High Arctic Energy Services Inc.

Good day, ladies and gentlemen, and welcome to the High Arctic Energy Services 2022 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.

Thank you, Paul, and good day to everyone. Welcome to High Arctic's first quarter conference call. Today, I'll be providing an update on the press release we issued after market yesterday, May 12th. Following my remarks, I will hand the call over to our Chief Financial Officer, Lance Mierendorf. Lance will be discussing our financial performance for the first quarter of 2022. After our formal comments, we'll open the call to answer any questions that you may have. Before we begin, though, I'd like to remind you that certain information discussed today may include forward-looking statements. Such statements reflect High Arctic'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 Discussion and Analysis and the 2021 Annual Information Form available on our website or on CDAR, where you should look under the heading Risk Factors. Well, the energy roller coaster continues. The events in Ukraine continue to unfold and the sanctions against Russia are driving a substantive shift in global energy trade relationships. Then there's the continued rebound in energy demand, the inability of OPEC to meet its production quotas, shortage of skilled labor in developed economies, rising inflation, a slowdown in China, ongoing COVID-19 variations and large volumes of people clambering to travel again. just to mention some of the things that are happening right now and over the past quarter. It's no surprise that commodity prices, the share prices of energy companies, our customers, and the share prices of the companies who service them, including High Arctic, have all been volatile recently. But putting all this noise to the side, there remains the fundamental fact that substantial underinvestment in the energy sector over the past seven years has created an energy deficit for supplying the growing global population's appetite for cooling, heating, transportation, and the charging of their phones. The sanctions imposed and under consideration against Russia has Europe rapidly moving to source supply of LNG from North America and Middle East suppliers. While Russia may find willing markets in China and the subcontinent, the pivot by Europe creates opportunity for Oceania to increase LNG supply to the other growing Asian consumer markets, including Japan and Korea. Papua New Guinea is ideally positioned to expand its LNG export capacity. The PNG-LNG project, which commenced shipments in 2014, has de-risked Papua New Guinea and established it as a supplier of choice for low cost, high quality, and reliable supply of LNG. And we sure were pleased by the successful and safe return to rig operations on Rig 115 in our PNG drilling services segment. The legacy exploration well was professionally capped and abandoned, fulfilling a key ESG commitment and adding to Hiarctic's record of over five years of recordable safety incident-free work in Papua New Guinea. We look forward to increasing activity there, where we anticipate activity levels in the coming years have the potential to exceed our past peaks. We expect further announcements about the advancement of the Papua LNG project and the development of Pinyang and other PNG LNG fields to support an expansion of the PNG LNG export facility, among other projects to increase oil and gas production there. In Canada, certain large infrastructure pipeline projects are positive for our oil and gas industry. Following the Enbridge Line 3 replacement project which entered service October 1 last year, there has been an increase in export oil volumes to the US. The LNG Canada pipeline project and the Trans Mountain expansion, both under construction, will, upon completion, provide long-awaited tidewater access to Asian markets. Additionally, in the near future, political focus on oil imports from countries outside North America may turn back towards the security of increased domestic supply. High Arctic's Canadian focused production services segment stands to benefit from the stimulus to drilling activity that will follow. This will be through the resulting well completion work, ongoing well production maintenance and end of life abandonment works. The Canadian services market is severely labour-constrained, a result of years of low activity with stagnant wage rates, change in generational priorities, and ongoing infrequent COVID-related crew shutdowns. This crew constraint has led to increasing demand-supply imbalance, and while measures are in place to respond, it will take time as both sustained utilisation and better compensation are necessary to attract personnel to our industry. Of a positive note for High Arctic, the current and projected services market imbalance has led to meaningful price increases, including the announced key contract renewal with improved pricing and more favorable terms coupled to a high volume of contracted work. Piarctic expects the pricing increases to continue throughout 2022 and into the new year until crew supply meets demand on an industry-wide level. The challenge for us is to continue to manage the corporation's resources such that we keep a control on costs, maintain readiness to deploy, and increase pricing at a rate in advance of cost inflation. I would now like to pass the call over to Lance to discuss key financial highlights from the quarter in more detail.

Thank you, Mike, and good morning to those listening in on the call today. While High Arctic experienced a substantial 60% increase in consolidated revenue during the quarter compared to Q1 of 2021, operating margins were slightly lower at 18.5% of revenue, and the company incurred a quarterly quarterly net loss of $2.7 million, which is equivalent to 5 cents per share. A significant increase in drilling operations and the provision of rental equipment and auxiliary equipment and services to customers in Papua New Guinea increased this region's share of consolidated revenue to more than 40%, up from 10% during the Q1 of 2021. Completion of a one-well abandonment program supported by two camps and hierarchics team of operations personnel, and the subsequent rig move off location, generated more than $10 million of revenue during the quarter. Combined, drilling and auxiliary services in P&G generated approximately $3.5 million of operating profit during the period. By contrast, in Canada, there was marginally lower activity during Q1 compared to the first three months of 2021 in terms of revenue, well servicing and subvening operating hours, and rig fleet utilization in the production services segment. High Arctic faced several challenges during the quarter, which had a noticeable impact on our ability to expand utilization of the services offered to our Canadian customers. Lingering effects of COVID-19 related rig shutdowns and isolated poor weather conditions for several rigs to be idle for short periods of time. In addition, a shortage of field personnel to crew rigs prevented high Arctic from meeting growing customer demand and therefore stifled growth in operating hours. Also, the company felt the emerging effects of cost pressures that started building during Q4 of 2021. wage inflation driven by shortage of skilled rig hands and increases in cost of retaining staff, overtime pay, and the company bearing costs of adding personnel to fully staffed rigs for the purposes of training and creating new crews, all combined to increase field personnel expenses. Essential operating costs such as fuel, equipment, and supplies have seen upper pressure from the supply change disruptions, and we experienced one-time non-capital costs associated with preparing equipment to return to service. Combined, these challenges reduced operating margins within our production services segment to 1.6% compared to 15.7% during this Q1 of 2021. The company has taken several actions to address these challenges experienced during including working alongside key customers on pricing in the impact of input cost inflation and the need for margin expansion to justify further investment in the energy services sector. In early April, High Arctic announced that it has agreed to terms with a key customer to renew significant contract in Canada for the provision of well servicing rigs and auxiliary equipment. Key features of the renewal included a 20% increase in the base hourly rate, increases to auxiliary equipment and service pricing, provision for fuel and fuel service adjustments, and alignment of other parameters to current market conditions. Other key customers of High Arctic are also demonstrating a willingness to address the current market conditions in a similar and collaborative manner. Moving to auxiliary service segments, while first quarter revenue of $4.7 million represents approximately 15% of our consolidated revenue, operating margins are robust at 63%, up from 47% experienced in Q1 2021. As I've noted earlier, activity increased in P&G in support of drilling operations, while in Canada, hierarchics saw modest improvements in the provision of nitrogen services, rental revenues related to pressure control equipment, and deployment of refurbished and upgraded catwalks to customer sites. From a consolidated perspective, general and administrative costs remain relatively flat at $2.4 million compared to Q1 2021. And this spending represented 8.5% of revenue generated during the quarter. HireTip remains committed to controlling costs and analyzing administrative overhead for effectiveness and efficiency, while ensuring the level of support aligns with our operating activities throughout the organization. The company generated EBITDA of $2.9 million, or 10% of revenue during the quarter, up substantially from $1.2 million generated in Q1 of 2021, a period during which $800,000 of government subsidies were received. Capital spending was limited to $1.6 million during the quarter and was partially funded from $1 million of proceeds generated from ongoing sales of highly and fully depreciated and unusable property equipment. At March 31st, we've maintained a strong balance sheet with $11.4 million of cash on hand and a working capital ratio of three to one. Based on trailing 12 months EBITDA, the company has access to $16.7 million of a $37 million revolving credit facility. which remains undrawn at quarter close, at quarter end. And lastly, given the current financial position and positive outlook we see for both our Canadian and P&G businesses, we reinstated a monthly dividend of a half a cent per share with payments beginning this month. With that, I'll turn the call back over to Mike.