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Cathedral Energy Services Reports Results for 2018 Q3

DRUCKEN

/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

CALGARY, Nov. 8, 2018 /CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) announces its consolidated financial results for the three and nine months ended September 30, 2018 and 2017.  Dollars in 000's except per share amounts.

This news release contains "forward-looking statements" within the meaning of applicable Canadian securities laws.  For a full disclosure of forward-looking statements and the risks to which they are subject, see "Forward-Looking Statements" later in this news release.

FINANCIAL HIGHLIGHTS

Dollars in 000's except per share amounts





Three months ended September 30  


Nine months ended September 30  



2018


2017


2018


2017

Revenues

$

42,570

$

36,015

$

117,700

$

108,693

Adjusted gross margin % (1)


16%


18%


10%


18%

Adjusted EBITDAS (1)

$

6,190

$

3,909

$

8,648

$

13,068

Basic and diluted per share

$

0.13

$

0.08

$

0.17

$

0.28

As % of revenues


15%


11%


7%


12%

Cash flow - operating activities

$

1,926

$

21

$

327

$

1,815

Earnings (loss) before income taxes

$

3,846

$

1,990

$

(33)

$

6,016

Basic and diluted per share

$

0.08

$

0.04

$

-

$

0.13

Net earnings

$

3,001

$

1,810

$

797

$

4,577

Basic and diluted per share

$

0.06

$

0.04

$

0.02

$

0.10

Equipment additions - cash basis

$

4,140

$

3,518

$

12,920

$

7,065

Weighted average shares outstanding









Basic (000s)


49,468


48,916


49,437


46,836

Diluted (000s)


49,474


49,035


49,459


46,947
















September 30  

2018  


December 31  

2017   

Working capital





$

32,970

$

31,016

Total assets





$

134,077

$

121,630

Loans and borrowings excluding current portion





$

7,028

$

46

Shareholders' equity





$

103,465

$

101,391










(1) Refer to "NON-GAAP MEASUREMENTS"






 

2018 Q3 KEY TAKEAWAYS

Q3 revenues increased 18% from $36,015 in 2017 Q3 to $42,570 in 2018 Q3 and year-to-date increased 8% from $108,693 in 2017 to $117,700 in 2018.

Adjusted gross margin for Q3 decreased to 16% from 18% in 2017 due to higher rentals of specialty equipment for the Canadian market. 

The Company had a significant sequential increase in adjusted gross margin from an average of 7% in the first half of 2018 to 16% 2018 Q3. The sequential increase was due to reduced repair expenses in Q3 and lower equipment rentals as a result of the company having additional equipment available due to its capital expenditure program.  As a result the year-to-date adjusted gross margin improved to 10% from 7% year-to-date at June 30, 2018.

Adjusted EBITDAS increased from $3,909 in 2017 Q3 to $6,190 in 2018 Q3, an increase of 58%.  Year-to-date adjusted EBITDAS decreased from $13,068 in 2017 to $8,648 in 2018.

The Company continues to make investments in equipment to relieve capacity constraints and to improve equipment utilization, reliability and performance.  Substantially all of these expenditures are targeted at the U.S. market.

OUTLOOK

Our financial results for 2018 Q3 were greatly improved compared to the first half of the year.   In Q2 we noted that we had implemented a number of cost saving measures which started to positively impact results in late Q2. These included better controls on expenses, improving operational efficiencies and engineering improvements to our equipment to improve durability and performance and mitigate equipment repair and refurbishment costs.  The on-going focus in these areas continued to positively impact our results in Q3.

In October we elected to close our Washington Pennsylvania (PA) district office and shop.  Cathedral fully intends to remain active in the U.S. Northeast market, however, both motors and MWD equipment for the area will now be provisioned from our Oklahoma City, Oklahoma (OKC) facility.  Our MWD equipment for all of our U.S. operations has been provided from OKC since 2016.  This decision was largely based on the activity levels in the PA area compared to other regions we operate in addition to the type of drilling involved. For example, there are approximately 75 rigs currently running in the PA region (Utica and Marcellus basins) compared to the Permian basin with approximately 490 rigs.  We believe that by deploying our PA equipment to other locations it will provide us with further growth opportunities in these areas in addition to allowing us to gain cost and organizational efficiencies.

By the end of October we have deployed 92 of our next generation 7" CLAW-XT™ high performance drilling motors in our fleet.  These motors generally garner premium pricing over prior generation motors and will allow us to grow our job capacity. Substantially all of this equipment has been targeted at the U.S. market.  We continued to make enhancements to our motors and certain MWD equipment in Q3 aimed at reducing operating costs.

In Q3 we rolled out the first set of Cathedral Linear Pulser tools as an add-on to our FUSION™ Measurement-While-Drilling (MWD) platform.  This technology will be our main MWD pulse telemetry platform going forward and will reduce our deployment and repair costs as we are currently dependent on third party suppliers with our capacity constrained existing linear pulse telemetry platform.  We are also continuing to deploy upgrades to our existing Dual Telemetry (DT) MWD tool in our operations which are aimed at improving our MWD equipment performance and reliability.  In Q4 we will be implementing an add-on device to our motors to allow logging drilling bit RPM.   This additional downhole information coupled with analysis by our Drilling Engineering team provides another means to help our customers improve their drilling performance.  This additional downhole information will also contribute to further development of our motor technology.

Through having additional equipment to deploy into 2019 and our continued focus on technology and our capabilities to improve drilling performance we are confident we are well positioned for the remainder of 2018 and into 2019.

2018 CAPITAL PROGRAM                                                                                                                   

During the nine months ended September 30, 2018 the Company invested $12,920 (2017 - $7,065) in equipment and $1,235 (2017 - $326) in new technology development primarily related to MWD systems. 

The following table details the current period's net equipment additions:




Nine months ended
September 30, 2018

Equipment additions:


Motors

$

7,403

MWD


5,053

Other


464

Total cash additions


12,920

Less: proceeds on disposal of equipment (excluding capital lease settlements)


(10,471)

Net equipment additions (1)

$

2,449

(1)See "NON-GAAP MEASUREMENTS"



 

Cathedral's current 2018 capital budget totals $18,900, which includes $1,650 for intangible additions.  The total net capital additions is estimated to be approximately $8,400.  Delivery lead times on capital items, including component parts for self-constructed assets, range from 60 to 180 days. 

RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30






Revenues


2018


2017






Canada

$

7,876

$

9,186






United States


34,694


26,829






Total

$

42,570

$

36,015






 

Revenues     2018 Q3 revenues were $42,570, which represented an increase of $6,555 or 18% from 2017 Q3 revenues of $36,015

Canadian revenues (excluding motor rental revenues) decreased to $7,697 in 2018 Q3 from $7,978 in 2017 Q3; a 14% decrease.  This decrease was the result of: i) a 15% decrease in activity days to 953 in 2018 Q3 from 1,120 in 2017 Q3; net of ii) a 13% increase in the average day rate to $8,076 in 2018 Q3 from $7,123 in 2017 Q3. 

The average active land rig count in Canada was up 1% in 2018 Q3 compared to 2017 Q3 (source: Baker Hughes).  Cathedral's activity levels relative to the industry were impacted by the scope of its customer drilling programs and their geographical focus relative to the overall industry.  The increase in day rates was due to general increases in customer pricing.

U.S. Directional Drilling revenues (excluding motor rental revenues) increased to $34,669 in 2018 Q3 from $26,630 in 2017 Q3; a 30% increase.  This increase was the result of: i) an 18% increase in activity days to 2,634 in 2018 Q3 from 2,233 in 2017 Q3; and ii) a 10% increase the average day rate to $13,162 in 2018 Q3 from $11,926 in 2017 Q3 (when converted to Canadian dollars). 

The average active land rig count for the U.S. was up 13% in 2018 Q3 compared to 2017 Q3 (source: Baker Hughes).  The Company experienced an 18% increase in activity days resulting in a slight increase in market share compared to 2017 Q3.  The market share increase was due  to the efforts of sales and marketing staff and improved performance on client jobs.  Day rates in United States Dollars ("USD") increased to $10,069 USD in 2018 Q3 from $9,520 USD in 2017 Q3; a 6% increase.  The increase in day rates was due to general increases in customer pricing and increased equipment damage recoveries.    

Motor rentals in Canada and the U.S. declined to $205 in 2018 Q3 compared to $1,408 in 2017 Q3 primarily as a result of reduced motor rentals from  Canadian customers in 2018 Q3 resulting from a temporary pause in their Canadian drilling programs.

Gross margin and adjusted gross margin     Gross margin for 2018 Q3 was 9% compared to 10% in 2017 Q3.  Adjusted gross margin (see Non-GAAP Measurements) for 2018 Q3 was $6,688 or 16% compared to $6,516 or 18% for 2017 Q3.   

Adjusted gross margin, as a percentage of revenue, decreased due to higher equipment rentals and to a lesser extent higher equipment repairs and an increase in the fixed component of cost of sales. The rental expense increase in the quarter was higher primarily due to rentals of specialty equipment for the Canadian market.  Repairs increased in part due to a more demanding drilling environment experienced in 2018 Q3. The increase in the fixed component of cost of sales was mostly attributable to increased office and shop payroll and other labour related costs.

Depreciation allocated to cost of sales decreased to $2,627 in 2018 Q3 from $2,748 in 2017 Q3.  Depreciation included in cost of sales as a percentage of revenue was 6% for 2018 Q3 and 8% in 2017 Q3.

Selling, general and administrative expenses ("SG&A")     SG&A expenses were $3,457 in 2018 Q3; a decrease of $572 compared with $4,029 in 2017 Q3.   As a percentage of revenue, SG&A was 8% in 2018 Q3 compared to 11% in 2017 Q3.  SG&A decreased primarily due to U.S. state sales taxes on intercompany equipment rentals which were significantly higher in 2017 Q3.  Cathedral's Canadian entity owns all Cathedral's downhole drilling equipment and rents it to the U.S. entity and is subject to state sales tax on these amounts

Technology group expenses     Technology group expenses are related to new product development and supporting and upgrading existing technology. Technology group expenses consist of salaries and related benefits and burdens as well as shop supplies.  Technology group activities spent on new product development are capitalized as intangible assets.  Technology group expenses were $513 in 2018 Q3; a decrease of $60 compared with $573 in 2017 Q3. Expenses decreased due to a higher proportion of the group's activity being on new product development.  In 2018 Q3, $268 of technology group expenses related to new product development were capitalized as intangible assets (2017 Q3 - $nil).

Gain on disposal of equipment     During 2018 Q3, the Company had a gain on disposal of equipment of $3,250 compared to $1,907 in 2017 Q3.  These gains mainly relate to equipment lost-in-hole.  Proceeds from clients on lost-in-hole equipment are based on amounts specified in service agreements and, in most cases; these proceeds exceed the net book value of the equipment and result in a gain.  The timing of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter.  In 2018 Q3, the Company received proceeds on lost-in-hole recoveries of $3,872 (2017 Q3 - $2,546).

Finance costs     Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $118 for 2018 Q3 versus $129 for 2017 Q3. 

Foreign exchange     The Company had a foreign exchange gain of $674 in 2018 Q3 compared to $1,059 in 2017 Q3 due to the fluctuations of the Canadian dollar relative to the U.S. dollar.  The Company's foreign operations are denominated in USD and therefore, upon consolidation, gains and losses due to fluctuations in the foreign currency exchange rates are recorded as other comprehensive income on the balance sheet as a component of equity.  However, gains and losses in the Canadian entity on U.S. denominated intercompany balances continue to be recognized in the statement of comprehensive income (loss).  Included in the 2018 Q3 foreign currency gains are unrealized gain of $624 (2017 Q3 - $1,142) related to intercompany balances.

Income tax     For 2018 Q3, the Company had an income tax expense of $845 compared to $173 in 2017 Q3. 

The 2018 Q3 effective tax rate excluding adjustments for prior periods was 22%.  The effective tax rate is impacted by one legal entity having pre-tax income and the other having  pre-tax losses.  Income tax expense is booked based upon expected annualized effective rates based upon the statutory rates of 27% for Canada and 23% for the U.S. 

RESULTS OF OPERATIONS – NINE MONTHS ENDED SEPTEMBER 30






Revenues


2018


2017






Canada

$

22,977

$

24,567






United States


94,723


84,126






Total

$

117,700

$

108,693

 

Revenues      2018 revenues were $117,700, which represented an increase of $9,007 or 8% from 2017 revenues of $108,693

Canadian revenues (excluding motor rental revenues) decreased to $20,790 in 2018 from $21,428 in 2017; a 3% decrease.  This decrease was the result of: i) a 15% decrease in activity days to 2,629 in 2018 from 3,076 in 2017; net of ii) an 14% increase in the average day rate to $7,908 in 2018 from $6,966 in 2017. 

The average active land rig count in Canada was down 5% in 2018 compared to 2017 (source: Baker Hughes).  Cathedral's lower activity levels relative to the industry were impacted by the scope of its customer drilling programs and geographical focus relative to the overall industry The increase in day rates was due to general increases in customer pricing.

U.S. Directional Drilling revenues (excluding motor rental revenues) increased to $93,632 in 2018 from $83,451 in 2017; a 12% increase.  This increase was the result of: i) a 5% increase in activity days to 7,705 in 2018 from 7,329 in 2017; and ii) a 7% increase in the average day rate to $12,152 in 2018 from $11,386 in 2017 (when converted to Canadian dollars).      

The average active land rig count for the U.S. was up 21% in 2018 compared to 2017 (source: Baker Hughes).  The Company experienced a 5% increase in activity days relative to the industry that resulted in a decrease in market share over this period.  This decrease in market share was largely due to equipment constraints starting in 2017 that extended into 2018 Q3.  The Company's investment in new equipment as well as client changes in the timing and scope of their drilling programs  resulted in an improvement in market share in 2018 Q3.  Day rates in USD increased to $9,430 USD in 2018 from $8,707 USD in 2017; an 8% increase.  The increase in day rates was primarily due to customer price increases.   

Motor rentals in Canada and the U.S. declined slightly to $3,277 in 2018 compared to $3,814 in 2017 primarily as a result of reduced motor rentals from  Canadian customers in 2018 Q3 resulting from a temporary pause in their Canadian drilling programs.

Gross margin and adjusted gross margin     Gross margin for 2018 was 4% compared to 11% in 2017.  Adjusted gross margin (see Non-GAAP Measurements) for 2018 was $12,081 or 10% compared to $20,075 or 18% for 2017.   

Adjusted gross margin, as a percentage of revenue, decreased due to higher equipment repairs, higher equipment rentals and specific one-time credits related to performance issues with certain U.S. clients in Q2.   Rental expenses were adversely impacted by specialty equipment rentals in Q2 that were billed through to clients with a lower mark-up than typical margins.  The impact of these rentals and the credits on U.S. work caused 1% of the decrease in adjusted gross margin.

The remaining decrease in adjusted gross margin was primarily from increased equipment repairs in 2018 Q1 and Q2.  Repairs increased in part due to a more demanding drilling environment and to a lesser extent upgrades being made to the Company's existing equipment fleet. In addition, there was an increase in the fixed component of cost of sales that were 2% higher on a percentage of revenue basis in 2018 compared to 2017.  This increase was mostly attributable to office and shop payroll and other labour related costs.

The Company had a significant sequential increase in adjusted gross margin from an average of 7% in the first half of 2018 to 16% 2018 Q3. The sequential increase was due to reduced repair expenses in Q3 and lower equipment rentals as a result of the company having additional equipment available due to its capital expenditure program.  As a result the year-to-date adjusted gross margin improved to 10% from 7% year-to-date at June 30, 2018.

Depreciation allocated to cost of sales decreased to $7,415 in 2018 from $8,128 in 2017.  Depreciation included in cost of sales as a percentage of revenue was 6% for 2018 and 8% in 2017.

Selling, general and administrative expenses ("SG&A")     SG&A expenses were $10,991 in 2018; an increase of $95 compared with $10,896 in 2017.   As a percentage of revenue, SG&A was 9% in 2018 compared to 10% in 2017.  SG&A increased primarily due to wage increases, including the reinstatement of previous wage rollbacks, increased U.S. health benefits and to a lesser extent, staff additions offset by lower U.S. state sales tax expenditures.  Staffing costs included in SG&A include executive, sales, accounting, human resources, payroll, safety and related support staff.

Technology group expenses     Technology group expenses are related to new product development and supporting and upgrading existing technology. Technology group expenses consist of salaries and related benefits and burdens as well as shop supplies.  Technology group activities spent on new product development are capitalized as intangible assets.  Technology group expenses were $1,741 in 2018; an increase of $102 compared with $1,639 in 2017. Technology group expenses increased primarily due to wage increases, including the reinstatement of previous wage rollbacks and new staff additions.  In 2018, an additional $729 of technology group expenses related to new product development were capitalized as intangible assets (2017 - $nil).

Gain on disposal of equipment     During 2018, the Company had a gain on disposal of equipment of $8,834 compared to $5,198 in 2017.  These gains mainly relate to equipment lost-in-hole.  Proceeds from clients on lost-in-hole equipment are based on amounts specified in service agreements and, in most cases; these proceeds exceed the net book value of the equipment and result in a gain.  The timing of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter.  In 2018, the Company received proceeds on lost-in-hole recoveries of $10,471 (2017 - $6,417).

Finance costs     Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $262 for 2018 versus $527 for 2017.  The decrease in finance costs relate to the reduction of amounts drawn on the Company's credit facility.  In 2017 Q1, the Company finalized the sale of its Flowback and Production Testing ("F&PT)" assets, raised funds through a private placement of shares and repaid the outstanding long-term debt.

Foreign exchange     The Company had a foreign exchange loss of $(415) in 2018 compared to a gain of $1,976 in 2017 due to the fluctuations of the Canadian dollar relative to the U.S. dollar.  The Company's foreign operations are denominated in USD and therefore, upon consolidation, gains and losses due to fluctuations in the foreign currency exchange rates are recorded as other comprehensive income on the balance sheet as a component of equity.  However, gains and losses in the Canadian entity on U.S. denominated intercompany balances continue to be recognized in the statement of comprehensive income (loss).  Included in the 2018 foreign currency gains are unrealized loss of $446 (2017 - gain of $2,016) related to intercompany balances.

Income tax     For 2018, the Company had an income tax recovery of $830 compared to expense of $1,297 in 2017.  Included in the 2018 provision was recoveries of $361 related to provisions of prior periods (2017 recovery of $12).

The 2018 effective tax rate excluding adjustments for prior periods is negative and on a percentage basis not meaningful.  The effective tax rate is impacted by one legal entity having pre-tax income and the other having  pre-tax losses.   Income tax expense is booked based upon expected annualized effective rates based upon the statutory rates of 27% for Canada and 23% for the U.S.

LIQUIDITY AND CAPITAL RESOURCES

Overview     On an annualized basis, the Company's principal source of liquidity is cash generated from operations.  In addition, the Company has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity.   For the nine months ended September 30, 2018, the Company had funds from operations of $327 (2017 – $1,815).  The decrease in funds is mainly due to reduced profits offset by change in non-cash working capital.  For the three months ended September 30, 2018, the Company had funds from operations of $1,926 (2017 Q3 - $21).

Working capital     At September 30, 2018 the Company had working capital of $32,970 (December 31, 2017 - $31,016).  The increase in working capital level was primarily due to increases in cash and accounts payable offset by increases in trade receivables and inventory relative to December 31, 2017. 

Credit facility     In December 2017, the Company signed a new credit facility (the "Facility") with a new lending syndicate.  The Facility consists of a $5 million operating facility and $15 million extendible revolving credit facility and expires December 31, 2019.  The Company extended the credit facility to December 31, 2020 under the same terms and conditions as the Facility.  The Facility is secured by a general security agreement over all present and future personal property.

The financial covenants associated with the amended Facility are:

Consolidated funded debt to consolidated Facility EBITDA (as defined in the Facility agreement) ratio shall not exceed 3.0:1; and
Consolidated interest coverage ratio shall not be less than 2.5:1.

The Facility bears interest at the financial institution's prime rate plus 0.75% to 2.25% or bankers' acceptance rate plus 1.75% to 3.00% with interest payable monthly.  Interest rate spreads for the Facility depend on the level of funded debt to the 12 month trailing Facility EBITDA.  The Facility provides a means to lock in a portion of the debt at interest rates through bankers' acceptance ("BA") based on the interest rate spread on the date the BA was entered into. 

At September 30, 2018, the Company had drawn $7,000 of its revolving credit facility. The Company's Funded Debt level under the lending agreement was $2,669.  For the rolling twelve months ended September 30, 2018, Facility EBITDA was $16,384.

Ratio 

Actual

Required

Consolidated funded debt to consolidated Facility EBITDA ratio     

0.2:1

3.0:1 maximum

Consolidated interest coverage ratio

39.1:1

2.5:1 minimum

 

Based on current available information, Cathedral expects to comply with all covenants for the next twelve months.

Contractual obligations     In the normal course of business, the Company incurs contractual obligations and those obligations are disclosed in the Company's MD&A for the year ended December 31, 2017.  As at September 30, 2018, the Company had a commitment to purchase approximately $1,556 of equipment.  Cathedral anticipates expending these funds 2018 Q4 based upon current delivery lead times.

Share capital     At November 8, 2018, the Company has 49,468,117 common shares and 3,725,667 options outstanding with a weighted average exercise price of $1.19.

FORWARD LOOKING STATEMENTS

This news release contains certain forward-looking statements and forward-looking information (collectively referred to herein as "forward-looking statements") within the meaning of applicable Canadian securities laws.  All statements other than statements of present or historical fact are forward-looking statements.  Forward-looking statements are often, but not always, identified by the use of words such as "anticipate", "achieve", "believe", "plan", "intend", "objective", "continuous", "ongoing", "estimate", "outlook", "expect", "may", "will", "project", "should" or similar words suggesting future outcomes.  In particular, this news release contains forward-looking statements relating to, among other things: Cathedral fully intends to remain active in the U.S. Northeast market; FUSION™ Measurement-While-Drilling (MWD) platform will be our main MWD pulse telemetry platform going forward and will reduce our deployment and repair costs; in Q4 we will be implementing an add-on device to our motors to allow logging drilling bit RPM; this additional downhole information will also contribute to further development of our motor technology; we are confident we are well positioned for the remainder of 2018 and into 2019; projected capital expenditures and commitments and the financing thereof; and Cathedral expects to comply with all covenants during 2018.

The Company believes the expectations reflected in such forward-looking statements are reasonable as of the date hereof but no assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon.

Various material factors and assumptions are typically applied in drawing conclusions or making the forecasts or projections set out in forward-looking statements.  Those material factors and assumptions are based on information currently available to the Company, including information obtained from third party industry analysts and other third party sources.  In some instances, material assumptions and material factors are presented elsewhere in this news release in connection with the forward-looking statements.  You are cautioned that the following list of material factors and assumptions is not exhaustive.  Specific material factors and assumptions include, but are not limited to:

  • the performance of Cathedral's businesses, including current business and economic trends;
  • oil and natural gas commodity prices and production levels;
  • alternatives to and changing demand for hydrocarbon products;
  • performance obligation to clients;
  • capital expenditure programs and other expenditures by Cathedral and its customers;
  • currency exchange and interest rates;
  • the ability of Cathedral to service its debt;
  • the ability of Cathedral to retain and hire qualified personnel;
  • the ability of Cathedral to obtain parts, consumables, equipment, technology, and supplies in a timely manner to carry out its activities;
  • the ability of Cathedral to maintain good working relationships with key suppliers;
  • the ability of Cathedral to market its services successfully to existing and new customers and reliance on major customers;
  • risks associated with technology development and intellectual property rights;
  • the ability of Cathedral to maintain safety performance;
  • the ability of Cathedral to obtain timely financing on acceptable terms;
  • the ability to obtain sufficient insurance coverage to mitigate operational risks;
  • risks associated with acquisitions and business development efforts;
  • environmental risks;
  • risks associated with information technology systems;
  • changes under governmental regulatory regimes and tax, environmental and other laws in Canada and U.S.; and
  • competitive risks.

Forward-looking statements are not a guarantee of future performance and involve a number of risks and uncertainties some of which are described herein.  Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause the Company's actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements.  These risks and uncertainties include, but are not limited to, the risks identified in this news release and in the Company's Annual Information Form under the heading "Risk Factors".  Any forward-looking statements are made as of the date hereof and, except as required by law, the Company assumes no obligation to publicly update or revise such statements to reflect new information, subsequent or otherwise.

All forward-looking statements contained in this news release are expressly qualified by this cautionary statement. Further information about the factors affecting forward-looking statements is available in the Company's current Annual Information Form that has been filed with Canadian provincial securities commissions and is available on www.sedar.com.

NON-GAAP MEASUREMENTS

Cathedral uses certain performance measures throughout this document that are not defined under GAAP. Management believes that these measures provide supplemental financial information that is useful in the evaluation of Cathedral's operations and are commonly used by other oilfield companies. Investors should be cautioned, however, that these measures should not be construed as alternatives to measures determined in accordance with GAAP as an indicator of Cathedral's performance. Cathedral's method of calculating these measures may differ from that of other organizations, and accordingly, may not be comparable.

The specific measures being referred to include the following:

i)

"Adjusted gross margin" - calculated as gross margin plus non-cash items (depreciation and share-based compensation); is considered a primary indicator of operating performance (see tabular calculation);

ii) 

"Adjusted gross margin %" - calculated as adjusted gross margin divided by revenues; is considered a primary indicator of operating performance (see tabular calculation);

iii) 

"Total Adjusted EBITDAS" - defined as earnings before finance costs, unrealized foreign exchange on intercompany balances, taxes,  depreciation, write-down of goodwill, write-down of equipment, write-down of inventory and share-based compensation; is considered an indicator of the Company's ability to generate funds flow from operations prior to consideration of how activities are financed, how the results are taxed and measured and non-cash expenses (see tabular calculation).  This measure includes both discontinued F&PT operations and continuing Directional Drilling operations;

iv)  

"Adjusted EBITDAS from discontinued operations" – Total Adjusted EBITDAS as calculated above from discontinued F&PT operations only;

v)  

"Adjusted EBITDAS from continuing operations" – Total Adjusted EBITDAS as calculated above for ongoing Directional Drilling as well as corporate administrative costs;

vi) 

"Net equipment additions" – is equipment additions expenditures less proceeds from equipment lost down-hole.  Cathedral uses net equipment additions to assess net cash flows related to the financing of Cathedral's equipment additions.

 

The following tables provide reconciliations from GAAP measurements to non-GAAP measurements referred to in this news release:

Adjusted gross margin




Three months ended September 30  

Nine months ended September 30  



2018


2017


2018


2017

Gross margin

$

4,010

$

3,755

$

4,542

$

11,904

Add non-cash items included in cost of sales:









Depreciation 


2,627


2,748


7,415


8,128

Share-based compensation


51


13


124


43

Adjusted gross margin

$

6,688

$

6,516

$

12,081

$

20,075

Adjusted gross margin %


16%


18%


10%


18%










Total AdjustedEBITDAS


Three months ended September 30  

Nine months ended September 30  



2018


2017


2018


2017

Earnings (loss) before income taxes

$

3,846

$

1,990

$

(33)

$

6,016

Add:









Depreciation included in cost of sales


2,627


2,748


7,415


8,128

Depreciation included in selling, general and administrative
expenses


54


25


131


75

Share-based compensation included in cost of sales


51


13


124


43

Share-based compensation included in selling, general and
administrative expenses


118


43


303


139

Finance costs


118


129


262


527

Subtotal


6,814


4,948


8,202


14,928

Unrealized foreign exchange (gain) loss on intercompany
balances


(624)


(1,142)


446


(2,016)

Non-recurring expenses


-


102


-


278

Adjusted EBITDAS from continuing operations


6,190


3,908


8,648


13,190

Adjusted EBITDAS from discontinued operations


-


1


-


(122)

Total Adjusted EBITDAS

$

6,190

$

3,909

$

8,648

$

13,068

 


CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
September 30, 2018 and December 31, 2017
Dollars in '000s
(unaudited)








September 30

2018


December 31
 2017

Assets










Current assets:





Cash

$

4,796

$

2,683

Restricted cash equivalents


-


1,514

Trade receivables


36,477


33,885

Current taxes recoverable


-


86

Prepaid expenses


1,319


1,460

Inventories


13,578


11,128

Total current assets


56,170


50,756

Equipment


62,209


58,383

Intangible assets


2,924


1,953

Deferred tax assets


12,774


10,538

Total non-current assets


77,907


70,874

Total assets

$

134,077

$

121,630






Liabilities and Shareholders' Equity





Current liabilities:





Operating loan 

$

-

$

1,233

Trade and other payables


22,517


17,926

Current taxes payable


429


-

Loans and borrowings 


100


233

Provision for settlements, current


154


348

Total current liabilities


23,200


19,740

Loans and borrowings 


7,028


46

Provision for settlements, long-term


384


453

Total non-current liabilities


7,412


499

Total liabilities


30,612


20,239






Shareholders' equity:





Share capital 


88,155


88,059

Contributed surplus


10,203


9,801

Accumulated other comprehensive income


8,923


8,144

Deficit


(3,816)


(4,613)

Total shareholders' equity


103,465


101,391

Total liabilities and shareholders' equity

$

134,077

$

121,630

 


CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Three and nine months ended September 30, 2018 and 2017
Dollars in '000s except per share amounts
(unaudited)





Three months ended September 30 

 Nine months ended September 30 



2018


2017


2018


2017



















Revenues

$

42,570

$

36,015

$

117,700

$

108,693

Cost of sales:









Direct costs


(35,882)


(29,499)


(105,619)


(88,618)

Depreciation


(2,627)


(2,748)


(7,415)


(8,128)

Share-based compensation


(51)


(13)


(124)


(43)

Total cost of sales


(38,560)


(32,260)


(113,158)


(96,789)

Gross margin


4,010


3,755


4,542


11,904

Selling, general and administrative expenses:









Direct costs


(3,285)


(3,961)


(10,557)


(10,682)

Depreciation


(54)


(25)


(131)


(75)

Share-based compensation


(118)


(43)


(303)


(139)

Total selling, general and administrative expenses


(3,457)


(4,029)


(10,991)


(10,896)



553


(274)


(6,449)


1,008

Technology group expenses


(513)


(573)


(1,741)


(1,639)

Gain on disposal of equipment


3,250


1,907


8,834


5,198

Earnings from operating activities


3,290


1,060


644


4,567

Finance costs


(118)


(129)


(262)


(527)

Foreign exchange gain (loss)


674


1,059


(415)


1,976

Earnings (loss) before income taxes


3,846


1,990


(33)


6,016

Income tax recovery (expense):









Current


(956)


2


(1,391)


(26)

Deferred


111


(175)


2,221


(1,271)

Total income tax recovery (expense)


(845)


(173)


830


(1,297)

Net earnings from continuing operations


3,001


1,817


797


4,719

Net loss from discontinued operations


-


(7)


-


(142)

Net earnings


3,001


1,810


797


4,577

Other comprehensive income (loss):









Foreign currency translation differences for foreign
operations


(773)


(1,932)


779


(3,579)

Total comprehensive income (loss)

$

2,228

$

(122)

$

1,576

$

998










Net earnings from continuing operations per share









Basic and diluted

$

0.06

$

0.04

$

0.02

$

0.10

Net loss from discontinued operations per share









Basic

$

-

$

-

$

-

$

-

Net earnings per share









Basic and diluted

$

0.06

$

0.04

$

0.02

$

0.10

                                                                           

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three and nine months ended September 30, 2018 and 2017
Dollars in '000s
(unaudited)





 Three months ended September 30 

 Nine months ended September 30 



2018


2017


2018


2017

 Cash provided by (used in): 









 Operating activities: 









 Net earnings from continuing operations 

$

3,001

$

1,817

$

797

$

4,719

 Items not involving cash 









 Depreciation 


2,681


2,773


7,546


8,203

 Share-based compensation 


169


56


427


182

 Income tax expense 


845


173


(830)


1,297

 Gain on disposal of equipment 


(3,250)


(1,907)


(8,834)


(5,198)

 Finance costs 


118


129


262


527

 Unrealized foreign exchange (gain) loss on
intercompany balances 


(624)


(1,142)


446


(2,016)










 Cash flow - continuing operations 


2,940


1,899


(186)


7,714

 Cash flow - discontinued operations 


-


-


-


(135)

 Changes in non-cash operating working capital  


(1,433)


(1,642)


1,358


(6,695)

 Income taxes (paid) refunded 


419


(236)


(845)


931

 Cash flow - operating activities 


1,926


21


327


1,815

 Investing activities: 









 Equipment additions 


(4,140)


(3,518)


(12,920)


(7,065)

 Intangible asset additions 


(415)


(92)


(1,235)


(326)

 Proceeds on disposal of equipment 


3,827


2,565


10,676


6,668

 Proceeds on disposal of discontinued operations 


-


-


-


17,252

 Changes in non-cash investing working capital 


(1,044)


1,429


(1,478)


1,926

 Cash flow - investing activities 


(1,772)


384


(4,957)


18,455

 Financing activities: 









 Change in operating loan 


-


-


(1,232)


(2,105)

 Repayments on loans and borrowings 


(2)


(37)


(153)


(26,395)

 Proceeds on share issuance from bought deal public


-


-


-


13,131

 Proceeds on share issuance from exercise of share options 


-


-


71


4

 Payment on settlements 


-


(249)


(236)


(2,073)

 Restricted cash 


-


-


1,514


-

 Interest paid 


(118)


(129)


(262)


(530)

 Advances of loans and borrowings 


1,500


-


7,000


-

 Cash flow - financing activities 


1,380


(415)


6,702


(17,968)

 Effect of exchange rate on changes on cash 


(56)


(79)


41


(151)

 Change in cash and cash equivalents 


1,478


(89)


2,113


2,151

 Cash, beginning of period 


3,318


4,138


2,683


1,898

 Cash, end of period 

$

4,796

$

4,049

$

4,796

$

4,049

 

Cathedral Energy Services Ltd. (the "Company" or "Cathedral"), based in Calgary, Alberta is incorporated under the Business Corporations Act (Alberta) and operates in the U.S. under Cathedral Energy Services Inc.  The Company is publicly traded on the Toronto Stock Exchange under the symbol "CET".  Cathedral, is a trusted partner to North American energy companies requiring high performance directional drilling services. We work in partnership with our customers to tailor our equipment and expertise to meet their specific geographical and technical needs.  Our experience, technologies and responsive personnel enable our customers to achieve higher efficiencies and lower project costs.  For more information, visit www.cathedralenergyservices.com.

SOURCE Cathedral Energy Services Ltd.

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