Q4 2021 High Arctic Energy Services Inc Earnings Call
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All participants thank you for standing by the conference is ready to begin good morning, ladies and gentlemen, welcome to the high Arctic Energy services 'twenty 'twenty. One Q4 results conference call I would now like to turn the meeting over to high Arctic <unk>, Chief Executive Officer, Mike Mcguire. Please go ahead.
Thank you Patrick and good afternoon, or good morning to everyone.
Welcome to Harden optics fourth quarter conference call today, I'll be providing an update on the press release, we issued after market yesterday March 10th.
Following my remarks, I'll hand, the call over to our Chief Financial Officer Lance.
Lance will be discussing <unk> performance for the fourth quarter of 2021.
After our formal comments, we'll 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 current expectations estimates projections and assumptions.
These forward looking statements are not guarantees of future performance.
And they are subject to certain risks, which could cause actual performance and financial results to vary materially from those contemplated in the statements.
For additional information on these risks please take a look at our management's discussion and analysis and the 2021 annual information form that accompanied our release under the heading of risk factors.
Yes.
Yeah.
Well, what a roller coaster the energy industry is old.
Entering 2022 global events propelled the energy sector into an immediate and significant supply constraint situation.
Thankfully it against Russia, combined with the actions of global LNG and transport corporations have removed substantial supply of oil and gas stressing the market at a time of increasing LNG demand as COVID-19 restrictions are lifted around the world.
High Arctic closed out to 2020 , one fiscal year in an excellent position as.
As underlying business fundamentals begin to improve.
Surplus pre pandemic cash of $9 $7 million was paid to shareholders in the form of a special one time dividend.
We exited the year with $12 million of cash on hand.
<unk> capital structure with the execution of an 8 million dollar fixed rate mortgage financing access to a revised $37 million of undrawn revolving credit facility and increasing revenue fueled by positive pricing trends, increasing demand for our services and the return to work in Papua New Guinea.
Yeah.
The return to rig activity in PNG was at 2021 highlight.
Even better was the ability of that team there to prepare transport assemble re commission adopt right 115 without a recordable incident.
In the process, increasing our recordable incident free performance after five and a hockey is 2.2 dollars 8 million Daniels.
Another highlight was the above market, 43% utilization, you know Canadian well servicing well servicing against the C. E O E C outreach at 37%.
Increasing revenue per hour in Canada through the second half 2021 is a trend that continues into the first quarter of this year.
Driven by substantially improved pricing agreements without teach estimates.
This was somewhat offset by redeployment of reactivation costs and inflationary cost pressure, particularly the cost of personnel.
COVID-19 site shutdowns continued and impacted the fourth quarter more than any prior period.
The ongoing sentiment towards living with endemic COVID-19 is increasingly positive. However, some sites shut down still persist in the first months of 2022 and how this might affect our business into the future does remain somewhat uncertain.
But we.
We expect commodity price strengths, coupled with the renewed global focus for the security of supply for oil and natural gas will drive further increases in energy service activity.
It is our view that more Canadian oil will be needed to supply foreign markets.
Canadian heavy oil is well placed to supply growing U S demand as it strives to meet President Baden's state of the Union commitment this year to start fixing out of the 65000 miles of highway and 1500 bridges in disrepair throughout the country.
Okay.
For the past 18 months.
Our E&P customers have prioritized balance sheet repair.
Led by increased return to shareholders.
With a prognosis the continued high oil and gas we anticipate that these companies now have additional free cash flow to invest back into their assets to increase production.
Providing high Arctic with optimism.
<unk> increases in utilization and pricing through 2022.
LNG is increasingly becoming the mobile low emissions energy source of choice through this period of energy transition.
Demand for LNG is increasing in Asia, Europe , and the sub continent in Papua New Guinea is ideally positioned as a key source of new LNG supply.
The signing of the Ping Yang gas agreement and the progression of the Papua LNG project towards final investment decision a key recent developments here.
The project timelines for those two major capital projects looks ideal.
Even though there are projections of significant supply shortfall from the current and committed LNG projects globally.
High Arctic is ideally positioned to benefit from our need to drill complete and service wells in both the Canadian and Papua New Guinea and markets.
So this is aligned with the development of the gas sources for the LNG projects in PNG should be accompanied with a return to exploration and appraisal to discover and delineate the future feedstocks for the existing and new LNG processing facilities.
Yeah.
The Saatchi in a partnership continued to grow in 2021 generating revenues of $2 $1 million in Canada. The partnership was particularly successful in the various provincial well abandonment and site closure project programs funded by the federal government, which work will continue through the through most of 2022.
With that summary, I'd like to now pass the call over to Lance to discuss key financial highlights from the quarter in more detail.
Thank you Mike I'll touch based on the key financial results and activities for the fourth quarter of this year.
On a consolidated basis Q4 revenues were $23 6 million up.
Up 26% over Q3 and up approximately 40% compared to Q4 2020.
Higher revenues were primarily generated from the ramp up of drilling related activities and our PNG operations.
During the quarter, we moved rig 115 caps equipment and people to the remote location, where the well abandonment what to take place.
Actual drilling operations commenced in January and the well abandonment program was completed during February of this year.
Revenue from our.
Production services segment, and Canada remained flat at $13 $6 million compared to Q4 2020. It was up only modestly from the $13 $1 million generated.
In Q3.
Shutdowns of brink sites due to COVID-19 impacts extreme cold weather and weekend downtime caused by a few key customers resulted in over 3000 less rig hours during the quarter.
Operating margins were 20% during Q4 and for all of 2021 down from operating margins of 23% experienced in the previous year.
Upward pressures on field labor costs were felt during Q4, partially offset by improving revenue per hour rig rates in Canada.
Subsequent to year end, we are seeing a marked increase in demand for our services opening up opportunities to negotiate higher rig rates, which are in turn expected to improve our operating margins as we proceed through 2022.
We continue to be disciplined in our support services and controlling the costs cost reduction initiatives throughout the past several quarters has led to a 20% year over year decline in general and administrative expenses.
We will seek further opportunities to optimize our administrative.
Expenses, while effectively supporting growth in our field operations.
I Arctic incurred a net loss of $4 $6 million for 10 cents a share during Q4.
And a loss of $18 6 million or 38 cents a share in 2021.
This compares to a 2020 loss of $26 million or 52 cents per share.
The noncash quarterly charge of approximately $6 million for depreciation of our large base of property equipment masks. The fact, we generate positive funds flow from operations for the year, we generated $3 7 million compared to $6 3 million in 2020.
In terms of EBITDA, we produced $1 $1 million during Q4 and $4 $4 million during 2021.
On November five 2021, the corporation paid $9 $7 million in dividends to shareholders, while preserving a strong capital structure.
The <unk> 20 per share dividend represented a 13% yield on it based on the trading value of high Arctic shares at the time the dividend that was announced.
As Mike mentioned earlier this morning, we announced the Recommencement of our monthly dividend by half cents per share payable starting may 12.
Also during the quarter high Arctic more mortgaged its company owned properties in Alberta, adding long term low interest debt to the capital structure.
The $8 $1 million of proceeds from the financing were made available to fund capital expenditures and Canada on equipment and in PNG as well as their operations.
As Mike alluded to earlier.
In the call at December 31, the Corporation had positive working capital of $30 million.
And a working capital ratio of three one we had cash on hand of $12 million $8 million of long term debt and had access to approximately $10 million of an existing undrawn $37 $37 million revolving credit facility.
Lastly, a few administrative items to note we changed external auditors to keep M. G. Late in 2021 and successfully completed the year end audit.
Of our 2021 results.
We also recently moved to Odyssey Trust company as our transfer agent, who will help organize our AGM scheduled to take place in may of this year.
With that I'll turn it back over to Mike.
Thanks Lance.
Before we turn the call over to questions I'd like to walk through the strategic objectives that high Arctic Cat's communities in 2022.
At the top of valleys is our ongoing commitment to safety excellence in quality service delivery.
Building on the World class platform, establishing that P&G operation and a continued drive in Canada as we work out quality centric single global platform for executing work.
Yeah.
We are able to generating free cash flow.
By focusing on actions to increase utilization of our world class fleet equipment.
Improvements in efficiency and workforce productivity building on at 2021, 20% reduction in G&A costs and disciplined operating cost control.
The development of new and existing employees to grow the pool they are competent label.
In this labor constrained operating environment, enabling us to grow our fleet deployment to meet increasing customer demand.
The pursuit of opportunities to secure the corporation's future as a lower emissions energy services provider.
You know annual information form we included for the first time, an ESG section out.
Wanting our focus areas and self assessments.
High Arctic already has a heightened pending electric rig design that can operate on available electric supply at the well site.
We will continue to pursue opportunities for growth and corporate transactions and well understood markets that enhance shareholder value.
Like the Catwalks, we invested in during 2021 that strengthened our service space added earnings and generated cash.
We will protect our strong balance sheet position with disciplined capital stewardship.
We will carefully review strategic transactions to optimize our structure scale and service lines to improve returns to shareholders.
The confidence we have in this improved market and improving business fundamentals for high Arctic is underscored by the announcements in our quarterly release of an intention to return to regular monthly dividends.
This morning before market, we declared that the monthly dividend payments will commence at half a cent per share in mind.
I'd like to close with a thank you to our employees as well as our shareholders.
The 2020, and 2021 years have been a challenge as we dealt with the impacts of the COVID-19 crisis and the oil price collapse.
We have confidence that the substantive Lee improved market conditions and business fundamentals.
That have already enabled wage increases and a return to dividend payments.
We are it is our intention to regularly review the corporation's ability to consider the sustainability of increases to the dividend and the use of buybacks under our NCI D of outstanding common shares through the generation of further surplus cash.
That concludes my comments and I'll now turn the call over to Patrick who will open the line for questions.
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Okay.
We will take the first question.
Please go ahead Josef Schachter.
Good morning, Mike and Lance a few questions for me in your comments you mentioned for the outlook of the stage is set for a meaningful near term ramp up of activity. When you were talking about PNG. When do you expect to bids to come out for.
Or more active work and how much capex, we have to spend to improve the equipment harder to take prepare it for the activity that the potential.
And energy company will want you to do and how much competition is there in the market now has a lot of it has gone away so that potentially margins will be pretty good when those contracts are left.
Thanks, Joseph Thank you for the question.
And again he is he's at the center.
They are focused for growth in the latter part of 2022 and into 2023 and beyond.
We would anticipate it.
<unk> is.
The level of activity that we're currently undertaking through most of this year with the likelihood of a ramp up in the fourth quarter with the additional deployment of another drilling rig.
We would expect over the next two.
Two to three year cycle, a continuation in increase of activity along similar lines of adding.
Approximately a rigor yeah, but that could accelerate as some of these projects move towards significant decision points. We would expect then.
Customers to be going to market seek services.
And possibly a sustained period of.
The high level of activity in PNG for many years on the basis of the two currently progressing LNG projects and the potential for more as.
As far as Capex.
Capex needs ease a little bit difficult to quantify at this point in time.
Maintained all of the rigs that we operate in a state of readiness to deploy so we would expect capital required for their deployment into service to be minimal but not.
Not negligible and we would expect to be in a position of advantage over any potential competition on the basis that we've been the only drilling contractor active in Papua New Guinea since 2015.
That said there is a global supply base of international drilling contractors and I'm sure that our customers will look to see competition in the market, which but we would expect to be able to deploy at margins similar to those we saw in the in the in the handful of years, leading into the Covid shutdown.
Yeah.
Okay. Good.
That's one for me is.
Is there is there a significant cost to the U S closure and bringing that equipment back into Canada.
So we believe Joseph that most of the costs in wanting things up in the U S has been booked already and the cost of relocation of equipment back to Canada. We did incur some in the fourth quarter and it did it did have an impact on the margins we were able to generate as we relocated one about well servicing units out of North Dakota.
And deployed it in the market in Western Canada.
These costs are not extensive albeit on a base, where we've been generating modest margins to day to day. They can have an erosive value at current.
Our current outlook would not see us relocating any further equipment from the U S to Canada in the current quarter.
But we will continue to monitor the market for opportunities and we would seek to be seem to be getting a premium rights that would justify the cost of relocation.
Okay and how's the M&A picture look for you you know you bought the snubbing business in the past you know adding to your.
Or your product liability.
The ability to deliver for customers do you see anything potentially getting their horizon, there and 22 from smaller operators that are in trouble and may not be able to have the ability to get labor et cetera to meet the recovery in the second half.
As expected in Canada.
Yeah, just a fantastic question and you touched on but I think what is the true K constraints in the market and that's labor and.
We have been looking for.
Opportunities to build some scale in our service lines and you talked about the the snubbing acquisitions, we completed the 19 at 19.
We continue to look for those opportunities to build scale, we continue to discuss potential.
Potentials for business combinations.
To date, we've not been able to realize on Oh bridged the gap of the value sort by seller to the value seen but by buyer, that's but but notwithstanding that we still believe that consolidation in the market for energy service companies. He is key.
<unk>, two I'm walking and maximizing values over total jail so shareholders.
Okay and one last one for me the dividend starting in May is that based just on your comfort zone of the Canadian side of the business and that you know the recovery and pricing power is there to sustain that dividend. So you don't have to you know five months from now 10 months.
Essentially have to reverse that decision, but the bill with the business sufficiently in Canada can cover that dividend.
Yeah, I would say that with confidence in both markets.
And very much in one with the comments you might have.
Followed us for a long time, you know the conservative nature of the board and management team. So we don't didn't declare the return to a dividend lightly and we have started with a modest number which is as you know not need the vista figured we would.
We were declared dividends out on a monthly basis pre COVID-19 .
Yes, we believe this is entirely sustainable base.
Based on our current outlook, taking a conservative view and we keep our eye open.
Able to generate the surplus cash that we expect as the market continues to improve pricing improves and additional services deployed in Papua New Guinea, we'd have an o'hare oil this probability for our ability to raise that dividend at a sustainable rate into the future.
Thanks, very much am I kind of Atlanta.
Congratulations on a I'm.
Getting the company, where it is whether you can start paying a regular different right again.
Awesome, Joseph always I always enjoy it.
Thank you.
Thank you once again, you May press Star one mechanical question.
No further questions registered at this time I would like to turn meeting back over to Mr. Mcguire.
Thanks, Patrick.
Shouldn't there the choice surpassed all of the main questions that are that the other guy doesn't know sorry participants movement to us too. So thank you very much to all who joined us today.
We wish you well for your debit 2022 we believe we're in a market now that is just not going to sustained improved performance for our company. We were happy to share those results with you.
Thank you.
The conference has now ended please disconnect your lines at this time and thank you for your participation.