abandonment, snubbing and nitrogen services and equipment on a rental basis to a large number of oil and natural gas exploration and production companies operating in Western Canada and the United States.
Globe Newswire: 05:41 GMT Friday 15th March 2019
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