Management Discussion OUTLOOK
While the recent highs in oil prices have bode well for record profits by major oil companies, and there are some positive signs of improved global drilling activities, the well stimulation market remains stagnant in the geographical regions the Company and its distributors serve. The Company remains guarded about its growth prospects in the near term. Until uncertainty is removed from client operations and clients have consistent well stimulation campaigns, Wavefront may experience a continued period of revenue contraction.
In the fourth quarter of 2021 and the first quarter of 2022, Wavefront saw new opportunities evidenced by multiple well stimulation packages awarded by various US-based clients; however, for numerous reasons, these well stimulation packages have seen sporadic activities, thus, negatively impacting revenue. In previous Company disclosures, Wavefront identified supply chain issues related to equipment shortages, inflation in tubular goods, and shortages of crucial equipment and consumable materials that were impacting activity levels and, thus, Wavefront’s near-term business opportunities. Much of these issues remain unresolved. Further, many E&Ps have been refraining from ramping up production; instead, opting to return cash to shareholders through dividends, debt repayment and share buybacks. This also impacts the volume of well stimulation work conducted by the E&Ps.
Moreover, the geopolitical situation in Eastern Europe intensified with Russia’s invasion of Ukraine on February 24, 2022. The Russian war in Ukraine continues to evolve as military action proceeds, and Western sanctions are imposed, exacerbating the ongoing global economic challenges, including sanctions against the importation of Russian crude oil, gas, and liquefied natural gas (“LNG”); foreign exchange implications; rising inflation; and additional supply chain issues.
Collectively, all the headwinds the Company is currently experiencing in the marketplace make it difficult to pinpoint when it will experience consistent, well stimulation work from clients.
With the broadening move towards decarbonization associated with human-induced effects on climate change, E&Ps and OFS companies must adapt and move outside of traditional oilfield services to sectors in the low-carbon space, as evidenced by Occidental Petroleum agreeing on net-zero oil created from captured atmospheric CO2 and a CO2 sequestration project in Louisiana.1
Given the energy sectors’ ESG and CO2 management needs, Wavefront has identified two areas in the low-carbon space where its existing proprietary technologies may play a pivotal role. The first area is CO2 sequestration, while the second area is geothermal operations.
CO2 sequestration in geological media is a well-researched and practiced approach. Depending on in-ground temperature and pressure and other characteristics, CO2 may be stored through several mechanisms in geological media as a gas, a liquid, or in a supercritical state by trapping in porous media such as depleted hydrocarbon reservoirs; oil reservoirs (EOR); or deep brine aquifers and regional-scale aquifers. The physics of fluid flow in porous media is universal – whether it occurs ten feet deep during environmental groundwater remediation, eight thousand feet deep during CO2-driven EOR or twelve thousand feet during salt cavern solution mining. Wavefront’s Powerwave® has been broadly used globally in environmental, mining, and oil and gas applications. In Michigan, Mississippi, and Texas, Powerwave® was successfully applied to optimize CO2-driven EOR projects to improve CO2 injection rates and CO2 distribution in the subsurface. Given Wavefront’s broad-based experience in multiple sectors, we are confident that Powerwave® may be successfully applied to large-scale CO2 sequestration projects to increase CO2 injection/sequestration rates, thus, keeping anthropogenic carbon from reaching the atmosphere.
Wavefront’s proprietary technology bundle includes fluid-driven tools for removing detritus materials often occurring in oil and gas production or injection wells. Such devices have been successfully used in traditional oil and gas operations. While geothermal wells have temperatures up to 325oC (617oF), several scale types are prevalent and often found in oil and gas wells. The Company’s proprietary tools are currently designed to withstand elevated temperatures; therefore, they can be immediately used under such conditions. Wavefront and its global OFS distributor are currently evaluating opportunities to deploy Wavefront tools in European and North American geothermal operations. Given Wavefront’s successful track record in wellbore cleaning, the Company is very confident of success in this potential new market.
Wavefront will continue to exercise disciplined operating costs and capital expenditure controls. Wavefront remains committed to strong project execution and best-in-class service. As client operating activities unfold, it will endeavour to generate solid gross profit margins across all market segments.
OVERALL RESULTS FROM OPERATIONS
Wavefront operates with one reportable segment that covers all aspects of the Company’s business.
Wavefront considers the basis on which it is organized, including the economic characteristics (i.e., the nature of the products and services and any bundling or cross use thereof, types of customers, operating segments served within the industry and similarity of segments with other OFS companies, quantitative and qualitative thresholds, etc.) and geographic areas, in identifying its reportable segment. The operating segment of the Company is defined as components of the
Company for which separate financial information is available and is evaluated regularly by the chief operating decision- maker in allocating resources and assessing performance. The chief operating decision-maker of the Company is the President and Chief Executive Officer.
Within this MD&A, however, Wavefront provides additional product level information such as revenues by product line and geography as it believes this additional supplemental information is helpful to stakeholders concerning the development of the business.
In fiscal 2020, the Company’s Distributor in Colombia completed four Powerwave Odyssey and four Powerwave SAN stimulations. Five Powerwave Odyssey stimulations remain to be completed from the initial ten well contracted programs granted to Wavefront’s Distributor. The remaining Powerwave work and the installation of a dual Powerwave Dragonfly IOR/EOR system were delayed due to coronavirus (“COVID-19”), and the commencement of the project completion remains unclear.
In Kuwait, since entering into a new Exclusivity Agreement with Gulf Drilling and Maintenance Co. (“GDMC”) for exclusive rights to Wavefront’s Powerwave® related intellectual property, know-how and tools for the State of Kuwait, including the Al Khafji Joint Operations region (a common territory along the borders of the Kingdom of Saudi Arabia and the State of Kuwait), work has ebbed and flowed. Given the delays in activity in the State of Kuwait and faced with the potential early termination of the Exclusivity Agreement, the Company agreed to amend the guaranteed minimum aggregate consideration from US $75,000 to US $50,000 per month. The Exclusivity Agreement expires on August 31, 2022; however, Management is working towards an extension. The anticipated activity in Kuwait is not expected until the fourth calendar quarter of 2022 or the first quarter of 2023.
In the Kingdom of Saudi Arabia (“Saudi Arabia”), the growth of Powerwave-related technology has been hampered by the well stimulation budgets for the calendar year 2022 being lower than in recent years as more investment is being directed to drilling activities. Wavefront’s local distributors are focusing current marketing efforts on the drilling and completions department of the National Oil Company (”NOC”) as, in many cases, there are post-drilling stimulation activities that are suited to the benefits of Powerwave, including the use of Wavefront devices to extend coiled tubing reach in extended reach wells while simultaneously stimulating the wellbore.
During the second fiscal quarter, the Company, through a local Distributor, commenced initial well stimulation work with the NOC of the United Arab Emirates (“UAE”). Various NOC entities in the UAE operate in three distinct areas – onshore, islands, and offshore. The Distributors’ initial Powerwave stimulation work has been completed in onshore extended reach horizontal wells. The Company and its various Distributors in the UAE are working to secure further work in all three functional areas of the NOC. We anticipate further uptake of Powerwave-related technology as the fiscal year progresses.
For the third quarter of 2022 (i.e., three-months ended May 31, 2022) recorded revenues amounted to $462,152 an increase of $90,871 from the comparative quarter (i.e., three-months ended May 31, 2021) revenues of $371,281. Of the revenues for the reporting quarter, $419,620 (May 31, 2021 - $354,079) relates to Powerwave stimulations, with $251,992 (May 31, 2021 - $335,862) of those revenues being derived from the Middle East, and $167,628 (May 31, 2021 - $18,217) from the United States. The decrease in Powerwave stimulations revenues in the Middle East is related to the termination of a distribution agreement wherein the former Saudi Arabian distributor guaranteed a minimum number of Powerwave stimulations, and the reduced aggregate minimum consideration from the Distributor in the State of Kuwait (see above). Additionally, there was a lower number of Powerwave stimulations than anticipated because of limited oil field access and marketing abilities and due to the change of distributors in Saudi Arabia.
Despite the $149,411 or 820.2% increase in USA Powerwave revenues for the third quarter 2022 (May 31, 2022 - $167,628; May 31, 2021 - $18,217) revenues were still negatively impacted by the client (i.e., individual exploration and production company or “E&P”) focus, as well as the aforementioned supply chain issues. Additionally, the potential in US $500,000 revenues related to the General Services Agreement (“GSA”), which was announced on October 13, 2021, and still cannot be recognized, at this time, due to unforeseen, circumstances beyond the Company’s control. It is the intent of the Company, at this time, to continue, in good faith, to work with the executive management of the E&P client to which the GSA was executed. Once the Company can recognize revenues, in accordance with IFRS, the Company will accordingly disclose any such recognition.
The Powerwave stimulation packages as announced in the fourth quarter 2021 and the first quarter 2022 commenced in the third quarter ended May 31, 2022. During the reporting quarter individual stimulations amounting to 15.7% of the announced Powerwave stimulation package were completed allowing the Company to record US $92,083 in revenues. Subsequent to the third quarter ending May 31, 2022, additional individual stimulations amounting to 11.0% of the announced Powerwave stimulation packages totalling US $55,705 were also completed.
Despite the strengthening of commodity prices, 73.3% of the announced Powerwave stimulation packages have yet to be completed due to the COVID-19 and related variants, indirect E&P supply chain issues, and various E&P decisions to reduce or delay both operating and capital expenditures in all markets and has negatively impacted Powerwave revenues.
All Powerwave stimulation package purchase orders remain valid; however, many E&P clients have provided commencement dates for remaining stimulations, only to have been in some instances postponed and rescheduled multiple times. The timeframes for remaining individual Powerwave stimulations to be completed remains uncertain, are beyond the Company’s control and may continue to adversely impact Company revenues.