High Arctic Energy Services Inc.

Good afternoon, ladies and gentlemen. Welcome to the High Arctic Energy Services 2023 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.

Thank you, Patrick. And good afternoon, everybody. Welcome to High Arctic's fourth quarter conference call. Today, I'll be providing an update on the press release we issued before markets opened this morning. April 8th, including discussion of our financial performance for the fourth quarter and full year of 2023. Following my remarks, I'll hand the call over to our Interim Chief Financial Officer, Lon Bate. Lon will be discussing our financial performance for the quarter and full year of 2023. 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 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 2023 Annual Information Form, available on our website or on CDAR+. Look under the heading Risk Factors. Starting with operations in Papua New Guinea. During the quarter, Rig 103 had strong operational performance. This represents the third full quarter of drilling activity for the corporation since the suspension of operations in early 2020. As well as the full quarter of drilling operations with RIG 103, we have 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 Papua New Guinea. Full utilization of our drilling services and our rental assets associated with Customer Owned Rig 103 had a significant impact on our earnings, which we anticipate will be the case for the first half of 2024. We are currently on the fourth and final of the approved wells in our customers program and on Friday they issued us with a notice confirming the drilling operations will be suspended after this well and the rig will be placed into cold stack storage. The term of the RIG 103 contract runs through to just past the middle of next year. We are optimistic for future drilling in PNG. This optimism is based on an expectation that advancement of the Papua LNG project, led by French multinational Total Energies, will stimulate exploration and appraisal activity in much the same way as the first PNG LNG project did a decade ago. We are, however, disappointed to observe that work towards a final investment decision on the Papua LNG project has been further delayed. On the weekend, the Government of Papua New Guinea and the project operating partner Total Energies issued a joint statement reaffirming commitment to the project but guiding towards a decision in 2025. The Papua LNG project is expected to be followed by the Pinyang gas field development in the western province of PNG. This is anticipated to result in the addition of further gas liquefaction capacity in the world-class PNG LNG export facility. State-owned Kummel Petroleum is advancing appraisal of other gas discoveries in PNG, planning for seismic surveys of the Kimu and Barakiwa discoveries onshore Papua New Guinea to 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 Papua New Guinea today. Through PIMS, PNG Industry Manpower Solutions, High Arctic has added the provision of recognized safety training, competency verification and equipment licensing services. We have long provided these training and competency solutions in-house. PIMMS also taps into our large pool of talent to provide manpower, skilled and semi-skilled labour, trades qualified personnel and professionals in Papua New Guinea. We are excited to be playing a significant role in preparing PNG citizens to be job ready for the major projects we anticipate in the second half of this decade and beyond. Turning to Canada, In Canada, we closed a transaction to acquire and then amalgamate Delta Rental Services. The acquisition of Delta in December and its integration with our legacy rentals business in Canada has delivered scale for a cash positive operation. Delta has blended seamlessly with High Arctic Rentals and the combined business is marketed under the Delta brand. The Delta acquisition is expected to increase Canadian revenues three to fourfold and contribute strongly to positive cash flow. The Delta acquisition contemplates, and the structure of the consideration is reflective of, Hiarctic's intention to reorganise and separate the Canadian and P&G businesses. I am confident that this transaction is symbolic of the prospects for a purely Canadian entity and how additional accretive transactions can be unearthed. Over the past two years, the corporation has divested underperforming and non-core assets and businesses. Now the corporation's Canadian business consists of a high margin equipment rentals business centered upon pressure control, a minority interest in Canada's largest oilfield snubbing services business, Team Snubbing Services, and industrial properties at Claremont and White Court in Alberta, Canada. Team Snubbing is Canada's largest snubbing provider, and we have a 42% equity stake in Team. Team has had an outstanding fourth quarter, setting new records in terms of hours worked, snubbing packages deployed, and available crews. This has transposed into record revenue levels and earnings. At the end of the quarter, Team declared its first dividend since acquiring High Arctic's Canadian snubbing assets. The two snubbing packages deployed in Alaska under Team Snubbing International operated almost continuously through the fourth quarter, shutting down in December and remaining shut down through the deepest of the cold weather, but now both packages have recommenced operations in March. I would now like to pass the call over to Lon Bake, Hyaptic's interim chief financial officer, to discuss key financial highlights from the quarter in more detail.

Thank you, Mike, and good afternoon to all of you joining on the call today. Now, just before I begin, I just want to remind everybody and state that all the dollar amounts mentioned on this call are Canadian dollars. Looking at our fourth quarter financial results from continuing operations and on a consolidated basis, High Arctic generated revenues of $18.1 million and adjusted EBITDA of $3.2 million and spent $130,000 on capital expenditures in the quarter. Also in the quarter, High Arctic generated net income of $2.75 million, which equates to $0.06 per share. This return to profitability for High Arctic was a result of the full utilization of our drilling services and asset rentals in both P&G and Canada. In addition, the positive quarterly results were driven by meaningful investment income from the short-term investments High Arctic holds, the equity income recorded from TEAM's strong Q4 results, and a $912,000 deferred income tax recovery that was recorded in the quarter. By far the most notable event in the quarter was the acquisition of Delta Rental Services that Mike just spoke to above. Some of the key details on this transaction are as follows. Total purchase price for Delta was $6.4 million and consisted of $3.4 million in cash paid on closing and the remaining roughly $3 million as an earn-out or contingent consideration payable. in a combination of cash and shares of High Arctic over a three-year period post-close. The contingent consideration payable is based on the Delta business achieving specific profitability targets and is adjusted for capital expenditures incurred. Key assets acquired include property and equipment valued at over $3.6 million and about $600,000 in working capital. Now, as part of this acquisition, High Arctic also recorded additional assets that consist of $1.5 million in intangibles for some of the branding customer relationships acquired on the business, and over $800,000 in goodwill. These values associated with the assets and goodwill acquired on the purchase liabilities assumed in the contingent consideration payable post-close, while based on our best estimates of fair values on the transaction date. But if within a year of the transaction date, new information is obtained by Arctic, regarding the facts and circumstances of the transaction at the transaction date that require us to adjust these, this purchase price will be adjusted. Now, given that the acquisition of Delta was also done right at the end of 2023, the results that we're speaking to today from the Delta operation really had no material impact on our results for the fourth quarter of 2023. Now, turning back to the quarter itself, as I already mentioned, in the quarter, business performed well, generating $3.2 million in adjusted EBITDA, consistent with Q3 of 2023. Customer-owned RIG 103 was fully utilized in the quarter. Our ancillary services business continued to perform at or above expectations, and as a result, Hiarctic producing a steady consolidated oil field services margin of 33.4% in the quarter, consistent with a Q3 pardon me, with 34% oilfield services operating margin achieved for the full year 2023. These 2023 margins compare very favorably to the 2022 oilfield services operating margins that were a negative 27% in Q4 2022 and only 14.4% for the full year of 2022. Much of this higher margin generation is a result of the 2022 disposition of the Canadian well servicing assets and snubbing assets. The sale of the nitrogen business is also driving these higher margins in 2023. And EBITDA generation as that sale of that business that closed in the Q3 in the third quarter of 2023 eliminated a service line that was negative impacting our bottom line. Turning to G&A, our G&A costs were $2.8 million in the quarter, which is higher than the $2.7 incurred in the previous quarter. G&A costs for the quarter represent 15.5% of revenue, also consistent with Q3 2023, and consistent with the fourth quarter of 2022. G&A for the business was elevated in the quarter as higher to concurred corporate and professional fees relating towards our work towards a revised reorganization plan, costs associated with the Delta acquisition, The cost is a result of the special meeting we held on January 10th of this year. In addition, we recorded an increase in our expected credit loss provision for some Canadian receivables in the quarter. But with that said, management continues to evaluate our G&A costs, and we continue to right-size our administrative support to align with expected operations going forward in both P&G and Canada. As mentioned earlier, adjusted EBITDA being $3.2 on the quarter, $3.2 million. This compares favorably to the negative adjusted EBITDA of $1.2 million or negative 10% of revenue in Q4 2022. Q4 2022 was negatively impacted, just want to remind readers, by a one-time inventory impairment charge of $3.7 million taken right at the end of last year. And general activity levels in P&G at that point in time were also not as robust as they were when compared to 2023. The largest revenue generator in the quarter for High Arctic was from the drilling segment, which is no surprise. Drilling services activities generated $14.3 million of revenue in Q4, higher than the $10.1 million in Q4 of 2022. This increase was due primarily to the fact that our customer-owned rig 103 was fully utilized in the quarter, whereas in Q4 2022, we had no owned or customer-owned rigs operating and turning, and most of the revenue then was derived from manpower provision. Q4 2023 operating margins were 22% for the segment, considerably higher than the negative 33% in Q4 2022, and that was obviously impacted by the inventory impairment I mentioned earlier. Our ancillary services segment spans both Papua New Guinea and Canada and continues to be our highest operating margin generator. We achieved an operating margin of 76% on 3.9 million in revenues, from continuing operations in Q4 2023, as compared to 28% margin on $2 million of revenue in Q4 2022. This improved margin reflects more revenue contribution from low-maintenance, fully-owned assets, and management expects the Q4 margins and activity levels that delivered this highly profitable segment to continue into 2024, and especially with the addition of the Delta business here in Canada. Consistent with last quarter, there was no activity in our production services segment, but we did incur some small expenses related to storage and preservation costs for the assets that do exist in that segment. During the quarter, CapEx totaled $130,000, and this spending was mainly focused on growth in our rental equipment in Papua New Guinea, plus some additional costs associated with building out our new financial and operational systems. We expect to continue with modest capital spending through 2024, mostly focused on maintaining and growing our rental fleet, both in Canada and Papua New Guinea. Finally here, our company ended the quarter here with just over $50 million of cash on hand. Approximately $33 million of that invested in secure interest-bearing short-term investments generated over $550,000 in interest income during the quarter. Our working capital position stayed steady in the quarter, and it was at the end of December, stood at $63 million. Working capital would have been higher than this, but do keep in mind that we did deploy $3.4 million in cash when we acquired Delta in the quarter. Consistent with past quarters, our only source of debt is our mortgage financing, which stands at $3.5 million, and that's mortgages on our land and buildings in Alberta, both Claremont and White Court, as Mike mentioned those assets earlier. And with that, I'll turn the call back over to you, Mike.