Cathedral Energy Services Reports Results for 2021 Q3

Canada NewsWire

CALGARY, AB, Nov. 9, 2021

/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

CALGARY, AB, Nov. 9, 2021 /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, 2021 and 2020.

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.

2021 Q3 KEY TAKEAWAYS

   -- The Company completed the acquisition of Precision Drilling Corporation's 
      directional drilling business and the assets of Valiant Energy Services 
      Ltd. and these acquisitions along with internally generated growth 
      increased the Company's Canadian market share to average 17.7% in 2021 
      Q3; 
   -- As part of the Precision Drilling acquisition, the Company completed a 
      marketing alliance with Precision; 
   -- The capital program increased from $6,000 to $9,000 in part due to the 
      investment of $3,000 from the Precision acquisition; 
   -- The Company executed on its plan to deliver RapidFireTM 
      Measurement-While-Drilling ("MWD") systems in both Canada and U.S.; 
   -- Revenues increased by $15,137 or 303% from $4,990 in 2020 Q3 to $20,127 
      in 2021 Q3; 
   -- Adjusted gross margin increased from 20% to 27%; 
   -- Adjusted EBITDAS increased from $84 to $5,170. This was the highest 
      quarterly Adjusted EBITDAS since 2018 Q3; 
   -- Cathedral posted positive net income of $403, which was the first 
      quarterly net income since 2018 Q3; 
   -- These were the first results of the Company's plan to increase size and 
      scale and a change in trajectory and strategic direction with a new 
      leadership team in place. 

PRESIDENT'S MESSAGE

Comments from President & CEO Tom Connors:

2021 Q3 was a pivotal inflection point for Cathedral, marking the shift to a much more positive trajectory going forward, both operationally and financially. Our Company generated Adjusted EBITDAS of approximately $5,200 for the period, our highest quarterly figure since the third quarter of 2018. This was accompanied by positive net income and was all driven by the core directional drilling and motor rental businesses, not one-time adjustments or significant lost-in-hole revenues.

We believe the existing market fundamentals will provide for a sustained period of increased demand for our services and higher levels of activity and utilization. Strong oil and natural gas prices, robust cash flows and balance sheets for E&P companies combined with an improved market structure in Canada and declining inventories of drilled but uncompleted wells in the US, indicate improving market conditions in both of our key markets. Further, as we continue to progress through the early stages of a market recovery we anticipate a more constructive pricing environment for the supply of our services due to constraints imposed by tight local labour markets and bottlenecks created by global supply chains.

In Canada, the combination and integration of two key acquisitions in the quarter firmly established Cathedral as a top three directional drilling contractor in the market. We grew our market share substantially in the quarter with up to 29 jobs running at certain times and an overall average market share of 17.7%, representing a 590% increase over the same quarter in the prior year. The growth in activity also led to improved margins and higher levels of Adjusted EBITDAS in the quarter. With a further increase in drilling days anticipated in 2022, we expect a continued expansion in our job count as we maintain or grow our portion of the market.

Our acquisition of Precision Drilling Corporation's ("PD") directional assets in the quarter enabled the addition of a complementary customer base and increased access to an expanded client list through our joint marketing alliance with a credible, reputable partner for North America. Cathedral was also able to purchase the assets of Valiant Energy Services Ltd. and secure the key leadership of this top tier private directional driller. This transaction has delivered immediate value to our business as they continue to deliver reliable performance and high levels of utilization.

We believe accretive acquisitions are a key cornerstone of our strategy to expand our size and scale and provide much needed consolidation in a fragmented marketplace. These first two acquisitions demonstrate the transformative nature of the right transactions and the evolution of our company will continue as we explore more opportunities that enhance our value proposition.

The USA operations are steadily improving under the new leadership and sales teams, who are focused on leveraging our premium motor and MWD technologies, differentiating through superior performance and service, and identifying further opportunities for expansion through smart, accretive acquisitions. The marketing alliance is already demonstrating value in our US market with immediate incremental work provided by two PD turnkey opportunities.

Technology is a cornerstone of our competitive advantage as we continue to invest meaningfully in our business with a capital budget of $9,000 for 2021. We are on schedule to execute on our plan to deliver 18 RapidFire(TM) Measurement-While-Drilling ("MWD") systems by year end and have already deployed several systems successfully in both of our core markets. In response to customer demand for technology that places the sensor readings closer to the drill bit, we expect to build out 25 REACT drilling motors in the coming weeks and months. This motor will reduce gamma and survey points by 5-6 meters and is ideal for thin target zones like those found in the Clearwater and Viking formations. Finally, over the longer term our marketing alliance with PD will also focus on areas where we can jointly utilize or develop technology to differentiate our service offering in the marketplace.

Financial flexibility is a key element for our ongoing technology build-out, as well as executing these previous acquisitions and contemplating potential targets in the future. To that end, the Company renewed its bank facility in late 2021 Q2 on traditional market terms and has access to its full capacity going forward. This will ensure the Company can continue to explore and execute on organic growth and accretive consolidation opportunities.

This quarter is clear evidence of Cathedral's ability to deliver on our ongoing strategy of achieving size and scale via technology expansion, organic growth and mergers & acquisitions. And provided these positive macroeconomic factors persist, I am confident we have the people, the operations, and the financing to maintain this momentum into Q4 and beyond.

2021 ACQUISITIONS

On July 23, 2021, the Company announced the closing of Cathedral's acquisition of Precision Drilling Corporation's ("Precision") directional drilling business (the "Transaction") for a purchase price of $6,350. The Transaction includes the operating assets and personnel of Precision's directional drilling business (including its operations facility in Nisku, Alberta), and a $3,000 cash investment by Precision to support growth and expansion of Cathedral, including continuing the buildout of RapidFire(TM) measurement-while-drilling guidance systems and nDurance(TM) drilling motors. Additionally, the Transaction is expected to enhance margins as expenses related to rental equipment used by Precision are replaced with proprietary Cathedral tools.

Cathedral issued 13,400,000 common shares (the "Consideration Shares") along with warrants to purchase an additional 2,000,000 common shares of Cathedral at a price of $0.60 per common share within a two-year period after closing. In addition to a 4-month statutory hold period on the Consideration Shares, the parties have agreed to contractual restrictions on resale as follows: 25% of the Consideration Shares are restricted until January 22, 2022; a further 25% of the Consideration Shares are restricted until July 22, 2022; and a further 50% of the Consideration Shares are restricted until July 22, 2023, subject to certain exceptions.

The Company has allocated the $6,350 purchase as follows:

   -- Cash $3,000 
   -- Land and building $1,500; and 
   -- Equipment $$1,850. 

The Company has expensed $139 in costs related to the Transaction. As the acquired assets were integrated into Cathedral's existing directional drilling operations it is impracticable to break-out the revenue and profit or loss of the acquired assets since the acquisition.

As part of the Transaction, Cathedral and Precision have entered into a strategic marketing alliance (the "Alliance"), which is expected to produce new U.S. and Canadian customer opportunities for Cathedral as well as potential integrated service offerings for customers. The Alliance is expected to support both parties' technology initiatives and lead the future of directional drilling. Precision's market leading Alpha(TM) digital technologies (AlphaApps, AlphaAutomation and AlphaAnalytics) are focused on automation and drilling performance and pair well with Cathedral's premium proprietary downhole equipment and directional drilling expertise.