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Edited Transcript of HWO.TO earnings conference call or presentation 9-Aug-19 3:00pm GMT

Q2 2019 High Arctic Energy Services Inc Earnings Call

Red Deer Sep 1, 2019 (Thomson StreetEvents) -- Edited Transcript of High Arctic Energy Services Inc earnings conference call or presentation Friday, August 9, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* J. Cameron Bailey

High Arctic Energy Services Inc - President, CEO & Director

* James Robert Hodgson

High Arctic Energy Services Inc - CFO

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Conference Call Participants

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* Elias A. Foscolos

Industrial Alliance Securities Inc., Research Division - Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the High Arctic quarterly results Q2 conference call. I'd now like to turn the meeting over to Cam Bailey. Please go ahead.

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J. Cameron Bailey, High Arctic Energy Services Inc - President, CEO & Director [2]

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Thank you and good morning, everyone. Welcome to the High Arctic's Second Quarter 2019 Conference Call.

Today, I'll be providing an update on the press release we issued on Thursday, August 7, 2019, and will -- following my remarks, Jim Hodgson, our Chief Financial Officer, will be discussing our financial performance for the period. After our formal comments, we will open the call to questions.

And before I begin, I'd like to remind you that certain information presented today may include forward-looking information. Such statements reflect High Arctic's current expectations, estimates, projections and assumptions. These forward-looking statements are not guarantees of future performance. They're subject to certain risks, which could cause actual performance and financial results to materially -- vary materially from those contemplated in the forward-looking statements. For additional information on these risks, take a look at our Annual Information Form under the heading Risk Factors.

So the second quarter is traditionally the spring break-up period characterized by low industry activity, which followed the industry challenges of a combination of extreme cold weather and mandated shut-in production in the -- starting in the Q4 2018 and Q1 2019.

The year began with relative optimism with PSAC forecasting 6,600 wells to be drilled and then revised dramatically downward to a disappointing 5,100 wells, down substantially from the 6,900 wells that were drilled in 2018. Now combined with that is the surplus global crude oil inventories that provide us -- that has provided a bearish sentiment to crude oil prices, and the escalation of U.S.-China trade wars further darken the outlook for crude oil prices with only the Middle East tensions providing some speculative support with a possibility of major supply disruption.

Combining that with low Canadian natural gas prices, which have remained depressed from domestic supplies being plentiful, it being the product of operators developing liquid-rich resource plays, that has resulted in our -- that lower gas price has resulted in a depression on the gas-directed drilling activities, which has affected our pressure support business.

We're faced with a continuation of dim industry fundamentals negatively impacting our business. And I'll again point out some highlights that High Arctic experienced during the quarter. The key bright spot for us is the relentless focus on providing the highest quality of service we can possibly deliver to our clients, and the ultimate measure of that is our safety performance. We are very proud to have worked through the 2019 year without a single lost time incidence and achieved a TRIF in North America of less than 1 and continued with a very strong track record going on 3 years now of 0 for our international operations.

Canada well service -- well servicing business has achieved its highest ever market share based on the hours -- based on hours worked up 14%. Also, Concord Well Service, for its first time in history, worked more hours than any other operator in Q2 with only 6% of the total industry well service fleet. This was achieved while maintaining a 15% contribution margin on this Canadian well service business.

Revenues in North America now represent 57% of our total revenues with approximately 7% of North American revenues coming from the U.S. As I mentioned on previous quarters -- quarterly calls, the entry in the U.S. came with transportation and preparation of equipment and crews, which required a substantial investment incurred in the fourth quarter of 2019 -- trade over in the first half of 2019. Missing from these periods has been consistent work and improved utilization.

We feel that a lot of the hard work is behind us, and we can start enjoy the profits from our investment in the equipment and people. Needless to say, there's -- the opening of U.S. operations has been more difficult than expected.

We have achieved a very solid reputation with operators in the DJ Basin and Bakken and have much more confidence of consistent, predictable work for the equipment and expect to see those benefits in the second half of the year. We're on pace right now to deliver about $1 million a month from U.S. operations.

PNG experienced a change of prime minister. It provided a reason for operators to pause its planning activity around drilling plans with the introduction of uncertainty of the gas agreement underpinning the PNG LNG expansion plans. Good news is that recent government communications with the press have indicated an acceptance of the existing gas agreement and assurances of maintaining the type lines for the -- time lines for the construction of the expansion of the PNG LNG facility. Based on exploration license commitments and the increased optimism ahead for the LNG expansion, we expect drilling activity to be on pace for the ramp-up in 2020.

We are still the sole drilling contractor, active contractor in PNG with Rigs 103 and 104 operating continually through the first half. We achieved 100% utilization, maintained 0 lost time incidents for the first half of the year. Rental and support business continue to benefit from those activities and expect to continue through the balance of 2019.

As mentioned before, Rig 115, 116 are thoroughly actively maintained and are ready to work at -- on immediate notice. We've intentionally done this to be ready for possible drilling by operators requiring to hold acreage with the looming lease expiries needed to be held with drilling activities. And we're now experiencing much more activity with regard to planning of those potential commitment wells.

As a reminder, our Rig 116 came off its take-or-pay contract in November 2018, and we continue to explore other markets where we can redeploy and where we continue to monitor the ramp-up of activity in PNG to -- for that rig to go to work.

High Arctic ended the year with $14.7 million of cash balances, total working capital of $37.5 million or $0.76 per share, providing us with financial resources for additional acquisition opportunities.

With that, I'd like to turn the call over to Jim to discuss our financial results in more detail.

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James Robert Hodgson, High Arctic Energy Services Inc - CFO [3]

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Thanks, Cam. Performance of our Production Services segment and our PNG operations resulted in consolidated revenue of $46.6 million in the quarter, which generated $4 million in adjusted EBITDA. This compares to $47.1 million and $13.9 million in revenue and adjusted EBITDA, respectively, for the second quarter of 2018, which experienced higher contracted revenue and activity from our PNG drilling operations.

The revenue in our Production Services division increased 17% to $21 million from $18 million in the second quarter of 2018. This increase was driven by a gain in market share with High Arctic having the highest number of service hours of Canadian well servicing providers in the quarter. This was supported by higher snubbing activity year-over-year with 2,628 hours in the quarter versus just under 1,000 hours in the same period in 2018 in North American operations.

Concord rigs generated $16.9 million in revenue during the quarter on 27,889 operating hours with an average revenue per hour of $606 and while achieving a 53% utilization in the quarter versus the 35% utilization generated by the CAODC-registered rigs.

Operating margins as a percentage of revenue decreased 0% in the quarter from 18% in the same period in 2018. This margin compression was due to higher R&M costs, repair and maintenance costs incurred in the quarter and nonreoccurring costs of approximately $1.5 million associated with the movement of Rig 12 snubbing unit to the United States during the quarter and the integration of the snubbing acquisition. This strategy to diversify into new markets generated 932 hours of service rig and 1,063 hours of snubbing work in the United States in the second quarter of 2019.

Revenue for our Drilling Services segment decreased to $20.5 million in the quarter from $23.2 million in the second quarter of 2018 primarily due to the expiry of the take-or-pay contract for Rig 116 on November 2, 2018, which accounted for -- would have accounted for $6.4 million in EBITDA in the same quarter of 2018.

Rig 103, as Cam noted, operated continuously on infield work during the quarter, while Rig 104 continued operating at the Muruk 2 site until late April and then began demobilizing to Moro. Rigs 115 and 116 were preserved in cold stack during the quarter and as Cam noted again, remained ready to redeploy.

With expected drilling activity in the quarter and no contribution from the take-or-pay contract on Rig 116, the Drilling Services segment generated $4.3 million in operating margin. As a percentage of revenue, operating margin decreased to 21% in the quarter from 46% in the second quarter of 2018.

Revenue for the Ancillary Services segment was lower at $5.9 million in the quarter compared to $6.8 million in the same period in 2018. International rentals were higher than expected during the quarter with the remaining contributing divisions of this segment showing decreases to -- over the quarter relative to the second quarter of 2018 driven primarily by lower activity levels.

Operating margin as a percentage of revenue decreased slightly to 64% from 66% in the second quarter of 2018 primarily due to reduced contribution from higher-margin divisions during the quarter.

Our general and administrative cost decreased to $4.1 million in the quarter from $4.5 million in the same quarter in 2018 due to efforts undertaken to reduce cost taken throughout 2018 and continuing into 2019. Adjusted net loss in the first -- in the second quarter of 2019 was $4 million or a loss of $0.08 per share compared to adjusted net earnings of $2.4 million or $0.05 a share in the second quarter of 2018.

We continue to maintain a strong balance sheet, exited the quarter with $14.7 million in cash, nothing drawn on our credit facilities and deposited working capital balance of $37.5 million.

So with that, let me turn things back over to Cam.

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J. Cameron Bailey, High Arctic Energy Services Inc - President, CEO & Director [4]

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Okay. Thank you, Jim. Now as you know, the industry fundamentals have not been kind to the industry, and headwinds continue to make the Canadian industry quite challenging. With 86% of our Canadian well service business tied to contracting arrangements, we're fortunate to be able to forge forward in a position of strength.

The Canadian service business continues to outperform the industry, providing a high quality of service with high standards of safety, and this is further illustrated with the strength of our customer base characterized as large multinational entities.

We're experiencing good, stable activities in our drilling operations in the PNG business and prepare to ramp up the activity leading into the expansion of the existing PNG LNG facility. Now by providing steady work incentives -- or providing steady work and incentives for safe work practices, it has led to employee satisfaction and low turnover for our Canadian business. We've maintained a strong balance sheet, offering financial flexibility to allow us to continue to be opportunistic and to continue to grow and consolidate in a very difficult, challenging market.

With that, that concludes my remarks, and I will turn it over to the operator who will open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Elias Foscolos.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [2]

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I've got just one question. Okay. I've really got one question, and it's going to focus on the Production Services division and the margin. And maybe I missed this in your remarks. I've been hopping between some calls.

Margin was essentially 0, which was a decline over the previous quarter and also over the last year sort of despite having sort of the precision assets. Can -- how -- I guess I want to word this correctly. You're attributing that to cost of moving into the U.S. So 2 questions are: When do you expect that to start reversing? Can we see further erosion? And what would you expect the normalized level to be, if you don't mind commenting?

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J. Cameron Bailey, High Arctic Energy Services Inc - President, CEO & Director [3]

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Okay. So two parts to that question. I mean one is the acquisition of the Precision assets in April, which pushed us into the second quarter, I mean we -- with the spring break-up, the -- our well services, basically our snubbing business, was really quite muted. And we had incurred a number of costs that could not be capitalized as part of the acquisition for movement and getting that equipment, so it was prepped and ready to go.

We moved 2 -- I believe it was 2 pieces of equipment, but certainly 1, this service rig, into the -- one of the additional service rigs into the U.S. And again, none of those costs could be capitalized. They're all expensed. And so a good portion of what we would expect for reasonable margins in Canada were actually affected by the combination of those 2 events.

When you break out Canadian well services and look at our market share, we actually performed extraordinarily well. As I mentioned on the call that we achieved 14% market share, that's a record that we've ever done. We actually earned more or worked more hours than any other operator in Canada. And when we kind of separate that business by itself and it's not broken out in our financials, that was actually a 15% contribution margin to us.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [4]

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Okay. So that would have been similar to last year, I'm guessing, despite the overall weakness in the sector. So I'm probably going to say by just doing some subtraction between quarters, I might be able to get to a normalized margin for the business going forward.

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J. Cameron Bailey, High Arctic Energy Services Inc - President, CEO & Director [5]

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Right. So what we do expect, we -- one of the problems that we have, and I tried to point out this in earlier comments, is that the biggest issue that we faced with U.S., not only was it just moving and the expenses and the standby of personnel to keep a staff -- keep the staff available for us to actually go to work, it was expensive. And now that we have steady work and have this line of sight to steady work, we expect the second half of the year to be -- to really start seeing the benefits of that investment.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [6]

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Okay. Focusing on to drilling and Papua New Guinea. Just was wondering, other than what you've kind of written in the MD&A, is there -- how do you see the outlook shaping up for 2020 and clearly, Rig 103 and 104 utilization and also potentially 115 or 116? If you could provide some comments.

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J. Cameron Bailey, High Arctic Energy Services Inc - President, CEO & Director [7]

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Okay. The first thing, we've had a continual shift to the right in our activities in Papua New Guinea. The -- we've maintained 100% utilization of 104 and 103 through the course of the year. We will have that continue to ride through to the second -- third quarter. And where uncertainty starts to come in is the last quarter of 2019.

We do see some comfort and confidence that we will see a ramp -- starting to see the ramp of activity heading into 2020 as we see the contractors really hunkering down for their planning activity of that drilling activity.

So we're just seeing the evidence of that now. The change of government did not help that exercise. I mean it basically put a moment of pause into the activity. But I think that has, for the most part, been cleared away, and it's back to business.

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Operator [8]

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We have no current questions in the queue. (Operator Instructions) And there are no further questions registered at this time. I would like to turn the meeting back over to Mr. Bailey for any additional or closing remarks.

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J. Cameron Bailey, High Arctic Energy Services Inc - President, CEO & Director [9]

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Okay. Well, I'd like to thank everybody for their participation and interest in High Arctic.

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Operator [10]

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Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.