Q2 2022 High Arctic Energy Services Inc Earnings Call
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Good morning, ladies and gentlemen, welcome to the H eight yes, 2022, Q2 results conference call I would now like to turn the meeting over to high Arctic Cheek, Chief Executive Officer, Mike Mcguire. Please go ahead Mr. Mcguire.
Thank you Patrick and.
Good morning, everybody.
As you can tell me a.
A little bit of a raspy throat. This morning, So you probably hear more from Lansing.
And let me begin by saying welcome to high Arctic second quarter conference call today, I'll be providing an update on the press release, we issued after market yesterday August 11th.
Following my remarks, I'll hand, the call over to Chief Financial Officer Lance Mirador.
No it will be discussing our financial performance for the second quarter of 2022.
After our formal comments, we'll open the call to answer any questions 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 only our current expectations estimates projections and assumptions.
These forward looking statements are not guarantees of future performance.
Our 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 management's discussion and analysis and the 2021 annual information form available on our website or on SEDAR.
You should look under the heading risk factors.
Laughter reflection on <unk> core strengths and our future opportunities, we made the strategic decision to divest certain assets in Canada and focus on research opportunities associated with our existing business in Papua New Guinea.
Up in New Guinea is a market, where we have a dominant position.
Three a high profit margins and free cash flow generation and where the corporation's future fortunes are inextricably taught.
The sale of our well servicing assets to precision drilling corporation, including optics, Canadian well servicing and workout a fleet marketed under the Concord, well servicing brand.
Comprising 51, marketable rigs 29 inactive and out of service rigs as.
As well as oilfield rental equipment associated with well servicing including 17 hydraulic catwalks, we purchased in 2021.
The transaction saw the transfer my optics, well servicing employees and the large majority of support personnel to precision.
The consideration included $10.2 million paid at closing and the remaining $28 million payable will be received in January 2023.
We expect to realize approximately $3 million in closing working capital collection over the next months.
Titled to four of our Alberta real estate locations will transfer to precision on final payment.
With high Arctic retaining owned Alberta properties in White Court and Claremont.
Precision assumes the lease obligation, Ohio properties in Cold Lake and that you said.
The snubbing style just teams snubbing services incorporated a private snubbing specialist headquartered in Red deer.
Included high optics, Canadian Snubbing fleet, comprising seven marketable packages and 32 inactive and added service snubbing units under balanced voices and associated support equipment.
Oh, Yeah, Arctic will receive the remainder of the consideration in the form of 420000 common voting shares in team representing 42% of the post closing total outstanding shares.
Well because appointed two directors to the five person board of team.
And as part of the consideration, Norway Arctic will receive a $3 $4 million convertible promissory note.
Additionally, an affiliate of team will enter into a five year lease and it takes one property in Claremont.
Good.
Comment on current market terms.
The transaction will result in the transfer of high optics and snubbing employees to team.
Post closing high Arctic retains its ancillary services segment in Canada comprised of the nitrogen pumping business and a smaller rentals business focused on pressure control, while retaining the haze rental services branding that we've developed over many years.
High Arctic also retains its snubbing assets in Colorado USA.
And these ancillary businesses will be supported from Al White Court, Alberta facility.
And the corporation will retain a small corporate headquarters in Calgary, Canada.
The two transactions represent the effective divestment of why aren't these Canadian production services and allows our management team to streamline and develop a longer term strategy for the remaining Canadian businesses and focusing our attention on the growth opportunities in Papua New Guinea.
But we are very excited about the opportunities for our drilling services segment. It's the next round of gas development projects materialize.
We recently announced that we'd agreed to terms with our principal customer in Papua New Guinea for a three year contract renewal covering customer owned highly portable drilling rig 103.
Hi, optics suite of services related to the supply of personnel camp accommodation and rental equipment to support drilling operations.
This contract was effective on August one 2022.
It includes options for.
For the customer to extend the contract on the same tunes and conditions beyond July 31st 2025.
As a reminder.
Late last year, why optics principal P&G customer emerged as one of the largest energy exploration and production companies operating in the Asia Pacific region to.
To create a regional champion of quality size and scale.
Both companies have an extensive history in Papua New Guinea.
And the resulting company has launched <unk> in the two LNG projects as well as operator ship, all producing Papua New Guinea, and oilfields and several gas fields supplying the existing PNG LNG export facility.
The contract announcement, followed a lot of recent positive developments in Papua New Guinea that highlight the tremendous expansion potential for LNG production.
On July 20th Sushi total energies, the operator of the Papua LNG joint venture.
Announced the commencement of upstream feed studies in Papua New Guinea targeting a final investment decision on the two train Papua LNG project by the end of next year in 2023 and commencement of production in 2027.
Earlier this year Exxon mobile operator of the P. N G L N G joint venture.
We announced the signing of a gas agreement for the development of the pin Yang gas field in the western provinces.
Any.
Which has long been anticipated to result in the addition of another train to the World class PNG LNG export facility.
We are very excited about the potential for expansion about business activities. There on the back of the forward movement of these projects.
I would now like to pass the call over to Lance and grab a drink water, while he discusses the chief financial wireless from the quarter in more detail.
Thanks, Mike and good morning, and thanks for listening in on the call today everyone.
As Mike explained we closed the sale of our Canadian well servicing and stuffing businesses, a few short weeks ago.
The particulars of these two transactions are reflected in our Q2 results to the reclassification of assets and liabilities related to the production services segment to held for sale and.
And we also recorded noncash accounting impairments to reflect the estimated fair value of these transactions.
The sale of the well servicing business for $38 $2 million in cash saw the company received $10 million in July and we will see the remaining $28 million in early 2023.
Mike mentioned this transaction involved the disposal Concord rigs as well as vehicles and certain company owned land and buildings supporting this line of business.
The excess of the net book value.
Of these assets over the fair value of the consideration received resulted in recording a noncash impairment in.
Q2 of $8 $2 million.
Additionally, the sale of the snubbing business saw higher received noncash consideration of $11 $1 million in the form of a 42% ownership in the acquiring company and as Mike mentioned, a long term receivable of $3 $4 million.
The fair value of this transaction was generally in line with the carrying value, resulting in a small $400000 noncash impairment.
With the significant reduction in our presence in Canada, the company's ability to access large accumulated pool of Canadian loss not loss carryforwards in the near future as reduced therefore, the related $7.9 million estimated deferred tax asset was.
Written down to nil in the quarter.
Excluding the noncash impairment and the deferred tax asset write down the company generated a net loss of $3 6 million or eight cents a share during the quarter, which is in line with Q1, 2020, or sorry, Q2, 2021.
On a consolidated basis the company consumed continues to see improved margins, achieving 23% during the quarter compared to 20% during the second quarter of 2021.
During the first half of the year, the company generated $6 $6 million and adjusted EBITDA tripled the amount that was generated in the first half of 2021.
In addition, during the same period high Arctic generated cash flows from operations of $6 $4 million.
After experiencing a very challenging 2021, and our drilling services segment.
Which is focused in Papa New Guinea, we're seeing increased activity in the form of providing drilling personnel to assist with the commencement of additional abandonment well in the country utilizing a third party rig.
Pairing rig 103 to return to service later in 2022.
And supporting well service activity for our customers.
This has led to improved margins for the segment achieving 24% in Q2 on revenues of $6 1 million.
Yeah.
Ancillary services in PNG in Canada continue to be our highest operating margin segments, where we achieved 55% in Q2 and 59% on a year to date basis on revenues of $4 2 million and $9 million respectively.
Prior to the sale of our production services segment, where we're seeing improved margins, but this segment like behind our other segments generating operating margins of 13, 3% during the quarter and seven 7% on a year to date basis.
With the improved business conditions in and growth in our Papua New Guinea activities in 2022 we were able to reinstate in Q2, our regular monthly dividend of a half cent per share.
The company continues to be prudent with its capital management and maintain a strong balance sheet.
During the quarter, we grew cash on hand by $3 $6 million and ended the quarter with $15 1 million on hand, and our working capital ratio of two six to one.
While the company no longer has access to a raw golfing credit facility, which was Undrawn at June 30, 2022 monetization of our Canadian well servicing production services segment for cash consideration provides liquidity with the while the company evaluates treated growth opportunities in Papua New Guinea, Canada and elsewhere.
With that I'll return it back over to Mike.
Thank you Lance.
The net proceeds of the well servicing transaction.
It provides additional liquidity to the corporation.
The timing of the second well servicing transaction payment provides an opportunity for us management team at my Arctic to evaluate the need and sources both working in gross capital in Papua New Guinea.
He has a history of returning surplus cash to shareholders and we will continue to consider capacity to distribute funds back to shareholders.
I'd now like to turn the conference back over to the operator, Patrick who will open the line for questions.
Thank you.
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Factor.
Good morning, Mike and <unk> Lab's.
First thing is my coffee.
Yes.
Recovery.
And that you're feeling better pretty soon I'm going to be first to Papua New Guinea.
I haven't heard of any other contracts have been Atlanta and has a they're getting.
But been mobilized outside of one O three.
Either in country or being brought into the country is yours.
First of all the start of the program.
Yeah. Thanks, Joseph Thanks for the Con remarks, yeah, so reflecting on Papua New Guinea, you recall earlier in the year, we had read woman doing some work at the most.
We have that same suite of personnel performing services on a well site without one about rigs conducting some abandonment activities.
Also have the entire personnel suite associated with free having thing.
Working for our primary customer in rig activities for the last couple of months and I now turn their attention to preparing one of its ready to go out to work.
We commenced drilling operations that was suspended.
I would just back in March 2020.
Apart from rig one three preparing to go to work at the moment. There is no other rig contracts currently in place in Papua New Guinea, and there has been no further importation or export of any drilling assets.
So when things pick up a one O four if there's any upgrade work that'll be paid for by the customer, but if you have to do things for 115 and one six for contracting is there much.
Need to do to upgrade them pumps electrical equipment.
Other things drill pipe.
Number potentially.
You'll have to spend to.
Forget that was ready for work in 'twenty, three or 'twenty four.
Yeah Fabulous question and the answer is there will be a small amount of capital required to put those rigs back to work and and to make sure that their equipment is Oh, it's memorial.
I'm liable and turned in its technology.
You, probably remember that back when we imported them that they were state of the optic drilling technology for their time as well as being able to be disassembled to fly under light helicopters.
And we will have some leaf that those rigs are ideally designed and capable of drilling any of the exploration wells currently being contemplated through the exploration and production retention licenses that have been granted beginning.
That said, we do need to spend a little bit of capital in the order of between two 4 million U S dollars rig for the purchase of <unk>.
Drill string.
Purchased salt.
Fluid contacting components and things that would ensure the reliable service rigs as they do go back out to market.
And one more on PNG are when do you think the comfort will be there where for the companies to start activating rigs and putting out tenders for contracting is it something mid 'twenty three second half of 'twenty three when do you. When do you think you'll start seeing that more than that.
Our activity pick up for you and for you know in terms of a competitive bid process.
Yeah.
So we believe that that's already started this commitment to get rig one three up and running is the first of what we expect will become over the next 18 months.
The commencement of several drilling operations, we anticipate based on the timelines and the ounces are the major the majors who.
Control of the two to two primary joint ventures.
And other smaller companies.
<unk> planning development projects in Papua New Guinea, we expect that timeline to be over the next 12 to 18 months.
Okay.
One for Canada, how many units do you have in your nitrogen pumping how old is the equipment is this something that others would want to buy or is this something that.
You may have to be.
If you wanted to sell it sold overseas.
Yeah. So we think that we believe that there's a strong market for nitrogen pumping services here in Canada.
The amount of activity increase and and plant turnaround requirements, well kiko rounds to bring online in upstream.
And upstream pipeline.
[noise] purging activities. So we have a strong outlook for services within origin pumping business that said it has for many years been a small part of our Canadian service offering.
We've got five pumping.
Pumping units and our current act EBIT at the moment, we do have a suite of inactive equipment that is sitting in good condition against the fence at the moment, we have capacity to expand all of their pumping equipment is maintained its certification and we would consider being current as far as technology.
Services, we have won.
Volume pumping unit four at low volume pumping units that we currently operate in the marketing, but we have more classes sitting against that as well.
Okay.
That does it for me. Thank you very much and again wish you a speedy recovery.
Yes, Thanks, Joseph I appreciate your comments.
Thank you as a reminder, you May press Star One you gave a question we'll take the next question. Please go ahead, Ian Botham individual investor.
Hi, Mike highlights I think for the.
Most of my questions were answered by that Joseph asked I'm, just just before I just it would you guys be able to talk about I saw that you know on the balance sheet you do have them through the you know the the changes due to the transaction, but there isn't that there wasn't anything on the on the income statement side of things are you able to talk about pro forma results for the first quarter and in first half.
With respect to the remaining properties of the company.
Yeah, we've the transaction closed in July and so we're gonna be recording in our income statement the activities up to the end of July it being an asset sale.
It's going to be just an elimination of the assets off the balance sheet. So we're not gonna have a pro forma.
It's not a discontinued operation.
Steve may be recalling that we aren't those assets often purchased back in 2016 Rosemont by $12 million I think it was at the time and the impairment.
Impairment, but there has to be a credit against the debit in the debit against the credits maybe that was just referring to say no no I appreciate that I know I understand that.
It was more just they are just taking a look at what would the operate what the operations would have been like had had they tell me. They continuing as that's been been are involved in the company during the first half.
A separation out of yeah that would be what would be.
Required for a discontinued operation so.
Yes, correct.
Do you just sort of a general and obviously, we could just and I am only asking to get some of the.
Obviously, we have the two different segments, but there's some overlap them.
Yeah.
Yeah, Theres overlap, we have an overlapping in our segment of our.
Disposal of in our accelerator services, we did dispose of as Mike mentioned, the rentals associated with production services when will it be stripped out as well and were sold to precision drilling.
And yes, so the I would say that the Q3 reporting will have.
A better breakout of what's remaining.
And what was disposed of in.
In the quarter.
Okay, Great and then so I guess that changing tack just looking back at the drilling operation historical drilling operations for one out of three of them went out for.
It's probably all for that that main client it looked like in 16 in 2016 through 2018, they were trailing about three rigs each at three three wells each year.
With a larger amount of seven wells drilled in 2019 do you have a sense.
What there Theyre looking ahead, you know I'd, rather just hasn't started and it's like but what they are they were aiming at for 2023.
In terms of plans there.
Yeah, Steve we went to and I'm not going to put words in the mouth savanna customers food I can only really could probably answer that and towards terms and in broad terms.
Rig 103 was in the midst drilling gas developed well when it was shut down in 2020.
It will return to complete a well and then the ongoing campaign for that will be a combination of new wells to maintain production as well as the reentry on existing wells to improve productivity from those wells, we anticipate that being <unk>.
Gas wells and are supplying the PNG LNG project as well as oil wells.
Yeah.
Feeding through to.
The oil terminals in the southern part of the beginning.
Right.
Okay.
But at least at this point there they're fine with just one out of three there's no discussions yet on one O four.
That's correct. The current the current needs are anticipated to be filled by region. One of the three into sleep broke and the use of the leap broke.
Substantially reduces the time between finishing one well and the commencement of the next so when we look at the 2016 through 2019 period one of the three in one of the four operated predominantly without leap frogs. So we see that you know an average three to four wells a year, adding those.
Leap frogs in Naples to drilling of at least one if not two more wells on that kind of time line of complexity of the three months well.
But some of the wells that is guided to are going to be shorter duration because of the nature of reentry and not having to re drill the upper parts as well.
Great. Thanks, and then just.
One last question just and you discussed this in the press release, but I wonder if there's maybe any more color on just what you know with with the environment seeming to be better for for Canadian oil field service companies now.
What was sort of the background thinking of the company in terms of our choosing.
Excuse me now after it.
Five years at the company, it's been holding these assets to the south.
Sure happy to put a little bit more color to that.
It was it's been out for unbelief sometime.
Validation was necessary in the energy services sector in Canada to realize profitability.
And actually to an appropriate seem to generated cash.
Our earliest thesis as we see ourselves as being a potential aggregator, but having pursued opportunities and being unable to reach you.
<unk>.
Led to a transaction in that direction, we would made an awesome that was a cash offer them that on reflection when we looked at our businesses.
We determined that cash at represented was far in excess of what we can generate out of that business.
Five year cycle.
The reason for that is not just a cost inflation, that's being particularly not just at the moment, where there's a lot of pressure and we're trying to maintain pricing ahead of growing cost space, but all sides requirement then to start investing substantive amount of maintenance capital into that rig fleet to maintain that level of ACA.
<unk> the other thing that we've been seeing.
Seeing as a trend not just yourselves crossed well servicing sector, particularly with a tightening in the labor market was making it very difficult to realize an aggregate number not a.
Number of active units that would help to work on the <unk>.
Making make.
Making profitable profit, making profits that was.
Expand enough to cover those further investments would be required then to put additional equipment out to work. So when we wrap that up.
We would like to sitting here, telling you about how we've been an aggregator and we were growing our business in Canada, but I'm having.
Realized I was kind of valuations that made sense to us.
In reflecting on the fact that Papua New Guinea is easy area, where we have a genuine.
Advantage in the market.
Engine and a history of generating good profits determined they are if it's now better focused in that area.
Taking a cash where it puts us for the main part of our Canadian business gives us a lot of optionality as to happen yeah.
As to how do we exploit the opportunities that are going to come the items that growing LNG LNG capacity in the country.
And things like that but it makes good sense.
And then I guess last if that just about ask you about the capital needs in Pangea and you guys were talking about around $4 million per for each of the two owned rigs got it back at the shape, if there's something else in and putting outside of any future opportunities, but is there anything else on that car fleet. Our property is that that would would require a significant amount of cash infusion.
I'm just thinking about you've got the talent, that's where the 28 coming in January and a little bit on the balance sheet.
Yes, good question Steve.
Yes.
We do see.
We do easily see a scenario where all of the rigs that we have access to actually deployed and there's more demand.
He believes it is not just cars in the LNG market its.
Its own property gains doorstep.
There.
Daily position to supply growing demand in Asia, which would assist the rest of the world diverting LNG gas to Europe as they try to wean themselves off of Russian gas, but also in the in the geothermal energy Mark Papa New Guinea sits on the ring of fire and there are several companies.
Made public statements in recent times about their desire to explore.
Explore and then develop some of that to get thermal energy capacity that geothermal drilling requires the same technology as oil and gas and the size and types.
About rigs.
Ideal for moving through property and have.
Very good efficiency designs for drilling multiple wells on one location.
Much like would be required for supplying a geothermal plant.
It doesn't take us long just realized that if we got all of the rigs that we have access to deployed and there's still more opportunities to invest.
Invest in additional drilling capability.
In a growing market, we're going to need access to capital and part of what we intend to do now over the next couple of months as we contemplate that receivable is to explore all possible options for accessing debt capital for our popular getting business.
Okay.
That's it.
It sounds very exciting and I remember the days back on you know the company with bringing in there I guess in 2015, and fix and bring in $40 million to $50 million free cash flow a year. So I guess you guys are obviously.
Obviously that brings in cash are you thinking about that on top of that.
But of course I am.
It would be nice to see that cash coming in before further investments like from my perspective it.
Yes, Stephen I think the neo we see the same thing we're incredibly passionate about Papua New Guinea for many reasons that include beyond the capacity to generate cash from our operations, but yet the deployment of our existing rigs that we own rigs that we have access to.
<unk> leasing agreements.
Would be enhanced further capital investment and we also I would hope that we can fund substantive amount of reinvestment in Papua New Guinea out of the cash flow generated.
Right right. Thank you very much appreciate the time and wishing you a complete recovery.
Yeah, Thanks, Steve I appreciate it.
Yeah.
Thank you.
No further questions at this time I would like to turn the meeting back over to Mr. Mcguire.
Well I'd like to thank everybody, who dialed in to listen to our call today, we show a very well.
And we can thanks for your time.
Thank you. The conference has now ended please disconnect your lines at this time and thank you for your participation.