High Arctic Energy Services Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 16, 2024

There are 5 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to the High Arctic Energy Services 2024 Q1 Results Conference Call. I would now like to turn the meeting over to High Arctic's Chief Executive Officer, Mike McGuire. Please go ahead, Mr. McGuire.

Speaker 1

Thank you, Melanie, and good morning to everyone. Welcome to HyOptics' Q1 conference call. Today, I'll be providing an update on the press release we issued after markets closed yesterday, May 15, including discussion of our financial performance for the Q1 of 2024. Following my remarks, I will hand the call over to our Interim Chief Financial Officer, Lon Bate. Lon will be discussing our financial performance for the quarter in more detail.

Speaker 1

After our formal comments, we will open the call to answer any questions that you may have. Before we begin, I'd like to remind you that certain information presented today may include forward looking statements. Such statements reflect HyOptics' current expectations, estimates, projections and assumptions. These forward looking statements are not guarantees of future performance and they are subject to certain risks, which could cause actual performance and financial results to vary materially from those contemplated in the forward looking statements. For additional information on these risks, please take a look at our management's discussion and analysis and the 2024 annual information form available on our website or on SEDAR Plus.

Speaker 1

Look under the heading Risk Factors. Starting with operations in Papua New Guinea, and during the quarter Rig 103 had strong operational performance. This represents the 4th full quarter of drilling activity for the corporation since the suspension of operations in early 2020. As well as the full quarter of drilling operations with Rig 103, we again saw a strong deployment of rental assets through the quarter, including those pulled through by drilling operations as well as rentals to the wider market. High Arctic also provided rental material handling equipment, a 100 man mobile camp and a large quantity of worksite matting to support other ongoing field activities with our 2 main customers in PNG.

Speaker 1

Full utilization of our drilling services and asset rentals associated with customer owned rig 103 had a significant impact on our earnings when compared to the same period in 2023, when we were mostly preparing for drilling operations. We have completed the drilling of the 4th and final of the approved wells in our customers program and as of today we are transporting the rig and associated equipment packages for them to be placed into cold stack storage. The term of the rig 103 contract runs through to July 2025 with options for the customer to extend. Presently, there is no confirmed drilling activity in the remaining contract period, but we continue to work with our customer to advance plans for potential future work. At the macro scale, we are optimistic for future drilling in PNG.

Speaker 1

This optimism is based upon an expectation that advancement of the Papua LNG project led by French Multinational Total Energies will stimulate exploration and appraisal activity in much the same way as the first PNG LNG project did a decade ago. We are however disappointed that a final investment decision on the Papua LNG project has been pushed out into 2025. This follows the joint statement in April reaffirming commitment to the project by the government of Papua New Guinea and the project operating partner, Total Energies. The Papua LNG project is expected to be followed by the P'nyang gas field development in the Western province of PNG, which is anticipated to result in addition of further gas liquefaction capacity in the world class PNG LNG export facility. State owned Kumar Petroleum is advancing appraisal of other gas discoveries onshore PNG to progress their aim to contribute to growing domestic energy needs and additional LNG export processing facilities.

Speaker 1

ExxonMobil and their partners are also advancing the backfill of the PNG LNG plant and have announced intentions to appraise a significant prospect that they have named Wildebeest. These LNG projects and other large scale mining and infrastructure projects moving through the pipeline will require tens of thousands of new workers and more skilled and supervisory personnel that do not exist in P and G today. Through PIMS, P and G Industry Manpower Solutions, we have added the provision of recognized safety training, competency verification and equipment licensing services. We have long provided these training and competency solutions in house. PIMS also taps into our large pool of talent to provide manpower, skilled and semi skilled labor, trades qualified personnel and professionals in PNG.

Speaker 1

We are excited to be playing a significant role in preparing Papua New Guinean citizens to be job ready for the major projects we anticipate in the latter part of this decade and beyond. In Canada, we have completed the 1st quarter of activity which includes the business of Delta Rental Services. The acquisition of Delta in late December last year, its amalgamation with High Arctic and its integration with our legacy rentals business in Canada has delivered the scale for a cash positive operation. Delta has blended seamlessly with High Arctic Rentals and the combined rentals business is now marketed under the Delta brand. The first quarter results are in line with our pre acquisition expectations with a strong contribution to revenue and positive cash flow.

Speaker 1

The Delta acquisition contemplated and the structure of the consideration with a large earn out was reflective of Hyattic's intention to reorganize and separate the Canadian and PNG businesses. The success of this modest but important growth step provides us with confidence that this transaction is symbolic of the prospects for a purely Canadian entity and how additional accretive transactions could be realized. Over the past 2 years, the Corporation has divested underperforming in non core assets and businesses. Now the corporation's Canadian business consists of a high margin equipment rental business centered on pressure control, a minority interest in Team Snubbing Services Inc, Canada's largest oilfield Snubbing Services business and industrial properties at Claremont and Whitecourt in Alberta, Canada. Biarctic has a 42% equity stake in team snubbing.

Speaker 1

Team has had another outstanding quarter in Q1, setting new high watermarks in terms of hours worked, snubbing packages deployed and available crews. This is transposed into a sizable equity pickup for High Arctic. During the quarter, team completed a reorganization of its international partnership. The result of this cashless arrangement sees team holding a fraction over 90% of the team Snubbing Services International Business and complete control of all decision making. The result is a more efficient overall team structure and overhead.

Speaker 1

After shutting down in December, the 2 snubbing packages deployed in Alaska remained shutdown through much of the quarter through the deepest parts of the cold weather with both packages recommencing operations in March. I'd now like to pass the call over to Lon Baite, Hyattic's Interim Chief Executive Chief Financial Officer to discuss key financial highlights from the quarter in more detail.

Speaker 2

Great. Thank you, Mike, and good morning, afternoon to you all joining the call today. Just before I begin, just want to state that all the dollar amounts mentioned on this call for me will be in Canadian dollars, unless otherwise mentioned. So looking at our Q1 financial results from continuing operations and on a consolidated basis, High Arctic generated revenues of $18,000,000 adjusted EBITDA of $4,500,000 or 25 percent of revenue. In the quarter, High Arctic generated net income of $3,500,000 which equates to $0.07 per share.

Speaker 2

This improvement in profitability for High Arctic was a result of a continued full utilization of our drilling services and rental business in P and G that Mike already mentioned, combined with the full quarter results from the Delta Rentals business we acquired in late December 2023. In addition, the positive quarterly results were driven by meaningful investment income from short term investments we hold and the strong quarterly contribution from Team Snubbing's Q1 results recorded as income from equity investment on our income statement. In the quarter, a great deal of effort was undertaken by the Canadian operations team to integrate the operational aspects of the Delta Rental Services business. And as mentioned, our Canadian Rentals business now operates under the Delta Rental Services banner in Canada, leveraging the platform we acquired. And in combining the two business, we've been able to acquire new customers in the space and in doing so, deploy a meaningful amount of rental assets that were idled prior to the acquisition.

Speaker 2

Now turning back to the quarter itself, as mentioned, the business performed well, generating the $4,500,000 in adjusted EBITDA, 40% more than the 3,200,000 dollars in adjusted EBITDA reported in Q4 2023. Consistent with the past 3 consecutive quarters, customer owned rig 103 in Papua New Guinea continue to be fully utilized. Our ancillary services segment continues to perform at or above expectations. And as a result, High Arctic produced a consolidated oilfield services operating margin of over 40% in the quarter, well above the 33% margin achieved from the prior quarter and higher than any other consolidated operating margin for quite some time. This margin performance of over 40% has been achieved through the culmination of strategic efforts taken at High Arctic to shed underperforming businesses over the past few years, adding Delta Services into the portfolio and through excellent operational execution in P and G that in the quarter saw exceptional margin performance driven by excellent operational execution at the rig site and disciplined cost controls.

Speaker 2

G and A costs were $2,800,000 in the quarter, consistent with prior quarter spend. The cost for the quarter represent 15.6 percent of revenues, again consistent with both Q4 and Q3 2023. G and A for the business has remained elevated as Hyattic has incurred corporate professional fees related to its work towards the recently announced reorganization plan. Some additional one time costs to integrate Delta are also included in the quarter as a result of the meeting the corporation held on January 10. As and where possible, management continues to evaluate its G and A burn and right size the administrative support to align with the expected operations going forward in both P and G and Canada.

Speaker 2

That being said, it is anticipated that with the recently announced reorganization plan, Q2 2024 RG and A will likely be a high watermark in our spending at High Arctic. Now assuming the reorganization goes ahead, as per our current timelines, meaningful G and A reductions will be realized in the second half of twenty twenty four collectively. As mentioned earlier, adjusted EBITDA was $4,500,000 in Q1 or 25.2 percent of revenues, comparing favorably to adjusted EBITDA of just $1,000,000 just shy of $1,000,000 or 11% of revenues in Q1 2023. This better performance in 2024, again, was due primarily to the fact that we were considerably busier in 2024 versus last year, plus some of the additional optimization mentioned earlier. Specifically in the Drilling Services segment, we drilled we generated $12,400,000 of revenue in the quarter, higher than the $6,300,000 in Q1 2023.

Speaker 2

This increase was due primarily to the fact, as mentioned, our customer owned rig 103 was only operational for 1 partial month in Q1 of last year. Preparatory work to ready that rig for service last year is captured in the PNG revenue tally for 20 23 Q1, but this activity was nowhere near the revenue level we experienced when Rig 103 is fully operational. As expected, our Q1 twenty twenty four operating margins in the Drilling Services segment were also higher at over 29% in the quarter, driven by this Our Ancillary Services segment spans BOLT P and G in Canada and continues to be our highest operating margin generator. We achieved operating margins of 66 percent on $5,600,000 of rev in Q1 2024 as compared to the 68% margin achieved in Q1 2023. The increased revenue is a result of increased deployment of our rental equipment in PNG and the additional revenue driven from the Delta business impacting the Canadian results.

Speaker 2

There was no activity in our Production Services segment again this quarter with only a small expense being booked related to storage and preservation cost for the remaining assets in this segment. Including our Production Services segment, just for our readers, for everybody's benefit is our 42 percent equity investment in team snubbing and our involvement in the Cichendi partnership, where High Arctic holds a 49% stake. The SiCheny partnership has experienced limited business activity since the 2022 Canadian sales transactions, but the partnership does still remain active, and we, along with our partner, continue to work to reposition its customer offerings and are exploring other avenues CapEx side, during the quarter, CapEx totaled just over $1,000,000 This spending was focused on both growth and capital upgrades performed in our rental equipment fleet, both in P and G and Canada, plus costs associated with building out and modernizing our financial and operating systems, again, both in PNG and Canada. We expect to continue with only modest capital spending in 2024 as it stands right now, and that will mostly be focused on maintaining and growing our rental fleet, both here and abroad. The company ended the quarter with $57,000,000 of cash on hand and over with over $40,000,000 of that invested in secure interest bearing short term investments, which generated interest income for us of $570,000 in the quarter.

Speaker 2

Our working capital position improved slightly in the quarter at the end of March and stood at $67,600,000 at March 31. Our reported cash and working capital balances did experience a positive translation impact at the end of March 2024. This was due to the appreciation of the U. S. Dollar visavis quarter just reported.

Speaker 2

Consistent with past quarters, our only source of debt is the mortgage financing we hold at the end of March. In total, long term, short term portion combined to total 3,500,000 that we hold in Alberta. Well, that is my report. And with that, I'll turn this back over to Mike.

Speaker 1

Thank you, Lon. A couple of days ago, we announced the setting of June 17, 2024 for an annual general and special meeting of shareholders for the purpose of, among other things, approving the reduction of the capital account maintained by the corporation in respect of the High Arctic common shares in an amount of up to $0.76 per share multiplied by the number of common shares issued and outstanding. And the distribution of a tax efficient return of capital to shareholders to a maximum of $38,200,000 The maximum distribution relates to the sale of Hyattic's Canadian well servicing assets in July 2022. Further, at the meeting, shareholders have been asked to vote upon the reorganization of the corporation via a court approved plan of arrangement. The arrangement will transfer High Arctic's PNG business to a separate, dedicated and independent publicly traded company named High Arctic Overseas Holding Corp.

Speaker 1

While the Corporation will continue to own and operate existing North American business including Delta Rentals. Each of the 2 companies will have its own management and operational teams and separate Board of Directors. Under the proposed arrangement for each common share of High Arctic held, every shareholder of High Arctic will receive 1 quarter of 1 common share of the new company, High Arctic Overseas Holdings Corp, and 1 quarter of one new common share of the corporation post arrangement. This separation is aimed at addressing the lack of synergies and inefficiencies of managing 2 small businesses on opposite sides of the world and allowing senior management to concentrate where they have had the most success in the past. Py Arctic's Board and management believe value can be created for shareholders.

Speaker 1

For the holders of SpinCo common shares, separation provides the opportunity for High Arctic International OHAI Overseas Holdings to consider transactions with a wider group of PNG focused companies and greater flexibility to relocate in the future to a market that better understands Papua New Guinea and is likely to ascribe greater value to the company. For the holders of post arrangement High Arctic common shares, the transaction opens up opportunities for Hyattic to participate in Canadian mergers and acquisition activities where the PNG business may have been perceived as an impediment to accretive transactions. Both the return of capital and the reorganization by plan of arrangement require approval by a minimum of 2 thirds of the votes cast by High Arctic shareholders, voting in person at the meeting or by proxy. The arrangement is also subject to the approval of the Toronto Stock Exchange and the Court of Kings Bench of Alberta and applicable regulatory approvals and certain other conditions customary for transactions of this nature. An application has been made to the TSX Venture Exchange for the listing of the new company's common shares upon completion of the arrangement, while we expect Hyattic to maintain its listing on the main Toronto Stock Exchange Board.

Speaker 1

I will now turn the conference over to Melanie, the operator, who will open the line for questions.

Operator

Thank you. We will now take questions from the telephone

Speaker 3

Mike Schmitt.

Operator

Please go ahead. Your line is now open.

Speaker 3

Yes. Hi. I have a question with regards to the deferred tax asset. Is the deferred tax asset perceived as having monetary value in discussions with potential M and A partners? And the second part to that question is, would the realization of the value of that asset be most easily achieved through merger with a large partner?

Speaker 2

Mike, it's Lon, CFO. I'll take that. So perceived value, so you're I just want to make sure that we haven't recorded a deferred tax asset on the books of High Arctic. So it was historically, right, but the last few years, it's we take something called a valuation allowance against it. So obviously, we do have non capital losses in the Canadian entity, the parent company that's listed in the TSX.

Speaker 2

And certainly, there is I mean, I'm not going to speculate on what the perceived value of those tax noncapital loss carryforwards are. Is there a market for them generically? Yes. It is something, obviously, in our press releases we talk about. It is factual.

Speaker 2

They do exist and under the right structure going forward into a transaction or just through organic growth in the Canadian business as we build out the Canadian platform, assuming the transaction and the reorganization goes ahead, they certainly will have value. Certainly, Delta, the acquisition we did there in December of last year, they were cash taxable upon the day before we complete that transaction and subsequent to the amalgamation. They're folded in with the operations here. And the Canadian operations are no longer subject to tax on that business. So the perceived value, we're not marketing these tax losses carried forward.

Speaker 2

We don't do that. That's just going to be part of the go forward entity and just call it a feature for the entity going forward, and it will be there on any transaction we do. There are a lot of regulations around how those are used in with change of control and the like going forward into certain transactions. So you referenced a large transaction. Again, depending on the regulation, whether those survive or not is sort of up to the regulations and CRA's view.

Speaker 3

Just tacking at the end

Speaker 1

of that, Mike, I think that to be clear that we intend to take steps aimed at protecting and retaining those non capital tax loss carry forwards and we do believe that it could be potentially attractive to other businesses like it was for Delta Rental Solutions or Delta Rental Services, I should say, to be amalgamated in or merged with a company such as ours where those tax losses then provide some further protection for the distribution of earnings out of the business.

Speaker 3

Great. Thank you very much. That's pretty much how I perceived everything and that confirms what I thought. Thank you.

Speaker 1

Thanks, Mike.

Operator

The next question is from. Please go ahead. Your line is now open.

Speaker 4

Hello, guys. Good progress. So thanks for that. I've got 2 questions. First one, can you give a little bit of reasoning behind kind of the short share rollback we're going to do if the organization goes through?

Speaker 4

That's one. And the second question is, could you give a little bit of background and reasoning on the 2 new directors, Craig Niebuhr for Canada and Bruce Apana for the SpinCo?

Speaker 1

Sure Ken. Mike here. Thanks for your questions and we'll start with the first one, the reasoning behind the share rollback. Yes, it was our view and discussed with our financial advisor that on the post arrangement traded potential trading values of the 2 corporations following what we expect to be a sizable cash distribution out of the business or out of the corporation that we didn't want to see them trading down as low digit, low cent stocks. So, we determined that a 1 for 4 or 4 for 1 sorry, 4 for 1 exchange would mean that they should list in a manner that would be much more of a meaningful figure to be trading on the stock

Speaker 4

exchange. Okay. And the follow-up question on that, is there also in the back of your mind reasoning that if there's less shares and potentially especially for the Canadian company easier to pay dividends on?

Speaker 1

I don't think the fact of aiming for less shares was at all part of the consideration. It was more about after that cash comes out of the business and the 2 pieces separate, where do we want to see the 2 companies trading at far as like a dollar figure in

Speaker 4

exchange. Okay.

Speaker 1

Okay. So the second question, a bit of background on the 2 directors. So I was intending and closing remarks to reflect upon Joe Oliver, the Honorable Joe Oliver's service as a Director with High Arctic for the past 8 years joining in 2016. And he has determined that having reached the point now where we do look likely subject to those remaining shareholder approvals and other regulatory hurdles that we're likely to end up with the reorganization in place and this was an ideal time for him to step off the board. And in that regard having concluded the business associated with approving our Q1 financial results and the release then yesterday Joe has provided us with his resignation.

Speaker 1

For a compliant board structure for the TSX that is as lean and cost effective for our shareholders as possible. We did need to have we believe we did need to have 4 directors with at least a minimum of those having 3 independent directors to form an audit committee and meet other TSX rules and regulations. So we the Board has conducted a short search and identified Pragney Bauer as a suitable candidate to step in and take the 4th Director seat replacing Joe Oliver. And Craig has consented then to being put forward as a nominee for election at the shareholder meeting. Craig's got a lot of experience in he's a Canadian, he's resident in Alberta, in Calgary and where the Corporation's headquarters is.

Speaker 1

He's got a lot of experience as a professional in the energy sector, both as a from the energy producers as well as services and other related sub industries within the energy sector. Lengthy career there, I think that I'll be speaking on behalf of the Board but to say we're excited about what Craig could bring to discussions in the Board room. The other Director for the Papua New Guinea business is Bruce Apana. I've known Bruce for over 10 years. Bruce Apana is a legal professional.

Speaker 1

He's educated in Australia and has served as a solicitor in the Australian Capital Territory, but for the majority of his career as a Papua New Guinea citizen he's worked in Papua New Guinea. He is resident in Port Moresby, he's well connected in the business and in the political circles and has been a long term associate of high arctics. He acts as a resident director of our subsidiaries there and as company secretary to those subsidiaries and has done so for the entire period I've been associated with the company. I'm excited about the idea here of a Papua New Guinean citizen, a man with an impressive background such as Bruce and a strong association with that company being on the Board of the Canadian parent entity.

Speaker 4

Okay, clear. Thank you.

Speaker 1

You're welcome, Matt.

Operator

There are no further questions registered at this time. I would now like to turn the meeting over back to Mr. McGuire.

Speaker 1

Well, I must admit I am a little surprised. I thought there might be more questions about our reorganization in the shareholder meeting and I'm going to choose to take that as meaning that the materials that we distributed in our press release have very clearly outlined what our intentions are. It has been a long process for us to get to this point, appreciate the patience of our shareholders, particularly those who've been in with us for a long period and held high Arctic. I'm excited about what the potential is for the 2 separated entities. Our timeline sees us moving towards having the return of capital distributed to shareholders in the second half of July and to complete the reorganization by the end of that month.

Speaker 1

And in doing so, starting the exciting new chapter of High Arctic Energy Services and High Arctic Overseas Holdings. Thank you for your time this afternoon and have a great day.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.

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High Arctic Energy Services Q1 2024
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