Q2 2021 High Arctic Energy Services Inc Earnings Call
Yeah.
[music].
This conference is being recorded.
That's gonna stay home if they don't go as you see.
All participants please standby your meeting is ready to begin good morning, ladies and gentlemen, welcome to the high Arctic Energy Services 2021, Q2 results conference call I would now like to turn the meeting over to high Arctic Chief Executive Officer, Mike Mcguire. Please go ahead Mr. Mcguire.
Thank you, Eric and good morning to everyone and welcome to Hi, I think second quarter conference call.
Today I'll be providing an update on the press release, we issued after market yesterday August 12, and following my remarks.
His feeling chief financial Officer, Judy said.
On interim basis, we'll be discussing our financial performance for the second quarter of 2021.
After our formal comments, we will open the call to answer any questions that you might have.
Before we begin I'd like to remind you that certain information presented today may include forward looking statements.
Such statements reflect high optics current expectations estimates projections and assumptions.
These forward looking statements are not guarantees of future performance and are subject to certain risks, which could cause actual performance and financial results to vary materially from those contemplated in the forward looking statements.
Additional information on these risks please take a look at 2020 annual information form under the heading risk factors.
With the continued 2021 rally in oil and gas prices the outlook.
For the energy services sector continues to improve.
<unk> is well positioned to take advantage of better market conditions with its strong balance sheet position.
In the second quarter utilization of.
Services in Canada have exceeded our expectations.
We saw across the board utilization rates increase you know Canadian production services segment, where our Concord, well servicing fleet utilization was 44% in the quarter versus industry utilization of 29%.
It was 12% up on utilization rates in the second quarter last year.
Now my optics snubbing package utilization increased to 19% in the second quarter compared to only 8% during the same period last year.
Yeah.
Given the improving economic environment in the short to medium term high Arctic expect activity to increase at a three operating segments.
Writing geographies of Canada, and Papua New Guinea.
With that being said COVID-19 continued to hamper activity during the quarter, especially in the international Papa New Guinea operation.
Only recently have.
Papua New Guinea travel bans receded since the cases of COVID-19 spiked in April.
High Arctic is started making preparations for the mobilization of rig 115, highly transportable camps and associated support equipment, which is expected to take place later in Q3 to commence work on a remote exploration well abandonment project that will provide revenues into the first quarter of 2022.
It remains my son beliefs.
To Papua New Guinea will in time provide significant upside for our shareholders.
In Canada, we are focused on identifying strategic assets and opportunities that would enhance our growth ambitions.
In July this year.
Investment in highly mobile automated tubular handling catwalk machines of $1.1 million.
Each represents a low risk investment in the growth of our highest rentals brand.
Our catwalks will be upgraded over the remaining period of 2021 and high Arctic will take sole control from the beginning of next year.
Yeah.
Key achievement this year for high Arctic is bringing the finalization of work on a practical process to convert existing Concord, well servicing rigs to reliable efficiently and inexpensive electric drive.
During the second quarter, we had dialog with select customers on possible field trials trials and hope to lock wanting soon.
We see tremendous opportunity for deployment in Western Canada, particularly on thermal well pads, where existing supply of electric power of adequate capacity is already available.
The upgrade is estimated to reduce the carbon dioxide emissions of a well service rig went over the wellbore by more than 35% compared to current diesel powered units.
High Arctic will continue to develop its technologies. We will also continue to explore opportunities to make acquisitions that strengthen our service space and enhances value to shareholders.
With a strong balance sheet position, we will carefully review strategic mergers that would strengthen both parties.
With that I'd now like to pass the call over to Lance to discuss our financial results in more detail.
Thank you Mike.
I'll briefly discuss the key highlights of high Arctic financial performance as Mike mentioned, the second quarter of 2021 saw higher activity and candidates production service segment offset by lower drilling related activity in Papua New Guinea.
On a consolidated basis high Arctic generated $800000 of adjusted EBITDA during the second quarter, which is slightly lower than the $1.3 million generated during Q2.2020.
During the first half of 2021 high Arctic adjusted EBITDA was $1.7 million.
The company continues to access all available government support programs, so far receiving $2 million in wage and rent subsidies subsidies during 2021.
In our production services Division revenue increased 40% to $13.3 million from $9.6 million in Q2, 2020 due to higher operating hours as the Q2 breakup period in Canada was earlier and shorter than <unk> experienced in prior years.
Despite higher revenues are oilfield operating margin.
16, 4% in Q2, 2021 was lower than the 23, 3% in.
In the same period in the prior year, where it was benefited more from a high level of government grants administered shortly after the beginning of the COVID-19 pandemic.
On a year to date basis <unk> operating margin was 16, 1%.
The Companys Canadian well service rigs generated 85% of the activity within this division or $11.3 million of revenue on 19469 operating hours with an average revenue per hour of $582.
Our fleet of 19 registered Concord service rigs achieved 44% utilization rate in the quarter, a full 15% higher compared to the C. O D seeds registered rigs.
Our Canadian sub snubbing packages generated the remaining 15% or $2 million of revenue in the division on operating hours of 1400 up substantially from 574 operating hours during the second quarter of 2020.
Snubbing activity was consistent throughout the spring breakup in Canada as gas well completion work was prioritized by customers due to strong gas prices and demand.
Lastly, due to the continuing challenging market conditions, and our focus areas in the United States. Our equipment remains idled and expenditures are being maintained at a minimal level in United States.
Moving to the auxiliary services segment revenue increased to $2.6 million in the quarter.
From $1.6 million in the second quarter of 2020.
Revenues were due to higher demand for higher fixed rental and nitrogen services in Canada, which more than offset lower rental revenue in Papua New Guinea.
This resulted in a segment.
Operating margin of 42, 1% in the quarter versus 36% in Q2.2020.
On a year to date basis revenues decreased to $4.8 million from $6.1 million in the prior year. The decline was largely driven by a reduction in well site.
Associated rentals in Papua New Guinea, including the contraction of well site matting needs.
Revenue from our for our drilling services segment continues to be significantly impacted by the ongoing cessation of drilling activity in PNG, thus limiting our revenue potential two minor services related to critical activities.
Rigs 103, $141.15, and 116, all remain cold stacked.
Whereas during the first half of 2020 rig 103 was operational.
We are starting to see improvements in the business environment and in Papua New Guinea, and now have line of sight on the mobilization of rig 115 in Q3 in anticipation of the commencement of operations later in Q4.
General and administrative costs decreased by 21% to $2.5 million in the second quarter versus $3.1 million in Q2.2020.
The overall decrease of $600000 is mainly due to reduced compensation costs as a result of targeted reductions in corporate administrative personnel, which took place over the past 12 months.
As reflected in the reduction in G&A high Arctic remains committed to ensuring these costs are managed and in line with activity and the overall strategic plan of the Corporation.
Continued lower activity, especially in the Papua New Guinea led to the led to the company and creating a consolidated net loss of $4 million or <unk> <unk> per share in the quarter compared to $6.1 million loss or <unk> 12 cents a share in Q2.2020.
Continued to maintain a strong balance sheet and exited.
Q2 with.
With $21.7 million cash on hand, no debt and working capital ratio of 41.
In Q1, the company repaid the outstanding that it had on its revolving credit facility of $10.10 million.
And the facility itself was extended to August 2023 unfavorable terms.
Cash flow from operations was $2 million during the quarter and capital expenditures were limited to 685000.
As Mike mentioned earlier do we did spend $1.1 million on capital expenditures in July acquiring Catwalks that are currently deployed in the field.
With that I'll turn it back over to Mike.
Thanks Lance.
Throughout the REIT. This recent severe period, it's been pleasing that our Canadian operation has been able to offset losses from Papua New Guinea, and maintaining a healthy cash balance.
Here, we set a strategic focus on the quality of people systems and productivity to strengthen underlying service processes to customers.
Hi, optics business activity in Canada continues to recover operating cash flow has returned to above breakeven.
As service demand increases there is a need for higher prices to restore profit margins enable reinvestment in equipment and provide a return on shareholders equity.
In Canada, COVID-19 vaccination rates reach world, leading levels in July and consequently, the reported new Covid cases, and serious hospitalizations dropped to levels that have allowed for the relaxation of many government imposed social and economic restrictions.
In Papua New Guinea, the Spike in COVID-19 cases has receded and major corporations have begun returning personnel to work.
However, there remains uncertainty from the possible ongoing impacts of the virus and in particular, the rising case numbers of the Delta variant.
Recent positive steps taken by governments within Canada and around the world towards reopening economies may moderate or reverse course and in process may impair our current favorable outlook.
That concludes my comments and I'll now turn the conference back over to Eric who will open the line for questions.
Thank you Mr Mcguire.
We will now take questions from the telephone lines. If you have a question and you're using a speaker phone. Please lift the handset before making your selection.
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Please press star one at this time, if you have a question there will be a brief pause while the participants register for questions. Thank you for your patience.
Okay.
And we have the next question. The first question. Please go ahead.
And we have the next question. Please go ahead.
Hello, Tim Monticello with <unk> capital markets.
Hi, Tim.
Hey, good morning.
Just a.
Curious about the oil search.
Total merger.
But can you just need a little bit your track record with Santos and PNG.
Yes.
Sure Tim Thanks.
Thanks for raising the question. So Santos has been in recent times and since high Arctic commenced operations in PNG and in 2007, our non operator present actively present in PNG.
Pain involved in many joint ventures, where high Arctic has provided services through its a its drilling services segment drilling wells for JV is that they've been partnering and in.
Ancillary services segment, where we have provided a substantive amount of rental equipment, including Worksite mapping to the joint ventures that Santos has been a participant in that would be the extent of out of our experience with Santos given that it's only in Papua New Guinea with Santos and ourselves are both prison.
Got it got it.
You see any.
Potential risks the relationship from that merger I mean, you guys have a pretty dominant positions can you sort of imagine that.
Fairly safe, but is there anything that maybe.
It could be an exposure.
Yes, so Tim I don't think that we see any any potential negatives that Santos is.
One of the original partners and the PNG LNG project.
Being an active participant in that as well as in the exploration sectors in the license blocks with they are the non operated joint venture partner, they've got extensive experience in Australasia and of being terribly successful over the last.
10 years.
Building their business up in LNG supply as well as our liquids production in Australia.
They have an on prem.
Presence in the business community import Mosby.
They've got participation on many of the of the chambers, both commerce and and petroleum and <unk>.
Believe that if this merger does close that it should be generally neutral for high Arctic and that we expect to be.
We continue to work for the same people within oil search you would then be wearing.
Our gatherer of Santos showed assuming that Santos rebrand after the merger.
Okay understood.
Switching a little bit to Canada.
Can you, maybe just talk a little bit about the dynamics, you're seeing in terms of pricing.
Yes.
Question I'm sure that a lot of people in our shoes in our segment of getting that same question. You know what we've seen this quarter is that theres been pressure on <unk>.
Personnel and with the pressure on personnel, we've seen rate increases.
As an industry, we've done outpaced Detroit.
<unk> people back to boots on the ground jobs in the in the energy sector, where the energy services.
Divisions of companies.
Far and away the largest employer.
So that's been the driver of movements in the quarter to date.
As I indicated.
My closing remarks, we do expect to see them in the coming quarters right improvement not just because of personnel constraints, but also because of the requirement now to come.
Companies like ourselves and our peers to reinvest in equipment to be able to provide quality services.
We've made a cruise and capable equipment.
Okay got it are you guys able to pass through any cost inflation, you're seeing today is that our struggle.
But we've not had any struggle with.
Pass through cost inflation to diet and this quarter has has been the active quarter with adjustments.
We've seen you are Ali right Ali revenue numbers going up and down and we can also have been up to maintain margin.
Okay, Great. That's all from me thanks, guys.
Once again, Tim please.
Once again, please press star one on your devices keypad. If you have a question and we did have another question or earlier and we seem to have lost some when they were up in the accuser if that a gentleman called please press star one again.
Okay.
Once again, please press star one on your devices keypad, if you have a question.
And we have a question from the next participant Joseph Please go ahead actor.
Good morning, Mike I got caught up in the.
The dialing in.
For the question so that's a real good read.
Aylwin.
What John talked about glad you could join us.
When you talk about the PMG abandonment is for the two quarters Q4 and Q1.
How material is that and then when you go into 2022.23, how do you see the potential for you know.
The amount of drilling that starts to happen.
They're in country.
Meeting the growth that's needed a number of years down the road when the new trains come on when do you. How do you see the ramp up occurring do you need to drill a few wells through two or three wells and 23, four or five wells in 24, or how do you see that ramp up so that you can see potential you know where you might have chances to bid for business.
On the Forex.
Yes.
Again really great questions. So Joseph.
The work for rig 115, and the abandonment, we expect it to be.
Operating on fruit.
Through the latter part of Q4 into the early part of Q1, and we have seen revenue for that coming in for several months either side as you know the challenges of mobilizing and moving equipment to a substantive amount of equipment by Biogen helicopter et cetera in Papua New Guinea.
While that project may not be particularly long on the well side itself overall period of revenue will come in around somewhere between seven or eight months.
Coming to the second part of the question what do we see that for a ramp up in drilling activity in Europe.
I'm looking into my Crystal ball.
And I think that.
Drilling activity in the latter part of 'twenty two.
He is highly likely given the lack of any activity since the end of the first quarter last year and remember that we have a rig rigged up over a well.
Was suspended meet why at that point in time and another rig that we're rigging up on another well site too.
To follow that drilling.
Well software run at the time.
We would expect to return to those wells net latter part of next year, and we would expect them to see a steady increase in drilling activity driven by the LNG projects and the commitment wells.
For the holders of exploration license blocks and retention license blocks. So we would expect that that these commitments that need to be on it getting towards the mature end of the license period and there will be only a limited amount of ability for the customer base to try and move those into future periods.
Unless they have committed to a drilling rig.
And with those rigs need to be highly portable for most of that work or or other rig two land rigs would be able to be moved in.
A long road.
For the debt.
Do you have a natural advantage because of the rigs.
Yes, a really important question Joseph and and the answer is that we can see that the majority of the drilling associated with that kind of work I was talking about will require helicopter axis, because it'll be in remote and undeveloped areas. However.
There will be some drilling we sorry.
Too much clarity I would say, we expect to see some drilling in back filling the existing LNG facility, which then could be accessible by road moving rigs because of the infrastructure that exists there.
That would not represent the larger portion of the drilling we expect to see maturing through latter part 'twenty two into 'twenty three 'twenty four.
Okay and lastly for me is the government our agreements with the with the energy companies is that all settled and do they have the agreements on.
Royalty revenue sharing and everything so that it doesn't come back as well.
That whole battle has to be rethought again, it a year or two down the road.
Yeah, once again, youre well informed and good question. So the Papua LNG project two trains for the expansion of the existing facility, but from separate joint venture that gas agreement is settled and agreed and moving forward and we saw and I think I mentioned at our last update after the Q1.
Results that.
Papua New Guinea government and French Supermajor total energies have committed for the revitalization of personnel and to move into the feed study aiming at a final investment decision in the near future.
One it looks like it's a walk.
We look at the other Willis.
There's two other major petroleum projects that are being.
Considered in both of them for some time now it would probably well known to those on the call.
The PNG LNG expansion using gas from opinion, we're pleased to see the government, saying that they are actively re engaged in discussions with the operator Exxon Mobil, We think that's a very positive development given that 18 months ago that two parties seem to have arrived at an impossible Hawaii. So we're watching this.
Spice to see how that develops and the other project is the is the project in the offshore in the Gulf of popular with the company called Twins, who have a development license for Pascal field passenger as a gas condensate discovery.
They looked like only.
Three or four weeks ago that they had reached agreement on terms therefore for gas gas agreement for the development of that field, but we noted some press that was seen late last week, which indicated that the twins, who had received a mockup of the actual gas agreement that looked like the the negotiating team for the state had started pulling the sheets.
So out of the beta.
Okay, one more.
More from me and Canada of course, we're seeing a lot of companies talking about their work and their involvement with indigenous groups, bringing them in as partners, bringing them. Some contracting work to them and that's something that's a big issue in the PNG and argue working with local groups and how does that work in there versus what we see going on in Canada.
Yeah, I'm going to try and keep this truncated.
I'm sure everyone's got things to do and I'll talk a lot about it but in a in a nutshell in Papua New Guinea, we do from time to time work with various land holder groups, which would be I guess somewhat equivalent to two first nation.
And in Canada.
And some of these groups have got companies that they can provide various services and we do engage with them and our customers engage with them and we see that it was only being good corporate citizen.
Looking to the benefit of the communities, where we work.
When it comes to.
Our service offering.
Technically.
Mature drilling high capital.
We don't have an active local partnership.
When it comes to that but we have from time to time obtained labor from various different land holding companies in the areas, where we work so that there's some involvement from that perspective.
We have engaged in a discussion with local.
Businesses to determine if there was.
Something we could do in the area of partnerships along the lines of something similar to what we've done here without Saatchi in a partnership in the Saudi in a group.
We continue to keep a dialog with the business community. There we have nothing that we are actively discussing at the moment, but if opportunities to do something there that would we believe would be beneficial to all parties does come up we would not exclude.
Some form of partnership with BG in the future.
Okay Super Thanks, very much and look forward to the upgrade in the future quarters to see the business picking up in PNG. Thank you.
Thank you Joseph and thanks for the kind comments.
There are no further questions registered at this time I would now like to turn the meeting over to Mr. Mcguire.
Okay. So that I think that brings us to the end of the call and I'd just like to thank participants for joining us today and.
With that I'll turn the call back to Eric.
I wish everybody well.
Okay.
Thank you. The conference has now ended please disconnect your lines at this time. Thank you for your participation.