Q2 2024 High Arctic Energy Services Inc Earnings Call
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Speaker Change: All participants please continue to stand by. The conference will begin momentarily.
Speaker Change: Once again, please continue to stand by. We thank you for your patience. Nous vous remercions de bien vouloir patienter. La conférence débutera sous peu. Nous vous prions de bien vouloir attendre. This conference is being recorded. Cette conférence est enregistrée.
Speaker Change: Good afternoon, ladies and gentlemen. Welcome to the High Arctic Energy Services 2024 Q2 results conference call. I would now like to turn the meeting over to High Arctic's Chief Executive Officer, Mike Maguire. Please go ahead, Mr. Maguire. Thank you, Mr. Maguire.
Mike Maguire: Thank you, Melanie, and good afternoon, everyone. Welcome to High Arctic's second quarter conference call. Today, I'll be providing an update on the press release we issued after markets closed yesterday, August 14th, including discussion about financial performance for the second quarter of 2024.
Speaker Change: Following my remarks, I'll hand the call over to our Chief Financial Officer, Lonn Bate. Lonn will be discussing our financial performance for the quarter in more detail.
Speaker Change: After our formal comments, we'll open the call to answer any questions that you may have.
Speaker Change: Before we begin, I'd like to remind you that certain information presented today may include forward-looking statements.
Speaker Change: Such statements reflect hierarchy's current expectations, estimates, projections and assumptions.
Speaker Change: 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.
Speaker Change: for additional information on these
Speaker Change: Please take a look at our management's discussion and analysis and the 2024 annual information form available on our website or on CDAR Plus.
Speaker Change: look under the heading risk factors
Speaker Change: Well, we have finally fulfilled our long-anticipated reorganization.
Speaker Change: By this time tomorrow, the corporation's new shares, and the shares of the spun-out P&G business, will have begun trading.
Speaker Change: On the 17th of June this year, High Arctic held its Annual and Special General Meeting.
Speaker Change: At the meeting, the corporation's shareholders approved, amongst other things, special resolutions approving the reorganization of the corporation by way of a plan of arrangement and a return of capital of up to 76 cents per common share.
Speaker Change: The return of capital was paid out at the 76 cent maximum to shareholders on July 17th this year.
Speaker Change: pursuant to the reorganization of the corporation.
Speaker Change: The P&G business was spun out to the current High Arctic shareholders through a new publicly listed entity named High Arctic Overseas Holdings Corporation.
Speaker Change: referred to in our filings as spinco.
Speaker Change: Spinco will trade on the TSX Venture Exchange under the trading symbol HOH.
Speaker Change: The new shares of High Arctic Energy Services, Inc. will trade under the existing ticker of HWO on the TSX main exchange.
Speaker Change: Each shareholder of the corporation has received as consideration one-quarter of one common share of Spinco HOH.
Speaker Change: and one quarter of one common share of post-arrangement High Arctic, HWO.
Speaker Change: for each common share of High Arctic held at the time of separation.
Speaker Change: As a result,
Speaker Change: High Arctic has 12,448,166 new High Arctic Common Shares Outstanding and Spinco has 12,448,166 Spinco Common Shares Outstanding.
Speaker Change: As a consequence of the June 17 approvals, our financial statements and MD&A for the second quarter classified the P&G business as assets and liabilities held for distribution.
Speaker Change: And as the P&G business represents a separate geographic area of operations,
Speaker Change: It has been presented as discontinued operations.
Speaker Change: In line with our prior guidance, I confirm that rig 103 completed the drilling of the fourth and final of the approved wells in our customer's program during this second quarter.
Speaker Change: The rig and associated equipment packages were placed into cold stack storage and crews have been released.
Speaker Change: Just a reminder that the term of the
Speaker Change: Presently, there is no confirmed drilling activity in the remaining contract period, but we continue to work with our customer to advance plans for future work.
Speaker Change: Associated with the cessation of drilling operations in P&G with Rig 103, we have seen a softening in the deployment of rental assets through the quarter, with those pulled through by drilling operations released upon the completion of the cold stack work.
Speaker Change: The P&G business also provided rental material handling equipment, a 100-man mobile camp, and a large quantity of worksite matting to support other ongoing field activities with our two main customers in P&G. These rentals are ongoing.
Speaker Change: At the macro scale, we're optimistic for future drilling in PNG.
Speaker Change: for SPINCO. This optimism is based upon an expectation that advancement of the Papua LNG project led by French multinational Total Energies will stimulate exploration and applausal drilling in much the same way as the first PNG LNG project did a decade ago.
Speaker Change: We are, however, disappointed that a final investment decision on the Papua LNG project has been pushed out into 2025 and potentially as late as the first quarter of 2026.
Speaker Change: With the Managing Director of P&G State-owned Coomal Petroleum being quoted earlier this week as stating that FID will now be in Q4 2025 or Q1 2026.
Speaker Change: This follows the joint statement in April this year, reaffirming commitment to the project by the government of Papua New Guinea and the project operating partner, Total Energies.
Speaker Change: The Papua LNG project is expected to be followed by the Pinyang gas field development in the western province of PNG.
Speaker Change: This project is anticipated to result in the addition of further gas liquefaction capacity in the world-class PNG LNG export facility.
Speaker Change: State-owned Kumul Petroleum is advancing appraisal of other gas discoveries onshore Papua New Guinea to progress their aim to contribute to growing domestic energy needs and additional LNG export processing facilities.
Speaker Change: ExxonMobil and their partners are also advancing the backfill of the P&G LNG plant and have announced intentions to appraise a significant prospect that they have named Wildebeest.
Speaker Change: 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 Papua New Guinea today.
Speaker Change: P&G Industry Manpower Solutions, our labour hire training and manpower business in P&G, has been established to tap into the business opportunities associated with that need.
Speaker Change: We have long provided training and competency solutions in-house, and PIMMS also taps into our large pool of talent to provide manpower, skilled and semi-skilled labour, trades qualified personnel and professionals in P&G.
SPNCO: SPNCO's team are excited to be playing a role in preparing PNG citizens to be job ready for the major projects anticipated in the latter part of this decade and beyond.
SPNCO: [inaudible]
Speaker Change: Turning to the corporation's remaining business.
Speaker Change: It consists of high-margin Canadian equipment rental business centred upon pressure control, a minority interest in Team Snubbing Services, Inc.
Speaker Change: Canada's largest oilfield snubbing services business.
Speaker Change: and Industrial Properties at Claremont and Whitecourt in Alberta, Canada.
Speaker Change: We have now completed the second quarter of activity, which includes the business of Delta Rental Services.
Speaker Change: The acquisition of Delta in late December last year, its amalgamation with High Arctic and its integration with our legacy rentals business in Canada, has delivered the scale for a cash positive operation.
Speaker Change: Delta has blended seamlessly with High Arctic's rentals and combined rental and the combined rentals business is now marketed under the Delta brand.
Speaker Change: The second quarter and first half results are in line with our pre-acquisition expectations with a strong contribution to revenue and positive cash flow.
Speaker Change: The Delta acquisition contemplated and the structure of the consideration with a large earn-out was reflective of High Arctic's intention to reorganize and separate the Canadian P&G businesses.
Speaker Change: The success of this modest but important growth step has provided us with confidence that this transaction is symbolic of the prospects for the now purely Canadian High Arctic and how additional accretive transactions may be realized.
Speaker Change: High Arctic has a 42% equity stake in Team Snubbing.
Speaker Change: The second quarter is traditionally a low activity period for snubbing in Canada due to the seasonal break-up and associated road bans.
Speaker Change: This year has been no different, with activity levels down from the record first quarter.
Speaker Change: During the quarter, team used the opportunity to provide crews with scheduled vacation and conducted planned maintenance and recertification activity.
Speaker Change: The team also completed the reorganization of its international partnership.
Speaker Change: The result of this reorganization, a cashless arrangement, sees Team holding a fraction over 90% of the Team Snubbing Service's international business.
Speaker Change: and complete control of all decision-making.
Speaker Change: This result leads to a more efficient overall team corporate structure and management structure.
Speaker Change: and a much more efficient overhead.
Speaker Change: In Alaska, the snubbing packages worked for the quarter, with activity negatively affected by extreme weather events and client scheduling.
Lonn Bate: I'd like now to pass the call over to Lonn Bate, High Arctic's Chief Financial Officer, to discuss key financial highlights from the quarter in more detail.
Lonn Bate: Thank you, Mike, and good afternoon to all of you joining on the call today.
Lonn Bate: Before I begin, I just want to state that all dollar amounts, unless otherwise stated,
Lonn Bate: that are mentioned on this call are all in Canadian dollars.
Mike Maguire: Also, as Mike mentioned,
Speaker Change: with the near certainty of completing the reorganization achieved in the past quarter.
Speaker Change: Our consolidated financial statements and MD&A classify the P&G business as assets and liabilities held for distribution and the P&G business as it represents a separate geographical area of operation.
Mike Maguire: Those operations and the results thereof have been presented separately as discontinued operations in our statements.
Mike Maguire: This change makes our consolidated statements and MD&A considerably different from the past.
Mike Maguire: So, what this means is that what we presented in our most recent quarter is that, you know, our income statement and cash flow statement.
Mike Maguire: show only the details of our continuing operations, which as Mike said is our Canadian rentals business, plus equity accounting for our investment in Team Snubbing.
Mike Maguire: The comparative quarter from 2023 and the six-month results for both June 30th, 2023 and 2024 have all been restated in this quarter as well.
Mike Maguire: So that the numbers are comparable and the reader of our financial statements can therefore compare the performance of the Go Forward Canadian business quarter over quarter, six months over six months.
Mike Maguire: In note 3 of our financial statements, we detail the assets held for distribution and the discontinued operations that are presented discreetly there for users of the financial statements to understand the assets and business being spun out.
Mike Maguire: of our books here in Canada into Spinco, and that's based on our current book values.
Mike Maguire: Okay, so turning to the second quarter as published here. Start in Canada and the result from our continuing operations. The Delta Rentals business which is centered on pressure control equipment and equipment supporting the high-pressure stimulation of oil and gas wells in the basin.
Mike Maguire: With the Delta acquisition we made in late 2023, our revenues from continuing operations have increased approximately three X for both the three and six months period ended June 30th, 2024 versus the comparable periods in 2023.
Hierarchic: Hierarchic achieved revenues of $2.5 million in Q2 2024 and $5.5 million for the first half of this year.
Hierarchic: Strong operating margin performance was also achieved in both 2024 periods with margins from this business consistently in the high 40% range.
Hierarchic: Margin revenue performance were slightly lowering in Q2 largely due to the spring breakup and the sort of typically lower industry-wide activity levels customary that we see in Canada for this quarter.
Hierarchic: There's no activity in our production services segment again this quarter.
Hierarchic: at least in terms of recordable revenue and margin.
Hierarchic: Included in our production services segment is our investment in Team Snubbing, our equity investment.
Hierarchic: and our involvement with the Sitchenny Partnership, where we hold a 49% stake. The Sitchenny Partnership has experienced limited business activity since the 2022 Canadian sales transaction.
Hierarchic: But the partnership does still remain active and we along with our partner continue to work to reposition our offerings to our customers and are exploring other avenues for business activity.
Mike Maguire: Mike also mentioned Team Acquired a controlling interest in Team Snubbing International in McWhorter.
Speaker Change: So financially, as a result of this acquisition, TEAM has now consolidated the results of TEAM Snubbing International for the first time, and that was essentially the full quarter as that transaction took place in early April of this year.
Speaker Change: So this consolidation of Team Snubbing International plus the increase in activity from Team's Canadian operations in the quarter helped drive the increase in revenues reported for Team.
Speaker Change: which are included in Note 7 to our interim financial statements.
Speaker Change: More than offsetting this additional business activity in the quarter for teamwork significant costs incurred by Team Snubbing International in the same quarter.
Speaker Change: In total, a quarterly net after-tax loss of $2.1 million. So that's gross, not the net that was picked up by us.
Speaker Change: That gross amount was recorded in the consolidated results team.
Speaker Change: that loss driven by the low activity in Alaska that Mike mentioned
Speaker Change: plus additional one-time costs.
Speaker Change: mentioned above that Team International restructured their management and operational teams up in Alaska.
Speaker Change: This restructuring initiative consolidated Team International's workforce, right-sizing it to where it needs to be, right, to service the overall Alaskan customer base.
Speaker Change: Turning to the P&G business, which in our disclosures is all-inclusive and so therefore includes both drilling and drilling services and rentals. Revenue was down in the quarter.
Speaker Change: down from $16.6 million in Q2 of last year to $10.4 million of this year.
Speaker Change: And as Mike stated, last year you know we were active on rig 103 as it worked the full quarter versus this recent quarter where our drilling operations for rig 103 ceased and much of the rental revenue that typically accompanies that drilling work also deaccelerated.
Speaker Change: G&A costs from continuing operations totaled $1.8 million in the quarter, higher than the $1.3 million incurred for this quarter last year, Q2 2023.
Speaker Change: This increase in G&A is a direct result of professional and other fees related to the arrangement and other aspects of the corporate reorganization that we just recently completed.
Speaker Change: In our MD&A, we've adjusted out the specific third-party non-recurring costs in our adjusted EBITDA non-IFRS measures.
Speaker Change: which for this quarter
Speaker Change: This additional G&A adjusted out totaled approximately three quarters of a million dollars and one and a quarter million dollars year-to-date 2024.
Speaker Change: Thank you.
Speaker Change: after stripping out this additional DNA associated with the reorganization.
Speaker Change: The business achieved positive EBITDA, adjusted EBITDA from continuing to operations of $200,000 for the current quarter, approximately $300,000 year-to-date.
Speaker Change: We, like in the stand-alone Go Forward Canadian entity, HWO, High Arctic anticipate meaningful G&A reductions to begin to appear in the second half of 2024.
Speaker Change: Post the close of reorganization after some transitional matters are completed, we'll be in a position to right-size the administrative support in Canada to align with our much simpler Canadian-only operations going forward.
Speaker Change: CapEx spend in 2024, Q2 totaled $450,000, with this spend being focused in Canada.
Speaker Change: both on growth and capital upgrades to our rental fleet, rental equipment fleet.
Speaker Change: plus costs associated with building out our financial and operational systems.
Speaker Change: We expect to continue with modest capital spending in 2024.
Speaker Change: mostly focused on maintaining and growing our rental fleet.
Speaker Change: In closing, I think from my perspective, with our recent press releases going out announcing the completion of our reorganization and our recent Q2 results.
Speaker Change: We've given the markets some guidance on cash, working capital, and the debt capital structures of the two distinct entities going forward. And I just want to revisit this important information here on the call.
Speaker Change: For the remaining Canadian business today, we have positive working capital of approximately $5 million, of which is inclusive of $4 million cash on hand, with the only debt in the company.
Speaker Change: held is $3.4 million in mortgage debt which is well secured with our White Court and Claremont properties.
Speaker Change: FinCo's now standalone P&G business starts out with a strong capital structure, no long-term debt, and positive working capital of approximately 19 million dollars inclusive of US 19 million dollars inclusive of US 13 million dollars in cash.
Speaker Change: Now, with that said, I'll turn the call back over to Mike for closing remarks.
Mike Maguire: Thank you, Lonn. Now that we've completed the reorganization...
Speaker Change: I'm holding the Chief Executive role in an interim capacity, assisting the Board of Directors in their search for a dedicated full-time Chief Executive Officer to put effect to our strategic vision for the Corporation.
Speaker Change: The Canadian rentals business is managed on a day-to-day basis by very capable and experienced people who do not need constant oversight. And while I will maintain a careful watch over the business of High Arctic, most of my time will be dedicated to the affairs of Spinco.
Speaker Change: The corporation and Spinco have entered into a transition services arrangement which will facilitate cooperation aimed at minimizing the cost to both companies as we move towards a completely separate management.
Speaker Change: Those arrangements include Lonn acting as interim CFO for Spinco as it conducts a review for the most suitable persons to fulfill that role on a permanent basis.
Speaker Change: And with that now, I'll turn the conference back over to Melanie, the operator, who will open the line for questions.
Melanie: Thank you, Mr. Maguire. We will now take questions from the telephone lines. If you have a question, please press star 1 on your device's keypad. If at any time you wish to cancel your question, please press star 2.
Speaker Change: Please press star 1 at this time if you have a question.
Speaker Change: There will be a brief pause while the participants register for questions. Thank you for your patience.
Speaker Change: The first question is from...
Joseph Schachter: Joseph Schachter
Speaker Change: Please go ahead.
Joseph Schachter: Good afternoon, Mike and Lonn. Mike, one question for each side of the two businesses.
Joseph Schachter: You mentioned that the board is in the process of putting together the management team, CEO for the Canadian operations, and then coming up with a go-forward strategy. Is that something that we could look forward to hearing imminently in the next few months, or is this something that could drag on until early next year?
Speaker Change: Thanks Joseph, good afternoon to you too. Yes the board search is for a permanent CEO or to replace myself for the Canadian business is something that's ongoing and that has commenced some time back.
Speaker Change: We have several candidates that we've...
Speaker Change: spoken with. Some have some interesting
Speaker Change: vision for the corporation. The board is not in a hurry to move on this, given the nature of the existing business and its high-quality management team, and will work methodically through the process to determine an appropriate person to lead the business into its long-term future and realise upon its vision.
Speaker Change: That vision was outlined in the in the materials that were issued to shareholders for the vote to
Speaker Change: on the arrangement to separate the two businesses. And just in a quick summary, what that vision included, a focus particularly on Canadian business activity and growing that core business through selective and opportunistic investments.
Speaker Change: leveraging the existing people assets systems in our work processes for the growth, sustaining capital stewardship that preserves the balance sheet strength and financial flexibility
Speaker Change: building up the business with accretive acquisitions that allow the corporation to optimize its available tax loss carry forwards which I'll remind listeners are in the vicinity of 130 million Canadian dollars.
Speaker Change: and positioning it for an efficient corporate structure that provides the opportunity to consider transactions that would create value for the corporation's shareholders. And this could be transactions that may result in bringing in a larger organization and affecting a ...
Speaker Change: an amalgamation with somebody to whom our structure and the various assets could be very attractive to their shareholders too.
Speaker Change: And the next question on Spinco, with that month a significant amount of cash and things being, as you said, pretty slow in P&G.
Speaker Change: Do you look at maybe doing acquisitions in the area, other countries in Southeast Asia or Southern Asia, where you could maybe mobilize those financial resources?
Speaker Change: and build a company up quicker? Is that something that you're contemplating?
Speaker Change: A short answer to that would be yes, and I'll expand upon that a little bit. And before I do, maybe I'll just touch on some of the reasoning behind leaving the cash in the various locations, Spinco and Romainco.
Speaker Change: In Canada, we have access to very sophisticated, well-developed, and highly resourced
Speaker Change: financial services sector and various different ways of accessing liquidity to affect a business strategy which may include some acquisitions and expenditure for growth.
Speaker Change: In Papua New Guinea, we don't have the same. The financial services there are rather immature, there's limited sources, and most of it's available in the Papua New Guinea and Kena, which is not a very liquid currency and difficult to...
Speaker Change: translate into hard currency in a reasonable time frame.
Speaker Change: So we made the decision to leave the cash in.
Speaker Change: the Papua New Guinean business that was there with the exception of some amounts that were transferred through to assist the Canadian business with making their final return of capital payments earlier back last month.
Speaker Change: What do we do with that cash? Well, we know in Papua New Guinea we need to have a substantive amount of cash available to us for the recommencement of operations. The restart of drilling in Papua New Guinea has a significant cost associated with it.
Speaker Change: and then that cost is harvested back then after the rigs commence work.
Speaker Change: So, we do need to maintain a reasonable cash balance there or at least have access to liquidity that would ensure that if we get a request to go to work, we can do so quickly and effectively with access to an adequate amount of cash to prepare ourselves and mobilize equipment to the first site.
Speaker Change: Then, as you questioned correctly, pot,
Speaker Change: positioned, we are in our business strategy for the Papua New Guinean business also looking to seek out opportunities to expand and root our business in that region, which could include
Speaker Change: M&A activity in Papua New Guinea or in countries near Papua New Guinea and in the near vicinity of where I'm sitting at the moment which is in Brisbane, Australia.
Speaker Change: So yes the short answer was yes and I think I'm hoping that the long answer provided enough color for people to understand what how we intend to move it to use the cash on a forward basis.
Speaker Change: Thanks for answering my questions and good luck with the go forward strategy and I'll be looking forward to seeing announcements in the future. Thank you.
Joseph Schachter: Thanks, Joseph.
Speaker Change: Once again, please press star 1 on your telephone's keypad if you have a question.
Speaker Change: There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Maguire.
Mr. Maguire: Thank you, Melanie. I'm hoping that the...
Mr. Maguire: The fact that there's not many questions today means that we've explained ourselves well and that we've been able to provide adequate guidance to people who are interested in or invested in our two corporations as they begin to trade tomorrow. An exciting.
Mr. Maguire: period I guess in the in the ongoing story of High Arctic and and I'm hoping that we we will be able to realize on the value that we expected to be created from the process of separating these two entities.
Mr. Maguire: I wish everybody a good afternoon. Thank you.
Speaker Change: Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.
Mr. Maguire: Mr. Maguire
Mr. Maguire: Yeah, hi Melanie. Yes, so we had, hi Mr. Bate, we had in total 20 locations connected in today's conference.
Mr. Maguire: Okay, that's pretty close to where we normally are. All right, very good. Thank you for facilitating and moderating us today, Melanie. No problem, my pleasure. And I hope I get to do the next one. We look forward to seeing you. Okay, thank you, have a great day.
Speaker Change: Okay, you too. Bye for now.
Speaker Change: Thank you. Thank you.
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