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spk00: Good morning, ladies and gentlemen. Welcome to the High Arctic Energy Services 2021 Q4 Results Conference Call. I would like to turn the meeting over to High Arctic's Chief Executive Officer, Mike McGuire. Please go ahead.
spk01: Thank you, Patrick, and good afternoon or good morning to everyone, depending upon where you are. Welcome to High Arctic's fourth quarter conference call. Today, I'll be providing an update on the press release we issued aftermarket yesterday, March 10th. Following my remarks, I'll hand the call over to our Chief Financial Officer, Lance Mierendorf. Lance will be discussing our financial performance for the fourth quarter of 2021. 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 HIACTA'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 2021 Annual Information Form that accompanied our release under the heading of Risk Factors. But what a rollercoaster the energy industry is on. Entering 2022, global events have propelled the energy sector into an immediate and significant supply constraint situation. Sanctions against Russia, combined with the actions of global energy and transport corporations, have removed substantial supply of oil and gas, stressing the market at a time of increasing energy demand as COVID-19 restrictions are lifted around the world. High Arctic closed out the 2021 fiscal year in an excellent position. As underlying business fundamentals began to improve, surplus pre-pandemic cash of $9.7 million was paid to shareholders in the form of a special one-time dividend in November. We exited the year with $12 million of cash on hand, a strengthened capital structure with the execution of an $8 million fixed rate mortgage financing, access to a revised $37 million undrawn revolving credit facility, and increasing revenue fueled by positive pricing trends, increasing demand for our services, and the return to work in Papua New Guinea. The return to RIG activity in PNG was a 2021 highlight. Even better was the ability of our team there to prepare, transport, assemble, recommission, and operate RIG 115 without a recordable incident. In the process, increasing our recordable incident free performance after five and a half years and 2.8 million man hours. Another highlight was the above market 43% utilization in our Canadian well servicing against the CAOEC average of 37%. Increasing revenue per hour in Canada through the second half of 2021 is a trend that continues into the first quarter of this year, driven by substantially improved pricing agreements with our key customers. This was somewhat offset by rig deployment and reactivation costs and inflationary cost pressure, particularly the cost of personnel. COVID-19 site shutdowns continued and impacted the fourth quarter more than any prior period. The ongoing sentiment towards living with endemic COVID-19 is increasingly positive, However, some site shutdowns still persist in the first month of 2022, and how this might affect our business into the future does remain somewhat uncertain. But we expect commodity price strength, coupled with the renewed global focus for the security of supply for oil and natural gas, will drive further increases in energy service activity. It is our view that more Canadian oil will be needed to supply foreign markets. Canadian heavy oil is well-placed to supply growing U.S. demand as it strives to meet President Biden's State of the Union commitment this year to start fixing over 65,000 miles of highway and 1,500 bridges in disrepair throughout their country. For the past 18 months, our E&P customers have prioritized balance sheet repair, followed by increased return to shareholders. With a prognosis for continued high oil and gas, we anticipate that these companies now have additional free cash flow to invest back into their assets to increase production, providing High Arctic with optimism for continued increases in utilization and pricing through 2022. LNG is increasingly becoming the mobile, low emissions energy source of choice through this period of energy transition. Demand for LNG is increasing in Asia, Europe and the subcontinent. And Papua New Guinea is ideally positioned as a key source of new LNG supply. The signing of the Pyongyang gas agreement and the progression of the Papua LNG project towards final investment decision are key recent developments here. The project timelines for those two major capital projects looks ideal, given that there are projections of significant supply shortfall from the current and committed LNG projects globally. Pi Arctic is ideally positioned to benefit from a need to drill, complete and service wells in both the Canadian and Papua New Guinean markets. Services aligned with the development of the gas sources for the LNG projects in PNG should be accompanied with a return to exploration and appraisal to discover and delineate the future feedstocks for the existing and new LNG processing facilities. The Saarchene partnership continued to grow in 2021, generating revenues of $2.1 million in Canada. The partnership was particularly successful in the various provincial well abandonment and site closure programs funded by the federal government, for which work will continue through most of 2022. And with that summary, I'd like to now pass the call over to Lance to discuss key financial highlights from the quarter in more detail.
spk03: Thank you, Mike. I will touch base on the key financial results and activity for the fourth quarter of this year. On a consolidated basis, Q4 revenues were $23.6 million, up 26% over Q3 and up approximately 40% compared to Q4 2020. Higher revenues were primarily generated from the ramp-up of drilling-related activities in our P&G operations. During the quarter, we moved Rig 115, camps, equipment, and people to the remote location where the well abandonment was to take place. Actual drilling operations commenced in January and the well abandonment program was completed during February of this year. Revenue from our production services segment in Canada remained flat at $13.6 million compared to Q4 2020 and was up only modestly from the $13.1 million generated in Q3. Shutdowns of rig sites due to COVID impacts extreme cold weather and weekend downtimes imposed by a few key customers resulted in over 3,000 less rig hours during the quarter. Operating margins were 20% during Q4 and for all of 2021, down from operating margins of 23% experienced in the previous year. Upward pressures on field labor costs were felt during Q4, partially offset by improving revenue per hour rig rates in Canada. Subsequent to year end, we are seeing a marked increase in demand for our services, opening up opportunities to negotiate higher rate rates, which are in turn expected to improve our operating margins as we proceed through 2022. We continue to be disciplined in our support services and controlling the costs. Cost reduction initiatives throughout the past several quarters has led to a 20% year over year decline in general administrative expenses. We will seek further opportunities to optimize our administrative expenses while effectively supporting growth in our field operations. High Arctic incurred a net loss of $4.6 million per $0.10 a share during Q4 and a loss of $18.6 million or $0.38 a share in 2021. This compares to a 2020 loss of $26 million or $0.52 per share. The non-cash quarterly charge of approximately $6 million for depreciation of our large base of property equipment masks the fact we generate positive funds flow from operations. For the year, we generated $3.7 million compared to $6.3 million in 2020. In terms of EBITDA, we produced $1.1 million during Q4 and $4.4 million during 2021. On November 5th, 2021, The corporation paid $9.7 million in dividends to shareholders while preserving a strong capital structure. The $0.20 per share dividend represented a 13% yield based on the trading value of hierarchic shares at the time the dividend was announced. As Mike mentioned earlier this morning, we announced the recommencement of a monthly dividend of $0.50 per share, payable starting May 12. Also during the quarter, High Arctic mortgaged its company-owned properties in Alberta, adding long-term low-interest debt to the capital structure. The $8.1 million of proceeds from the financing were made available to fund capital expenditures in Canada on equipment and in P&G as well in their operations. As Mike alluded to earlier in the call, at December 31st, the corporation had positive working capital of $30 million. and a working capital ratio of 3.1. We had cash on hand of $12 million, $8 million of long-term debt, and had access to approximately $10 million of an existing undrawn $37 million revolving credit facility. Lastly, a few administrative items to note. We changed external auditors to KPMG late in 2021 and successfully completed the year-end audit of our 2021 results. We also recently moved to Odyssey Trust Company as our transfer agent who will help organize our AGM scheduled to take place in May of this year. With that, I'll turn it back over to Mike.
spk01: Thanks, Lance. Before we turn the call over to questions, I'd like to walk through the strategic objectives that High Arctic has committed to in 2022. At the top of our list is our ongoing commitment to safety excellence and quality service delivery. building on the world-class platform established in our P&G operation and a continued drive in Canada as we work our quality-centric single global platform for executing work. We aim at generating free cash flow by focusing on actions to increase utilization of our world-class fleet of equipment, continued improvement in efficiency and workforce productivity, building on our 2021 20% reduction in G&A costs, and disciplined operating cost control. The development of new and existing employees to grow the pool of our competent labor. In this labor-constrained operating environment, enabling us to grow our fleet deployment to meet increasing customer demand. The pursuit of opportunities that secure the corporation's future as a lower-emissions energy services provider. In our annual information form, we included for the first time an ESG section outlining our focus areas and self-assessments. High Arctic already has a patent pending electric rig design that can operate on available electric supply at the well site. We will continue to pursue opportunities for growth and corporate transactions in well understood markets that enhance shareholder value. Like the catwalks we invested in during 2021 that strengthened our service base added earnings and generated cash. We will protect our strong balance sheet position with disciplined capital stewardship. We will carefully review strategic transactions to optimize our structure, scale and service lines to improve returns for shareholders. The confidence we have in this improved market and improving business fundamentals for High Arctic is underscored by the announcement in our quarterly release of an intention to return to regular monthly dividends. This morning, before market, we declared that the monthly dividend payments will commence at 0.5% per share in May. I'd like to close with a thank you to our employees as well as our shareholders. The 2020 and 2021 years have been a challenge as we dealt with the impacts of the COVID-19 crisis and the oil price collapse. We have confidence that the substantively improved market conditions and our business fundamentals that have already enabled wage increases and a return to dividend payments. It is our intention to regularly review the corporation's ability to consider the sustainability of increases to the dividend and the use of buybacks under our NCIV of outstanding common shares through the generation of further surplus cash. That concludes my comments, and I'll now turn the call over to Patrick, who will open the line for questions.
spk00: Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star 1 on your device's keypad. When prompted by the system, please clearly state your name to register your question. You may answer your question at any time by pressing star 2. Please press star 1 at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. We'll take the first question. Please go ahead.
spk02: Joseph Schachter. Good morning, Mike and Lance. A few questions for me. In your comments, you mentioned for the outlook, the stage is set for a meaningful near-term ramp-up of activity when you're talking about PNG. When do you expect bids to come out for more active work, and how much capex we have to spend to improve the equipment or to prepare it for the activity that the potential energy company will want you to do? how much competition is there in the market now? Has a lot of it gone away so that potentially margins will be pretty good when those contracts are let?
spk01: Thanks, Joseph. Thank you for the question. Papua New Guinea is at the center of our focus for growth in the latter part of 2022 and into 2023 and beyond. We would anticipate a continuation of the level of activity that we're currently undertaking through most of this year with the likelihood of a ramp up in the final quarter with the additional deployment of another drilling rig. We would expect over the next two to three year cycle a continuation in increase of activity along similar lines of adding approximately a rig a year, but that could accelerate as as some of these projects move towards significant decision points we would expect then customers to be going to market seek services and possibly a sustained period of high level of activity in png for many years on the basis of the two currently progressing lng projects and the potential for more as far as capex needs is a little bit difficult to quantify at this point in time. We've maintained all of the rigs that we operate in a state of readiness to deploy, so we would expect capital required for their deployment into service to be minimal, but not negligible. We would expect to be in a position of advantage over any potential competition, on the basis that we've been the only drilling contractor active in Papua New Guinea since 2015. That said, there is a global supply base of international drilling contractors, and I am sure that our customers will look to see competition in the market, but we would expect to be able to deploy at margins similar to those we saw in the handful of years leading into the COVID shutdown.
spk02: Okay, good. Next one for me is, is there a significant cost to the U.S. closure in bringing that equipment back into Canada?
spk01: So we believe, Joseph, that most of the costs in winding things up in the U.S. have been booked already. The cost of relocating equipment back to Canada, we did incur some in the fourth quarter, and it did have an impact on the margins we were able to generate as we relocated one of our well-servicing units out of North Dakota and deployed it in the market in Western Canada. These costs are not extensive, albeit on a base where we've been generating modest margins to date. They can have an erosive value. Our current outlook would not see us relocating any further equipment from the US to Canada in the current quarter, but we will continue to monitor the market for opportunities, and we would seek to be getting premium rates that would justify the cost of relocation.
spk02: Okay. And how's the M&A picture look for you? You bought the snubbing business in the past, adding to your product ability to deliver for customers. Do you see anything potentially in the horizon there in 22 from smaller operators that are in trouble and may not be able to have the ability to get labor, et cetera, to meet the recovery in the second half as expected in Canada?
spk01: Yeah, Joseph, fantastic question. And you touched on, I think, what is the true key constraint in the market, and that's labor. And we have been looking for opportunities to build some scale in our service lines. And you talked about the snubbing acquisitions we completed in 18 and 19. We continue to look for those opportunities to build scale. We continue to discuss potentials for business combinations. To date, we've not been able to realise or bridge the gap of the value sought by seller to the value seen by buyer. But notwithstanding that, we still believe that consolidation in the market for energy service companies is key to unlocking and maximizing value for return on shareholders.
spk02: Okay. And one last one for me. The dividend starting in May, is that based just on your comfort zone of the Canadian side of the business and the recovery and pricing power is there to sustain that dividend so you don't have to, five months from now, 10 months, potentially have to reverse that decision, but to build the business sufficiently in Canada can cover that dividend?
spk01: Yeah, I would say that we have confidence in both markets and very much in line with the comments you made. You've followed us for a long time. You know the conservative nature of board and management here. So we didn't declare the return to a dividend lightly. And we have started with a modest number, which is not near the figure we were declaring dividends at on a monthly basis pre-COVID. Yes, we believe this is entirely sustainable based on our current outlook, taking a conservative view. And we keep our eye open that if we are able to generate the surplus cash that we expect as the market continues to improve, pricing improves, and additional services deploy in Papua New Guinea, we have our eye on this for our ability to raise that dividend at a sustainable rate into the future.
spk02: Super. Thanks very much, Mike and Lance, and congratulations on that. getting the company where it is so you can start paying a regular dividend again.
spk01: Awesome, Joseph. Always enjoy your call. Thank you.
spk00: Thank you. Once again, you may press star 1 if you have a question. No further questions registered at this time. I would like to turn the meeting back over to Mr. McGuire.
spk01: Thanks, Patrick. And I assume then that Joseph asked all of the meaningful questions that the other dozen or so participants were meaning to ask too. So thank you very much to all who joined us today. We wish you well in your endeavours through 2022. We believe we're in a market now that is going to sustain improved performance for our company. We're happy to share the results with you.
spk00: Thank you. The conference has now ended. Please disconnect your lines at this time and thank you for your participation.
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