Q1 2021 High Arctic Energy Services Inc Earnings Call
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All participants thank you for standing by your conference is about to begin good morning, ladies and gentlemen, and welcome to the high Arctic Energy services 2021 and Q1 results conference call and I'd like to turn the meeting over to Mike Mcguire. Please go ahead Mr. Mcguire.
Thank you and the good good morning to everybody and welcome to Haptics first quarter conference call today, I'll be providing an update on the press release, we issued off the market last night Tuesday, and make those things.
Following my remarks, Lance me and Dole foods, filling chief Financial Officer, Judy and an interim basis I will be joining us to discuss the our financial performance for the period.
After our formal comments loved and the cold to answer the questions before we begin I would like to remind you. The certain information presented today may include forward looking statements.
Such statements reflect high up its current expectations estimates projections and assumptions.
These forward looking statements and no guarantees of future performance and the subject to certain risks, which could cause actual performance and financial results to vary materially from those contemplated in the forward looking statements.
For additional information on these risks please take a look at our annual information form under the heading of perspectives.
And with that will begin and when.
The guided the past 12 months, where the main focus on safe and effective operations and maintaining our reputation for superior quality service high on.
He is emerging from the global crisis with the strong balance sheet and disposition of worldwide the improved market conditions, with which 2021 of us.
With oil and gas price is having sustained the return to pre pandemic levels and find out cost of a basis considering opportunities to expand the business activities.
Sequential quarterly increases and utilization of our services and Canada has been achieved and I believe we will place the high potential growth and the Canadian as the commodity market strength is.
The sense that we've withstood the depths of the economic lows driven by last year's oil supply crisis, and ongoing hills pin debit. So high Arctic returned to the bank of the $10 million of debt, we drawdown facility last year as a precautionary and marriage from Asia, which reflected the our history of Conservative financial management.
In PNG of COVID-19, 19 case sports and that occurred in March but stopped almost all of our activities during the quarter, resulting in the short term drain on our earnings as we continue with our equipment preservation efforts to maintain operational readiness.
We expect to benefit from this readiness later in 2020, one is government and industry COVID-19 prevention strategies take hold and travel restrictions are relaxed and business activities increase.
In addition, we were recently reminded by total energies and the Papua New Guinea and governments of the importance of the Papua LNG project to both of the project JV partners and the people of Papua New Guinea, when they announced re mobilization to complete project pre feed which is a key step on the on the pathway to a final investment decision.
It's my belief the high optics commitment to PNG will in time provide significant upside for our shareholders.
Yeah.
In the quarter, we saw across the board utilization increases you know Canadian production services segment, where our Concord, well servicing fleet utilization rose to 48% and the quarter versus industry utilization of 39% Rep.
The representing an increased utilization of 10% over the previous quarter.
Yeah High Arctic Snubbing fleet utilization increased 19% and our nitrogen and fleet utilization rose 25 per cent on the previous quarter.
The key achievements of high Arctic and this quarter has been the finalization of work on the practical purposes to convert existing coal COVID-19, well servicing rigs two of reliable efficient and inexpensive electric drive.
We're very pleased to announce the tightened is pending on the design and we plan to identify the industry partners to further test of the technology this year.
We see tremendous opportunity for deployment, and western Canada, particularly and thermal well applications, where existing supply of electrical power of adequate capacity is already available.
Crucially at this stage of development the upgraded service rig maintains the ability to self propelled down the highway.
The upgrade is estimated to reduce carbon dioxide emissions of of well service rigs went over the wellbore by more than 35 per cent compared to current diesel boundaries.
And with that introduction now I'd like to pass the call over to Lance to discuss the financial results in more detail.
Thank you Mike.
As Mike said I'll I'll discuss the key highlights during the quarter for high Arctic and the per.
First quarter of 2021 high Arctic continued to see the benefits from our continued focus on overhead cost reductions and improvements and operational efficiencies out.
The consolidated basis high Arctic generated $800000 of adjusted EBITDA during the quarter, which is marginally lower than the $1 2 million generated in Q4 and is approximately a third of the $2 7 million of adjusted EBITDA in Q1 and 2020.
High Arctic accessed $900000 of various government subsidies during the quarter and continues to monitor and apply for programs where eligibility criteria are met.
Revenue and our.
Production services Division increased 12% over Q4 to $15 $4 million, but declined approximately 30% compared to Q1, 2020 when the negative impacts of COVID-19 pandemic had yet to take hold.
You can sort of focus on cost control throughout 2020.
Without compromising the quality of our services led to improved oilfield services operating margins were.
We achieved margins of 14, 3% or $2 $2 million during the quarter compared to six 9% or $1 5 million during the first quarter of 2020.
While downward pressure on pricing is abating as industry conditions conditions gradually improve hourly revenue is only marginally.
Been experienced below the comparable period in 2020.
The company's Canadian well service rigs and generated $12 $7 million and revenue on 21120 hours.
And with an average revenue per hour rate of $600.
Our average fleet of 49 registered Concord service rigs achieved 48% utilization and the quarter versus the 39% utilized and rate.
Utilization rate generated by theater was C E O D C registered rigs.
Cost reduction initiatives.
And government cues wage subsidy.
Combined to generate operating margins of one point in mind, and the $9 million or 15% of revenue in the quarter.
Canadian Snubbing service operating hours decreased by 21 per cent compared to the pre pandemic Q1, 2020.
The 2009 hours and the first quarter.
Recently, we experienced high quarter over quarter activity as the steady steadily increasing gas well completion work takes hold within and overall improving business environment.
Q1, and snubbing services were 18% higher compared to Q4.
Well revenue reached $2 $7 million during the first quarter.
Due to continued challenging market conditions and targeted areas and the United States, our activities remain idle and our U S operations and expenditures are being maintained at a minimum level.
Moving to the and ancillary services segment revenue increased to $2 1 million to $2 million, three and Q1 up from $1 $7 million and the fourth quarter, but well below the $4 $5 million achieved in Q1, 2020.
The decline was largely driven by a reduction and well site work activity and in particular and well site associated rentals, and Papa New Guinea, including of contraction and well site needs.
Operating margins as a percentage of revenue reached 50 per cent compared to 58% in.
And the first quarter of 2020.
Revenue for our drilling services segment continues to be impacted by the ongoing cessation of drilling activity and Papa New Guinea, thus limiting our revenue potential two minor services related only to critical activities.
The rigs one of three one of four 115 and 116, all remains cold stacked during the quarter, whereas the first quarter of 2020 rigs one of the three and one of them four were operational.
On a consolidated basis general and administrative expenses declined 46% to $2 $5 million and the quarter versus $4 6 million and the first quarter of 2020.
And the overall decrease of $2 $1 million is mainly due to reduced compensation costs. As a result of the targeted reduction and corporate administration personnel that took place over the past 12 months.
In addition accused government support reduced G&A by point of $1 million during the quarter.
As reflected.
And the reduction in G&A high Arctic remains committed to ensuring these costs are maintained and balanced within the overall strategic plan of the corporate Corporation.
The low lower the low level, sorry, excuse me the lower level of operational activity led the company to incur of consolidated net loss of $5 $2 million or <unk> 11 per share during the quarter compared to a loss of $2 2 million or four cents and the comparable quarter in 2020.
Decreased tax expense was mainly associated with a decrease and withholding taxes related to our intercompany dividends as relative decreases and deferred income tax recoveries.
We continue to maintain a strong balance sheet and exited the quarter with $21 million of cash on hand and of working capital ratio of 41.
During the quarter of the company repaid its outstanding balance of $10 million, which was drawn on the $45 million debt facility, which was recently recently extended to August 2023 on favorable terms.
Funds provided from operations were 400000, and the quarter, while capital expenditures were limited to only 800000 doors and the quarter.
With that I'll turn it back over to Mike.
Well, thanks very much Lance.
The rally in oil and gas prices and markets around the world continued throughout the first quarter of 'twenty one despite some challenges and the price rally continues to this day.
Benchmark indices, including Brent and W. T I and the western Canadian select and.
And let J K M LNG, the Henry hub, and the Alberta natural gas will reach peaks not seen since pre pandemic period.
One of 2020.
And of being recently trading and elevated stable bands.
Utilization of high Arctic services, and Canada has continued to rise through the quarter as the our customers sort of rise day production.
Today produces of being conservative with the capital capital with many prioritizing balance sheet improvement over capital investment.
But the prospect of sustained commodity prices has a high Arctic expecting further increases in demand for our services throughout the rest of the year.
And the U S. COVID-19 infection rates of slowed markedly as vaccinated populations where.
There are strong indications of economic recovery, there that avoid oil cut consumer and capital markets.
In Canada is vaccination rates climb of relaxation of social and economic restrictions are expected to take place with the corresponding improvement in business and travel conference.
In terms of.
This should drive increases in domestic energy demand during the second half of 2020, one and beyond.
Matching the current momentum, we see and the U S who still remain the largest buyer of exported western Canadian crude oil products.
High Arctic has already seen a busy of second quarter and 2021 here in Canada. Following an early spring break up and we're seeing improved interest and their services.
In Papua New Guinea, and the recent Spike in COVID-19 cases has seen travel bans imposed from the United the countries, particularly Australia, yes.
The Australia and travel ban has the result of shutting down the primary source of skilled ex Patriot P&G work is.
The results of the high Arctic is bringing the continuation of the cessation of all drilling and exploration activity and the deferral of our customers non essential plant and the maintenance and project activity.
Reliable travel reached the PNG are essential for projects to reach minutes high.
High Arctic has taken steps to ensure that our capability as the specialist PNG energy services contractor will be preserved.
We maintain regular dialogue with our customers employees and the industry and government representatives.
We expect a modest return to work later in 2021 as the true.
COVID-19 prevention strategies take hold and are optimistic of more meaningful activity increases and the medium to longer term.
Last weeks announcement by total energies and the PNG government on the re mobilization of Papua LNG project teams and other required resources to complete project pre feed on the pathway to a final investment decision follows all of us from the PNG government in recent months the indicated changing tone towards both foreign investment and resource.
<unk> and the importance of LNG expansion to the people of PNG.
That concludes my calls my comments I'll now turn the conference over the rocks in who will open the line for questions.
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You will take the first question.
Please go ahead Josef Schachter.
Good morning, Mike Thanks for having the conference call. This morning, two areas for me one in terms of the outlook for our business later in Canada of.
For the.
The service rigs of the snubbing units et cetera.
Have you been to the discussion with clients and D. C of meaningful pick up and where do you see it is it more related to activity and in terms of the service.
Service rig activity or thermal oil or are you seeing more in terms of the natural gas side and then the second question is given your comments about the Papua New Guinea, and maybe pick up a little bit in later of the year because of COVID-19. When do you see really the activity picking up for drilling is it going to take into 2020 three for the F. I D.
Or do you see people looking to start drilling to get a gas ready before that.
Excellent Thanks, Joseph and the thanks for joining us on the call today.
I'll start with the first question and the Canadian service rigs and yes, what we have been in discussion with the our customers and we are expecting and general across the board continuation of of activity. Both in the thermal heavy oil, where we have a substantial presence and and gas we see the gas.
The market improving in the.
The Montney area and the deep basin clean water and we expecting increases in activity and of which we would operate out of the out of central facility that that's just and just the just west of Edmonton.
And we also expect to see continued activity from the sort of reclamation programs.
And in Q1, we achieved a 11% of our activity from the SRP programs and we expect that to continue to increase through the year.
I hope that addresses the first question and I'll move to the PNG question.
P and geez, it's always a good question and not otherwise a straightforward answer and co.
Implicated place to do business and our expectation at this point and time is just to start to see a return to some drilling activity early next year.
We would not expect it to be substantive until the following year as the lead times associated with projects and P&G will require some sustaining forward period.
And customers to prepare them, but we are in discussions with our customers day and customers are talking about drilling.
Okay.
Moving to the to the first.
And part of it but I was asking about in terms of price.
And.
How far do you see utilization rates, having to go up before pricing power will start coming back when you talk to people and the Frac side. They said they don't get rate.
The rates higher than they are they're not going to bring back fleets and anybody who wants to be pricing and lower levels, they'll they'll factor and bring them back into the yard is there a certain level, where you start seeing pricing improving for service rigs and snubbing rigs and how far does that utilization rate have to get before before you see some up high.
And there.
Yeah, good questions again.
So I think I see right increases two minutes and almost almost immediately but the.
The the first REIT increases is going to be about compensation of the at a high rate to compensate.
The work is in our sector people are already becoming.
Constraint to activity of about to date high Arctic has not experienced any any substantive the effects of that but works and we've.
With the long without colleagues or our peers in the and.
And in the C of O D C and lifting our rights to prefer for out of workers and at the beginning of June and that's supposed to increases will end up and the pockets of our employees and.
And it won't be.
And any material benefit to the contractor.
Coming to the point, you make and yes, we agree that current rates will not support.
The investment in the equipment required to return a long idled.
And out of the App.
And back into service.
Expect that the utilization rates are going to have to increase only a small amount until we get to that point across the sector.
It's the only speculate as to what that amount is but I would probably be speculating towards the 10% to 15% and not towards the non the the 60% to 80% range.
I hope that's helpful.
One more from me if I can M&A activity do you see any possibilities of tuck under acquisitions within your core businesses do you see any distressed opportunities.
Somewhat of a private somebody wanted to have a public entity and from a liquidity to the investment.
Yeah, we we have actually said I think in the last call as well that we expect to see.
More movement in the space and in the energy services sector, having followed in the last six months of the consolidation amongst our customer base.
We have not.
And that level of of desperation, yet or of a significant financial distress debt has presented.
Obvious tuck in opportunities, we have looked at acquisitions and the way, we certainly haven't been able to conclude close and he and I do believe the part of the story as to why that's not occurring is about government subsidies and all of the subsidies are in place I think that many companies of hoping to continue to operate through them.
And the the what is still a.
The press market compared to what it was pre pandemic and and compared to what it was part of the pre 15 downturn and.
I'm, hoping to come out of the other side of it and tried the way and to get a spin of condition.
We still have out of our eyes on potential acquisitions, we still think the market will have.
Have oh.
Well, we will be of the condition, which would lend itself to support the underlying theory of just the the consolidation in the energy services sector, we expect to play a role with the.
Okay. Thanks, very much that's great. That's all from me. Thank you.
Thanks Joseph.
Once again, please press star one at this time to ask a question.
We will take the next question. Please go ahead, Jim Monticello with the ATB capital markets.
Hey, good morning.
My question revolves around the.
The electric.
Service right.
And the opportunity that you guys are per Se I'm curious you know what do you think the implementation cost per rig would be.
And have you had any conversations with customers around this and I'm curious how you got to the point, where you started developing this internally is this the customer driven initiatives versus internal I'm.
On the sort of a speculative basis.
Yeah.
Glad you asked the question I'm excited to be to be talking about our a rig and the patent pending.
Condition, we have the.
As far as the what the cost of doing it but you know that would be telling and and I think that maybe I'd rather keep that in my pocket for now, but we when we looking at the second part of your question and and what has initiated at D. C something that high Arctic identified with the rise in ESG focus and.
More than more than two years ago.
And separately the discussing it through 'twenty 2019, we used the period of 2020 and the law of activity then to further progress of the the engineering behind it.
Got to a point, where we had engaged with a couple of key customers on the concept and the way in which we will be looking to progressive.
Being favorably received by them.
And we progressed all the way through the into Finalization concept design and the the application of the patent.
We expect application to mostly be dominated the early in the thermal oil weighted.
Having a substantive number of pumping electrically powered pumping units on one well pad means of access to reliable electricity and force for service rig to tap into is already there.
And and recognizing that in more frontier of completion activity.
And in the gas completion area with the little bit less of that pad work and a little bit and.
Reliable access that we would expect that that sector would take longer for us to get at.
A rig utilization and.
Yeah.
Got it.
Okay.
And then.
I guess, it's probably pretty early days here, but.
Just the sort of follow on one of the last questions is.
Like would you be willing to deploy this in the fleet on the speculative basis or would you need customer commitments.
And higher pricing and as well the sort of justify that investment.
Yes, sorry.
A couple of couple of answers to that question and one where we see that a potential savings for our customers and the reduction in diesel usage and in the.
As well as the the the good the good corporate citizen as.
Aspect of being able to report on the on lower emissions from well servicing activities.
Is appealing to our customers and.
So we would expect that we don't need of substantive.
The increasing pricing to justify the investment and in the E rig.
Coming to the.
Concept of of contracted versus speculative I think you hear and the earliest stages, it's something that's going to involve working collaboratively with customers. It's not simply a matter of just having of power source available, but ensuring that the power source available is.
Adequate for the needs of the service rig.
Which I think means then we're in the dialogue long before deployment.
And and being in that dialogue long before deployment and we'd have.
And expectation of the comfort of the the unit will be well utilized.
And that May in turn turn towards more speculative.
Implementation on service rigs and.
Given that the.
The electric power can be remotely generated the if necessary and I see the little risk in that regard.
Okay great.
And then.
And just.
I'm wondering if you could talk a little bit of a boat the gives and takes and your expectations for.
The tiny when you should be able to be back and P&G operating.
Yeah, well, we were encouraged at the moment the COVID-19 spikes at the the led to the.
Shutdown of travel, particularly the shut down and initiated by Australia and.
And a couple of other countries.
And it is is turned quite quite markedly.
Down to less than 10% of the daily case reported at the moment the than what where they were back at the the.
Part of the March early April so we're encouraged by that and we expect and that those governments will will allow those routes to reopen again soon and albeit and.
Access to traveling the Papua New Guinea is still high basis of.
I permission from the emergency control of it.
But prior to that to that event and in late March and we were not seeing any day.
Declines on the essential oil and gas work is rotating fly in fly out workforce.
And so we are expecting that that'll means some simple I mean, the very near future. He's the debt travel retail I've been yeah.
Customers and it will and I will be able to get people rotating back and forth into the country, we will be able to do so too we would expect the modest increasing in activity and they are very modest in the next quarter, but in the last quarter of the year of expect it to become a more substantive increase in activity for us and.
While not back to pre pandemic levels I would expect it'll be substantially more than what we've seen over the last couple of quarters and and we would expect the early next year in.
In absence of any other unexpected events and every.
Turn to some drilling activity.
Got it.
And that's all from me thanks.
Thank you.
As a reminder, please press star one at this time, if you have a question there'll be a parcel of participants register for questions. Thank you for your patience.
And there are no further questions registered at this time I would like to turn the call over back to Mr. Mcguire.
The thanks, Roxanne and I'd like to thank Tim and Joseph for the questions and everybody who has joined us here today.
And.
And with not having any further comments I'd like to let you know the the Kohl's concluded.
Thank you. The conference has now ended please disconnect your lines at this time and we thank you for your participation.
Yeah.