High Arctic Energy Services Inc.

Q4 2022 Earnings Conference Call


spk05: Good afternoon ladies and gentlemen. Welcome to the High Arctic Energy Services 2022 Q4 Results Conference Call. I would now like to turn the meeting over to High Arctic's Chief Executive Officer Mike McGuire. Please go ahead.
spk00: Thank you Chris and good morning everyone. Well good afternoon to those in Canada. I'm talking to you from Brisbane at the moment and thank you for your patience waiting for us to begin as I experienced a few technical difficulties getting online. Welcome to High Arctic's fourth quarter conference call. Today I'll be providing an update on the press release we issued early this morning, March 28th. Following my remarks, I'll hand the call over to our Chief Financial Officer Lance Mirandorf. Lance will be discussing our financial performance for the fourth 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 High Arctic's current expectations, estimates, projections and assumptions. These forward-looking statements are not guarantees of future performance and they're 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 in the 2022 annual information form available on our website or on CDAR. Look under the heading risk factors. Well, following the divestment of our Canadian production services segment in the third quarter, we have focused on Papua New Guinea in this fourth quarter. PNG 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. During the fourth quarter, we ramped up both our deployed operational personnel and crews as we to commence operations and build key managerial and support positions within our PNG operations. We took a deep dive into the large inventory of spare parts, equipment and consumables to ensure we have a solid understanding of our capacity to support our growing operations in PNG. We also progressed preparations for rig 103 to commence drilling activity with a work scope that was expanded to include an upgrade of its top drive and I'm pleased to confirm the upgraded rig is currently operating again, having returned to the well that drilling was suspended on back at the beginning of the COVID travel restrictions in 2020. High Arctic anticipates rig 103 will operate consistently through the term of the contract which runs through to July 2025. This recommencement of drilling operations follows the recent announcement in PNG that the total energies led Papua LNG project has commenced downstream front-end engineering and design work or feed. This follows certain upstream feed work that commenced last year and continues the progress towards a final investment decision expected later this year. Indication suggests the Papua LNG project will be based on four electric driven LNG liquefaction trains housed in the existing export facility in Port Moresby, the capital city of Papua New Guinea. This facility is operated by Papua LNG partner ExxonMobil for the country's other LNG project. Total energies has recently outlined plans to bury almost a million tons per annum of carbon dioxide with the Papua LNG project and a major tree planting project to boot. We expect the sequestration of CO2 to require additional wells to be drilled on top of those planned for gas production. Last week Mr Wapu Songk, the managing director of the national oil company Kumul Petroleum was quoted as stating that they are in early talks with potential partners to build their own LNG processing unit. Mr Songk said the proposed one million tonne a year unit would be in addition to the new units to be built by the Papua LNG venture and would be fed from undeveloped gas that Kumul Petroleum have secured retention licenses over. These developments support management's optimistic outlook on the gas development activities in PNG which are expected to lead to increased demand for drilling and related services. I'd like now like to pass the call over to Lance to discuss key financial highlights from the quarter in more detail.
spk03: Thank you Mike and good afternoon to those joining on the call today. Our fourth quarter results of the first complete quarter without contribution from the production services segment which was divested in July of 2022. On a consolidated basis, HiRTIC generated revenues of 13 million dollars and incurred a net loss of 9.1 million dollars or 19 cents a share in Q4. Q4 oil field operating margins were significantly impacted by inventory adjustments which led to a loss operating loss of 2.4 million dollars. While on a full year basis the oil field operating margin was 11.9 million dollars or 15 percent revenue. During Q4 we recorded a net provision of 3.9 million dollars stemming from an extensive evaluation and counting of inventory materials and supplies located at various sites in Papua New Guinea. The adjustment included 14 4.5 million dollar inventory write down offset by a 600,000 we conducted extensive counts of inventory that we manage on behalf of a main customer in Papua New Guinea. We find to utilize this some of this inventory well from our stock and from our customers to own stock on the ongoing operations of rake 103. In Q4 we recognized a liability of 3.3 million dollars relating to customer inventory which we were obliged to replenish this liability forms part of the contingent the total contingent liability of 8.3 million dollars which we reflected in the notes to our financial statements in this contingency section. Following this evaluation and again as Mike pointed out we are confident that we have sufficient and appropriate materials and supplies on hand at present to support our ongoing operations in Papua New Guinea. The company recorded negative 892,000 of adjusted EBITDA in the quarter and generated 5.7 million sorry of adjusted EBITDA for 2022 up from 4.9 in 2021. In 2022, hierarchy experienced a 75 cent loss per share of which 44% relates to non-cash items of impairment, a reversal of deferred income tax, asset and inventory provision. During the fourth quarter hierarchy provided personnel materials handling equipment and rental equipment including a 100 man cab and a large quantity of dirt-based mats in support of customers field operations with our two primary customers in Papua New Guinea. In addition we increased drilling personnel deployed to prepare rake 103 for the recommencement of development drilling activities. These activities in our drilling services segment generated 10.1 in the quarter and we surpassed 30 million dollars Canadian of drilling service equipment for the year. Drilling segment margins have been impacted by the previously discussed inventory adjustments and low margin reimbursable cost contribution associated with the supplying and installing the top drive on rake 103. When adjusted to back out the impact of the provision of inventory breakdown the drilling services segment margin increases from .4% to 15.4%. I figure that's about .6% experienced in 2021. Our facility services segment spreads across both P&G and Canada and continues to be our highest operating margin generator.
spk02: We achieved 44
spk03: % operating margin during the quarter and 54% across 2022 on revenues of 2.9 million and 14.9 respectively. With increased activities in P&G and consistent demand for pressure control rentals and nitrogen services in Canada we do anticipate this segment to continue to grow in revenue as we move through 2023. The company continues to be prudent with its capital management and maintains a strong balance sheet. During the quarter capital expenditures were limited to under a hundred thousand dollars and we spent 4.1 million dollars on capital during the year. We expect modest capital spending in 2023 mostly focused on maintaining rental equipment in our drilling fleet. With the cash proceeds from sale of the well servicing business last July the company ended the year with 19.6 million dollars cash on and cash equivalents. Inclusive of the precision receivable our working capital ratio increased to 7.71 at the end of the year. This year and following year and we did collect the 28 million dollars from the sale of the well servicing to precision and we placed that in bearing accounts earning between four and a half and five percent. IARC continues to pay monthly dividend of half a penny per share and in Q4 2022 we renewed our NCIB to repurchase shares throughout 2023. We continue to assess financial options in line with our strategic objectives moving forward and the company has a history of returning surplus cash to shareholders and will continue to consider our capacity to distribute surplus funds while exploring opportunities to invest into strategic growth activities as they emerge. With that I'll pass it back over to Mike.
spk02: I'm there Mike.
spk00: Thank you Lance. Yes all good. IARC has taken transformative actions in 2022 which will allow the corporation to focus on the emerging opportunities to deploy drilling assets in New Guinea while maintaining exposure to the Canadian energy services market. IARC believes that the fundamentals for sustained high LNG demand particularly in Asia positions PNG for substantive liquefied national gas export growth and the contemplated expansion projects are progressing. While the restart and drilling activity has been slower than we expected IARC is optimistic for future drilling contracts in the coming activity cycle associated with the major project advancements. IARC maintains active dialogue with the management of all active energy companies in PNG towards understanding their project time frames and plans for drilling activity and the potential for utilization of high Arctic's drilling assets. We've now realized the drilling rig deployment in the first half of 2023 and expect to continue to increase deployment of rentable assets and ancillary services through 2023. We expect that as the major projects move into execution the demand for drilling has the potential to exceed our past activity peaks. I will now turn the conference call over to the operator who will open the line for questions.
spk05: Thank you. So we will now take questions from the telephone lines. If you have a question 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 system please clearly state your name to register your question. You may cancel 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 pause while participants register for questions. Thank you for your patience. Once again please press star 1 on your device's keypad if you have a question. Our first question is from
spk02: Joseph Schachter. Hi Mike and Lance. Just going at the macro level how much BCF would go through on four electric driven trains and how much capacity with gas goes through right now on the current system just to get an idea of the scale of the ramp up and then if one of these companies decides they want to start drilling a little quicker. Lance mentioned that the capex for 23 might be less than 22. Could there be an announcement Q3, Q4 if there is a ramp up where your capex budget would go up quite a bit and you want a more husband to cash for putting all the equipment to work and doing whatever upgrading you need to to meet the client's requirements.
spk00: Yeah thanks Joseph. Start with the first part of the question on the throughput of the facility. I don't have the figures to hands in BCF but the total annual numbers are top of mind. The current facility with its two what we'd call I guess conventionally gas driven trains put out currently put out 8.4 million tonnes per atom. The electric trains are to be smaller in scale. I understand that they're expected to put through somewhere around 1 million tonnes per atom so with four of those for the Pupware LNG project expansion that that gives them capacity of 4 million tonnes per atom. I would bear in mind that the nameplate capacity of the PNG LNG 2 train export facility is 6.4 million tonnes per atom so it has operated substantively around you know 25% above capacity since it came online. These electric trains I'm not sure how much additional capacity they may have above that design target of 1 million tonnes per year but that's the figure that was quoted by the managing director of Kumal Petroleum. The second question relating to the capital expenditures we have revised our our budgets for 2023 with the slower startup that seen and experience to date and expectations that customers are deferring drilling activities into 2024 and 2025. So we don't expect to have to incur substantive capital expenditures this year based on the expectation of only having the one rig 103 out at work unless one of those other projects does start to come forward in the back half of the year from current expectations of 2024. The where we do expect to spend some capital is is in the growth of deployment of of ancillary rentable equipment items such as the DuraBase matting product and our fleet of material handling equipment has started to experience substantive upswings in in in requests for for service and we have projected to spend a modest amount of capital on in growing that fleet of equipment through 2023.
spk02: I can add one more on on the overview if they do FID everything are we looking at 27, 28, 29, 30 for when they'll be on the train starting up just trying to get an idea of the timeline that we're looking at.
spk00: Yeah I haven't seen a specific date mentioned by the project proponents but there is a discussion around a lot of the the the the quoted statements in the media which indicates a 2027 online first gas from the new project.
spk02: Okay super that does it for me thanks so much thanks for your answers.
spk00: Thanks Joseph.
spk02: Thanks Joseph.
spk05: Thank you. The next question is from
spk01: Eve Balsam. Hi Mike Hylats. Would you be able to break down just a large difference if you could break down the eight million dollars fund flow use and operations during the quarter and compare that to the adjusted EBITDA of negative about one million so I can understand the impact there.
spk00: Sure I'll let Lance answer that question.
spk03: Good question sorry what I'm going to have to do some digging on that one what was the what was the question again? Sure
spk01: it's it's there's I think you guys have for the quarter about eight million funds flow use and operations versus the adjusted EBITDA of about negative one million. Yeah
spk02: okay well
spk03: I'll pull it up real quick here maybe we can go on to the next question I'll pull it up real
spk01: quick. Sure would you guys be able to discuss any results at team snubbing
spk00: Yeah I'll have to let Lance answer that one as well. While he's looking up those numbers I can give more of a qualitative answer and that team snubbing has and I think I said this at the conference call in November that they had immediately upon aggregation of the two businesses expanded their their service offerings in Canada to greater than what some of the two parts were coming together and they've maintained that all the way through the first quarter. They've also now contemplating and moving equipment up to Alaska as part of their international partnership of which they have a 50% of so the 50% partnership there in team snubbing international operation up in I guess it's the USA right but Alaska and immobilizing equipment up there which includes some of the the snubbing packages that were acquired from from high arctic as well. That's good.
spk01: Maybe one other sort of bigger picture question and just if the if high arctic has only the drilling rig 103 in regular consistent activity during the year do you expect that that on its own along with the ancillary rental equipment would would allow the company to be profitable for the for the year?
spk00: Yeah our projection is profitable on a cash basis so if I knock out depreciation expense which is still quite a large number given that we're still depreciating the drilling assets in PNG we would expect to make cash profit but probably a modest loss financial loss.
spk01: Thanks. And I guess while waiting I just you guys had mentioned that there's still being consideration of the of what to do with the net sale proceeds earlier I think there was an indication that that there would be consideration of potential distributions of the cash to shareholders about the time of the final payments which I guess was earlier in January. Has there been further discussion among the board and about that?
spk00: Management has undertaken an extensive analysis of of our forward needs and have explored several different scenarios for the use of those proceeds none of which have matured to a point where we can say something specifically about it at this point but it is front of mind.
spk01: Okay well I guess we'll keep listening for that.
spk03: All right Lance here I think the the reconciliations that we didn't have any activities from our operations in Canada right? Right. And we did have much lower margins in PNG for reimbursement like reimbursement costs so we did a lot of spending on costs that we spend for purchase on behalf of the customer and then acquire them and purchase or acquire them transfer them and install them. There's a lower margin percentage on that.
spk01: Was there also is the four and a half million dollar inventory adjustment is there was there a related cash outflow on that or or not at this time?
spk03: No absolutely not no there's you know that's there's like I said there's sufficient cash sorry inventory on hand we're we did not make any additional purchases at all we don't anticipate making any purchases of large quantities of inventory it's all on hand and in country and some of the you see or to mention an obligation to replenish inventory so that's where we just need to we of course over time certain types of supplies and equipment it changes over time depending on the you know technological advancements of the rig and and the design of the drilling programs that we do for our customers so certain equipment changes over time and that's that's where we we have in our inventory you know items that that meet that specification and we work with our customer to draw some of the inventory from theirs and from ours to fulfill our drilling obligations to support our drilling operations so you know it's it's this adjustment was really just to verify what we've done with these counts is just verify all of that inventory in hand and on hand and what what can be usable in the future and and what's relevant and what we need to replenish from what we've we've combined used within our operations over the last number of years
spk01: okay thank you very much that's clear that's all thanks please i have
spk05: all right thank you once again please press star one into devices t-pad if you have a question if you do have a next question please go ahead
spk04: Murray Weimer, Lager Capital. Hey gentlemen how you doing?
spk00: Good thanks Murray.
spk04: Very good excellent hey just really quickly Mike what other assets what do we have in Canada at this point in time you know outside if you have an investment you have a receivable what else exists in Canada?
spk00: So we have a nitrogen pumping service line that consists of five active low rate pumpers one high rate pumper and a fleet of high pressure air pressure control equipment and we also have a high pressure air pressure control equipment that provides services mostly through the the northwest of Alberta to to an array of customers that include both service companies and oil operating companies and we have a a a a rentals business which is centered around the provision of pressure control equipment which includes things like blowout preventers but also high pressure iron valves and other pressure control equipment as well as a smorgasbord of other ancillary rentable items from generators and and office trailers through to units space heaters and and and and oil field handling equipment it also has an array of customers that include both service companies and and oil and gas EMP companies. And what about land and fielding?
spk04: I'm sorry? Sorry I'll let you finish there first. Oh
spk00: I was just gonna say and there's there's there's five dormant snubbing units in Colorado that we have essentially decided to divest and we're looking for a buyer to take those units. You were going to ask another question I think about real
spk04: estate was it? Yeah yeah yeah because I know at year end there was
spk00: Yeah so there were some owned and some leased properties that transferred across with the sale of our well servicing business to precision drilling. We retained owned properties at White Court which is now our Canadian headquarters where our rentals business is is operated out from and and a larger facility in in Claremont just outside Grand Prairie. That facility has been leased on a long-term basis to an affiliate of Team Snubbing and and we basically become landlord there. Both of those properties have got a mortgage on them of an approximate value I believe lands at the moment around 3.7 million dollars.
spk03: Yeah about 4.2 right now Mike. Yeah and it's around 75% of the value of the of those properties.
spk04: Okay okay thank you. Let's hop back into the top of the beginning. One of the questions Joseph had was on expenditures and you said you know it's not significant for this year but if and when the operations pick up and I'm going to pick 25, 24, 25 is it a material amount of expenditures of capital outlays that you would have to incur in order to get the other rigs up because I remember they were they're stacked but one of them I don't think it ever worked so it should be relatively good shape or is there going to be a you know a material and I'll use material as five to ten dollar capex in order to put those units to work.
spk00: Yeah there would be some money need to be spent to to return equipment to work but nothing near the the the band that you just outlined as material we would expect the cost to put any of the rigs that we have sitting idle and and responsible for at the moment to work we would expect expense the capital expenditures of sub three million dollars depending upon which one it was.
spk04: Do you see any other competitors right now in PNG or are you still really the only game in town for heli portable?
spk00: We're the only company that that owns or operates any heli portable drilling units in Papua New Guinea at the moment.
spk04: That's all I have thank you gentlemen I'll take the rest offline.
spk00: Thanks Mari.
spk04: Thank
spk05: you there are no further questions registered at this time and I would now like to turn the meeting back over to Mr. McGuire.
spk00: Thanks Chris I'd like to thank the participants who join us today and the thoughtful questions that were put to us and wish everybody a good day.
spk05: Thank you the conference is now ended please disconnect your lines at this time and thank you for your participation.

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