Red Deer, Canada – May 14, 2013 – High Arctic Energy Services Inc. (TSX: HWO) (“High Arctic” or the “Corporation”) today announced its operating and financial results for the quarter ended March 31, 2013.
First Quarter Highlights
The operations in Papua New Guinea (PNG) generated significantly higher revenue in the first quarter which offset the slower activity levels in the Canadian operation Despite increased revenues, adjusted EBITDA decreased 12% to $12.6 million for the three months ended March 31, 2013 from $14.3 million for the same period in 2012 due primarily to a reduction in the Canadian operating margin.
Consolidated revenue for the first quarter increased 6% to $44.8 million compared to $42.2 million for the same quarter in 2012. The growth in revenue for the quarter was driven by increased activity in PNG with revenues of $29.9 million compared to $23.5 million for the first three months of 2012 as a result of having a second active drilling rig operating in 2013. In addition, the Corporation continues to see increased revenues derived from its rental fleet with growth year over year of approximately $1.3 million from its rental operations in PNG.
Revenue for Canada was $14.9 million for the first three months of 2013, a decrease of $3.8 million (20%) for the same period in 2012. The first quarter saw reduced revenue levels in the core snubbing and nitrogen businesses as both activities were softer with overall industry activity down. The operating margins in Canada were adversely affected by the reduced revenue levels and by competitive pricing conditions primarily in the nitrogen activity.
Consolidated operating margins continued to be strong at 33% for the quarter but fell from 39% earned for the three months ended March 31, 2012. The percentage was affected by the higher rig rental costs associated with operating an additional active rig in PNG in 2013 while the lower operating margins in Canada caused the overall reduction of $1.6 million in the operating margin.
As a result of its continued strong financial results, High Arctic increased its monthly dividend to $0.0125 per share in March, 2013, a 25% increase from the previous monthly dividends paid. At that monthly rate, the annual dividend will total approximately $7.5 million, which represents an annualized rate of 23% of funds provided from operations during the trailing twelve months ended March 31, 2013.
High Arctic continues to maintain a strong balance sheet. At March 31, 2013, the Corporation had $9.6 million of net cash on hand (March 31, 2012 – $6.5 million) and working capital of $40.9 million (March 31, 2012 – $34.5). The Corporation also continues to generate strong cash flows from its operations. For the three months ended March 31, 2013, High Arctic generated $11.2 million (2012- $13.4 million) of funds provided from operations.
Selected Comparative Financial Information
The following is a summary of selected financial information of the Corporation. All figures are derived from financial information that is prepared or presented in accordance with International Financial Reporting Standards (“IFRS”):
|
|
Three Months Ended March 31 |
||||
| $ millions (except per share amounts) |
|
2013 |
2012 |
Change |
% |
| Revenue |
|
44.8 |
42.2 |
2.6 |
6 |
|
|
|
|
|
|
|
| EBITDA(1) |
|
12.4 |
14.0 |
(1.6) |
(11) |
| Adjusted EBITDA(1) |
|
12.6 |
14.3 |
(1.7) |
(12) |
|
|
|
|
|
|
|
| Operating earnings |
|
9.8 |
11.7 |
(1.9) |
(16) |
|
|
|
|
|
|
|
| Net earnings |
|
8.4 |
10.7 |
(2.3) |
(21) |
| per share (basic)(2) |
0.17 |
0.23 |
(0.06) |
||
| per share (diluted)(2) |
0.17 |
0.22 |
(0.05) |
||
| Funds provided from operations(1) |
|
11.2 |
13.4 |
(2.2) |
(16) |
| per share (basic) |
0.23 |
0.29 |
(0.06) |
|
|
| per share (diluted) |
0.22 |
0.28 |
(0.06) |
|
|
|
|
|
|
|
|
|
| Dividends |
|
1.6 |
– |
1.6 |
– |
|
|
|
|
|
|
|
| Capital expenditures |
|
5.9 |
1.6 |
4.3 |
– |
| Working capital |
|
40.9 |
34.5 |
6.4 |
19 |
| Total assets |
|
131.4 |
105.5 |
25.9 |
25 |
|
|
|
|
|
|
|
| Total non-current financial liabilities |
|
13.7 |
11.2 |
2.5 |
22 |
|
|
|
|
|
|
|
| Net cash, end of period (1) |
|
9.6 |
6.5 |
3.1 |
48 |
|
|
|
|
|
|
|
| Shares outstanding at end of period (millions) |
|
49.8 |
49.6 |
0.2 |
– |
(1) Readers are cautioned that EBITDA, Adjusted EBITDA, Funds provided from operations and net cash do not have standardized meanings prescribed by IFRS – see “Key Financial Measures”.
(2) The restricted shares held by a trustee under the Executive and Director Incentive Share Plan are included in the shares outstanding. The number of shares used in calculating the net earnings per share amounts are determined differently as explained in the Financial Statements.
Outlook
The PNG LNG project is on schedule to deliver first gas towards the end of 2014 and this continues to be the focus of our main customer and their partners in the facility. While the long term outlook is favourable as the associated production becomes an important cash flow stream for our customer, the capital demands of that project affect the capital available for drilling in the near term. As a result, High Arctic returned to a one drilling rig operation at the start of May, 2013 and some of the associated equipment rental fleet is being placed on a standby rate. It is currently forecasted that Rigs 103 and 104 will operate on a leapfrog basis for the balance of 2013, similar to what occurred during the first nine months of 2012. We do not anticipate any drilling opportunities with other operators in 2013. Rig 102 should operate into the fourth quarter at a minimum. We have begun discussions with our main customer on the long term contract renewals and anticipate an early renewal effective as early as July 1, 2013. Some pricing concessions have been offered, particularly on the rental equipment, to reflect the long term nature of the rentals, some of which have now been operating for that customer continuously for more than five years. Other cost reductions, to reflect the lower drilling activity levels, will primarily be accomplished through personnel reductions.
During the past two years, the Corporation has been able to significantly grow its equipment rental business in PNG that now serves an increasing breadth of customers. In January 2013, we deployed a new heli-portable 104 person camp with our primary customer that we constructed as part of the 2012 capital spending program, and which will provide incremental revenue in 2013. Additional rig matting and cranes went on contract in late 2012 and High Arctic should receive a full year of revenue from those additions in 2013. The matting rental business has expanded significantly over the past two years; High Arctic had approximately 7,000 mats earning revenue at March 31, 2013. Since that date, 100 mats have been returned by customers and contracts for an additional 750 mats have been signed resulting in approximately 7,650 currently under contract. Opportunities to expand this business line and increase our rental fleet will be pursued. However, the anticipated slower drilling activity in 2013 by our primary customer, as well as other operators in PNG, may reduce demand for new rental equipment in 2013. Our focus will be on reducing administration costs, keeping existing equipment deployed and purchasing new equipment, when supported by contracts, as we wait out the completion of the LNG facility.
Activity levels in the Western Canadian Sedimentary Basin (‘WCSB’) have seen year over year declines in the first part of 2013 due to persistent weak natural gas prices and transportation bottlenecks for Alberta crude oil. The start of the 2013 winter drilling season in the WCSB saw drilling rig activity levels down approximately 10% from the start of the 2012 season, improving to a 4% reduction from the prior year by the end of February 2013. High Arctic in turn has also experienced year over year activity level reductions to date in 2013. The impact of the slower drilling activity has been somewhat mitigated by the continued industry transition to longer reach horizontal wells with multi-stage completions that often require snubbing services. Liquids rich gas play development is expected to continue at reasonable levels and be the primary driver for High Arctic’s business. The activity in the Duvernay, Montney and other deep basin plays in northwest Alberta and northeast British Columbia are expected to remain stronger than other regions as producers focus on the reservoirs offering the highest hydrocarbon liquids content. High Arctic will continue its efforts to increase the proportion of its work conducted on oil wells where snubbing is needed on higher pressure wells.
Deploying High Arctic’s 250K UB units is part of the strategy in 2013 to increase the Canadian revenue, which has been challenging in the past as the demand for the rigs has been limited by the number of wells needing their high pushing capacity. The longer horizontal multi-stage fracturing techniques create new opportunities for these rigs as the horizontal well lengths can exceed 6000 meters and the longer horizontal lengths strain the capacity of coiled tubing. Each of High Arctic’s three 250K UB units have a high push and pull capability and high torque rotary drive and are not constrained by the length of a coil spool, thus providing a possible opportunity to extend the lateral length. The Corporation continues to actively market these units as a completions solution for both oil and natural gas wells and future work has been contracted to commence in June, 2013 for a period of approximately four months.
Based on the current market environment, the outlook for High Arctic is for flat EBITDA for the remainder of 2013 as compared to the last three quarters of 2012.
Selected Quarterly Financial Information
The following is a summary of selected financial information of the Corporation for the last eight completed quarters:
| $ (millions, except per share amounts) |
Mar 31, 2013 |
Dec 31, 2012 |
Sep 30, 2012 |
Jun 30, 2012 |
Mar 31, 2012 |
Dec 31, 2011 |
Sep 30, 2011 |
Jun 30, 2011 |
||
| Revenue |
44.8 |
38.6 |
35.8 |
29.6 |
42.2 |
37.1 |
29.3 |
24.9 |
||
| Adjusted EBITDA |
12.6 |
10.0 |
10.1 |
5.2 |
14.3 |
11.2 |
7.8 |
3.9 |
||
| Net earnings (loss) |
8.4 |
5.9 |
6.5 |
5.7 |
10.7 |
7.8 |
3.0 |
(0.1) |
||
| per share (basic) |
0.17 |
0.12 |
0.13 |
0.13 |
0.23 |
0.17 |
0.07 |
(0.01) |
||
| per share (diluted) |
0.17 |
0.12 |
0.12 |
0.13 |
0.22 |
0.16 |
0.06 |
(0.00) |
||
| Funds provided from operations |
11.2 |
8.7 |
9.4 |
3.4 |
13.4 |
10.9 |
6.0 |
2.5 |
||
Key Financial Measures
This Press Release contains references to certain financial measures that do not have a standardized meaning prescribed by IFRS or previous Canadian GAAP and may not be comparable to the same or similar terms used by other companies. High Arctic uses these financial measures to assess performance and believes these measures provide useful supplemental information to shareholders’ and investors. These financial measures are computed on a consistent basis for each reporting period and include the following:
EBITDA
Management believes that, in addition to net earnings reported in the consolidated statement of earnings, EBITDA (earnings before interest, taxes and depreciation and amortization) is a useful supplemental measure of the Corporation’s performance prior to consideration of how operations are financed or how results are taxed or how depreciation and amortization affects results. EBITDA is not intended to represent net earnings calculated in accordance with IFRS.
Adjusted EBITDA
This measure is used by management to analyze EBITDA (as referred to above) prior to the effect of share-based compensation, gain on sale of assets or investments, foreign exchange gains or losses and other non-recurring charges, and is not intended to represent net earnings as calculated in accordance with IFRS. The following tables provide a quantitative reconciliation of consolidated net earnings to EBITDA and Adjusted EBITDA for the three months ended March 31:
|
Three months ended March 31, 2013 |
Three months ended March 31, 2012 |
|||
| Net earnings |
8.4 |
10.7 |
||
| Add: | ||||
| Interest and finance expenses |
0.2 |
0.2 |
||
| Income taxes |
1.2 |
0.8 |
||
| Amortization |
2.6 |
2.3 |
||
| EBITDA |
12.4 |
|
14.0 |
|
| Add (deduct): | ||||
| Share-based compensation |
0.2 |
0.4 |
||
| Foreign exchange (gain) loss |
– |
(0.1) |
||
| Adjusted EBITDA |
12.6 |
|
14.3 |
Operating Earnings
Management believes that in addition to net earnings, operating earnings reported in the consolidated statements of earnings is a useful supplemental measure as it provides an indication of the results generated by High Arctic’s principal business activities prior to consideration of how those activities are financed or how the results are taxed. Operating earnings is not intended to represent net earnings calculated in accordance with IFRS.
Funds Provided from Operations
Management believes that, in addition to net cash generated from operating activities as reported in the consolidated statements of cash flows, cash flow from operating activities before working capital adjustments (funds provided from operations) is a useful supplemental measure as it provides an indication of the funds generated by High Arctic’s principal business activities prior to consideration of changes in items of working capital.
This measure is used by management to analyze funds provided from operating activities prior to the net effect of changes in items of non-cash working capital, and is not intended to represent net cash generated from operating activities as calculated in accordance with IFRS. The following tables provide a quantitative reconciliation of net cash generated from operating activities to funds provided from operations for the three months ended March 31:
|
Three months ended March 31, 2013 |
Three months ended March 31, 2012 |
|||
| Net cash generated from operating activities |
2.8 |
9.1 |
||
| Add: | ||||
| Net changes in items of non-cash working capital |
8.4 |
4.3 |
||
| Funds provided from operations |
11.2 |
|
13.4 |
Net cash
Net cash is used by management to analyze the amount by which cash and cash equivalents exceed the total amount of debt. The amount, if any, is calculated as cash and cash equivalents less total gross debt.
The following tables provide a quantitative reconciliation of cash and cash equivalents to net cash as at March 31:
|
March 31, 2013 |
March 31, 2012 |
|||
| Cash and cash equivalents |
23.4 |
22.5 |
||
| Less: | ||||
| Long term debt |
(13.8) |
(16.0) |
||
| Net cash |
9.6 |
|
6.5 |
Forward-Looking Statements
This news release may contain forward-looking statements relating to expected future events and financial and operating results of the Corporation that involve risks and uncertainties. Actual results may differ materially from management expectations, as projected in such forward-looking statements for a variety of reasons, including market and general economic conditions and the risks and uncertainties detailed in both the Corporation’s Management Discussion and Analysis for the three months ended March 31, 2013 and in the Annual Information Form for the year ended December 31, 2012 found on SEDAR (www.sedar.com). Due to the potential impact of these factors, the Corporation disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law.
About High Arctic
The Corporation is a global provider of specialized oilfield equipment and services, including drilling, completion and workover operations. Based in Red Deer, Alberta, High Arctic has domestic operations throughout western Canada and international operations located in Papua New Guinea.
Further Information
A full copy of the results of the Corporation including the Management’s Discussion and Analysis and the Condensed Consolidated Interim Financial Statements for the three months ended March 31, 2013, can be found on the Investor Relations page of High Arctic’s website at haes.ca or at www.sedar.com.
Ken Olson
Chief Financial Officer
(403) 340-9825
ken.olson@dev.haes.ca
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