High Arctic loses $2.2-million in Q1 HIGHLIGHTS
The following highlights the Corporation's results for Q1-2020:
Internal promotion of Mike Maguire to CEO to lead the Corporation's response to the current global crisis.
Revenue of $39.6 million (Q1-2019 $46.5 million) and adjusted EBITDA of $2.7 million (Q1-2019 $5.5 million) for the Quarter.
Implementation of programs with a target to reduce annualized cash outflows by $25 million compared to 2019.
Deliverance of top-tier quality essential services to our core customers during the onset of the crisis to maintain our base business.
Strict oversight of working capital to manage our cash balances and maintain a strong balance sheet through the crisis.
Mike Maguire, Chief Executive Officer commented: "We are in challenging times, but we have a corporate culture of delivering high quality services for our customers. Our team is focused on keeping our base business and balance sheet strong to ensure we are ready to excel in the recovery when it comes."
The Corporation's strategic priorities for 2020 include:
Safety excellence and a focus on quality through global standards, including safeguarding our people against COVID-19.
Reinforcement of existing core markets evidenced by top-tier customer market share in Canada and PNG.
Cost control focused on operating cash flow while balancing strategic priorities, to emerge from the current conditions ready to reactivate and grow.
Capital stewardship characterized by disciplined working capital management and capital allocation to maintain value for shareholders including common share buybacks, where appropriate.
The unaudited interim consolidated financial statements ("Financial Statements") and management discussion & analysis ("MD&A") for the quarter ended March 31, 2020 will be available on SEDAR at www.sedar.com , and on High Arctic's website at www.haes.ca . Non-IFRS measures, such as EBITDA, Adjusted EBITDA, Adjusted net earnings (loss), Oilfield services operating margin, Operating margin %, Percent of revenue, Funds provided from operations, Working capital and Net cash are included in this News Release. See Non-IFRS Measures section, below. All amounts are denominated in Canadian dollars ("CAD"), unless otherwise indicated.
Within this News Release, the three months ended March 31, 2020 may be referred to as the "Quarter" or "Q1-2020". The comparative three months ended March 31, 2019 may be referred to as "Q1-2019". References to other quarters may be presented as "QX-20XX" with X being the quarter/year to which the commentary relates.
High Arctic reported revenue of $39.6 million, incurred a net loss of $2.2 million and realized Adjusted EBITDA of $2.7 million during Q1-2020. This compares to Q1-2019, with revenue of $46.5 million, a net loss of $1.0 million and Adjusted EBITDA of $5.5 million. Changes were mainly due to $6.9 million of reduced revenue, attributable to reduced drilling services activity, with revenue reduction of $4.9 million over Q1-2019, together with $0.8 million of restructuring costs.
Q1-2020 dividends amounted to $1.6 million ($0.03 per share), compared to $2.5 million in Q1-2019 ($0.05 per share).
Dividends were suspended in March 2020, which amount to approximately $0.8 million per month.
Cash increased $19.0 million as compared to a decrease of $8.5 million in Q1-2019.
Late in Q1-2020, the Corporation drew $10 million on its available $45 million loan facility.
Utilization for High Arctic's 50 registered Concord Well Servicing rigs was 58% in the Quarter versus industry utilization of 36% (source: Canadian Association of Oilwell Drilling Contractors "CAODC"), and
High Arctic did not repurchase any shares during the Quarter.
RESPONDING TO RECENT GLOBAL DEVELOPMENTS
During Q1-2020, the global coronavirus ("COVID-19") reached a pandemic state as declared by the World Health Organization on March 11th. Measures taken by governments around the world to contain the virus significantly reduced demand for crude oil along with other products and services. This caused a significant slowdown in the global economy, market volatility and significant uncertainty in terms of how long these conditions will persist.
At the same time, the cooperation between the Organization of Petroleum Exporting Countries ("OPEC") and non-OPEC members, primarily Saudi Arabia and Russia, to manage global crude oil production levels broke down and each party increased their daily crude production, increasing overall global supply. The combination of these events resulted in a crisis and sudden decline in benchmark crude oil prices. Average benchmark crude oil prices in March 2020 declined approximately 50 percent compared with average prices in December 2019.
As customers reduce their capital and other spending, including shut-ins of production to manage through this event, the services needed for drilling and completions and other services to the oil and gas industry have been negatively impacted. The duration of the current commodity price volatility is uncertain.
Recognizing the severe financial impact of these conditions to near-term customer cash flow and the immediate shift from growth to urgent cash preservation and financial flexibility, High Arctic was quick to adjust in anticipation of slowing customer demand. Accordingly, the Corporation has implemented measures expected to reduce certain cash outflows by approximately $25 million over prior-year 2019 levels including:
A 65% reduction in capital expenditures.
The suspension of monthly shareholder dividends in March 2020.
A 30% to 50% workforce reduction to executive, management and support personnel.
Acceleration of change to globalize processes and reduce fixed infrastructure costs, and
Change in executive leadership and formation of a Board Executive Committee to provide oversight.
These austerity measures were carefully considered to reinforce High Arctic's solid base of business in the markets we compete in while preserving a strong financial position and quality service offerings.
To close out the 2020 first quarter we are well positioned to persevere through the uncertainty with capacity ready for deployment when markets recover and restore activity levels. Highlights include:
Resilient focus on the safety and well being of our people through mature health, safety and environment policies including procedures to safeguard against COVID-19.
Core customer base in Canada and a term contract through Q3-2021 for well servicing with a large investment grade customer in western Canada.
Standing operations in PNG since 2012 and a term contract through Q3 2021 for heli-portable drilling services with a leading customer in PNG.
Regional workforce strength and equipment poised for quick activation.
A dominant market share and niche service offering positioned for liquified natural gas development with heli-portable drilling services in PNG and snubbing services in western Canada, and
Liquidity of $63 million with cash of $28 million combined with $35 million in Bank Facility borrowing capacity.
High Arctic's near-term outlook will continue to be impacted until such time as the COVID-19 pandemic stabilizes, world economies begin to open up, and travel restrictions are removed. Further, the impact of future impairment charges, increased risk of collectability of accounts receivable and measurement uncertainty will continue to be relevant considerations in future periods if conditions persist or worsen. The Corporation's flexible operating plan will provide options to prudently manage operations and preserve financial flexibility.
During Q1-2020, the Corporation responded immediately to reduce operating expenses in line with revenue generating activities, and further reduced indirect support and general and administrative personnel world-wide, providing significant annualized cost savings. Further, High Arctic undertook an extensive cash re-budgeting process, in response to higher risks and uncertainty in the current environment. The Corporation suspended its monthly dividend in March 2020 for an indefinite term to preserve cash resources.
High Arctic reached out to its customers to ensure that close working relations are continued as we all manage through this downturn. Our focus on high quality service and customer service differentiation continues to be an absolute imperative. These attributes have been, and continue to be, key principles for High Arctic throughout the energy industry economic cycle.
The impact to our customers' capital spending and operating budgets, and their ability to pay for work completed on a timely basis, could have a significant impact on High Arctic's financial operating results as the time period associated with the global shut-down extends into the year. We continue to work closely with our customers to ensure credit and operating risks are minimized.
Although details are still forthcoming, the Canadian federal government's $1.7 billion well abandonment and site reclamation stimulus may provide meaningful opportunity for High Arctic to participate in the resulting work programs, through our Production Services segment.
Liquidity and Capital Resources
Operating Activities
Cash provided from operations of $8.6 million (Q1-2019 - $ nil) for the Quarter was due to $2.0 million of funds flow and $6.6 million due to working capital changes, mainly the reduction in accounts receivable during the quarter.
Investing Activities
During the Quarter, the Corporation's cash from investing activities amounted to $1.9 million (Q1-2019 - use of $1.4 million). Capital expenditures during the Quarter of $1.9 million (Q1-2019 - $2.6 million) were offset by proceeds on disposal of $4.9 million (Q1-2019 - $1.4 million). The balance of the change related to changes in associated accounts payable for capital items.
Financing Activities
During the Quarter, the Corporation drew $10 million of its $45 million available long-term debt facility. High Arctic distributed $1.6 million in dividends to its shareholders, down $0.9 million from $2.5 million in Q1-2019 as a result of the suspension of dividends in March 2020.
Further, no common share buy-backs were completed in the Quarter, compared to $2.9 million that were purchased and cancelled in Q1-2019 under the Normal Course Issuer Bid ("NCIB"). Dividends payable decreased by $0.8 million in the Quarter, accounting for the change in non-cash working capital.
Credit Facility
As noted above, the Corporation has drawn $10 million of the $45 million revolving loan facility available, which matures on August 31, 2021. The facility is renewable with the lender's consent and is secured by a general security agreement over the Corporation's assets.
The Corporation's loan facility is subject to two financial covenants which are reported to the lender on a quarterly basis. As at March 31, 2020, the Corporation remains in compliance with these two financial covenants under the credit facility.
OUTLOOK
While the outlook for the global oil business is challenging, High Arctic is taking measures during this period of uncertainty to provide financial flexibility and reinforce our solid base of business. Our people continue to focus on quality as measured by safety performance excellence and long-term customer relationships. Our diversification with operations in Canada, an emerging presence in the US and lead service provider status in PNG has proven beneficial to mitigate currency and commodity risk. Initiatives taken to reduce cash outflows by $25 million over 2019 levels serves to preserve financial strength and cope through this unprecedented COVID-19 economic downturn.
In Papua New Guinea, active well site work ceased quickly in March 2020 as response by our customers to the significant travel bans and declaration of the PNG Government of a State of Emergency.
While the Corporations Drilling Services are suspended, we continue to provide skilled personnel and rental services to assist our customers with services to maintain the production of oil and LNG essential to the people of Papua New Guinea and their foreign customers. While the government of PNG was quick to respond to the COVID-19 crisis and has announced some relief for displaced workers, the Corporation does not expect any stimulus announcements to support the energy sector. A return to well site activity levels of recent years will be predicated on stabilised commodity prices, lifting of State of Emergency, removal of travel restrictions and the signing of an agreement with the State for the P'nyang gas development.
Given the outbreak of the COVID-19 virus and the recent government mandated decisions that have been made as a result, the impact will be substantial, at least in the immediate term. Furthermore, in the absence of information regarding when or how government orders to return to any type of normal operating pattern will be made, we cannot offer any meaningful guidance or outlook to our shareholders at this time. Economic activity and demand will be determined by the actions and policies of government as the pandemic and its' impact unfolds in the coming months.
High Arctic's Outlook dated March 12, 2020, outlined the instability which existed at that time due to COVID-19. As events unfolded we took very quick action to prepare for a serious disruption in economic growth and demand destruction. These steps included restructuring our work force, while ensuring the close relationships with our lender, customers and vendors were appropriately managed and maintained.
It is clear that the next few months and potentially quarters will be difficult. High Arctic believes we are positioned to manage through these challenging times given our strong relationships with our customers, our ability to capitalize upon Canadian government abandonment programs, and our continued focus on excellence in our service offering. The health of our balance sheet, our strong working capital position and the skill of our management team provide us the ability to weather the economic slowdown until activity can be restored. Business combinations and acquisitions will be reviewed to the extent they strengthen our service base but will not be our primary focus over the short-term.