Q4 2022 High Arctic Energy Services Inc Earnings Call
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Speaker 3: This conference is being recorded. This conference is being registered. All participants please stand by. Your meeting is ready to begin. Good afternoon ladies and gentlemen. Welcome to the High Arctic Energy Services 2022 Q4 results conference call. I would now like to turn the meeting over to High Arctic's Chief Executive Officer, Mike McGuire. Thank you very much for being here today.
Speaker 4: Thank you Chris and good morning everyone or good afternoon to those in Canada. I'm talking to you from Brisbane at the moment and thank you for your patience waiting for us to begin as I experienced a few technical difficulties getting online.
Speaker 4: Welcome to High Arctic's fourth quarter conference call. Today I'll be providing an update on the press release we issued early this morning March 28th.
Speaker 4: Following my remarks, I will hand the call over to our Chief Financial Officer, Lance Mirendorf, and Lance will be discussing our financial performance for the fourth quarter of 2022.
Speaker 4: After our formal comments, we'll open the call to answer any questions that you may have.
Speaker 4: Before we begin, I'd like to remind you that certain information presented today may include forward-looking statements.
Speaker 4: Such statements reflect hierarchies, current expectations, estimates, projections and assumptions.
Speaker 4: These forward-looking statements are not guarantees of future performance.
Speaker 4: and they're subject to certain risks which could cause actual performance and financial results to vary materially from those contemplated in the forward-looking statements.
Speaker 4: For additional information on these risks, please take a look at our management's discussion and analysis in the 2022 Annual Information Form available on our website or on CEDAR.
Speaker 4: look under the heading Risk Factors.
Speaker 4: Well, following the divestments of our Canadian Production Services segment in the third quarter, we now focused on Papua New Guinea in this fourth quarter.
Speaker 4: PMG is a market where we have a dominant energy services position.
Speaker 4: a history of high profit margins and free cash flow generation.
Speaker 4: Papua New Guinea is now central to High Arctic's long-term business strategy.
Speaker 4: During the fourth quarter we ramped up both our deployed operational personnel and crews as we readied Rig 103 to commence operations and filled key managerial and support positions within our PNG operations.
Speaker 4: We took a deep dive into the large inventory of spare parts, equipment and consumables to ensure we have a solid understanding of our capacity to support our growing operations in P&G.
Speaker 4: We also progressed preparations for rig 103 to commence drilling activity with a work scope that was expanded to include an upgrade of its top drive.
Speaker 4: I'm pleased to confirm the upgraded rig is currently operating again.
Speaker 4: having returned to the well that drilling was suspended on back at the beginning of the COVID travel restrictions in 2020.
Speaker 4: Hyarctic anticipates RIG 103 will operate consistently through the term of the contract which runs through to July 2025.
Speaker 4: This recommencement of drilling operations follows the recent announcement in PNG that the Total Energy's lead Papua LNG project has commenced downstream front-end engineering and design work or FEED.
Speaker 4: This follows certain upstream feed work that commenced last year and continues the progress towards a final investment decision expected later this year.
Speaker 4: Indications suggest the Papua LNG project will be based on four electric-driven LNG liquefaction trains housed in the existing export facility in Port Moresby, the capital city of Papua New Guinea.
Speaker 4: This facility is operated by Papua LNG partner ExxonMobil for the country's other LNG project.
Speaker 4: Total Energies has recently outlined plans to bury almost a million tonnes per annum of carbon dioxide with the Papua LNG project.
Speaker 4: and a major tree planting project to boot.
Speaker 4: We expect the sequestration of CO2 to require additional wells to be drilled on top of those planned for gas production.
Speaker 4: Last week, Mr Wapu Songk, the Managing Director of the national oil company Kumul Petroleum, was quoted as stating that they are in early talks with potential partners to build their own LNG processing unit. Mr Songk said the proposed 1 million tonne a year unit?
Speaker 4: would be in addition to the new units to be built by the Papua LNG venture.
Speaker 4: would be fed from undeveloped gas that Kumul petroleum have secured retention licenses over.
Speaker 4: These developments support management's optimistic outlook on the gas development activities in PNG, which are expected to lead to increased demand for drilling and related services.
Speaker 4: I'd now like to pass the call over to Lance to discuss key financial highlights from the quarter in more detail.
Speaker 5: Thank you Mike and good afternoon to those joining on the call today. Our fourth quarter results of the first complete quarter without contribution from the Production Services segment which was divested in July of 2022.
Speaker 5: On a consolidated basis, Hierarchic generated revenues of $13 million and incurred a net loss of $9.1 million or 19 cents a share in Q4.
Speaker 5: Q4 oilfield operating margins were significantly impacted by inventory adjustments
Speaker 5: which led to a loss, operating loss, of $2.4 million.
Speaker 5: While on a full year basis, the oil field operating margin was $11.9 million or 15% of revenue.
Speaker 5: During Q4, we recorded a net provision of $3.9 million, stemming from an extensive evaluation and counting of inventory, materials, and supplies located at various sites in Papua New Guinea. The adjustment included over 400 pieces of pathogen from the Canadian Defence errors
Speaker 5: $4.5 million inventory write down offset by a $600,000 reversal of a provision for obsolescence.
Speaker 5: Not only did we examine and assess our own inventory, we conducted extensive counts of inventory that we managed on behalf of a main customer in Papua New Guinea.
Speaker 5: We find to utilize some of this inventory, both from our stock and from our customers' own stock, on the ongoing operations of RIC 103.
Speaker 5: In Q4 we recognized a liability of $3.3 million relating to customer inventory.
Speaker 5: which we obliged to replenish pursuant to contractual obligations.
Speaker 5: This liability forms part of the total contingent liability of $8.3 million, which we've reflected in the notes to our financial statements in the contingency section.
Speaker 5: Following this evaluation, and again as Mike pointed out, we are confident that we have sufficient and appropriate materials and supplies on hand at present to support our ongoing operations in Papua New Guinea.
Speaker 5: The company recorded negative $892,000 of adjusted EVA DA in the quarter and generated $5.7 million of adjusted EVA DA for 2022, up from $4.9 million in 2021. In 2020, the company recorded negative $9.9 million in 2020, up from $4.9 million in 2022.
Speaker 5: I have to experience a 75 cent loss per share of which 44% relates to non-cash items of impairment.
Speaker 5: reversal of deferred income tax, asset and inventory provision.
Speaker 5: During the fourth quarter, IARC had provided personnel, materials handling equipment, and associated rental equipment, including a 100-man cap and a large quantity of dirt-based mats, in support of customers' field operations with our two primary customers in the beginning.
Speaker 5: In addition, we increased drilling personnel deployed to prepare RIG 103 for the recommencement of development drilling activities.
Speaker 5: These activities in our drilling services segment generated $10.1M in the quarter and we surpassed $30M Canadian of drilling service equipment for the year.
The joint segment margins have been impacted by the previously discussed inventory adjustments and low margin reversible cost contribution associated with the supplying and installing the top drive on rig 103.
When adjusted to back out the impact of the provision of inventory write-down, the drilling services segment margin increases from 4.4%
to 15.4%. I figure that's comparable to 15.6% experienced in 2021.
Our Insiliy Services segment spreads across both PMG and Canada and continues to be our highest operating margin generator. We achieved 44% operating margin during the quarter and 54% across 2022 on revenues of $2.9 million at $14.9 million respectively.
with increased activities in PNG and consistent demand for pressure control rentals and nitrogen services in Canada.
We do anticipate this segment to continue to grow in revenue as we move through 2023.
The company continues to be prudent with its capital management and maintains a strong balance sheet.
During the quarter, capital expenditures were limited to under $100,000. We spent $4.1 million on capital during the year.
We expect modest capital spending in 2023, mostly focused on maintaining rental equipment in our drilling fleet.
With the cash proceeds from the sale of the well servicing business last July , the company ended the year with $19.6 million cash on and cash equivalents.
Inclusive of the precision receivable, our working capital ratio increased to 7.7 to 1 at the end of the year.
this year and following year and we did flush the $28 million from the sale of the well servicing to precision and we placed that in interest bearing accounts earning between 4.5% and 5%.
IRT continues to pay monthly dividend of half a penny per share and in 2024-2022 we re-lued our NCIB to reverse its shares throughout 2023.
We continue to assess financial options in line with our strategic objectives moving forward. The company has a history of returning surplus cash to shareholders and will continue to consider our capacity to distribute surplus funds while exploring opportunities to invest in strategic growth activities as they emerge.
With that, I'll pass it back over to Mike.
With that, I'll pass it back over to Mike. Yeah, I need their mic.
Thank you Lance. Hi Arctic has taken transformative actions in 2022 which will allow the corporation to focus on the emerging opportunities to deploy drilling assets in Papua New Guinea while maintaining exposure to the Canadian energy services market. Hi Arctic believes that the fundamentals for sustained high LNG demand, particularly in Asia.
project advancements.
Hiaarctic maintains active dialogue with the management of all active energy companies in PNG towards understanding their project timeframes and plans for drilling activity and the potential for utilization of Hiaarctic drilling assets.
We have now realised the drilling rig deployment in the first half of 2023 and expect to continue to increase deployment of rentable assets and ancillary services through 2023.
We expect that as the major projects move into execution, the demand for drilling has the potential to exceed our past activity peaks. I will now turn the conference call over to the operator, who will open the line for questions.
Thank you. So we will now take questions from the telephone lines. If you have a question and you are using a speakerphone, please lift your handset before making your selection. If you have a question, please press star 1 on your device's keypad. When prompted by the system, please clearly state your name to register your question. You may cancel your question at any time by pressing star 2. Please press star 1 at this time if you have a question. There will be a pause while participants register for questions.
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Our first question is from Joseph Shactor.
Hi Mike and Lance.
Just kind of going at the...
macro level, how much BCF would go through on four electric driven trains, and how much capacity with gas goes through right now on the current system, just to get an idea of the scale of the ramp up. And then, um,
If one of these companies decides they want to start drilling a little quicker, Lance mentioned that the capex for 23 might be less than 22. Could there be an announcement Q3, Q4, if there is a ramp up, where your capex budget would go up quite a bit?
and you want a more husband cash for putting all the equipment to work and doing whatever upgrading you need to to meet the client's requirements.
Yeah thanks Joseph. Start with the first part of the question on the the throughput of the facility. I don't have the figures to hands in BCF but the total annual numbers are top of mind. The current facility with its two what we'd call I guess conventionally gas driven trains.
million tons per annum. So with four of those for the Papua LNG project expansion that gives them capacity of four million tons per annum, I would bear in mind that the nameplate capacity of the PNG LNG to trading export facility is 6.4 million tons per annum so it has operated substantively around 25% above capacity.