High Arctic Energy Services Inc.

All participants, please stand by. Your conference is now ready to begin. Good afternoon, ladies and gentlemen. Welcome to the High Arctic Energy Services 2024 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, Melanie, and good afternoon, everyone. Welcome to High Arctic's second quarter conference call. Today, I'll be providing an update on the press release we issued after markets closed yesterday, August 14th, including discussion of our financial performance for the second quarter of 2024. Following my remarks, I'll hand the call over to our Chief Financial Officer, Lon Bate. Lon will be discussing our financial performance for the quarter in more detail. 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 hierarchics' 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 2024 annual information form available on our website or on CDAR+. Look under the heading Risk Factors. Well, we have finally fulfilled our long-anticipated reorganization. By this time tomorrow, the corporation's new shares and the shares of the spun-out P&G business will have begun trading. On the 17th of June this year, High Arctic held its annual and special general meeting. At the meeting, the corporation shareholders approved, amongst other things, special resolutions approving the reorganization of the corporation by way of a plan of arrangement and a return of capital of up to 76 cents per common share. The return of capital was paid out at the 76 cent maximum to shareholders on July 17th this year. Pursuant to the reorganization of the corporation, the P&G business was spun out to the current Hiarctic shareholders through a new publicly listed entity named Hiarctic Overseas Holdings Corporation, referred to in our filings as SpinCo. SpinCo will trade on the TSX Venture Exchange under the trading symbol HOH. The new shares of Hiarctic Energy Services Inc. will trade under the existing ticker of HWO on the TSX main exchange. Each shareholder of the corporation has received as consideration one quarter of one common share of SpinCo HOH and one quarter of one common share of post-arrangement high arctic HWO for each common share of high arctic held at the time of separation. As a result, Hyarctic has 12,448,166 new Hyarctic common shares outstanding, and SpinCo has 12,448,166 SpinCo common shares outstanding. As a consequence of the June 17 approvals, our financial statements and MD&A for the second quarter classified the P&G business as assets and liabilities held for distribution. And as the P&G business represents a separate geographic area of operations, it has been presented as discontinued operations. In line with our prior guidance, I confirm that RIG 103 completed the drilling of the fourth and final of the approved wells in our customer's program during this second quarter. The RIG and associated equipment packages were placed into cold stack storage and crews have been released. Just a reminder that the term of the RIG 103 contract in PNG runs through to July 2025 with options for the customer to extend. Presently, there is no confirmed drilling activity in the remaining contract period, but we continue to work with our customer to advance plans for future work. Associated with the cessation of drilling operations in P&G with Rig 103, we have seen a softening in the deployment of rental assets through the quarter, with those pulled through by drilling operations released upon the completion of the cold stack work. The P&G business 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 P&G. These rentals are ongoing. At the macro scale, we're optimistic for future drilling in PNG for SpinCo. This optimism is based upon an expectation that advancement of the Papua LNG project led by French multinational Total Energies will stimulate exploration and appraisal drilling in much the same way as the first PNG LNG project did a decade ago. We are, however, Disappointed that a final investment decision on the PUPWA LNG project has been pushed out into 2025 and potentially as late as the first quarter of 2026. With the Managing Director of PNG State-Owned Kumul Petroleum being quoted earlier this week as stating that FID will now be in Q4 2025 or Q1 2026. This follows the joint statement in April this year, reaffirming commitment to the project by the government of Papua New Guinea and the project operating partner, Total Energies. The Papua LNG project is expected to be followed by the Pinyang gas field development in the western province of PNG. This project 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 onshore Papua New Guinea to progress their aim to contribute to growing domestic energy needs and additional LNG export processing facilities. ExxonMobil and their partners are also advancing the backfill of the PNG LNG plant and have announced intentions to appraise a significant prospect that they have named Wildebeest. 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. P&G Industry Manpower Solutions, our labour hire training and manpower business in P&G, has been established to tap into the business opportunities associated with that need. We have long provided training and competency solutions in-house, And PIMS also taps into our large pool of talent to provide manpower, skills and semi-skilled labor, trades qualified personnel and professionals in P&G. SpinCo's team are excited to be playing a role in preparing P&G citizens to be job ready for the major projects anticipated in the latter part of this decade and beyond. Turning to the corporation's remaining business, It consists of high-margin Canadian equipment rental business centered upon pressure control, a minority interest in Team Snubbing Services Inc., Canada's largest oilfield snubbing services business, and industrial properties at Claremont and White Court in Alberta, Canada. We have now completed the second quarter of activity, which includes the business of Delta Rental Services. The acquisition of Delta in late December last year, its amalgamation with High Arctic and its integration with our legacy rentals business in Canada, has delivered the scale for a cash-positive operation. Delta has blended seamlessly with High Arctic's rentals and the combined rentals business is now marketed under the Delta brand. The second quarter and first half results are in line with our pre-acquisition expectations with a strong contribution to revenue and positive cash flow. The Delta acquisition contemplated and the structure of the consideration with a large earn-out was reflective of Hiarctic's intention to reorganize and separate the Canadian P&G businesses. The success of this modest but important growth step has provided us with confidence that this transaction is symbolic of the prospects for the now purely Canadian High Arctic and how additional accretive transactions may be realized. High Arctic has a 42% equity stake in team snubbing. The second quarter is traditionally a low activity period for snubbing in Canada due to the seasonal breakup and associated road bans. This year has been no different with activity levels down from the record first quarter During the quarter, Team used the opportunity to provide crews with scheduled vacation and conducted planned maintenance and recertification activity. Team also completed the reorganization of its international partnership. The result of this reorganization, a cashless arrangement, sees Team holding a fraction over 90% of the Team Snubbing Services international business and complete control of all decision-making. This result leads to a more efficient overall team corporate structure and management structure and a much more efficient overhead. In Alaska, the snubbing packages worked for the quarter with activity negatively affected by extreme weather events and client scheduling. I'd like now to pass the call over to Longbait, High Arctic's 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. Just before I begin, I just want to state that all dollar amounts, unless otherwise stated, that are mentioned on this call are all in Canadian dollars. Also, as Mike mentioned, with the near certainty of completing the reorganization achieved in the past quarter, Our consolidated financial statements in MD&A classify the P&G business as assets and liabilities held for distribution, and the P&G business as it represents a separate geographical area of operation. Those operations and the results thereof have been presented separately as discontinued operations in our statements. This change makes our consolidated statements in MD&A considerably different from the past. What this means is that what we presented in our most recent quarter is that our income statement and cash flow statement show only the details of our continuing operations, which, as Mike said, is our Canadian rentals business, plus equity accounting for our investment in Team Snubbing. The comparative quarter from 2023 and the six-month results for both June 30th, 2023 and 2024 have all been restated in this quarter as well, so that the numbers are comparable and the reader of our financial statements can therefore compare the performance of the go-forward Canadian business quarter over quarter, six months over six months. In O3 of our financial statements, we detailed the assets held for distribution and the discontinued operations that are presented discreetly there for users of the financial statements to understand the assets and business being spun out of our books here in Canada into SpinCo, and that's based on our current book values. Okay, so turning to the second quarter as published here. Start in Canada and the result from our continuing operations. The Delta Rentals business, which is centered on pressure control equipment and equipment supporting the high pressure stimulation of oil and gas wells in the basin. With the Delta acquisition we made in late 2023, our revenues from continuing operations have increased approximately 3x for both the three and six month period ended June 30th, 2024. versus the comparable periods in 2023. IRCTC achieved revenues of $2.5 million in Q2 2024 and $5.5 million for the first half of this year. Strong operating margin performance was also achieved in both 2024 periods, with margins from this business consistently in the high 40% range. Margin revenue performance were slightly lower in Q2, largely due to the spring breakup and the sort of typically lower industry-wide activity levels, customary, that we see in Canada for this quarter. There's no activity in our production services segment again this quarter, at least in terms of recordable revenue and margin. Included in our production services segment is our investment in Team Snubbing, our equity investment, and our involvement with the Ciceni partnership, where we hold a 49% stake. Sorry, 49%. The Ciceni partnership, has experienced limited business activity since the 2022 Canadian sales transaction. But the partnership does still remain active, and we, along with our partner, continue to work to reposition our offerings to our customers and are exploring other avenues for business activity. Mike also mentioned Team acquired a controlling interest in Team Snubbing International in the quarter. So financially, as a result of this acquisition, Team has now consolidated the results of Team Snubbing International for the first time, and that was essentially the full quarter as that transaction took place in early April of this year. So this consolidation of Team Snubbing International plus the increase in activity from Team's Canadian operations in the quarter helped drive the increase in revenues reported for Team, which are included in Note 7 to our interim financial statements. But more than offsetting this additional business activity in the quarter for team were significant costs incurred by Team Snubbing International in the same quarter. In total, the quarterly net after-tax loss of $2.1 million, so that's gross, not the net that was picked up by us. That gross amount was recorded in the consolidated results of Team Snubbing. That loss, driven by the low activity in Alaska that Mike mentioned, plus additional one-time costs mentioned above, as Team International restructured their management and operational teams up in Alaska. This restructuring initiative consolidated Team International's workforce, right-sizing it to where it needs to be to service the overall Alaskan customer base. Turning to the P&G business, which in our disclosures is all-inclusive and so therefore includes both drilling services and rentals. Revenue was down in the quarter, down from $16.6 million in Q2 of last year to $10.4 million of this year. And as Mike stated, last year we were active on Rig 103 as it worked the full quarter versus this recent quarter where our drilling operations for Rig 103 ceased. and much of the rental revenue that typically accompanies that drilling work also deaccelerated. G&A costs from continuing operations totaled $1.8 million in the quarter, higher than the $1.3 million incurred for this quarter last year, Q2 2023. This increase in G&A is a direct result of professional and other fees related to the arrangement and other aspects of the corporate reorganization that we just recently completed. In our MD&A, we've adjusted out these specific third-party non-recurring costs in our adjusted EBITDA non-IFRS measures, which for this quarter, this additional G&A adjusted out totaled approximately $3.25 million and $1.25 million year-to-date 2024. After stripping out this additional G&A associated with the reorganization, the business achieved positive EBITDA, adjusted EBITDA from continuing operations of $200,000 for the current quarter, approximately $300,000 year-to-date. We, like in the standalone Go Forward Canadian entity, HWO, High Arctic, anticipate meaningful G&A reductions to begin to appear in the second half of 2024. Post the close of reorganization after some transitional matters are completed, we'll be in a position to right-size the administrative support in Canada to align with our much simpler Canadian-only operations going forward. CapEx spend in 2024, Q2, totaled $450,000, with this spend being focused in Canada, both on growth and capital upgrades to our rental equipment fleet, plus costs associated with building out our financial and operational systems. We expect to continue with modest capital spending in 2024, mostly focused on maintaining and growing our rental fleet. So in closing, I think from my perspective with our recent press releases going out announcing the completion of our reorganization and our recent Q2 results, we've given the market some guidance on cash working capital and the debt capital structures of the two distinct entities going forward. And I just want to revisit this important information here on the call. For the remaining Canadian business today, we have positive working capital of approximately $5 million, of which is inclusive of $4 million cash on hand. But the only debt in the company held is $3.4 million in mortgage debt, which is well secured with our White Court and Claremont properties. BINCO's now standalone P&G business starts out with a strong capital structure, no long-term debt, and positive working capital of approximately US$19 million, inclusive of US$13 million in cash. Now, with that said, I'll turn the call back over to Mike for closing remarks.