High Arctic Energy Services Inc.

Good morning, ladies and gentlemen. Welcome to the HAES 2022 Q2 Resolve 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, Patrick. Good morning, everybody. As you can tell, I might have a little bit of a raspy throat this morning, so you'll probably hear more from Lance than me. Let me begin by saying welcome to Hiarctic's second quarter conference call. Today I'll be providing an update on the press release we issued aftermarket yesterday, August 11th. Following my remarks, I'll hand the call over to Chief Financial Officer Lance Mierendorf. Lance will be discussing our financial performances for the second quarter of 2022. After our formal comments, we'll open the call to answer any questions 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 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's discussion and analysis and the 2021 annual information form available on our website or on CDAR. You should look under the heading Risk Factors. Well, after reflection on Hyartic's core strength and our future opportunities, we made the strategic decision to divest certain assets in Canada and focus on resurgent opportunities associated with our existing business in Papua New Guinea. Papua New Guinea is a market where we have a dominant position, a history of high profit margins and free cash flow generation, and where the corporation's future fortunes are inextricably tied. The sale of our well-servicing assets to Precision Drilling Corporation included High Arctic's Canadian well-servicing and workover fleet, marketed under the Concord well-servicing brand and comprising 51 marketable rigs, and 29 inactive and out of service rigs, as well as all field rental equipment associated with well servicing, including 17 hydraulic catwalks we purchased in 2021. The transaction saw the transfer of High Arctic's well servicing employees and the large majority of support personnel to Precision. The consideration included $10.2 million paid at closing and the remaining $28 million payable will be received in January 2023. We expect to realise approximately $3 million in closing working capital collection over the next months. Title to four of our Alberta real estate locations will transfer to Precision on final payment, with High Arctic retaining owned Alberta properties in White Court and Claremont. Precision assumes the lease obligation for High Arctic's properties in Cold Lake and Atchison. The snubbing sale to Team Snubbing Services Incorporated, a private snubbing specialist headquartered in Red Deer, included High Arctic's Canadian snubbing fleet comprising seven marketable packages and 32 inactive and out-of-service snubbing units, under-balanced hoists and associated support equipment. High Arctic will receive the remainder of the consideration in the form of 420,000 common voting shares in Team representing 42% of the post-closing total outstanding shares. High Arctic has appointed two directors to the five-person board of team, and as part of the consideration, High Arctic will receive a $3.4 million convertible promissory note. Additionally, an affiliate of team will enter into a five-year lease of High Arctic's owned property in Claremont, Alberta, on current market terms. transaction will result in the transfer of High Arctic's and snubbing employees to team. Post closing, High Arctic retains its ancillary services segment in Canada comprised of the nitrogen pumping business and a smaller rentals business focused on pressure control while retaining the Hayes rental services branding that we have developed over many years. High Arctic also retains its snubbing assets in Colorado, USA. And these ancillary businesses will be supported from our White Court, Alberta facility. And the corporation will retain a small corporate headquarters in Calgary, Canada. The two transactions represent the effective divestment of High Arctic's Canadian production services and allows our management team to streamline and develop a longer term strategy for the remaining Canadian businesses and focus our attention on the growth opportunities in Papua New Guinea. Well, we are very excited about the opportunities for our drilling services segment as the next round of gas development projects materialize. We recently announced that we had agreed to terms with our principal customer in Papua New Guinea for a three-year contract renewal covering customer-owned Heliportable Drilling Rig 103 and High Arctic's suite of services related to the supply of personnel camp accommodation and rental equipment to support drilling operations. This contract was effective on August 1st, 2022 and includes options for the customer to extend the contract on the same terms and conditions beyond July 31st, 2025. As a reminder, late last year, High Arctic's principal P&G customer merged with one of the largest energy exploration and production companies operating in the Asia-Pacific region, to create a regional champion of quality, size and scale. Both companies have an extensive history in Papua New Guinea, and the resulting company has large stakes in the two LNG projects, as well as operatorship of oil-producing Papua New Guinean oil fields and several gas fields supplying the existing PNG-LNG export facility. The contract announcement followed a lot of recent positive developments in Papua New Guinea that highlight the tremendous expansion potential for LNG production. On July 20th this year, Total Energies, the operator of the Papua LNG joint venture, announced the commencement of upstream feed studies in Papua New Guinea, targeting a final investment decision on the two-train Papua LNG project by the end of next year, 2023, and commencement of production in 2027. Earlier this year, ExxonMobil, operator of the PNG-LNG joint venture, announced the signing of a gas agreement for the development of the Pinyang gas field in the western province of Papua New Guinea, which has long been anticipated to result in the addition of another train to the world-class PNG, LNG export facility. We are very excited about the potential expansion of our business activities there on the back of the forward movement of these projects. I'd now like to pass the call over to Lance and grab a drink of water while he discusses the key financial highlights from the quarter in more detail. Thanks, Mike.

And good morning and thanks for listening in on the call today, everyone. As Mike explained, we closed the sale of our Canadian Wells servicing and stubbing businesses a few short weeks ago. The particulars of these two transactions are reflected in our Q2 results to the reclassification of assets and liabilities related to the production services segment to held for sale. And we also recorded non-cash accounting impairments to reflect the estimated fair value of these transactions. The sale of the Wells servicing business for $38.2 million in cash saw the company receive $10 million in July and we will see the remaining $28 million in early 2023. As Mike mentioned, this transaction involved the disposal of Concord rigs as well as vehicles and certain company-owned land and buildings supporting this line of business. The excess of the net book value of these assets over the fair value of the consideration received resulted in recording a non-cash impairment in Q2 of $8.2 million. Additionally, the sale of the snubbing business saw Hy-Vee receive non-cash consideration of $11.1 million in the form of a 42% ownership in the acquiring company, and as Mike mentioned, a long-term receivable of $3.4 million. The fair value of this transaction was generally in line with the carrying value, resulting in a small $400,000 non-cash impairment. With a significant reduction in our presence in Canada, the company's ability to access the large accumulated pool of Canadian lost carry-forwards in the near future is reduced. Therefore, the related $7.9 million estimated deferred tax asset was written down to nil in the quarter. Excluding the non-cash impairment, and the deferred tax asset write-down, the company generated a net loss of $3.6 million or $0.08 a share during the quarter, which is in line with Q2 2021. On a consolidated basis, the company continues to see improved margins, achieving 23% during the quarter compared to 20% during the second quarter of 2021. During the first half of the year, the company generated $6 million in adjusted EBITDA tripled the amount that was generated in the first half of 2021. In addition, during the same period, Hiarctic generated cash flows from operations of $6.4 million. After experiencing a very challenging 2021 in our drilling services segment, which is focused in Papua New Guinea, We're seeing increased activity in the form of providing drilling personnel to assist with the commencement of additional abandonment well in the country utilizing a third-party rig, preparing Rig 103 to return to service later in 2022, and supporting well service activity for our customers. This has led to improved margins for the segment, achieving 24% in Q2 on revenues of $6.1 million. Ancillary services in P&G and Canada continue to be our highest operating margin segments, where we achieved 55% in Q2 and 59% on a year-to-date basis on revenues of $4.2 million and $9 million, respectively. Prior to the sale of our production services segment, we were seeing improved margins, but this segment lagged behind our other segments, generating operating margins of 13.3% during the quarter and 7.7% on a year-to-date basis. With the improved business conditions and growth in our Papua New Guinea activities in 2022, we were able to reinstate in Q2 a regular monthly dividend of a half cent per share. The company continues to be prudent with its capital management and maintain a strong balance sheet. During the quarter, we grew cash on hand by $3.6 million and ended the quarter with $15.1 million on hand and a working capital ratio of 2.6 to 1. While the company no longer has access to a revolving credit facility, which was undrawn at June 30, 2022, monetization of our Canadian Wells Servicing Production Services segment for cash consideration provides liquidity while the company evaluates strategic growth opportunities in Papua New Guinea, Canada and elsewhere. With that, I'll return it back over to Mike.