High Arctic Energy Services Inc Earnings Call
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Good morning.
Good morning, ladies and gentlemen, welcome to the high Arctic Energy Services' 2023, Q3 results conference call I would now like to turn the meeting over to high Arctic.
<unk> Executive officer.
Mike Mcguire. Please go ahead Mr Mcguire.
Thank you Austin and good.
Good afternoon to everyone and welcome to Hi, optics third quarter Conference call.
Today I'll be providing an update on the press release, we press release, we issued a short time ago today November 15th including discussion about financial performance for the third quarter of 2023.
Following my remarks, I'll hand, the call over to our interim Chief Financial Officer, Lorne bite modern will be discussing our financial performance for the third quarter.
After our formal comments, we'll open the call to answer any questions that you may have.
Before we begin I'd like to remind you that certain information presented today may include forward looking statements.
Such statements reflect <unk> 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 forward looking statements.
For additional information on these risks please take a look at our management's discussion and analysis and.
The amended and restated 2022 annual information form available on our website.
On the SEDAR website.
Look under the heading risk factors.
Starting with operations in Papua New Guinea.
During this quarter rig 103 had strong operational performance.
This represents the second full quarter of drilling activity for the corporation since the suspension of operations in early 2022 2020.
We're currently half way through the four proved wells you know customers program.
Based on this we expect the rig to continue to operate and generate revenues into the middle of next year.
Unless additional approved wells are added to the program.
The term of the rig 103 contract runs through to July 2025 with options for the customer to extend it further.
212 months terms.
As well as the full quarter of drilling operations with <unk> three we have seen strong deployment of rental assets through the quarter.
Including those pulled through by drilling operations as well as rentals to the wider market.
High Arctic also provided rental material handling equipment of 100 man mobile camp and a large quantity of worksite matting to support other ongoing field activities. We've got two main customers in Papua New Guinea.
Full utilization about drilling services and asset rentals associated with customer owned rig one of three had a significant impact on our earnings which we anticipate will be the case for the remainder of 2023.
We are optimistic for future drilling in PNG.
This optimism is based upon expectations that advancement of the Papua LNG project led by French multinational total energies will stimulate exploration and appraisal activity in much the same way as the first PNG LNG project did a decade ago.
The Papua LNG project is expected to be followed by the opinion gas field development in the western provinces PNG.
Which is anticipated to result in the addition of further gas liquefaction capacity in the World class PNG LNG export facility.
State Orange cream will petroleum is advancing appraisal of all the gas discoveries in PNG.
Viewing seismic contractors for the chemo and Barrick keyword discoveries onshore PNG.
This is to progress their aim to contribute to growing domestic energy needs and additional LNG export processing facilities in the future.
These LNG projects and other 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 pins PNG industry manpower solutions high Arctic has added the provision of recognized safety training competency verification and equipment licensing services.
We have long provided these training competency solutions in house.
Teams 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 for what we expect of the major projects that you anticipated in the second half of this decade and beyond.
In Canada, we closed the transaction to sell out Canadian nitrogen transportation hauling and pumping services business for.
For cash consideration of 1.35 million.
The style delivered a net gain of $615000 and contributed approximately one point to $8 million of cash off the transaction expenses and high Arctic harvested the associated working capital as the business at closing.
Our pressure control focused rentals in Canada enjoyed another solid quarter of revenue growth, where revenues are now up 30% over the same period last year.
As rentals is fielding inquiries from an increasingly broad range of customers, including contractors and energy companies alike.
Team snubbing as Canada's largest snubbing provider and we have a 42% equity stake in team.
Same reap the rewards of a well managed breakout period maintenance program in June three.
Team has realized a record revenue mark in excess of $5 million for the quarter.
Team has a 50% interest in international partnership marketed.
Teams Snubbing International these partnership commenced their first services. This year deploying two snubbing packages to U S independent producers in Alaska.
Both of these packages operated almost continuously through the third quarter.
Teen Snubbing International are also looking into opportunities in other foreign jurisdictions.
At this juncture I'd now like to pass the call over to Lon bite Ow.
Our our interim Chief financial officer to discuss key financial highlights from the quarter in more detail.
Yeah.
Great. Thank you, Mike and good afternoon to those of you joining on the call today.
Now just before I begin I'd like to mention that all dollar amounts here mentioned on this call are Canadian dollars unless otherwise stated.
Looking at our third quarter results from continuing operations on a consolidated basis.
High Arctic generated revenues of $17 8 million up marginally from our second quarter 2023, and approximately double that achieved during the first quarter of 2023.
Prior to the commencement of operations with rig 103, and our PNG drilling service segment.
Arctic generated adjusted EBITDA of $3 2 million down from $4 4 million in Q2, 2023 but up substantially from the approximately 600000.
In the same quarter of 2022 with Q3 2022.
And this quarter Arctic occurred and that loss of $15 million, which on a per share basis equated to a loss of 31 cents a share.
This significant net loss recorded in the quarter related to a noncash impairment charge.
$25 million.
He can against high Arctic PNG operations T G U.
The net impact of this charge on net income after factoring in the associated deferred tax recovery of $3 9 million.
$6 6 million.
As we've disclosed in our Q3 financial statements indicators of impairment of are noted in the quarter.
Included our primary customer planning to conclude its drilling after completing the minimum well commitment on their drilling schedule.
And also the lack of outstanding customer contract tenders.
Our open bid submissions currently for healthy portable rigs, probably one five and one six.
These factors are.
And our reduced activity level.
Reduced level pardon me of anticipated drilling activity in that business.
After performing an impairment analysis of the PNG.
Operation C. G. You it was determined that its recoverable amount.
It was below its estimated carried value of that C. G U.
And as a result, the corporation recorded there.
Impairment aforementioned.
In the quarter the business performed well.
Generating $3 2 million in adjusted EBITDA and it should be noted that high Arctic would posted a positive net income number had it not been for the noncash impairment charge.
Customer owned rig 103 was fully utilized in Q3 2023, and our ancillary services segment continues to perform at expectations and as a result high Arctic achieved.
Higher consolidated operating margins of 33% in the quarter versus 26% when compared to the third quarter of last year.
This increase in margin is primarily driven by strength in demand for rental equipment, both in Canada and upland Mckinney.
Before he does that utilization in charge out rates associated with rig 103 operations.
And an increased supply of high Arctic technical and operation down Paul our services to our customers in PNG.
G&A costs were $2 7 million in the quarter, which is higher than the $2 5 million from last year's.
Comparable quarter.
G&A costs as a percentage of revenue was 15%, which was lower than the 21%.
In the third quarter of last year.
Reason, though for the increase in absolute G&A spend this quarter as a result of one time severance costs.
I'd also legal professional fees that we've incurred mostly related to the reorganization of Michigan.
Management continues to evaluate its G&A cost and cost levels and rightsize the op.
Right size the support in our business to align with expected expected operations.
Going forward and bulky and G in Canada.
So our largest revenue contributor for Arctic in the quarter.
China generated from our drilling segment.
Our drilling services segment, our activities there generated $13 9 million of the revenue achieved in 'twenty in Q3 2023.
Much higher than the $4 9 million from the segment in Q3 of last year.
This increase was due primarily to the fact that our customer owned Greg one of the three was fully utilized in the quarter.
Whereas in last year's Q3, Arctic had no older customer owned rigs operating and most of the revenue was derived from manpower provision.
Q3, 2023 operating margins were 23% roughly in line with last year's 24%.
Our ancillary services segment spreads across both Papua New Guinea in Canada and continues to be our highest operating margin generator.
We achieved an operating margin of over 69% on $3 9 million in revenue in this quarter as composed as compared to 60 at 62% margin.
On $2 3 million of revenue in Q3 2022.
The improved margin reflects higher activity levels and more revenue contribution from low maintenance fully owned assets.
Management expects, our Q3 margins and activity level. So it delivered this to continue through the remainder of this year and into 2024.
There's no top line activity in our production services segment this quarter, but a small expense being booked related to storage preservation costs for sure for the assets in that segment.
Whereas in 2022.
The third quarter results are included.
Stub period of operations from the well servicing asset that we sold to position drilling.
Snubbing assets hold onto team snubbing.
During the quarter capital expenditures totaled 700000, mainly focused on growth in our rental equipment, and Canada and Papua New Guinea. With addition of deployable pressure control equipment in Canada.
Vehicles, and other incidental rental equipment that customers are looking for in.
In their field operations in parts of PNG.
We expect to continue with modest capital spend for the rest of 2023, mostly focused on maintaining and growing our rental fleet, both in Canada, and Papua New Guinea.
The company ended the quarter with 4.68 or $46 8 million in cash on hand with over $37 million of that.
Unearned balance investment in secure interest bearing short term investments.
Which combined to generate a $538000 of interest income during the quarter.
This interest income was directed at supporting our monthly half cents a share dividend.
But subsequent to the quarter I Arctic elected to suspend its dividend, but the view that the corporation can optimize its future ability to fund the pending tax efficient return of capital to its shareholders.
Our working capital position increased slightly in the quarter from Q2 of this year.
And at the end of September was at 63, and a half million only debt on the books of the mortgage financing, we have a $3 6 million.
The held against our land and buildings.
Britta.
And with that I'll turn the call back over to Mike.
Yes.
Thanks Lauren.
Before turning the call over to questions I believe it appropriate to provide an update on the reorganization of the corporation.
As a reminder, in May we announced an intention to recommend to shareholders a tax efficient return of capital to a maximum of $38 $2 million relating to the Q3 2022 sale of high optics, Canadian well servicing assets and a reorganization of the corporation involving the spin.
And off of the Papua New Guinea business.
The separation was aimed at addressing the inefficiencies of managing to small businesses on opposite sides of the world with few synergies, allowing senior management to concentrate with I've had the most success in the past.
In August we provided an update updated outline that affected the reorganization by way of a purchase rights issuance, whereby all shareholders would be issued the maximum tax efficient.
The most a tax free return of capital and proportionate rights to acquire a share of the P&G business is holding company in Cyprus.
With the proceeds of sale than used to capitalize and provide liquidity for the corporation to pursue goes.
Yeah.
However, the corporation received feedback from several shareholders.
The feedback generally related to the unlisted nature of the high optic international holding company and concerns about corporate governance and minority shareholder protections in a foreign jurisdiction.
We suspended work on that previously announced transaction.
We are working with advisers towards a process that delivers on the shareholder feedback received and the strategic games of the reorganization.
There is no guarantee that we can achieve all of these aims.
We will make further announcements once we have determined to path forward, which may include making no changes at all.
In the meantime, we focus on managing and pursuing opportunities for the existing businesses.
I'll now turn the conference over to the operator, who has seen 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 you had said before making your selection.
If you have a question. Please press star one on your devices keypad when prompted by the system. Please clearly state your name to register your question. If at any time you wish to cancel your question. Please press star two.
There will be brief pause while participants register for questions.
For your patients.
Okay.
The first question will be from.
Josef Schachter. Please go ahead.
Good afternoon, Mike and lawn.
My first question is for a long thanks for taking the questions and having to use a conference call.
The write down of the $20 million.
For the P N G C G U.
If we if there is a.
Pick up in business in.
2020 for 2025 isn't reversible charge or is this a once you've done this it stays from it stays as a write down.
Yeah. Thanks for the question there, Joe and yeah, we either buy for us.
And our current GAAP you are allowed to write up.
Your assets.
And the C. G. You if you do see you know obviously your future cash flows and.
Improved to the point, where it makes sense and obviously there is a ceiling in terms of what you can write them back up and that feeling would be would be the 25 million that we broke them down.
Okay Super So it's like a same kind of reversal for reserves when you get to a price changes like we see in the E&P side.
Yes precisely.
Okay, Mike for you.
You mentioned last time on the call that our road was gonna be built for some of the drilling so.
The.
The likelihood of getting near term contracts for the mobile was going to be tougher.
Given the.
The announcements you made today about all the work that's going on does.
Does that change your view on potential upside.
Business for it and secondly, with the ancillary business are gaining a lot of our business and that's why you're spending money, adding capacity there providing it to other operators, who will bring in land rigs that we'd be able to go through that.
That's being built.
Yeah. Thanks for the questions Joseph addressing the first part.
Right just to be to clarify make sure that this.
This is our expectation that the project proponents for Papua LNG.
We'll be building roads to the well sites for the wells that will that will be supplying the gas.
Two the yet to be built LNG facility.
We expect the roads to be built because the.
Project.
Operator total energies the French supermajor has gone to the market seeking seeking quiet.
Tender submissions for the creation of roads.
Assuming that roads are built which we've had to do now and based on that information.
We believe out helicopter transportable rigs.
Less competitive when it comes to securing that drilling for the I think it's 11 wells that.
They tend to be drilled for that project.
And so much is while they have a substantive advantage for remote access our exploration and appraisal where there is no roads and can route. They can move by helicopters. When there is a road. There there are a lot less efficient to assemble disassemble and transports because they break down into much smaller pieces.
We do and I want to remind people too we do have history here.
The last four wells wells 456, and seven that were drilled in the Antelope fields were all drilled YY Arctic.
We expect that if the project goes ahead, which that announcement I think most of our calls would be aware, but I'll just remind people that announcement, which was anticipated to be around this time.
Latter part of 2023 has now been pushed into 2024.
According to the project website is currently flagged as early 2024.
Is that project goes ahead, we do expect to see down the track and some stimulation of exploration and appraisal drilling.
That was was observed by us back in the <unk>, a decade ago with the first LNG project PNG LNG.
And you know that stimulated activity was what soares investing reached 11516, which were purpose purpose rebuilt and.
Engineered to be optimum to moving remote parts of Papua New Guinea, which is tropical rainforest in a with a with a large mountain range.
So we've got some optimism there and I think my comments today are somewhat consistent with.
Comments, we'd be making up for quite some time.
With regards to we can see scenarios in the future where we could have.
<unk> deployed and we could be as busy or busier than we've ever been in the past those projects yet yet to materialize.
We're hoping that and optimistic that.
A positive investment decision will be taken on these projects early next year and that our E E.
Even if we are.
Unable to secure the direct drilling well that it will lead to work down the track for us in that exploration space.
Talking of moving to the second part of the question on ancillary.
Yes, Joseph I think you've got a very accurate read through there.
We're seeing opportunity for investment in our in rental equipment and an investment in people.
And with where we are able to deploy those at the moment.
A measured pace.
These projects that are expected to be coming online are coming in.
<unk> committed to in the second half of the decade will require more equipment require more mobile equipment will require more people skilled unskilled ins and professional and we are taking steps at the moment too.
Positioning ourselves to play a significant role in providing those services that equipment and some of those people.
One last one for me.
And in that time.
Whole restructuring and go go forward is looking at all the options now.
Including just the go forward strategy as one company are you guys in that process looking at where you might apply the cash.
To build a.
Go forward company, if it stays together either in Canada or.
Build up a bigger operation in Papua New Guinea, including having land rigs that you would operate.
Yes, so a key aspect to that.
A real or all continuing without reorganizing is our analysis of forward capital needs and access to adequate liquidity for the two independent parts, whether they be separate at all were still combined.
To be able to realize.
The business strategies and and opportunities for growth into the future.
As we work through this process that is front and center now about thinking to ensure that we will have we will have adequate access there and and at the same time, though.
Optimize the position that the corporation can be in to be.
It'd be up to effect a tax efficient return of capital.
Okay. Thanks for the color on that and good luck with all of the machinations coming to a decision at the board level of what how to move forward. Thank you.
Thank you Joseph.
Once again, please press star one on your devices keypad, if you have a question.
Yeah.
There are no further questions registered at this time I would now like to turn the meeting back over to Mr. Mcguire.
Thanks, Hudson I'm, I'm, I'm I'm going to say that perhaps that's a reflection that we address what most people's questions. My in my opinion in the are in the lead in dialogue between loan and myself.
We are working to ensure that we're focused on in the business that we have.
Optimizing yelp had chances to pick up additional work and deploy idled assets.
Mentioned I think in the last call and and your mood.
Those who've been able to access it given.
We posted our results only a short time ago.
I would note that we've commented in the in our outlook.
The key appointment to Chris Fraser.
In a business development role for Papua New Guinea and business and.
I want to reassure our investors that while we have been looking at reorganization at the same time, we've not taken our eye off the ball in the opportunities to deploy our idled assets into <unk> to expand their service offerings, and Papua New Guinea and in Canada.
I'd like to thank everybody for joining us this afternoon, and we shouldn't running a pleasant evening.
Thank you. The conference has now ended please disconnect your lines at this time. Thank you for your participation.
Yeah.
Yeah.
Thank you the conference has now ended.
<unk> disconnect your lines at this time, thank you for your participation.