Mr. Tom Connors reports

CATHEDRAL ENERGY SERVICES LTD. REPORTS THIRD QUARTER RESULTS

Cathedral Energy Services Ltd. has released its third quarter results for 2023.

Third quarter highlights

The company achieved the following Q3 2023 results and highlights:

• Industry-leading active job count in Canada during the quarter.
• Increased United States activity days and job count versus Q3 2022, despite a lower industry rig count.
• Revenue of $145.6-million in Q3 2023 is the highest quarterly revenue in the company's history and represents an increase of 26 per cent, compared with $115.2-million in Q3 2022.
• Adjusted EBITDAS (earnings before interest, taxes, depreciation and amortization, and stock-based compensation) of $30.1-million in Q3 2023, an increase of 7 per cent, compared with $28.1-million in Q3 2022.
• Net income of $5.7-million in Q3 2023, compared with $8.7-million in Q3 2022.
• Cash flow -- operating activities of $9.1-million in Q3 2023, compared with $11.5-million in Q3 2022.
• Free cash flow of $6.1-million in Q3 2023, compared with $16.8-million in Q3 2022.
• The company purchased 2,434,900 common shares of Cathedral under its normal course issuer bid for a total purchase amount of $2.2-million at an average price of 82 cents per common shares. Subsequent to Sept. 30, 2023, the company purchased 1.86 million common shares for a total of $1.6-million at an average purchase price of 86 cents per common share.
• Loans and borrowings less cash of $71.5-million as at Sept. 30, 2023, compared with $69.4-million as at Dec. 31, 2022.
• The company acquired Rime Downhole Technologies LLC, a privately held, Texas-based, engineering business that specializes in building products for the downhole measurement while drilling (MWD) industry in exchange for approximately $41-million (U.S.).
• The company sees a significant opportunity for margin expansion in its United States business as it deploys its own MWD technology to reduce its rental expenses.

President's message

Comments from president and chief executive officer Tom Connors:

"Despite the fact that North American industry rig counts were meaningfully lower year over year, particularly in the U.S., our activity levels and financial results showed continued strength in revenue and adjusted EBITDAS and our activity levels demonstrated resiliency with stable to increasing job counts relative to the prior year. It is difficult to post growth in energy services against a backdrop of lower activity, but our resource play focus, customer mix and high-performance offering helped to more than offset the slowdown. Size and scale remain an industry priority as our exploration and production (E&P) clients continue to consolidate into larger entities and increasingly demand a more sophisticated offering from their service providers. In response to this continuing trend, Cathedral has grown to become the largest directional drilling service provider in Canada on a full-year basis and one of the largest independent providers in the U.S.

"Our U.S. directional drilling job count remained resilient in the third quarter with an average active rig count of 54 versus a directional and horizontal land rig count that averaged 604 rigs on any given day (source: Enverus daily rig count). This compares to the Baker Hughes land rig count, which was down 10 per cent on average versus 2023 Q2 and down 15 per cent year over year versus Q3 2022. We believe that our U.S. operating entity, Altitude Energy Partners LLC, grew market share from early 2023, which is a testament to the strong leadership, operating performance and performance focus that this division continues to display. The acquisition and integration of Rime, announced on July 11, 2023, has proceeded according to plan. We continue to target the deployment of as many as 30 newly developed Rime MWD packages by the end of the first half of 2024. The new MWD tool is made up of Rime technology already proven, tested and performing on a significant number of U.S. land rigs. We continue to believe we have a significant opportunity for margin expansion and bolstered margin resiliency as we deploy our internally developed technology to reduce our reliance on third party rental technology. Adding an internally developed pulse MWD system to an operation of Altitude's scale could have a meaningful impact on our financial results as 2024 progresses.

"Cathedral's Canadian directional job counts averaged approximately 42 active rigs per day for the quarter, which was generally on par with a year ago, versus an industry directional and horizontal rig count which averaged approximately 174 rigs (source: JWN Rig Locator), which was 6 per cent lower than the same period last year, according to the broader Baker Hughes industry rig count. We continue to leverage our technical strength, expertise and experience in the fast-growing multilateral market where we anticipate attractive customer economics will continue to propel growth into the future. We are currently gearing up for a very busy winter drilling season that should see activity levels surpass those of a year ago.

"Cathedral has a keen focus on generating high levels of free cash flow through the balance of 2023 and through 2024 with a target of reducing loans and borrowings to less than 0.5 times adjusted EBITDAS by year-end 2024. A strong balance sheet will always be a priority as we continue to build size and scale going forward. In preparation for an active winter in Canada and a steadily improving rig count in the U.S. in 2024 the board has approved a preliminary capital budget of $15-million to allow for delivery of items with longer lead times and the timely buildout of our own MWD technology in the first half of the year," concluded Mr. Connors.

Organizational update

Cathedral announces that James R. (J.R.) Boyles has resigned as a director effective Nov. 10, 2023, to rejoin the management team of Cathedral's subsidiary, Altitude. Mr. Boyles is an original founder of Altitude where he held the role of CEO from March, 2016, until he resigned from that role and was appointed executive chairman in January, 2020. He joined the Cathedral board of directors shortly after the company's July, 2022, acquisition of Altitude. The company is delighted to have Mr. Boyles rejoin the company in a management capacity, his history with Altitude combined with his operational expertise and positive energy will be a significant benefit to Altitude and the company welcomes his interest in returning on a full-time basis to support this important business unit. Mr. Boyles added: "I am excited about contributing to the Cathedral group by returning to a full-time role with Altitude. Cathedral and its group of companies have world class operations and a disciplined growth strategy and I am excited to help with its continued growth." Cathedral's board of directors has a search firm retained and is currently conducting a North American-wide search for new board of director candidates.

Outlook

Global oil prices rose considerably in the third quarter while United States natural gas prices also showed signs of strengthening. This combination will add considerably to the free cash flow of the company's North American E&P clients and may lead to a gradual increase in land rig counts throughout 2024. Specifically, West Texas Intermediate (WTI) oil prices started Q3 2023 just under $70.00 (U.S.) per barrel and peaked at over $94.00 (U.S.) per barrel late in the quarter -- more than a 30-per-cent intraquarter move. U.S. NYMEX natural gas prices began the quarter at approximately $2.70 (U.S.) per million cubic feet (mmbtu) and nearly eclipsed $3.00 (U.S.) per mmbtu by quarter's end -- slightly more than a 10-per-cent move. More importantly, the oil market futures curve has tipped decidedly into backwardation looking out the next few years -- a sign that oil market futures traders see a tight supply and demand balance in the foreseeable future. The futures curve for U.S. natural gas has a 12-month strip price well above $3.00 (U.S.) per mmbtu -- another sign of renewed optimism around this critical growth commodity going forward.

The North American land rig count has been weaker than many industry observers have been forecasting -- both in the U.S. and Canada. As the company stated in its 2023 Q2 MD&A (management's discussion and analysis) outlook section, a group of six energy service equity analysts (source: ATB Capital Markets, BMO Capital Markets, National Bank Financial, Peters & Co, Stifel, TD Securities) forecast a bottoming of the U.S. land rig count sometime in Q3 2023 and then a turn higher in 2023 Q4 as improved E&P cash flows allowed drilling budgets to start being replenished. This group of analysts also forecast continued growth through 2024. The updated consensus outlook from this group suggests that the average U.S. land rig count forecast will fall to approximately 616 rigs in 2023 Q4 from an average of 630 rigs in Q3 2023. Given the current count of under 600 active U.S. land rigs, this would imply a meaningful move higher in the final two months of 2023. Further, this group of analysts continues to forecast continuing growth in U.S. land drilling in each of the four quarters of 2024 (2024 Q1 average of 646 rigs, rising to 661, 676 and 683 rigs sequentially).

In Canada, the same group of six research analysts sees 2023 Q4 average active rigs numbering 178 rigs versus 181 rigs in Q3 2023 -- likely due to end-of-year E&P budget exhaustion. More encouragingly, in 2024, this group forecasts that the average first quarter Canadian drilling count will be 217 rigs as compared with 199 rigs in 2023 Q1, growth of 9 per cent year over year. Through all four quarters of 2024, the Canadian drilling rig count is forecast to grow by 8 per cent year over year. This contrasts with the full-year 2024 U.S. land rig forecast that is expected to fall by 0.9 per cent year over year.

A recovery in drilling activity may be slower in the U.S. market as some private E&P players remain cautious. In Canada, drilling has accelerated as major producers begin to line up reserves and production volumes to supply the roughly two billion cubic feet (bcf) per day LNG Canada project, which is set to begin exporting natural gas volumes in 2025. The buildout of various new U.S. LNG facilities also continues at a steady pace. In fact, U.S. natural gas export volumes are set to rise to nearly 21 bcf per day by the end of 2025 from just over 13 bcf per day today (source: Energy Information Administration, U.S. Liquefaction Capacity Workbook, June 29, 2023). By 2027, a further 4.3 bcf per day of export capacity will come on line based on current projects under construction (source: EIA). This will result in almost a doubling of U.S. gas export volumes within four years. The growth in U.S. LNG export capacity is a reason the company remains optimistic about consistent levels of oil field service activity in the long term.

Finally, Cathedral is also encouraged by a number of developments that should improve the longer-term outlook for Canadian oil and natural gas. Both the Trans Mountain oil pipeline and the Coastal Gaslink natural gas pipeline are set to be completed in 2024 and receive line pack and first export volumes over the course of the next 12 to 18 months.

Normal course issuer bid

On July 3, 2023, the company received approval from the Toronto Stock Exchange to purchase up to 12,160,008, or 5 per cent, of the 243,200,173 issued and outstanding common shares of the company under the NCIB. The ability to purchase common shares under the NCIB commenced on July 17, 2023, and will terminate no later than July 16, 2024. The actual number of common shares purchased under the NCIB, the timing of purchases and the price at which the common shares are purchased will be subject to management's discretion.

Under the TSX rules, the company is entitled to purchase up to the greater of: 25 per cent of the average daily trading volume of the respective class of shares; or 1,000 shares on any trading day; or a larger amount of shares per calendar week, subject to the maximum number that may be acquired under the NCIB, if the transaction meets the block purchase exception rule under TSX rules. Accordingly, unless a block purchase meets the block purchase exception under TSX rules, the company is entitled to purchase up to 99,621 common shares on any trading day.

During the nine months ended Sept. 30, 2023, 2,434,900 common shares were purchased under the NCIB for a total purchase amount of $2.2-million. A portion of the purchase amount reduced share capital by $2-million and the residual purchase amount of $200,000 was recorded to the deficit.

In connection with the NCIB, the company has established an automatic securities purchase plan for the common shares. Accordingly, the company may repurchase its common shares under the plan on any trading day during the NCIB, including during regulatory restrictions or self-imposed trading blackout periods. The plan commenced on July 17, 2023, and will terminate on July 16, 2024. As at Sept. 30, 2023, the company recognized $1.8-million as an accrued liability ($1.7-million reduced share capital and $100,000 was recorded to the deficit) for the maximum common shares to be purchased under the plan subsequent to Sept. 30, 2023. Subsequent to Sept. 30, 2023, the company purchased 1.86 million common shares for a total purchase amount of $1.6-million at an average purchase price of 86 cents per common share.

About Cathedral Energy Services Ltd.

Cathedral Energy Services, based in Calgary, Alta., is incorporated under the Business Corporations Act (Alberta) and operates in the United States under Discovery Downhole Services, a division of Cathedral Energy Services Inc., Altitude Energy Partners LLC and Rime Downhole Technologies LLC. Cathedral's common shares are publicly traded on the TSX under the symbol CET. Cathedral is a trusted partner to North American energy companies requiring high-performance directional drilling services. The company works in partnership with its customers to tailor its equipment and expertise to meet their specific geographical and technical needs. The company's experience, technologies and responsive personnel enable its customers to achieve higher efficiencies and lower project costs.

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