High Arctic Energy Services Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 15, 2024

There are 4 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Welcome to the High Arctic Energy Services 2024 Q2 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 afternoon, everyone. Welcome to High Arctic's 2nd quarter conference call. Today, I'll be providing an update on the press release we issued after markets closed yesterday, August 14, including discussion of our financial performance for the Q2 of 2024. Following my remarks, I'll hand the call over to our 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'll 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 Hyattic's 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. Well, we have finally fulfilled our long anticipated reorganization. By this time tomorrow, the corporation's new shares and the shares of the spun out PNG business will have begun trading. On the 17th June this year, High Arctic held its Annual and Special General Meeting. At the meeting, the corporation shareholders approved, amongst other things, special resolutions approving the reorganization of the corporation by way of a plan of arrangement and a return of capital of up to $0.76 per common share.

Speaker 1

The return of capital was paid out at the $0.76 maximum to shareholders on July 17 this year. Pursuant to the reorganization of the corporation, the PNG business was spun out to the current high Arctic shareholders through a new publicly listed entity named High Arctic Overseas Holdings Corporation, referred to in our filings as SpinCo. SpinCo will trade on the TSX Venture Exchange under the trading symbol HOH. The new shares of High Arctic Energy Services Inc. Will trade under the existing ticker of HWO on the TSX main exchange.

Speaker 1

Each shareholder of the corporation has received its consideration 1 quarter of 1 common share of SpinCo, HoH, and 1 quarter of 1 common share of post arrangement High Arctic HWO, for each common share of High Arctic held at the time of separation. As a result, High Arctic has 12,448,000 166 New High Arctic Common Shares Outstanding and SpinCo has 12,448,166 SpinCo common shares outstanding. As a consequence of the June 17 approvals, our financial statements and MD and A for the Q2 classified the PNG business as assets and liabilities held for distribution. And as the PNG business represents a separate geographic area of operations, it has been presented as discontinued operations. In line with our prior guidance, I confirm that rig 103 completed the drilling of the 4th and final of the approved wells in our customers' program during the Q2.

Speaker 1

The rig and associated equipment packages were placed into cold stack storage and crews have been released. Just a reminder that the term of the rig 103 contract in PNG 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 future work. Associated with the cessation of drilling operations in PNG with Rig 103, we have seen a softening in the deployment of rental assets through the quarter, with those pulled through by drilling operations released upon the completion of the cold stack work. The P and G business 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

These rentals are ongoing. At the macro scale, we're optimistic for future drilling in PNG for SpinCo. 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 drilling 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 and potentially as late as the Q1 of 2026. With the Managing Director of PNG State Owned Kumul Petroleum being quoted earlier this week as stating that FID will now be in Q4 2025 or Q1 2026.

Speaker 1

This follows the joint statement in April this year 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. This project is anticipated to result in the addition of further gas liquefaction capacity in the world class PNG LNG export facility. State owned Kuma Petroleum is advancing appraisal of other gas discoveries onshore Papua New Guinea to progress their aim to contribute to growing domestic energy needs and additional LNG export processing facilities. 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 Wilderbeest.

Speaker 1

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 Papua New Guinea today. P and G Industry Manpower Solutions, our labor hire training and manpower business in P and G has been established to tap into the business opportunities associated with that need. We have long provided training and competency solutions in house and PIMS also taps into our large pool of talent to provide manpower, skills and semi skilled labor, trades qualified personnel and professionals in P and G. SpinCo's team are excited to be playing a role in preparing P&G citizens to be job ready for the major projects anticipated in the latter part of this decade and beyond. Turning to the Corporation's remaining business, it consists of high margin Canadian equipment rental business centered upon 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.

Speaker 1

We have now completed the 2nd quarter of activity, which includes the business of Denta, 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 combined rentals business is now marketed under the Delta brand. The second quarter and first half results are in line with our pre acquisition expectations with a strong contribution to revenue and positive cash flow. The Delta acquisition contemplated and the structure of the consideration with a large earn out was reflective of Hyun Arctic's intention to reorganize and separate the Canadian P and G businesses.

Speaker 1

The success of this modest but important growth step has provided us with confidence that this transaction is symbolic of the prospects for the now purely Canadian High Arctic and how additional accretive transactions may be realized. High Arctic has a 42% equity stake in team Snubbing. The 2nd quarter is traditionally a low activity period for snubbing in Canada due to the seasonal breakup and associated road bans. This year has been no different with activity levels down from the record Q1. During the quarter, team used the opportunity to provide crews with scheduled vacation and conducted planned maintenance and recertification activity.

Speaker 1

Team also completed the reorganization of its international partnership. The result of this reorganization, a cashless arrangement, sees team holding a fraction over 90% of the team Snubbing Services international business and complete control of all decision making. This result leads to a more efficient overall team corporate structure and management structure and a much more efficient overhead. In Alaska, the snubbing packages worked for the quarter with activity negatively affected by extreme weather events and client scheduling. I'd like now to pass the call over to Lon Baite, Hyattic's Chief Financial Officer to discuss key financial highlights from the quarter in more detail.

Speaker 2

Thank you, Mike, and good afternoon to all of you joining on the call today. Just before I begin, I just want to state that all dollar amounts, unless otherwise stated, that are mentioned on this call are all in Canadian dollars. Also as Mike mentioned, with the near certainty of completing the reorganization achieved in the past quarter, our consolidated financial statements and MD and A classify the P and G business as assets and liabilities held for distribution and the P and G business as it represents a separate geographical area of operation. Those operations and the results thereof have been presented separately as discontinued operations in our statements. This change makes our consolidated statements and MD and A considerably different from the past.

Speaker 2

So what this means is that what we presented in our most recent quarter is that our income statement and cash flow statement show only the details of our continuing operations, which as Mike said, is our Canadian Rentals business, plus equity accounting for our investment in Team Snubbing. The comparative quarter from 2023 and the 6 month results for both June 30, 2023 2024 have all been restated in this quarter as well, so that the numbers are comparable and the reader of our financial statements can therefore compare the performance of the go forward Canadian business quarter over quarter, 6 months over 6 months. In Note 3 of our financial statements, we detailed the assets held for distribution and the discontinued operations that are presented discreetly there for users of the financial statements to understand the assets and business being spun out of our books here in Canada into SpinCo, and that's based on our current book values. Okay. So turning to the Q2 as published here.

Speaker 2

Start in Canada and the result from our continuing operations, the Delta Rentals business, which is centered on pressure control equipment and equipment supporting the high pressure stimulation of oil and gas wells in the basin. With the Delta acquisition we made in late 2023, our revenues from continuing operations have increased approximately 3x for both the 3 6 month period ended June 30, 2024 versus the comparable periods in 2023. Iartic achieved revenues of $2,500,000 in Q2 2024 and $5,500,000 for the first half of this year. Strong operating margin performance is also achieved in both 2024 periods with margins from this business consistently in the high 40% range. Margin revenue performance were slightly lower in Q2, largely due to the spring breakup and the sort of typically lower industry wide activity levels customary that we see in Canada for this quarter.

Speaker 2

There's no activity in our production services segment again this quarter, at least in terms of recordable revenue and margin. Included in our production services segment is our investment in team snubbing their equity investment and our involvement with the Sicheny partnership where we hold a 49% stake sorry, 49%. The Sicheny partnership has experienced limited business activity since the 2022 Canadian sales transaction. But the partnership does still remain active and we along with our partner continue to work to reposition our offerings to our customers and are exploring other avenues for business activity. Mike also mentioned team acquired a controlling interest in Team Snubbing International in the quarter.

Speaker 2

So financially as a result of this acquisition, team has now consolidated the results of Team Snubbing International for the first time and that was essentially the full quarter as that transaction took place in early April of this year. So this consolidation of Team Snubbing International plus the increase in activity from Team's Canadian operations in the quarter helped drive the increase in revenues reported for Team, which are included in Note 7 to our financial our interim financial statements. More than offsetting this additional business activity in the quarter for Teamwork significant costs incurred by Team Snubbing International in the same quarter. In total, the quarterly net after tax loss of 2,100,000 dollars So that's gross, not the net that was picked up by us. That gross amount was recorded in the consolidated results team.

Speaker 2

That loss driven by the low activity in Alaska that Mike mentioned, plus additional one time costs mentioned above as Team International restructured their management and operational teams up in Alaska. This restructuring initiative consolidated Team International's workforce, rightsizing it to where it needs to be to service the overall Alaskan customer base. Turning to the P and G business, which in our disclosures is all inclusive, and so therefore includes both drilling services and rentals, revenue was down in the quarter, down from $16,600,000 in Q2 of last year to $10,400,000 of this year. And as Mike stated, last year, we were active on Rig 103 as it worked the full quarter versus this recent quarter where our drilling operations for Rig 103 ceased and much of the rental revenue that typically accompanies that drilling work also deaccelerated. G and A costs from continuing operations totaled $1,800,000 in the quarter, higher than the $1,300,000 incurred for this quarter last year, Q2 2023.

Speaker 2

This increase in G and A is a direct result of professional and other fees related to the arrangement and other aspects of the corporate reorganization that we just recently completed. In our MD and A, we've adjusted out these specific 3rd party non recurring costs in our adjusted EBITDA non IFRS measures, which for this quarter, this additional G and A totaled approximately $0.75 1 $250,000 year to date 2024. After stripping out this additional G and A associated with the reorganization, the business achieved positive EBITDA adjusted EBITDA from continuing operations of $200,000 for the current quarter, approximately $300,000 year to date. We, like in the standalone go forward Canadian entity, HWO, High Arctic, anticipate meaningful G and A reductions to begin to appear in the second half of twenty twenty four. Post the close of reorganization after some transitional matters are completed, we'll be in a position to right size the administrative support in Canada to align with our much simpler Canadian only operations going forward.

Speaker 2

CapEx spend in 2024 Q2 totaled $450,000 with this spend being focused in Canada, both on growth and capital upgrades to our rental fleet rental equipment fleet, plus costs associated with building out our financial and operational systems. We expect to continue with modest capital spending in 2024, mostly focused on maintaining and growing our rental fleet. So in closing, I think from my perspective with our recent press releases going out announcing the completion of our reorganization and our recent Q2 results, We've given the market some guidance on cash working capital and the debt capital structures of the 2 distinct entities going forward. And I just want to revisit this important information here on the call. For the remaining Canadian business today, we have positive working capital of approximately $5,000,000 that which of which is inclusive of $4,000,000 cash on hand, but the only debt in the company held is $3,400,000 in mortgage debt, which is well secured with our Whitecourt and Claremont properties.

Speaker 2

Finco's now standalone P and G business starts out with a strong capital structure, no long term debt and positive working capital of approximately $19,000,000 inclusive of sorry, that's US19 $1,000,000 inclusive of US13 $1,000,000 in cash. Now with that said, I'll turn the call back over to Mike for closing remarks.

Speaker 1

Thank you, Long. Now that we've completed the reorganization, I'm holding the Chief Executive role in an interim capacity, assisting the Board of Directors in their search for a dedicated full time Chief Executive Officer to put effect to our strategic vision for the corporation. The Canadian rentals business is managed on a day to day basis by very capable and experienced people who do not need constant oversight. And while I will maintain a careful watch over the business of High Arctic, most of my time will be dedicated to the affairs of SpinCo. The corporation and SpinCo have entered into a transition services arrangement, which will facilitate cooperation aimed at minimizing the cost to both companies as we move towards a completely separate management.

Speaker 1

Those arrangements include Lon acting as Interim CFO for SpinCo as it conducts a review for the most suitable persons to fulfill that role on a permanent basis. And with that now, I'll turn the conference back over to Melanie, the operator, who will open the line for questions.

Operator

Thank you, Mr. McGuire. We will now take questions from the telephone The first question is from

Speaker 3

Joseph Schachter.

Operator

Please go ahead.

Speaker 3

Good afternoon, Mike and Lon. Mike, one question for each side of the two businesses. You mentioned that the Board is in the Canadian operations and then coming up with a go forward strategy. Is that something that we could look forward to hearing imminently in the next few months or is this something that could drag in drag on till early next year?

Speaker 1

Thanks, Joseph. Good afternoon to you too. Yes, the Board Church is for a permanent CEO or to replace myself for the Canadian business is something that's ongoing and that has commenced sometime back. We have several candidates that we've spoken with, some have some interesting vision for the corporation. The Board is not in a hurry to move on this given the nature of the existing business and its high quality management team and we'll work methodically through the process to determine an appropriate person to lead the business into its long term future and realize upon its vision.

Speaker 1

That vision was outlined in the materials that were issued to shareholders for the vote to on the arrangement to separate the 2 businesses. And just in a quick summary, what that vision included, a focus particularly on Canadian business activity and growing that core business through selective and opportunistic investments, leveraging the existing people assets, systems in our work processes for the growth, sustaining capital stewardship that preserves the balance sheet strength and financial flexibility, building up the business with accretive acquisitions that allow the corporation to optimize its available tax loss carry forwards, which I'll remind listeners are in the vicinity of CAD130 1,000,000 and positioning it for an efficient corporate structure that provides the opportunity to consider transactions that would create value for the corporation shareholders. And this could be transactions that may result in bringing in a larger organization and affecting an amalgamation with somebody to whom our structure and the various assets could be very attractive to their shareholders too.

Speaker 3

Okay. And the next question on SpinCo, with that amount of significant amount of cash and things being, as you said, pretty slow in P and G, do you look at maybe doing acquisitions in the area, other countries in Southeast Asia or Southern Asia, where you could maybe mobilize those financial resources and build the company up quicker. Is that something that you're contemplating?

Speaker 1

Short answer to that would be yes, and I'll expand upon that a little bit. And before I do, maybe I'll just touch on some of the reasoning behind with leaving the cash in the various locations SpinCo and RemainCo. In Canada, we have access to a very sophisticated, well developed and highly resourced financial services sector and various different ways of accessing liquidity to affect business strategy, which may include some acquisitions and expenditure for growth. In Papua New Guinea, we don't have the same. The financial services there are rather immature, there's limited sources and most of it's available in the Papua New Guinea in Kenya, which is not a very liquid currency and difficult to translate into hard currency in a reasonable timeframe.

Speaker 1

So we made the decision to leave the cash in the Papua New Guinean business that was there with the exception of some amounts that were transferred through to assist the Canadian business with making the final return of capital payments earlier back last month. What do we do with that cash? Well, we know in Papua New Guinea, we need to have a substantive amount of cash available to us for the recommencement of operations. The restart of drilling in Papua New Guinea has a significant cost associated with it. And then that cost is harvested back then after the rigs commence work.

Speaker 1

So we do need to maintain a reasonable cash balance there or at least have access to liquidity that would ensure that we get a request to go to work, we can do so quickly and effectively with access to adequate amount of cash to prepare ourselves and mobilize equipment to the first site. Then as your question correctly positioned, we are in our business strategy for the Papua New Guinea business also looking to seek out opportunities to expand and route our business in that region, which could include M and A activity in Papua New Guinea or in countries near Papua New Guinea and in the new vicinity of where I'm sitting at the moment, which is in Brisbane, Australia. So yes, the short answer was yes, and I think I'm hoping that the long answer provided enough color for people to understand what how we intend to move it to use the cash going forward basis.

Speaker 3

Thanks for answering my questions and good luck with the go forward strategy and I'll be looking forward to seeing announcements in the future. Thank you.

Speaker 1

Thanks, Joseph.

Operator

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

Speaker 1

Thank you, Melanie. I'm hoping that the fact that there's not many questions today means that we've explained ourselves well and that we've been able to provide adequate guidance to people who are interested in or invested in our 2 corporations as they begin to trade tomorrow. An exciting period I guess in the ongoing story of high Arctic and I'm hoping that we will be able to realize on the value that we expected to be created from the process of separating these two entities. I wish everybody a good afternoon. Thank you.

Operator

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

Operator

Maguire?

Speaker 1

Yes. Hi, Melanie. Yes.

Operator

So we had hi, Mr. Bates. We had in total 20 locations connected in today's conference.

Speaker 1

Okay. That's pretty close to where we normally are. All right. Very good. But thank you for facilitating and moderating us today, Melanie.

Operator

No problem. My pleasure. And I hope I get to do the next one. Okay. Thank you.

Operator

Have a great day.

Speaker 1

Okay. You too. Bye now. You too. Bye now.

Speaker 1

Thanks.

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Earnings Conference Call
High Arctic Energy Services Q2 2024
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