High Arctic Energy Services Inc.

Good morning, ladies and gentlemen. Welcome to the High Arctic Energy Services 2023 Q2 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, Louise, and good morning to everyone. Thanks for joining us. Welcome to High Arctic's second quarter conference call. Today, I'll be providing an update on the press release we issued yesterday, August 3rd, including discussion of our financial performance for the second quarter of 2023. 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 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 2022 Annual Information Form available on our website or on CDAR+. Look under the heading Risk Factors. Starting with operations in PNG, and during the quarter, Rig 103 had a strong operational performance across the full quarter. This represents the first full quarter of drilling activity for the corporation since the suspension of operations in the first quarter of 2020. High Arctic anticipates Rig 103 will operate consistently through the term of the contract, which runs through to July 2025. As well as the full quarter of drilling operations with Rig 103, we've seen strong deployment of rental assets through the quarter, including those pulled through by drilling operations, as well as rentals to the wider market. High Arctic also provided rental material handling equipment, a 100-man mobile camp, and a large quantity of worksite matting to support other ongoing field activities with our two main customers in PNG. Full utilization of our drilling services and asset rentals associated with customer-owned RIG 103 had a significant impact on revenues and earnings, which we anticipate will be the case for the remainder of 2023. While the deferral of other projects pushed redeployment of RIG 115 out from this year, there is a catalog of projects under discussion for potential RIG deployment in the coming years. Our optimism for future drilling in PNG remains underpinned by the advancement of the Papua LNG project by French multinational Total Energies. Incidentally, last week the French President visited Papua New Guinea for the first time, meeting with the Prime Minister of Papua New Guinea and forging stronger ties between France and PNG. The Papua LNG project is expected to be followed by the Pinyang gas field development in the western province of Papua New Guinea, which is anticipated to result in the addition of further gas liquefaction capacity in the world-class PNG LNG export facility. State-owned Kumu Petroleum is advancing appraisal of other gas discoveries in PNG, recently pursuing seismic contractors for the Kimu and Barakiwa discoveries onshore Papua New Guinea. progress their aim to contribute to growing domestic energy needs and additional LNG export processing facilities. These LNG projects and other large-scale mining and infrastructure projects moving through the pipeline will require tens of thousands of new workers and more skilled and supervisory personnel that do not exist in PNG today. Through PIMS, PNG Industry Manpower Solutions, We have added the provision of recognised safety training, competency verification and equipment licensing services. We have long provided these training and competency solutions in-house. TIMSS also taps into our large pool of talent to provide manpower, skilled and semi-skilled labour, trades qualified personnel and professionals in PNG. We are excited to be playing a significant role in preparing PNG citizens to be job ready. In Canada, we announced and this week closed a transaction to sell our Canadian nitrogen transportation hauling and pumping services business for cash consideration of $1.35 million. The sale delivers a net gain of approximately $550,000 and contributes approximately $1.24 million of cash after transaction expenses and high arctic retains associated working capital of the business as of 21 July. Our pressure control focused rentals enjoyed a solid quarter despite the wildfire and other disruptions experienced through the region of our customer base, where revenues were relatively flat to the first quarter of 2023. Hayes Rentals is fielding inquiries from an increasingly broad range of customers, including contractors and energy companies alike. Team Snubbing is Canada's largest snubbing provider and we have a 42% equity stake in Team. As is the case each year, the second quarter represents the lowest activity level for snubbing contractors due to the seasonal break-up period. Team saw a contraction in Canadian activity and utilised the available personnel and resources to consolidate into a single facility in Red Deer and prepare for the anticipation of increased field operations in the third quarter. including work on major repairs and maintenance. The team has a 50% interest in an international partnership marketed under Team Snubbing International. This partnership commenced their first services this quarter, deploying two snubbing packages to U.S. independent producers in Alaska. Team Snubbing International are also looking into opportunities in other foreign jurisdictions. Turning to second quarter financial results, On a consolidated basis, High Arctic generated revenues of $17.2 million, approximately double that achieved during the first quarter, and generated EBITDA of $3.8 million, up from $1.3 million in Q1. The company saw a marginal profit from continuing operations during the quarter, while we experienced a small loss from the now discontinued operations of the nitrogen business. Our oilfield services operating margins were higher in Q2 2023 at 37.5% compared with 23.1% in the second quarter of 2022. Year-to-date, we've achieved 36% margins compared to 20.7% in the first half of 2022. The increase is primarily due to strength in demand for rental equipment in both Canada and PNG, the full utilization and charge-out rates associated with RIG 103 operations, and an increase in the supply of high Arctic technical and operational manpower services to customers in PNG. General and administrative costs were $2.1 million in the second quarter, a reduction of 22% when compared to the same period last year. G&A costs represent 11.9% of our second quarter revenues and 15.4% of year-to-date 2023 revenues. We expect this will decrease and trend lower for the remainder of 2023 as the higher revenue from our operations in PNG is sustained. Management will continue to evaluate G&A costs and right-size support to align with expected operations in both Papua New Guinea and Canada. Adjusted EBITDA for the second quarter was $4.4 million or 25.6% of revenues as compared to $3 million or 11.9% of revenues in the second quarter of 2022. The largest revenue contributor for High Arctic during the quarter was generated from the drilling segment. Full utilization of RIG 103 during the quarter helped to drive $13.4 million of revenue in Q2, compared to $6.1 million in the second quarter of 2022, a period when Rig 115 successfully completed a short-duration project and entered storage. Active drilling in Q2 2023 lifted operating margins to 28.1% from 24% in Q2 2022. Our ancillary services segment spreads across both P&G and Canada and continues to be our highest operating margin generator. We achieved 70.8% operating margin on $3.8 million of revenues in Q2, as compared to 60% margin on $3.5 million of revenues in Q2 2022. The improved margin reflects more revenue contribution from low maintenance, fully owned assets, and management expects the Q2 margins and the activity levels that delivered this to continue through the remainder of the year. There was no activity in our production services segment again this quarter, whereas in 2022, the second quarter was the last full quarter of operations from the well-servicing assets sold to precision drilling, and snubbing assets sold to team snubbing services. During the quarter, capital expenditures were $700,000, mainly focused on growth in our rental equipment in Papua New Guinea, with the addition of light vehicles and other incidental rental equipment that customers are increasingly needing for field operations in remote parts of the country. We expect to continue with modest capital spending in 2023, mostly focused on maintaining and growing our rental fleet in both Canada and PNG. The company ended the quarter with $45.5 million of cash on hand, with approximately $36 million invested in secure, interest-bearing short-term investments, which generated $510,000 during the quarter. Interest income partially funded our monthly half cent a share dividend where we returned over $700,000 to shareholders during Q2. Our working capital position increased slightly during the quarter and sat at $61.8 million on June 30th. I'm excited to provide an update on the reorganization of the corporation. consisting of a tax-efficient return of cash to shareholders and the spin-off of the Papua New Guinean business. This separation will address the inefficiencies of managing two small businesses on opposite sides of the world, with few synergies, and will allow senior management to concentrate where they have had the most success in the past. The remaining publicly listed company with Canadian assets and tax pools will create an attractive vehicle for future growth and transactions. Our P&G business has, in our view, been consistently undervalued by the public market, and we believe that the current market conditions make it appropriate to take steps towards unlocking value. The reorganization is expected to result in the payout to shareholders of $38.2 million equivalent to approximately 75 cents per fully diluted share by way of tax-efficient return of capital distribution. The sale of High Arctic International to existing shareholders who opt to participate through issuance by the corporation of a right for shareholders to purchase from the corporation one ordinary share of High Arctic Energy Services Cyprus Ltd. for each common share held in High Arctic. A shareholder election process where shareholders can elect to do nothing and receive their return of capital distribution as cash, elect to exercise their purchase rights in full or in part, elect to use some or all of the funds to be received pursuant to the return of capital toward the exercise of any purchase rights. And receipt by the corporation of the proceeds of the sale of ordinary shares of High Arctic International. Through this reorganization, the corporation aims to completely divest its ownership of High Arctic International, an unlisted company incorporated and domiciled in Cyprus that owns the corporation's interests in its foreign subsidiaries. The corporation expects to announce the exercise price for the purchase of High Arctic International and complete the information memorandum to be circulated to shareholders in September. The potential special shareholder meeting is anticipated to be held in October and the process concluded prior to year end. I believe our customers and employees in both P&G and Canada will appreciate and benefit from a locally managed business. I will now turn the conference over to Louise, our operator, who will open the line for questions.

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. So if you have a question, please press star 1 on your device's keypad. When prompted by the system, please unmute your phone and clearly state your name to register in the Q&A. 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 brief pause while participants register and we thank you for your patience.