High Arctic Energy Services Inc.

Good afternoon, ladies and gentlemen. Welcome to the High Arctic Energy Services 2022 Q3 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, Michael, and good morning, everyone, or good afternoon if you're in Canada. Welcome to High Arctic's third quarter conference called Today I'll be providing an update on the press release we issued earlier this morning, November 11th. 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 third quarter of 2022. 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 HIARCTIC'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. Look under the heading Risk Factors. Early in the third quarter, or on July 27th to be precise, High Arctic closed two independent transactions to divest certain assets in Canada. The sale transactions represented the effective divestment of our production services segment, allowing us to focus on putting the drilling rigs in our drilling services segment back to work in Papua New Guinea. ENG is a market where we have a dominant energy services position, a history of high profit margins and free cash flow generation. Papua New Guinea is now central to High Arctic's long term business strategy. Recapping the sale transactions, the well servicing sale to Precision Drilling Corporation included high arctic's canadian well servicing and work over rig fleet marketed under the concord well servicing brand as well as some oil field rental equipment associated with well servicing including the 17 hydraulic catwalks we purchased in 2021 the transaction saw the transfer of high arctic's well servicing employees and the large majority of canadian support personnel to precision The consideration included $10.2 million, which was received at closing, and a $28 million payment, which is payable next January. Precision has assumed the lease obligations for High Arctic's properties in Cold Lake and Atchison. Entitled to four Alberta real estate locations owned by High Arctic will transfer to Precision on final payment. The snubbing business was sold to Team Snubbing Services Incorporated. a private snubbing specialist headquartered in Red Deer. It included the transfer of High Arctic's Canadian snubbing fleet, under-balanced hoists, associated support equipment and High Arctic snubbing employees to TEAM. High Arctic acquired 42% of the post-closing shares in TEAM and appointed two directors to the five-person board. Additionally, High Arctic will receive a $3.4 million convertible promissory note from TEAM. Post-closing, High Arctic retained owned Alberta properties in White Court and Claremont, with an affiliate company of TEAM entered into a five-year lease of the Claremont property. High Arctic retained its Canadian nitrogen pumping business and a smaller rentals business focused on pressure control equipment marketed under the Hayes Rental Services branding. High Arctic also retains its snubbing assets in Colorado, USA. These businesses are grouped into our ancillary services segment and are supported from our White Court, Alberta facility. The corporation retains a small corporate headquarters here in Calgary. Pivoting now to Papua New Guinea. Effective August 1st, 2022, High Arctic commenced services under a three-year contract renewal with our principal customer in PNG for customer-owned Heliportable Drilling Rig 103 and High Arctic services related to the supply of personnel, camp accommodation and rental equipment. The contract includes two one-year options to extend further out on the same terms and conditions beyond July 31, 2025. This customer has large stakes in the two LNG projects in Papua New Guinea, as well as operatorship of all producing PNG oil fields and several gas fields supplying the existing PNG LNG export facility. Work is underway to prepare RIG 103 for service. which includes an upgrade of its top drive. And while we are confident in our readiness, the overall project has not been immune from the supply chain challenges experienced around the world this year. As a result, our customer has informed us of intentions to defer the start of drilling out towards the end of the first quarter of 2023. High Arctic anticipates RIG 103 will then operate consistently through the term of the contract. I'd 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 afternoon to those of you on the call today. As Mike mentioned, our third quarter results reflect the impact of the disposition of our production services segment in July. Both the Canadian well servicing and Canadian snubbing businesses, inclusive of field personnel, support staff, lease premises, and certain company-owned land and buildings formed two separate sales transactions. Past consideration from the sale of our well-servicing business to Precision Drilling was $38.2 million. In advance of receipt of a final payment of $28 million in January, the company will repay $3.6 million of mortgage debt associated with this land and building, which are included in this transaction. The book value of the assets and associated liabilities was $47 million, resulting in a non-cash impairment of $8.9 million, of which 700,000 was recognized during Q3. The company retained positive working capital generated from the well-servicing business of a little over $5 million at the time of closing the transaction. We've harvested $3 million in Q3. We anticipate the remaining outstanding receivables will be collected before the end of the year. With the transition of the business over to precision drilling essentially complete, we are now focusing on growing the Hayes Rental Services brand in Canada and leveraging off of a long history of servicing customers in this market. As Mike mentioned earlier, highlighted earlier, the sale of the stubbing business saw High Arctic receive non-cash consideration of $11.1 million in the form of 42% ownership in team stubbing and a $3.4 million long-term receivable. The value of this transaction was generally in line with the carrying value, yet resulted in a non-cash impairment of $700,000, of which $200,000 is now reflected in our Q3 results. Team Snubbing now has the largest fleet of snubbing equipment in Canada and has already increased its market share with deploying snubbing packages at the end of Q3 exceeding the sum of the two parts in Q2. Additionally, Team has plans to expand internationally for which we will participate as a shareholder. The investment in Team is accounted for as an equity investment with a share of the net earnings being reflected in our records. During the two months since the combining of our assets, Team has generated profits in excess of $600,000. $275,000 has been equity accounted for in Hierarchic's third quarter results. In addition, the carrying value of the long-term receivable from Team snubbing was determined by discounting the timing of future cash flows associated with that note. This resulted in a one-time non-cash initial accretion charge of $900,000 recorded in the quarter. With a significant reduction in our Canadian presence, the corporation's ability to access the large pool of accumulated Canadian lost carry-fords in the near future is limited. Therefore, a related $7.9 million non-cash deferred tax asset value has been written down to nothing, to nil. Moving over to our activities in P&G, after experiencing a very challenging 2021, our drilling services segment is seeing increased activity driven by the provision of drilling personnel and related equipment to customers to assist with various types of activity. Early in the first quarter of 2022, Rig 115 completed the abandonment of a legacy exploration well for a key customer, after which the rig was relocated to our support base to be preserved and maintained in preparation for future deployment. During the second and third quarters of 2022, High Arctic provided personnel, materials handling equipment, and associated rental equipment, including a 100-man well site camp and a large quantity of durable matting in support of customer field activities. These activities continued throughout Q3, as did the provision of manpower and equipment for a production facility maintenance shutdown project. As we move through Q3 and extending into Q4, we are working with our principal customer to prepare Rig 103 for the recommencement of development drilling and operations in 2023. These activities combined generated almost $5 million in revenue during Q3, and we surpassed $20 million in drilling services revenue year-to-date. Drilling segment operating margins have increased year-over-year, reaching 23.7% in Q3 2022 and 22.9% year-to-date, up from single digits experienced during the first nine months of 2021. Our ancillary services segment spreads across both P&G and Canada and continues to be the highest operating margin generator, where we achieved 50% margins in Q3 and 57% year-to-date basis on revenues of $2.9 million and $11.9 million, respectively. With increased drilling services activities in P&G and consistent demand for pressure control rentals and nitrogen services in Canada, we see this segment continue to experience revenue growth as we enter into 2020-23. On a consolidated basis, the company continues to see improved margins, achieving 24.7% during the quarter compared to 21% in the third quarter of 2021. The company generated EBITDA of $600,000 in the quarter and $6.5 million year-to-date, which is double the amount we generated during the first nine months of 2021. Capital expenditures were limited to $700,000 during the quarter and $4 million year-to-date, and we expect minimal capital expenditures to be incurred for the remainder of 2022. The company did experience a loss of $0.09 per share in the quarter, of which $0.03 per share relates to non-cash impairments and non-cash carrying value adjustment to the note receivable from Team Stubby that I mentioned earlier. The company continues to be prudent with its capital management and maintains a strong balance sheet. During the quarter, with the significant impact on the cash proceeds from the sale of the well servicing business, the company grew its cash on hand by $8.3 million and ended the quarter with $23.4 million cash on hand. Inclusive of the precision receivable, our working capital ratio is 5.7 to 1. With the receipt of the remaining $28 million in January, the Corporation anticipates holding a substantial cash balance early in the new year. We have advanced our investigations into possible future sources of debt financing for both growth and our projected capital needs in Papua New Guinea. The Corporation has a history of returning surplus cash to shareholders and will continue to consider capacity to distribute surplus funds to shareholders while exploring opportunities to reinvest in strategic growth and activities and initiatives as they emerge. With that, I'll turn it back over to Mike.