01:08:29 EDT Wed 29 May 2024
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Cathedral Energy Services Ltd
Symbol CET
Shares Issued 225,277,967
Close 2023-05-11 C$ 0.80
Market Cap C$ 180,222,374
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Cathedral Energy Services earns $794,000 in Q1

2023-05-11 19:40 ET - News Release

Mr. Tom Connors reports


Cathedral Energy Services Ltd. has released its consolidated financial results for the three months ended March 31, 2023, and 2022.


  • The Company achieved the following 2023 Q1 results and highlights:
  • Revenue of $127,665 in 2023 Q1, an increase of 271 per cent, compared to $34,385 in 2022 Q1.
  • Adjusted EBITDAS of $15,187 in 2023 Q1, an increase of 119 per cent, compared to $6,944 in 2022 Q1.
  • Canadian directional drilling market share averaged 25.3 per cent in 2023 Q1, an increase from 19.9 per cent in 2022 Q1.
  • Loans and borrowings less cash of $57,719 as at March 31, 2023, compared to $69,360 as at December 31, 2022.
  • The Company received $16,012 in cumulative warrant exercise proceeds by the warrant expiry date of April 25, 2023, which accounted for 99.7 per cent of eligible warrants.
  • Cathedral used the proceeds realized in April 2023 to pay off the $13,000 owing on its Syndicated Operating Facility.
  • Margins in the quarter relative to the prior year were primarily impacted by higher direct costs related to labour, repair and maintenance and third party equipment rental costs, offset by lower fixed costs as a percentage of revenue, with these costs expected to normalize moving forward.
  • The Company remains proactive in regards to its capital budget with the ability to increase or decrease expenditures in response to changing market conditions, including commodity prices which generally drive activity levels. While the Company remains constructive on the outlook for 2023, particularly the second half of the year, the Company is reducing its net capital budget to $36,000 for 2023 versus the $46,000 previously announced.

United States

  • Job count remained flat to 2022 Q4.
  • Pricing was flat to 2022 Q4 albeit with a higher proportion of lower revenue conventional work.
  • A higher percentage of conventional work reduced average base day rates by approximately two thousand dollars per day.
  • Lower revenue rates temporarily compressed margins as the Company continues to rent third party Measurement-While-Drilling ("MWD") technology.
  • The mix of higher revenue Rotary Steerable ("RSS") work returned to 2022 Q4 averages by March 2023.
  • 2023 Q2 job count has increased to over sixty, up from a range of fifty-two to fifty-four earlier in 2023 Q1.
  • Bookings and activity in 2023 Q2 and the second half of the year continue to solidify and steadily increase.
  • While Discovery Downhole Services ("Discovery") had marginally lower utilization in the first quarter of 2023, utilization levels in the second quarter of 2023 have recovered to similar levels achieved in 2022 Q4.


  • Day rates increased to $12,392 per day from $11,798 per day in 2022 Q4.
  • Peaking at sixty-two jobs, we were one of the most active directional drilling providers in the quarter.
  • Equipment acquired through our consolidation activity provided spare capacity to meet increased customer demand and activity levels.
  • Reactivating equipment to meet increased demand resulted in a temporary increase in repair costs compared to historical levels and reduced margins by approximately 3 per cent from both 2022 Q1 and 2022 Q4.
  • The motor reactivation completed in 2023 Q1 will reduce capital requirements and improve margins in the second half of the year as we replace rentals and return to a more consistent level of repairs through the remainder of the year.
  • We anticipate activity levels rebounding from seasonal spring lows in late-May to early-June and building to levels as strong or stronger than those experienced in 2022 Q3.


Comments from President & CEO Tom Connors:

We experienced different dynamics in each major market in North America during the first quarter of 2023. In the U.S., pricing and activity remained flat while the market experienced some moderation in overall industry activity, leading to a lower revenue mix. Canada experienced robust activity with temporarily higher levels of repair work to meet increased demand. Canadian directional drilling revenue registered its highest level ever due to a combination of: acquisitions over the last year; strong client retention and continued high Canadian market share; pricing increases on a year-over-year and sequential quarterly basis; and strong overall exploration and production ("E&P") company spending levels in the Western Canadian Sedimentary Basin. U.S. results were also up substantially year-over-year, due to the acquisition of Altitude Energy Partners ("Altitude") in mid-summer 2022.

With zero excess rental capacity in the market and near record levels of activity in Canada for Cathedral, we were fortunate to have added equipment through acquisitions to meet the increased demand. In order to meet the increased demand for motors, the Company reactivated a number of motors for a fraction of the cost of purchasing new equipment. The expense of reactivating such motors did result in an increase in repair costs in the quarter. Correspondingly, the increase in the active motor fleet will reduce the requirement for capital to purchase new equipment moving forward and should offset rental costs and improve margins through the remainder of the year. Although the reactivation effort did push our repair costs higher than in 2022 Q1, the trend of higher repairs and lower margins in the first half of the year, followed by lower repairs with higher margins in the second half of the year is consistent with historical trends. As such, we anticipate that margins over the twelve-month period of 2023 will look consistent, if not slightly improved, from 2022. Pricing also increased approximately $500 per day in 2023 Q1 versus 2022 Q4 and the Company anticipates levels will remain somewhat steady for the next couple of quarters.

In the U.S. directional business, prices and activity remained flat from 2022 Q4, but overall revenue rates per day decreased approximately two thousand dollars per day due to a higher mix of conventional work versus rotary steerable work in the quarter. The reduction of revenue, due to altered work mix, temporarily impacted margins in the first two months of the year, and was exacerbated by the necessity to rent third party MWD technology on almost every job. Cathedral is actively pursuing options to supply our own MWD platform to potentially capture an organic growth opportunity that would lead to an improvement in margins and a commensurate expansion in EBITDAS. Rig-counts moderated somewhat in the quarter, down by approximately 4 per cent. Despite the fact that there were some rig reductions and changes to drilling programs, our U.S. Altitude team nimbly filled the work with other customers, so much so, that the number of U.S. operating days actually increased 3.5 per cent vs 2022 Q4 levels.

Our focus on performance and delivering value to our customers has delivered a steady increase in job count through the end of March and into April, resulting in over sixty jobs per day currently for Altitude, marking a return to levels of rotary steerable utilization consistent with 2022 Q4. The outlook for activity for the remainder of the year is expected to remain stable from the levels accomplished in Q2 or build slightly from those levels in the back half of the year based on current visibility.

Our mud motor rental business, Discovery, experienced a slight decline in rental utilization, consistent with the rest of the market but, as of today, has returned to utilization levels experienced in 2022 Q4. Mud motor rental utilization is expected to remain steady in the near-term with an increase in the second half of the year, as we take delivery of the latest generation of higher demand motor technology, that is part of our planned 2023 capital program.

The combination of seven different acquisitions over an eighteen-month period continues to deliver increased market share, EBITDAS, and free cash flow for Cathedral as we differentiate ourselves with a much stronger, unified, and highly competent team. Cathedral remains steadfast in its efforts to continue to grow the business by offering exceptional value and excellence to our customers. Virtually all of the key personnel added through the acquisitions remain with the Company, which is a direct benefit of our acquisition structure that aligns our partners to existing shareholders with equity in the Company. This alignment has resulted in a larger, combined team with no loss of any customers or market share related to acquisition integration. We continue to focus on building out the strength of Cathedral by employing a guiding philosophy that we will incorporate and learn from the best of each business we have purchased. On that basis, we have been able to improve efficiencies, best practices, and systems more rapidly than might otherwise have been possible on our own.

The strength of our free cash flow profile, achieved through the acquisitions, has proven powerful. Cathedral's loans and borrowings less cash position at June 30, 2022 proforma the close of the Altitude acquisition in July 2022 of approximately $79,447 has decreased to $57,719 in only nine months to the end of 2023 Q1. Additionally, in April 2023, the balance sheet was further strengthened with the cumulative exercise of 99.7 per cent of the warrants from the $26,451 bought deal financing completed in April 2022. Of this amount, 88.6 per cent of the warrants were exercised in April 2023, further demonstrating clear shareholder support and confidence in our plan going forward.


In 2022, the Company executed five strategic acquisitions as detailed below:

  • U.S.- based company, Altitude in July 2022 for total consideration of $124,112, comprised of a cash payment of $87,245 and a common share issuance of $36,867, with the purchase price allocated primarily to working capital, property, plant and equipment, intangible assets and goodwill;
  • U.S.- based operations, Discovery in February 2022 for total consideration of $20,892, comprised of a cash payment of $18,160 and a common share issuance of $2,732, with the purchase price allocated primarily to inventory and property, plant and equipment;
  • LEXA Drilling Technologies Inc. ("Lexa") in June 2022 for total consideration of $1,761 in exchange for intangible assets;
  • Compass Directional Services ("Compass") in June 2022 for total consideration of $8,315, comprised of a cash payment of $4,000 and a common share issuance of $4,315, with the purchase price allocated primarily to inventory and property, plant and equipment; and
  • the Canadian directional drilling business of Ensign Energy Services ("Ensign") in October 2022 for total common share consideration of $5,965 with the purchase price allocated primarily to inventory and property, plant and equipment.

In addition to the assets acquired as described above, there were certain other minor working capital, right-of-use assets and lease liabilities, and deferred tax liabilities recognized as part of the purchase price allocations.


The Company recognized $127,665 of revenues in 2023 Q1, an increase of $93,280 or 271 per cent, compared to $34,385 in 2022 Q1 and cost of sales of $110,601 in 2023 Q1, an increase of $81,745 or 283 per cent, compared to $28,856 in 2022 Q1.

As a result, the Gross margin per cent and Adjusted gross margin per cent decreased to 13 per cent and 21 per cent in 2023 Q1, compared to 16 per cent and 29 per cent in 2022 Q1, respectively. Margins in the quarter relative to the prior year were primarily impacted by higher direct costs related to labour, repair and maintenance and third party equipment rental costs, offset by lower fixed costs as a percentage of revenue, with these costs expected to normalize moving forward.

Consolidated depreciation and amortization expense allocated to cost of sales increased to $9,225 in 2023 Q1, compared to $4,289 in 2022 Q1 due to property, plant and equipment additions, including those related to the 2022 acquisitions. Depreciation and amortization expense included in cost of sales as a percentage of revenue was 7 per cent for 2023 Q1 and 12 per cent in 2022 Q1.


Uncertainty in underlying commodity prices led to some market moderation in the first quarter of the year, particularly in the U.S. market. West Texas Intermediate ("WTI") oil prices have generally been range-bound between USD $65.00 and USD $83.00/bbl, while US NYMEX natural gas prices have weakened materially into the USD $2.00 - $2.40/mmbtu range. The market for public energy service equities has priced in a fairly significant rollover in land-based activity, although to-date, the rig-counts in both the U.S. and Canada have not seen any significant declines, outside of normal seasonality associated with spring break-up conditions in Canada and the Northern U.S. We believe that current economic conditions are sufficient for most programs to proceed in most areas by most E&P companies. With the change in drilling technology and market dynamics that occurred during the last decade in North America, the market is reaching maximum capacity for the equipment ideally suited to perform the work at the activity levels experienced in 2023 Q1 and those forecasted for the remainder of 2023 and into 2024. There has been some reshuffling of spending and priorities by some of our clients, but levels of activity are generally robust given the industry's capacity to supply properly specified equipment and qualified people.

Specifically, updated weekly rig data from Baker Hughes as at April 28, 2023 shows that the latest land rig-count of 735 has only fallen 4 per cent from the 2022 exit level of 764. Similarly, the U.S. oil vs natural gas rig-count shows only small changes year-to-date. The more sizable oil rig-count is off by 5 per cent (to 591 rigs from 621 rigs at December 31, 2022), while natural gas-directed drilling is up 3 per cent year-to-date (to 161 rigs from 156 rigs at December 31, 2022). The very important Permian play experienced a decrease in rig counts into mid-March, but the Permian has now moved back above the 2022 exit level (to 357 rigs from 350 rigs at December 31, 2022).

While E&P companies high-graded rigs paused programs or reduced drilling programs in the first quarter, the market stabilized and strengthened as we entered the second quarter with steady improvement anticipated for the remainder of the year. Note that a group of seven Canadian-based energy research analysts (Source: ATB Capital Markets, BMO Capital Markets, Stifel FirstEnergy, National Bank Financial, Peters & Co, Raymond James, TD Securities) is currently forecasting that U.S. land drilling levels will be down roughly 2 per cent in 2023 Q2 versus 2023 Q1, but up 5 per cent year-over-year. Moving to the second half of 2023, the same group of analysts is forecasting modest year-over-year declines: 2023 Q3 U.S. land drilling is forecast to be down 2 per cent year-over-year, while the 2023 Q4 land rig-count is forecast to be down 4 per cent year-over-year. On an absolute basis, the analysts' trajectory has the U.S. land rig-count bottoming sometime in 2023 Q3 before starting a slow ramp into 2024 and continuing the next year.

In Canada, activity levels remain low due to spring break-up and this is expected to last until early-June when road bans start being lifted and the climb back to stronger levels begins. After a strong first quarter, where the Western Canadian rig-count was up 12 per cent year-over-year, on average, the latest active weekly rig-count of one hundred is essentially unchanged from the ninety-nine rigs running one year ago. The same group of seven Canadian energy research analysts is forecasting that 2023 Q2 rig activity in Canada will be up 10 per cent year-over-year, up 9 per cent year-over-year in 2023 Q3 and up 12 per cent year-over-year in 2023 Q4. Calendar year 2024 rig activity is also forecast to rise approximately 2 per cent year-over-year. The underlying sentiment from industry forecasts is that for now, publishing energy research analysts are more bullish on Canadian activity than the U.S., which likely relates to the beginning of LNG-related drilling activity in Canada and the strong natural gas liquids component of the natural gas streams for many of the Canadian E&P companies.

The virtue of Cathedral's greatly expanded North American business model is that we can be a major player, no matter where the field spending levels are strongest. U.S. LNG projects will also be constructive for drilling activity, moving forward, as multiple years of natural gas-related drilling and production expenditures will be required, particularly in areas along the Southern U.S., including the Permian, Haynesville and Eagle Ford plays. Cathedral aims to grow its exposure in these areas in the coming quarters and years.

Cathedral Energy Services Ltd., based in Calgary, Alberta is incorporated under the Business Corporations Act (Alberta) and operates in the U.S. under Cathedral Energy Services Inc.

Cathedral is publicly traded on the Toronto Stock Exchange under the symbol "CET". Cathedral is a trusted partner to North American energy companies requiring high performance directional drilling services. We work in partnership with our customers to tailor our equipment and expertise to meet their specific geographical and technical needs. Our experience, technologies and responsive personnel enable our customers to achieve higher efficiencies and lower project costs. For more information, visit www.cathedralenergyservices.com.

We seek Safe Harbor.

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