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Edited Transcript of HWO.TO earnings conference call or presentation 10-May-19 3:00pm GMT

Q1 2019 High Arctic Energy Services Inc Earnings Call

Red Deer May 24, 2019 (Thomson StreetEvents) -- Edited Transcript of High Arctic Energy Services Inc earnings conference call or presentation Friday, May 10, 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

* Michael Storry-Robertson

National Bank Financial, Inc., Research Division - Associate

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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 Q1 Conference Call.

I would now like to turn the meeting over to Cam Bailey. Please go ahead, Mr. Bailey.

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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 First Quarter 2019 Conference Call. Today, I'll be providing an update on the press release that we issued yesterday, Thursday, May 9. And following my remarks Jim Hodgson, our Chief Financial Officer, will be discussing our financial performance for the period. After our formal -- I'm obligated to say this, and it's a little bit boring for our call, but our disclaimer is, after our formal comments, we'll open the, up the call to some answers. And before we begin, I'm going to remind you that certain information presented today may include forward-looking information. Such statements reflect High Arctic's current expectation estimates, projections, assumptions. These forward-looking statements are not guarantees of future performance, and they're subject to certain risks, which could cause the actual performance and financial results to vary materially from those contemplated in the forward-looking statements. For additional information on risk, take a look at our annual information form under the heading Risk Factors.

So talk a little bit about the quarter, the industry, what was experienced in the fourth quarter and 2019, continued into 2019 with a combination of cold weather and mandated shut-in production causing many of the operators to defer well operations into the later half of the year. The surplus crude oil production caused from pipeline capacity constraints caused many of our customers to significantly reduce field activities in the fourth quarter and it carried on into the first quarter.

We have witnessed a much improved Canadian oil price due to the Alberta government mandated apportionment; however, the key problem being takeaway capacity remains and will have a negative effect on field activities until those problems are eventually solved. Canadian natural gas prices remain depressed, which also impacts our pressure services business with reduced natural gas-directed drilling activity.

In light of what seems to be a confluence of relatively dim industry fundamentals, there are some number of items I want to point out that High Arctic was able to gain strength in an overall weak environment. We have been very mindful of the fact that we had a very attractive and robust activity leading into the commissioning of the PNG LNG facility in 20 (technical difficulty). And the objective in recognition of the lull of inactivities which followed was to diversify our revenue base, which was accomplished with the acquisition of Tervita in 2016, followed up with the acquisition of Powerstroke in 2018, giving us an expandable footprint in the U.S. And most recently, the acquisition of Precision Drilling's snubbing in -- that we completed in April of this year. As of the first quarter, the revenue in North America had grown from 15% to over 50%, with U.S. now contributing a small, but growing proportion of our business. Throughout the organization, we have performed with top-tier operational excellence and we continue with this quarter with that result. We had a sold drilling contract from PNG and rig 103 104 operated on behalf of Oil Search achieved 100% utilization and maintained 0 lost-time incident. Our rental and support businesses benefited quite nicely from the recent active drilling campaign by Oil Search and continue -- will continue through 2019. Rigs 115 and 116 are thoroughly and actively maintained and can return to work immediately without any delays. We have done this intentionally to be ready for possible drilling operations by operators requiring to hold acreage, and the looming lease expiries needed to be held with well drilling.

We have operated our Canadian well service business with 0 lost-time incidents while maintaining utilization in the quarter of 51% compared to an industry utilization of 37%. Activity experienced in the second quarter through breakup is exceeding our expectation as customers have simply delayed work, and we are seeing this continuing all through the balance of the year. Our entry into the U.S. has been slow and cautious to ensure that we can deliver the same quality of service that we've offered throughout Canada. Our service rig operations operating in Williston began working in the first quarter with production work and has now moved to some very lucrative 24-hour drilling operations, drilling laterals in existing wellbores, operating with drilling rig contract rates.

We are moving a service rig from Canada to follow up in the production work that it opened up for us in the Williston Basin. We have 5 snubbing units moved into Colorado and have established ourselves as the premier pressure service provider in that market. We have streamlined operations and begun to see some profitability. The acquisition of Precision Drilling operations provided a very high-quality underutilized equipment deployed in a very soft market and our purchase price reflects that. The acquisition provides great return base in the current utilization rates in Canada. We can improve materially on that by moving underutilized equipment to U.S. basins where the activity is brisk.

As I mentioned in the Q4 2018 call, the entry into the U.S. came with transport, preparation of equipments and crews, required a substantial investment, which was incurred mostly in the fourth quarter and carried on into the first quarter. And now that we have established a reasonable market share, we are beginning to see our investment provide some very attractive returns. As of March period, both the pressure services and well services began making profits.

At the beginning of November, rig 116 in Papua, New Guinea came off its take-or-pay contract, and we continue to explore other markets where we can deploy and we continue to monitor the ramp-up of activity within PNG to be able to balance the decision of moving that rig or keeping it within PNG. We are continuing to backfill the loss of the 116 contribution with the ramp-up of activities in the U.S.

High Arctic ended the year with $23 million of cash balances and total working capital of $52.7 million or a $1.05 a share, which is giving us ample financial strength to -- for further opportunistic acquisition opportunities.

We are pleased to have completed the Precision Drilling snubbing division acquisition and continuing to actively examining other opportunities that will complement our existing businesses.

With that, I'm going to turn the call over to Jim, and he can 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. The performance of our Production Services segment and our PNG operations resulted in consolidated revenues of $46.5 million in the quarter, which generated $5.5 million of adjusted EBITDA. This compares to $53.7 million and $13.7 million in revenue and adjusted EBITDA, respectively, for the first quarter of 2018,

which experienced higher contracted revenue and activity in our PNG drilling operations.

Revenue in our Production Services division decreased 6% to $22 million from $23.3 million in the first quarter of 2018. This decrease was driven by decreased well servicing activity year-over-year due to extreme weather shutdowns followed by early spring break-up road bans but was partially offset with higher snubbing activity year-over-year. The Concord rigs generated $17.4 million in revenue during the quarter on 27,913 operating hours with an average revenue per hour of $635. The operating margins as a percentage of revenue decreased to 10% in the quarter from 18% in the same period of 2018. This decrease was due to a small increase in operating costs in the well servicing division, combined with a modest increase in hourly rate. As Cam mentioned, the strategy to diversify into new markets generated 1,584 hours of rig work in the United States in the first quarter of 2019, which is a combination of both snubbing and service rig work.

Revenue for our Drilling Services segment decreased to $18.8 million in the quarter from $23.5 million in the first quarter of 2018 due to lower drilling activity and the end of the take-or-pay contract for rig 116, which occurred on November 2, 2018. Rig 103 operated continuously on infield work during the quarter, while rig 104 continued operating at [Maruk] 2 exploration well site. And as Cam noted, rigs 115 and 116 were preserved in cold stack during the quarter, but remain ready to redeploy.

With lower drilling activity in the quarter and no contribution from the take-or-pay contract on rig 116, the Drilling Services segment generated $4.2 million of operating margin. As a percentage of revenue, operating margin decreased to 22% in the quarter from 38% in the first quarter of 2018.

Revenue for the Ancillary Services segment was lower at $5.7 million in the first quarter of 2019 compared to $7.8 million in the same period of 2018. All contributing in the divisions of this segment showed decreases during the quarter relative to the first quarter of 2018, driven primarily by lower activity levels. The operating margin as a percentage of revenue decreased to 51% from 63% in the first quarter of 2018, primarily due to reduced contribution from international rentals, which earns higher margins than the Canadian rentals division, combined with reduced contribution from the nitrogen division in the quarter.

Our general and administrative costs decreased to $3.7 million in the quarter from $4.3 million in the first quarter of 2018 due to Canadian cost reductions and restructuring efforts undertaken to reduce cost taken throughout 2018 and continuing into 2019. The adjusted net loss for the quarter 2019 was $1 million or $0.02 per share down from $6.7 million positive or $0.08 a share in the first quarter of 2018. High Arctic continues to maintain a strong balance sheet and exited the quarter as Cam said with $23 million in cash, nothing drawn on our credit facilities and positive working capital balance of $52.7 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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Thanks, Jim. We have experienced a good stable activity in our drilling operations in PNG and have been preparing to ramp up for activity leading into the expansion of the existing LNG facility. High Arctic is well set up to take advantage of the continuing growth in the country, driven by the PNG LNG expansion and the robust regional LNG demand. The Canadian service business continues to outperform industry by providing high-quality service with high standards of safety and this is illustrated by the strength of our customer base characterized by large multinational entities. We have been able to achieve high employee satisfaction by providing steady work and incentives for safe work practices, and our strong balance sheet offering financial flexibility allows us to be opportunistic and to continue to grow and consolidate in a difficult and challenging market. That concludes my comments.

And I'll turn it back over to the conference operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Pardon the interruption. Sir, would you like to go to Q&A?

Pardon. Hello, Sir. Can you hear me?

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

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Yes, we can hear.

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Operator [3]

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Would you like to go to Q&A now?

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

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Yes, please.

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Operator [5]

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(Operator Instructions) We do have our first question from Michael Robertson of National Bank Financial.

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Michael Storry-Robertson, National Bank Financial, Inc., Research Division - Associate [6]

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In the press release, you noted that 7 of the snubbing units acquired from Precision have been active over the last 12 months. I was hoping if you would be able to clarify how consistently active those units have been for the 7 units, like a ballpark estimate of the operating hours from the preceding 365 days. I'm just trying to get a better idea of what sort of utilization rates we should expect going forward with the 29 units now in the fleet? And there's a pretty wide range of potential interpretation, based on the language in the release.

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

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No, I understand. So just to give you some guidance around it, so over the last year and what we expect for this year is that those 7 units will operate with approximately 6,000 hours.

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Michael Storry-Robertson, National Bank Financial, Inc., Research Division - Associate [8]

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Okay. That's super helpful. Second one from me. There has been a lot of comments, just obviously devoted to the growing inventory of orphan wells recently. We would assume that service rig providers, yourself included, would be a direct beneficiary from that growing backlog. I was wondering what you guys are sort of seeing out there? Whether you also think it will help bolster service rig utilization? Or if we're missing something?

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

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I think you're kind of on the right track, that once we start to see some true activity dealing with the abandonments, then we are going to be beneficiaries of the activity. The problem is much of the orphaned well activity is very difficult to actually make money at. And the number of companies that are actually bidding at that work is just -- the -- it is an extraordinarily competitive arena and difficult to actually make a decent return on it.

Having said that, many of our clients that are large multinationals have [their] abandonment programs that have been ramped up, and we have been beneficiaries of them deploying rigs specifically to deal with their abandonments internally. So distinction between the orphan well program and required abandonments in the inventories of active operators. And so those we expect to actually benefit from, and we've actually put one more rig to work specifically to do some of that work.

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Operator [10]

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We now have our next question from Elias Foscolos of Industrial Alliance Securities.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [11]

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Got a couple of questions. First of all, I'd like to start with U.S. revenue. It looks like we saw a sequential decline in U.S. revenue, and my calculations might be $2.3 million for Q4, and then I think about $1.4 million for Q1. Was there something that caused that decline in Q1? Am I calculating it correctly? And then following up on that, directionally, where can that go from an organic perspective?

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James Robert Hodgson, High Arctic Energy Services Inc - CFO [12]

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Cam, is...

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J. Cameron Bailey, High Arctic Energy Services Inc - President, CEO & Director [13]

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Okay. So let me deal with the back half of that question. And the first half, we just need a little bit of -- we're just going to look at the numbers, come back to address it. So one of the -- as I mentioned, one of the problems that we had suffered was quite a slow introduction of our well service rig, and the well service rig that came with the Powerstroke acquisition was quite a unique build and it was essentially a service rig that is capable of doing drilling operations. And deployed into the Williston and what it was really targeted for was doing redrills of laterals or new lateral drills in existing wellbores. And so where there is a well pad that has numerous wellbores on top it with wellheads on top of it, a drilling rig can't get in and do that work. So we -- this rig was specifically designed to do drilling and has a very small footprint, and so that drilling work has just commenced in the month of March. We were doing some production work, very modest amount and we did about 502 hours in the quarter. And now is pushed into 24-hour operations, and there are literally hundreds of potential wellbores ahead of it, to the extent that we are successful in this first round of drilling. So you can do the math with 24-hour operations, what that means just 1 rig deployed. It [would serve] that the production work that, that company started to do is being followed up with the service rig that we are moving from Canada down to the U.S. And we expect more to follow. And ideally, we would like to have 5 service rigs into that market.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [14]

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Thanks for that color. Just for a bit of a follow-up, and maybe I missed this, Cam. Are you telling me that rig is now actually -- that one is specifically segmented into the Drilling Services? Or is that categorized as Production Services?

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J. Cameron Bailey, High Arctic Energy Services Inc - President, CEO & Director [15]

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No. That is in -- it is in well services. So what's -- so one of the observations that you made in the first comment was reduction in revenue. So we did lump both the well servicing rig and snubbing together into U.S. revenue line. We are now breaking that out, so that we have a distinction of well servicing U.S. and snubbing.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [16]

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Okay. I appreciate the color on that. And maybe I'll follow up with that a bit offline. On -- moving to Papua New Guinea and Ancillary Services, with 115 and 116 parked, has that had an impact on the Ancillary Service or the rentals for Papua New Guinea?

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J. Cameron Bailey, High Arctic Energy Services Inc - President, CEO & Director [17]

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Yes -- yes and no. To the extent that 115 is operating and so it's actively drilling, then we get -- we have -- we're beneficiaries from the actual -- the rental support equipment that would be associated with that activity. So 116 didn't have that. 116 was just the take-or-pay contract and so when it was parked, there was no associated rentals that went with that. So the activity in our Ancillary is really driven by 103, 104 and any drilling activity that takes place with 115, 116. In addition to that is our Canadian rentals. In our Canadian rentals, there was a note with regard to decreasing margins in the rental business. So one of the areas that is quite helpful to us in the rental business is the snubbing operations, and our big spreads are actually earned from the pressure services and rentals regarding the rental services, so if we have some weakness that appears in snubbing, it will also translate into some weakness in our high-margin rental activities.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [18]

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Okay. So on Papua New Guinea, just for clarification, there is nothing disproportionate on the rental side between the owned rigs and the operated rigs? For example, you would have 3 units of rentals working if you have all 3 of those work, and if you have 103 and 104 you would have, I'm going to call it, just 2 units of rentals. That seem about right?

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J. Cameron Bailey, High Arctic Energy Services Inc - President, CEO & Director [19]

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That's about right.

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James Robert Hodgson, High Arctic Energy Services Inc - CFO [20]

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Yes, that's right.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [21]

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And one more thing with Papua New Guinea, a bit of outlook for rig 103, it appears that, that would be busy for the entire year and it looks like 104 is busy at the moment, and it looks like at some point in the quarter it might be demobilized. Is there visibility for when that might get back on, sort of back on being used, and is there anything beyond 103, 104 that you see by Q4, or Q1 next year that could bring 115 back?

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J. Cameron Bailey, High Arctic Energy Services Inc - President, CEO & Director [22]

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So there is a couple of points in that question. So just to deal with the demob of 104, so demob of 104 is just going to another location, demobing from the current location to a new location. So we expect both 103, 104 to be fully utilized throughout the year. So notwithstanding its -- we describe it as being demobed, we are still -- still have full rates attached to that as it's going through the remobilization to a new location. Now the second part of that is, what is the prospect of 115, 116 going to work and our expectations still exist that there will be drilling activity, principally to deal with expiring leases that the 3 principal operators have within the country, and required to drill -- they are required to drill the hold acreage. So the key question of that equation is, can they renegotiate with the government to maintain their -- maintain leases, and that's a call we can't make.

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Operator [23]

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It does not appear we have any questions at this time. Would you like another prompt, Mr. Bailey?

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J. Cameron Bailey, High Arctic Energy Services Inc - President, CEO & Director [24]

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If there are no further questions, then I think we can terminate the call. And thank you, everyone, for your participation in today's call, and both Jim and I are free to answer any follow-up calls you may have.

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Operator [25]

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Ladies and gentlemen, the conference has now ended. Please disconnect your lines at this time. Thank you for your participation.