CALGARY, Canada – November 10, 2022, High Arctic Energy Services Inc. (TSX: HWO) (the “Corporation” or “High Arctic”) released its’ third quarter results today.
Mike Maguire, CEO of High Arctic, commented:
“Papua New Guinea is key to High Arctic’s long-term business strategy. There have been significant LNG commitments in PNG made by large oil and gas companies and High Arctic is positioned well to support our customers’ future investments. Over fifteen years High Arctic has developed the logistics expertise and trained local workforce required to operate the heli-portable drilling rigs in otherwise inaccessible PNG locations.
As our long-term investors know, PNG is a market where we have developed a strong position with potential for higher profits and free cash flow. In the past this has funded corporate growth and shareholder returns.
The divestment of our Canadian Production Services segment this quarter allows us to focus on putting rigs back to work in PNG. We are currently providing services to both our principal customer and the PNG-LNG operator, and we are looking forward to returning to consistent drilling operations following an exceptional period of Covid driven activity suspension.
The Corporation continues to look at the capital allocation decision in relation to its current and expected significant cash balances. This may include a return of capital to shareholders or reinvestment in the business.”
Highlights
The following highlights the Corporations results for Q3-2022 and YTD-2022:
• During the Quarter, High Arctic made a strategic shift to capitalize on opportunities and focus on developments in its core market of Papua New Guinea while resetting its long-standing energy service presence in Canada.
o Disposed of Canadian well servicing business for cash consideration, originally acquired in 2016
o Consolidated snubbing industry in Canada through disposal of snubbing business for an equity interest and note receivable in acquiring company
o Renewed a key drilling services contract in PNG as the country begins early-stage reactivation of upstream activity in its largest commodity export, liquified natural gas
o Carried forward in Canada with active Rental and Nitrogen Services businesses
o Built upon its record of shareholder returns with dividend payments of $731, and
o Delivered safety excellence and ESG alignment with a customer portfolio of high-quality operators.
• Preparations to return to drilling in PNG with Rig 103 progressed, adding an upgrade of the topdrive, enhancing the rigs drilling capability. Rig 103 is expected to commence drilling operations by the end of the first quarter of 2023.
• High Arctic maintained a strong financial position, with working capital of $65,434 including $23,386 cash, $12,101 accounts receivable, $28,000 asset sale receivable (due in January 2023), and total debt of $7,860 as at September 30, 2022.
Outlook
High Arctic has taken transformative actions this quarter 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. High Arctic believes that the fundamentals for sustained high LNG demand, particularly in Asia, positions PNG for substantive LNG export growth, and the drilling required to realize this has the potential to exceed our past activity peaks.
On August 1, 2022 High Arctic entered into a three-year contract renewal covering customer owned Heli-portable Rig 103 and High Arctic’s services related to the supply of personnel, camp accommodation and rental equipment to support the drilling operations in PNG.
Work is currently underway to prepare Rig 103, including an upgrade of its topdrive, for recommencement of drilling early in 2023. High Arctic anticipates Rig 103 will operate consistently through the term of the contract. This cornerstone contract is flexible and scalable to align with activity, which positions High Arctic to respond quickly to future incremental drilling opportunities associated with LNG expansion. While the contract for customer owned Rig 104 was not renewed at that time, High Arctic is optimistic for future contracts with third-party customers in the coming activity cycle.
High Arctic maintains active dialogue with the management of all the active energy companies in PNG, towards understanding their project timeframes and plans for drilling activity utilizing High Arctic’s owned rigs. The Corporation expects an additional drilling rig deployment in the 1st half of 2023 and is optimistic about further activity increases by the end of next year.
The advancement of the TotalEnergies led Papua-LNG project’s front-end-engineering-and-design continues to progress and has recently included public forums outlining plans for early-works and overall project timelines around a final investment decision on the two-train Papua-LNG project in the 2nd half of 2023. Earlier this year ExxonMobil, operator of the PNG-LNG joint venture, announced the signing of a gas agreement for the development of the P’nyang gas field in the Western Province of PNG, which is anticipated to result in the addition of another train to the world class PNG-LNG export facility. These developments underpin our optimism of an expanding PNG energy sector and increasing future demand for our people, equipment and expertise.
In Canada, the post-closing transitional activities have progressed smoothly with the buyers of Concord Well Servicing and High Arctic’s snubbing division. The consolidated Team Snubbing Services has already increased market share, with deployed services exiting Q3-2022 exceeding the sum of the two parts in 2021. Team’s dominant market position and service quality has immediately driven pricing improvements and margin growth.
Streamlining of the management support structure of High Arctic’s remaining Canadian business is well underway and has been consolidated for efficient operation of our pressure control focused HAES Rentals and Nitrogen pumping services. Management remains attentive to opportunities to best realize a return on the investments in these Canadian service lines, and the dormant snubbing assets in the USA. Commensurate with these efforts is an exploration of growth financing options levered off the Corporations assets in PNG.
Strategy
Strategic priorities build on High Arctic’s core values, code of business conduct and fiscal discipline, including:
• Safety excellence and quality service delivery,
• Actions aimed at generating free cash flow including:
• Increased utilization of the Corporation’s world-class fleet of equipment,
• Improved efficiency and work force productivity, and
• Operating cost control.
• Development of new and existing employees to grow our workforce to meet demand,
• Pursuit of opportunities that secure the Corporation’s future as a lower emissions energy services provider,
• Pursuit of opportunities for growth and corporate transactions in well understood markets that enhance shareholder value, and
• Disciplined capital stewardship to improve returns for shareholders including divestitures, dividends and common share buybacks.
Noteworthy performance during the third quarter included:
• Activity in PNG maintained a personnel count of about 200 employees deployed, reaching key safety milestones of 6 years and 3 million work hours recordable incident free.
• As previously announced, renewed a three-year contract for drilling services with its principal customer in PNG, and made progress towards commencing active drilling operations with Rig 103 in Q1-2023.
• On July 27, 2022, the Corporation sold its Canadian well servicing business for an aggregate purchase price of $38,200, and sold its Canadian snubbing business for 42% equity ownership of Team, the acquiring company, and a note receivable of $3,365 (the “Sale Transactions”).
• During the Quarter, High Arctic generated $942 (YTD-2022 $ $7,362) in cash flow from operations and spent $660 ($3,976) on equipment capital expenditures for positive net cash generation of $282 (YTD-2022 $3,386).
• Paid shareholders dividends of $731 (YTD $$1,218) and after Quarter-end began to buy back shares, in nominal quantities, pursuant to its Normal Course Issuer Bid expiring in early December 2022.
Canadian Production Services Segment Divestments
As reported last quarter, On July 27, 2022, High Arctic executed two separate asset sales transactions resulting in the effective divestment of the Corporation’s Production Services segment.
The Canadian well servicing business was sold for an aggregate purchase price of $38,200 payable in cash. The Well Servicing Transaction involved the sale of well servicing rigs, associated rental equipment, and real estate used in the support of these operations along with the transfer of field personnel and a large majority of the office support personnel. Cash payment of $10,200 was received on first closing in July 2022. The second and final closing of the Well Servicing Transaction will occur in January 2023, with the remaining $28,000 cash payment and transfer of real estate titles to the purchaser. The Corporation will repay $3,565 of mortgage principal related to the real estate properties at second closing.
As at Q2-2022, an estimated impairment of $8,236 was charged relating to the difference in carrying value of the assets and total consideration of the Well Servicing transaction. An additional impairment of $646 was identified in Q3-2022, resulting in a total impairment of $8,882 relating to this transaction. By comparison, the well servicing business was purchased in August 2016 for $42,800 with a non-cash $12,700 gain on the acquisition booked to PP&E.
The Canadian Snubbing business was sold to Team Snubbing Services Inc. for consideration consisting of 42% ownership in the post-closing outstanding shares (420,000 common voting shares) in Team, valued at $7,738, and a convertible promissory note of $3,365. The note has a five-year term, with interest accruing at 4.5% from January 1, 2023, and principal repayments commencing July of 2024. Investment in the share capital of Team represents a joint arrangement whereby High Arctic has significant influence of the operations and rights to the net assets of Team. This transaction involved both the sale of High Arctic’s Canadian snubbing assets and the transfer of field personnel.
As at Q2-2022, an estimated impairment of $443 was charged relating to the difference in carrying value of the Canadian snubbing assets of $11,546 and estimated fair value less cost to sell of $11,103. An additional impairment of $233 was identified in Q3-2022, resulting in a total impairment of $676 relating to the Snubbing Transaction.
High Arctic retains its Ancillary Services Segment in Canada comprised of the Nitrogen Pumping business and a Rentals business focused on pressure control equipment. High Arctic also retains its snubbing assets in the USA, which along with the hydraulic workover rig (Rig 102) in PNG remain idle and will be reported under Ancillary Services.
As a result of the Sale Transactions, the Corporation has a significantly reduced Canadian business and has written down the deferred tax assets of $7,743 while retaining in excess of $130,000 of operating tax loss carry-forward in Canada. Additionally, the Corporation cancelled its revolving bank loan credit facility effective July 27, 2022.
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For further information contact:
Lance Mierendorf, Chief Financial Officer
P: +1 (587) 318 2218
P: +1 (800) 688 7143
High Arctic Energy Services Inc.
Suite 2350, 330 – 5th Ave SW
Calgary, Alberta, Canada T2P 0L4
website: www.haes.ca
Email: info@haes.ca