Q2 2023 High Arctic Energy Services Inc Earnings Call
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No one else you want to be as we lapped a silty jacana fields.
This conference is being recorded so it's closer to home that don't go as you see.
All participants your conference is now ready to begin good morning, ladies and gentlemen, and welcome to the high Arctic Energy services 20, twenty-two Q2 results conference call I would now like to turn the meeting over to <unk>, Chief Executive Officer, Mike Mcguire. Please go ahead Mr. Mcguire.
Thank you Luis and good morning.
Thanks for joining us.
Welcome to <unk> second quarter conference call today.
An update on the press release, we issued yesterday August .
Excluding discussion.
For the second quarter of 2023.
Okay.
In the call.
To answer any questions that you might have before we begin.
Certain information presented today may include.
Forward looking statements.
Such statements reflect.
Current expectations estimates projections and assumptions.
These forward looking statements.
And to use a future performance.
Subject to certain risks, which could cause actual performance.
Our results to vary materially from those contemplated.
Good looking statements.
For additional information on these risks please take a look at our management's discussion and analysis.
And the 2022.
Paul.
Plus.
Look under the heading risk factors.
Starting with operations in PNG.
During the quarter.
<unk> had a strong operational performance across the full quarter.
This represents the first full quarter of drilling activity.
Since the suspension of operations in the first quarter of 2020.
Hi.
Three we'll operate consistently through the term of the contract, which one runs through to July 2025.
As well as the full quarter of drilling operations.
We've seen strong deployment of rental asset.
Including those pulled through by drilling operations as well as rentals to the wider market.
<unk> also provided rental material handling equipment.
And a large quantity of worksite.
To support other ongoing field activities.
Customers in PNG.
Full utilization of our drilling services and asset rentals associated with customer.
<unk> had a significant impact on revenues and earnings, which we anticipate will be the case for the remainder of 2023.
While the deferral of other projects pushed redeployment of rig 115 out for this year. There is a catalog of projects under discussion for potential redeployment in the coming years.
Our optimism for future drilling in PNG remains underpinned by the advancement of the Papua LNG project by French multinational total energies.
Incidentally last week, the French President visited Papua New Guinea for the first time.
Meeting with the Prime Minister of Papua New Guinea, and forging stronger ties between France and PNG.
The Papua LNG project is expected to be followed by the opinion gas field development in the western provinces of Papua New Guinea.
Which is anticipated to result in the addition of further gas liquefaction capacity in the World class PNG LNG export facility.
State ice cream or petroleum is advancing appraisal of all the gas discoveries in PNG recently pursuing seismic contractors for the <unk> and Barra keyword discoveries onshore Papua New Guinea.
To progress their aim.
To contribute to growing domestic energy needs and additional LNG export processing facilities.
These LNG projects.
Large scale mining and infrastructure projects moving through the pipeline will require tens of thousands of new workers and more skilled and supervisory personnel that do not exist in PNG today.
Through team's PNG industry manpower solutions, we have added the provision recognized safety training competency verification and equipment licensing services.
We have long provided these training accomplishing competency solutions in house.
He was also taps into a large pool of talent to provide manpower skilled and semiskilled labor trades qualified personnel and professionals in PNG.
We are excited to be playing a significant role in preparing PNG citizens to be job ready.
In Canada we.
We announced this week closed a transaction to sell out Canadian nitrogen transportation holding in pumping services business for cash consideration of $1 $35 million.
Decided to leave as a net gain of approximately $550000.
And contributes approximately one point to $4 million of cash after transaction expenses.
<unk> retains associated working capital of the business as off 21 July .
Our pressure control focus rentals enjoyed a solid quarter, despite the wildfire and other disruptions experienced through the region about customer base, where revenues were relatively flat to the first quarter of 2023.
I use rentals is fielding inquiries from an increasingly broad range of customers, including contractors and energy companies alike.
Teams snubbing is Canada's largest snubbing for BARDA, and we have a 42% equity stake in the team.
As is the case each year the second quarter represents the lowest activity level for snubbing contract is due to the seasonal break up period.
James or contraction in Canadian activity and utilized the available personnel and resources to consolidate into a single facility in red deer, and prepare for the anticipation of increased field operations in the third quarter, including work on major repairs and maintenance.
Hain has a 50% interest in an international partnership marketed under teams Snubbing International.
This partnership commenced their first services this quarter deploying two snubbing packages to U S independent producers in Alaska.
James Snubbing International are also looking into opportunities in other foreign jurisdictions.
Turning to second quarter financial results.
Consolidated basis high Arctic generated revenues of $17 $2 million Approx.
Approximately double that achieved during the first quarter and generated EBITDAR of 3.8 million up from $1 3 million in Q1.
The company saw a marginal profit from continuing operations during the quarter, while we experienced a small loss from the discontinued operations of the nitrogen business.
Oilfield services operating margins were higher in Q2 2023.
At 37, and a half per cent compared with 23, 1% in the second quarter of 2022.
Year to date, we've achieved 36% margins compared to 27% in the first half of 2022.
The increase is primarily due to strength in demand for rental equipment in both Canada and PNG.
The full utilization and charged yet rights associated with rig 103 operations and an increase in the supply of high Arctic technical and operational manpower services to customers in PNG.
Yeah.
General and administrative costs were $2 1 million in the second quarter, a reduction of 22% when compared to the same period last year.
G&A costs represent.
7.9% second quarter revenues and 15, 4% of year to date 2023 revenues.
We expect this will decrease and trend lower for the remainder of 2023 as the higher revenue from our operations in PNG is sustained.
Management will continue to evaluate G&A costs, and rightsize support to align with expected operations in both Papua New Guinea and Canada.
Adjusted EBITDA for the second quarter was $4 $4 million.
Or 25, 6% of revenues as compared to $3 million or 11, 9% of revenues in the second quarter of 2022.
Yeah.
The largest revenue contributor.
During the quarter was generated from the drilling segment.
Fully utilized.
Utilization of rig 103 during the quarter helped to drive $13 $4 million of revenue in Q2.
Compared to $6 1 million in the second quarter of 2022.
The period when rig 115 successfully completed a short duration project and into the storage.
Active drilling in Q2, 2023 lifted operating margins to 28, 1% from 24% in Q2 2022.
Yeah, right, our ancillary services segment.
Fred's across both PNG, and Canada and continues to be our highest operating margin generator.
We achieved 78% operating margin on $3.8 million of revenues in Q2.
As compared to 60% margin on $3 $5 million of revenues in Q2 2022.
The improved margin reflects more revenue contribution from low maintenance fully owned assets and management expects the Q2 margins and the activity levels that delivered this to continue through the remainder of the year.
There was no activity in our production services segment again this quarter, whereas in 2020 to the second quarter was the last full quarter of operations from the well servicing assets sold to precision drilling and snubbing assets sold to team Snubbing services.
During the quarter capital expenditures were $700000, mainly focused on growth in our rental equipment in Papua New Guinea with the addition of light vehicles and other incidental rental equipment that customers are increasingly needing fulfilled operations.
In remote parts of the country.
We expect to continue with modest capital spending in 2023, mostly focused on maintaining and growing our rental fleet in both Canada N P N G.
The company ended the quarter with $45.5 million of cash on hand, with approximately $36 million invested in secure interest bearing short term.
Short term investments.
Which generated $510000 during the quarter.
Interest income partially funded their monthly half cent a share dividend, where we returned over $700000 to shareholders during Q2.
Our working capital position increased slightly during the quarter and sat at $61.8 million on June 30th.
I'm excited to provide an update on the reorganization of the corporation.
Consisting of a tax efficient return of cash to shareholders and the spin off of the Papua New Guinea and business.
This separation will address the inefficiencies of managing to small businesses on opposite sides of the world with few synergies.
We'll allow senior management to concentrate where they have had the most success in the past.
The remaining publicly listed company with Canadian assets and tax pools will create an attractive vehicle for future growth in transactions.
Our PNG business has in our view being consistently undervalued by the public market and we believe that the current market conditions make it appropriate to take steps towards unlocking value.
The reorganization is expected to result in.
The pay out to shareholders of $38 2 million equivalent to approximately 75 cents per fully diluted share by way of tax efficient return of capital distribution.
The sale of high Arctic international to existing shareholders, who opt to participate through issuance by the cooperation of a right for shareholders to purchase from the corporation, one ordinary share of high Arctic Energy services Cypress limited for.
For each common share held in high Arctic.
A shareholder election process, where shareholders can elect to do nothing.
And receive their return of capital distribution is cash.
Elect to exercise their purchase rights in full or in part.
Elect to use some or all of the funds to be received pursuant to the return of capital toward the exercise of any purchase rights.
And receipt by the cooperation of the proceeds of the sale of ordinary shares of high Arctic International.
Through this reorganization the corporation aims to completely divest its ownership of high Arctic International.
An unlisted company incorporated and domiciled in Cyprus that earns the corporation's interest in its foreign subsidiaries.
The corporation expects to announce the exercise price for the purchase of high Arctic International and complete the information memorandum.
To be circulated to shareholders in September .
The potential share a special shareholder meeting is anticipated to be held in October and the process concluded prior to year end.
I believe that customers and employees in both PNG and Canada will appreciate and benefit from a locally managed business.
I will now turn the conference over to Luis our operator, who will open the line for questions.
Thank you we will now take questions from the telephone line. If you have a question and you're using a speaker phone. Please lift your handset before making your selection. So if you have a question. Please press star one on your devices keypad when prompted by the system piece on mute your phone and clearly state your.
Aimed to register in the Q&A.
You may cancel your question at any time by pressing star two.
Please press star one at this time, if you have a question that would be a brief pause while participants register and we thank you for your patience.
We have a question from Josef Schachter. Please go ahead.
Good morning, Mike two questions.
You've made the comment about the rights and all of that if somebody owns 25000 shares they will get 25000 rights. If people don't take up the rights will be people, who have you know.
75 cents can they buy other Reits are so that they can end up owning more of the international Cypress company.
Yeah, Hi, Joseph Thanks for joining us again.
Short answer to your question is the the process, we're working through is to enable shareholders.
To subscribe for additional shares.
In high Arctic international subject to their availability from other shareholders, who may not exercise their rights and to be distributed on a pro rata basis.
So there'll be a will be there won't be a kind of an over the counter market for Reits is that what we're looking at I mean people can decide based on that to take down more.
At this stage and we haven't concluded the the work on this we've not been able to identify a pathway to create an over the counter tradable arrangement for the rights. So we are working with our advisors to try and work out what we can do to enable shareholders.
Potentially transfer those rights.
And then my next question relates to the running of the remaining well high Arctic as it as you know the public company that goes forward in 2024.
Is there going to be.
Current management team or are you going to be involved or used to be on the board.
How does this go like are you just going to be focused on PNG Cypress company I'm, just trying to get an idea of how is the go forward management process, that's going to be.
Yeah, No. Good question, Joseph and I'm sure that many of the coal probably came to to understand the answer off so.
The intentions at the moment.
Which will crystallize and be distributed with the information memorandum would be to recruit dedicated management for the Canadian business, but to ensure that there is a transition re arrangement in place that would enable me to retain the roll through it I transition an orderly transition to ensure that.
Incoming management have got the opportunity to come up to speed on the business understand and be able to enunciate for shareholders. What the vision for the Canadian business would be into the future fair to two I think assume that are subject to the shareholders.
Actually improving and its actually going through the reorganization I would be more likely to one more interest with the Papua New Guinea and business.
Okay Super and the launch of I'll look forward to seeing the documents for September .
The meeting in October Thank you very much.
Thanks, Joseph look forward to seeing you there.
Thank you next question is from Brian co chunk of it.
Please go ahead.
Oh, Hi, Mike My question is somewhat similar to Joseph but I'll be a little bit more direct here.
At this point do you anticipate having a backstop for the rights offering such that.
To ensure that the entire company is sold in high Arctic Canada is totally divested.
Yeah really good question Frank.
And this is one of the key things that we're working on at the moment and Ah is expected to be resolved in a couple of coming weeks. The intention is to fully divest into fully divest we will we will be wanting to sell all of the shares of high Arctic International that backstop.
May include the corporation potentially bought sorry, the corporation the high Arctic International company buying any shortfall of shifts that have taken up with subscribed for them and they may need to find funding to do so.
At the moment the intention is to yes, divest fully hobbies that existing shareholders will subscribe to all of the rights that are often said ts divested to its existing shareholder base.
And to the extent that we need a backstop, we're investigating options data that we will deliver that in a fair amount of four high Arctic shareholders.
Okay. Thank you and with regards to the international operations.
And let's just sort of look forward and you're running full out with all your rigs and everything and generating a lot of cash flow.
Do you anticipate the.
Uh huh.
Our business model is to be that cash flow machine paying.
The dividends like you did a couple of years ago, they were pretty healthy dividend rates that you were paying when you are essentially.
Now before you bought it the Canadian operations that you had that you divested and that you were paying dividends and and that is that how you would see the forward business of Oh, Papau, New Guinea or is it gonna be a consolidator in that region or is that am I too early to be even asking a question I guess so.
Look I think this is a really important question and it will be addressed in the information memorandum like what is what is the business strategy for these two separate entities I think it would be fair to them to believe that if Papua New Guinea is able to return the rigs to service.
I realize you know operational levels and pricing levels equivalent to its past say around the 2000.
13 through 17, 18 years and there was strong is there was a lot of them.
Returns then distributed to shareholders and that was driven by that business I think it's reasonable to assume that that is part of our business plan is to turn it into a dividend.
A dividend maker for Ford shareholders, but I also do believe that a it's it's it's reasonable that if we were to realize this level of performance that we have Oh, Matt may have opportunities to expand our footprint into other parts in the region. The Australasia region beneath the near Asia region.
And the Corporation has.
For many years, even including through the Covid period looked for opportunities to expand it's a it's it's especially ality in healthy portable drilling in remote locations into other territories and we haven't actually concluded and secured any any work in other jurisdictions to.
So hence we focus on Papua New Guinea at this point and that focus on Papua New Guinea is to be as ready as we can to realize opportunities that we are all but I'm hopeful for optimistic bore with a lot of signals coming at the back end of this decade, maybe a lot busier than than the front end. So I think that's reasonable for shareholders too.
<unk>.
Either or both of those scenarios could be real.
Right right, Okay, and the last thing I was just gonna comment was just having gotten rates in the past from various other issuers. There I have seen where you know they'll trade on the on the a T. S X for 30 days or whatever their expiry is there so that may be an option.
Got you know related to Joseph question as opposed to having to go over the counter there. So I don't I don't know how much it cost or whatever but.
I have seen that before so.
Yeah, and this is something we did a we did investigate it really unfortunately, the nature of the rulings are the rules associated with listing of rights in the on the T. S X would preclude the transaction that we've outlined in the press release Okay.
Understood Okay, well, thank you, Mike and good luck going forward.
Thanks, Frank a great questions. It bye bye.
Bye for now thank you. Our next question is from Mercury Weimer.
Please go ahead.
Hey, Mike Murray Here, Hey, Mike Walk walk me through that transaction I know it hasn't been.
<unk> finalized yet, but right now I own.
As a shareholder I own each of the pieces, one being 75 cents worth of cash.
One being the operations in PNG and the other one being whatever is left.
In the public company. So post deal. So you go through and I vote on a deal do I get 75.
A piece of P N G and a piece of that.
Public company, because that's what I own collectively today, So what walk me through how you think that's going to come together.
Yeah. Good question good I'm, sorry, so the way in which the transaction is structured is that.
You would receive the 75 cents of cash a right to buy a share equivalent share in high Arctic P&G business. The high Arctic, we're calling high Arctic internationally now documents that were released yesterday.
And you would retain your share that would hold.
The Canadian business.
The silos so E N G.
Would then return the proceeds back into the Canadian business, which you would still own your share of.
Oh, okay. Okay.
Okay that that that was a part of it is missing because right now.
I Oh, no, let's say I'm on a million shares as an example, right now I owe them.
2% of the operations in PNG.
So fast forward, if I don't exercise that right.
Someone else buys it but that cash.
Quite a bunch of the value of the PNG operation goes back into the Canadian operation, which I still own my pro rata share.
That is 100% yes.
Okay.
Okay, no that that works for me.
Really my only discussing there was also a comment on the REIT.
Being traded a virtually every transaction I've ever worked with the.
The exchange does allow that so I'm not sure why they wouldn't allow you to.
List the rights in this case, but you mentioned that you had looked at that and for some reason that it does not apply.
Yeah, It would be it would be really very attractive to us into and to shareholders as evidenced by Franco's question yours, as well and Joseph too to be Frank We would we would love to be able to do that.
So I understand it it was explained to me by the lawyers, who are smart enough to properly understand it.
Because.
The REIT is to buy a private company.
And it may have something to do with it being foreign as well, but I can't quite remember if that's right.
Not be listed.
I think it's because it's the private entity, that's probably what it is.
Yeah, and so we and look we don't we are exploring to see I'm all.
And any available avenues that would enable shareholders to transfer those particularly our shareholders. He may hold the holding of high Arctic in in restricted funds.
Right and I do think Mike because it's private normally these transactions are you have to write it off and then another public entity and then the exchange can all it quite a bit been a private that's probably why it can't.
The other component of it maybe we can create a you know a grain market trade somehow on that I mean, there's probably not a lot of shareholders in the company. So maybe we can put something together like that because it would be good for those that.
Wanted to sell it to be able to sell it.
Didn't or are those that wanted to buy a bigger piece to do that so you get a ROI or some of them looking to that as well.
Yeah, No I appreciate that and we will look into it. Thanks Maury.
Yeah, Okay. Thank you.
Thank you. So once again, please press star one on your devices keypad. If you have a question when prompted by this system. Please on mute your line and clearly state your name to register in the Q&A.
Our next question is from Shar.
Shafter. Please go ahead.
Mike Sorry, I, just look at the balance sheet and add a few more questions.
$7 million of cash.
45 million minus the 38.
The accounts receivable about <unk> is that staying in the current high Arctic and that will be part of the go forward strategy, there or just part of that go into it.
High Arctic International.
Yeah. Good question. Thanks, Thanks for that one Joseph I'm sorry.
Our current cash at bank is distributed through the various bank accounts and in several different.
Jurisdictions, but the bulk the majority of it is is is here in Canada.
The intention would be for the spin out that it would spin out the P&G business with normal levels of working capital. So there would be some cash retained in the P&G business. It retained its net receivables and in the end, but the bulk of the cash that's in there will be distributed.
To shareholders and the corporation will be made liquid again through the sale proceeds.
Okay, and the property and equipment of 47 million.
Is the majority of that going into the PNG company.
Sorry, Joseph little bit faint on that one I didn't pick up the part of that question, the property and equipment and $47 $1 million most of that will go into the PNG company.
Yeah, I think that are on the P. P. N E. In the financial statements you get a breakdown there of the equipment is to what parts or segments of the <unk>.
The corporation they see within I think we've got $41 million approximately of oilfield equipment.
The lion's share of that book value sits within the P&G business given the sale of a large part of our Canadian oilfield equipment.
So I think it's fair to assume that the large majority of that is the PNG assets.
So if you take out some working capital the receivables, which are mostly PNG and that property plant and equipment.
And then divide that by about $48 seven youre looking at it over a dollar kind of number in PNG International Am I is that correct.
Your math, Joseph Joseph but I don't have any reason to doubt it.
Okay. Thanks, very much like for that additional color.
Thanks for the questions Joseph.
Thank you. Our next question is from Zachary Tang please.
Please go ahead.
Hi can you hear me.
Yes go ahead.
Okay. Thanks, I have two question number one.
Yeah could you talk about the tax implications for.
The median pad citizen I'm holding.
The new cooperation with Cypress I assume there will be.
Dividend withholding tax or anything else.
Thanks for the question I'm going to start by saying I am.
Not a tax adviser and.
Anything that I might say now would be purely speculation mm.
There will be in our information memorandum guidance on potential taxing implications for Canadian residents.
And for residents the residents of foreign jurisdictions.
I would expect that dividends from a foreign entity for a Canadian residents would be subject to the tax rules of that foreign entity al.
High Arctic International is domiciled in Cyprus, and I get it and that would be subject to tax rules for distributions of dividends from Cypress, but I would also expect that Canadian residents may have a taxing event for the income in Canada as well.
Okay. Thank you question number two from what you alluded to earlier on the cash from the rights offering local calling to the cleanest stop.
Any plan on what we're going to do it without cat.
Dividend or buying other stuff do you have any plan.
Yeah. So good question and yes, it will be part of our information memorandum is what our business strategy for the Canadian entity will be following the separation of the two.
Our intention would be to.
Build out business grow our business in Canada.
And to the point of where we were generating profits that can be washed through out substantive non capital tax losses to provide an efficient return into the the Canadian shareholders.
Okay perfect. Thank you very much that's all I have thank you.
Thank you there are no further questions registered at this time, so how do we turn the meeting back over to Mr. Mcguire.
Thanks Louise.
Like to thank all the participants who are dialed into two here a second quarter 2023 update for you time I'd also like to thank the <unk>.
Ive questions part questions for the question is five five participants who raised questions for your wealth with three questions I encourage those who haven't to please to take a look at our in our MD&A and financial statements you'll find them. Both on the SEDAR plus if you if you get really frustrated trying to navigate SEDAR plus Luckily I've found my aim.
You can find them on our website to under our Investor tab.
Thank you Youre constantly now oops I'm sorry go ahead.
Sorry, Louise I was just gonna had been bought you to finish the call Wonderful. Your conference has now ended please disconnect. Your lines at this time, we thank you for your participation.
Yeah.