/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, March 6 /CNW/ - Cathedral Energy Services Income Trust (the "Trust" / TSX: CET.UN) is pleased to report its results for 2007 Q4 and the year-end December 31, 2007. Dollars are in '000's except for day rates and per Trust Unit amounts.
FINANCIAL HIGHLIGHTS
Three months ended Years ended
December 31 December 31
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2007 2006 2007 2006
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Revenues $ 39,054 $ 35,327 $ 145,106 $ 138,254
EBITDAS(1) $ 13,707 $ 13,046 $ 46,731 $ 52,793
Per Trust Unit - diluted $ 0.43 $ 0.42 $ 1.47 $ 1.68
Income before taxes $ 9,772 $ 9,573 $ 31,990 $ 39,679
Net income $ 10,365 $ 8,127 $ 24,863 $ 35,348
Per Trust Unit - basic $ 0.33 $ 0.26 $ 0.79 $ 1.16
Per Trust Unit - diluted $ 0.33 $ 0.26 $ 0.78 $ 1.12
Cash distributions declared
per Trust Unit $ 0.21 $ 0.26 $ 0.84 $ 0.805
Distributable cash(2) $ 12,043 $ 11,283 $ 38,993 $ 45,972
Cash distributions
declared $ 6,649 $ 8,026 $ 26,405 $ 24,681
Payout ratio(3) 55% 71%(4) 68% 54%(4)
Property and equipment
additions and corporate
acquisitions:
Paid or payable in cash $ 5,205 $ 4,448 $ 19,857 $ 26,436
Paid or payable in
Trust Units - 320 - 1,820
----------- ----------- ----------- -----------
$ 5,205 $ 4,768 $ 19,857 $ 28,256
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Weighted average Trust
Units outstanding:
Basic ('000) 31,652 30,831 31,402 30,578
Diluted ('000) 31,836 31,316 31,781 31,423
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December 31 December 31
2007 2006
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Working capital $ 16,947 $ 15,051
Long-term debt and capital
lease obligations excluding
current portion $ 17,441 $ 15,552
Unitholders' equity $ 79,250 $ 76,223
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(1) EBITDAS, earnings before interest on long-term debt and capital lease
obligations, taxes, depreciation, amortization and non-cash
compensation expense is provided to assist investors in determining
the ability of the Trust to generate cash from operations. EBITDAS
does not have any standardized meaning within Canadian Generally
Accepted Accounting Principles and therefore may not be comparable to
similar measures presented by other companies and/or trusts. During
2007 the Trust re-named "EBITDA" to "EBITDAS" but the formula used to
calculate both terms are the same.
(2) Distributable cash is defined as cash flow from operating activities
before changes in non-cash operating working capital less required
principal repayments on long-term debt and capital lease obligations
and maintenance capital expenditures. Distributable cash does not
have any standardized meaning within Canadian Generally Accepted
Accounting Principles and therefore may not be comparable to similar
measures presented by other trusts. During 2007 the Trust re-named
"distributable income" to "distributable cash" but the formula used
to calculate both terms are the same.
(3) Cash distributions declared as a percentage of distributable cash.
(4) Payout ratio is 57% for 2006 Q4 and 50% for the year ended
December 31, 2006 if the December 2006 "special" cash distribution of
$0.05 per Trust Unit is excluded.
FORWARD-LOOKING INFORMATION
Certain statements in this news release including (i) statements that may contain words such as "anticipate", "could", "expect", "seek", "may" "intend", "will", "believe", "should", "project", "forecast", "plan" and similar expressions, including the negatives thereof, (ii) statements that are based on current expectations and estimates about the markets in which the Trust/Cathedral operates and (iii) statements of belief, intentions and expectations about developments, results and events that will or may occur in the future, constitute "forward-looking statements" and are based on certain assumptions and analysis made by the Trust/Cathedral. Forward-looking statements in this MD&A include, but are not limited to, statements with respect to future capital expenditures, including the amount, nature and timing thereof; oil and natural gas prices and demand; other development trends within the oil and natural gas industry; business strategy; expansion and growth of the Trust's/Cathedral's business and operations including the Trust/Cathedral's market share and position in the oilfield service market; and other such matters. Such forward-looking statements are subject to important risks and uncertainties, which are difficult to predict and that may affect the Trust's/Cathedral's operations, including, but not limited to: the impact of general economic conditions in Canada and the United States; industry conditions, including the adoption of new environmental, safety and other laws and regulations and changes in how they are interpreted and enforced; volatility of oil and natural gas prices; oil and natural gas product supply and demand; risks inherent in the Trust's/Cathedral's ability to generate sufficient cash flow from operations to meet its current and future obligations; increased competition; the lack of availability of qualified personnel or labor unrest; fluctuation in foreign exchange or interest rates; stock market volatility; opportunities available to or pursued by the Trust/Cathedral and other factors, many of which are beyond the control of the Trust/Cathedral. The Trust's/Cathedral's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do transpire or occur, what benefits the Trust/Cathedral will derive therefrom. Subject to applicable law, the Trust disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
All forward-looking statements contained in this document are expressly qualified by this cautionary statement. Further information about the factors affecting forward-looking statements is available in the Trust's current Annual Information Form which has been filed with the applicable Canadian provincial securities commissions and are available on www.sedar.com.
NON-GAAP MEASURES
This news release refers to certain financial measurements that do not have any standardized meaning within Canadian Generally Accepted Accounting Principles ("GAAP") and therefore may not be comparable to similar measures provided by other companies and/or trusts.
The specific measures being referred to include the following:
i) "Gross margin" - calculated as revenues less operating expenses is
considered a primary indicator of operating performance (see tabular
calculation under Results of Operations);
ii) "EBITDAS" - defined as earnings before interest on long-term debt
and capital lease obligations, taxes, depreciation, amortization and
non-cash compensation expense; this measure is considered an
indicator of the Trust's ability to generate funds flow from
operations prior to consideration of how activities are financed,
how the results are taxed and measured and non-cash expenses (see
tabular calculation under EBITDAS); during 2007 the Trust re-named
"EBITDA" to "EBITDAS" but the formula used to calculate both terms
are the same;
iii) "Distributable cash" - defined as cash flow from operating
activities before changes in non-cash operating working capital less
required principal repayments on long-term debt and capital lease
obligations and maintenance capital expenditures; distributable cash
is a key performance measurement used by management, analysts and
investors to evaluate the financial performance of the Trust (see
tabular calculation under Distributions); during 2007 the Trust re-
named "distributable income" to "distributable cash" but the formula
used to calculate both terms are the same;
iv) "Maintenance capital expenditures" - refers to capital expenditures
required to maintain existing levels of service but excludes
replacement cost of lost-in-hole equipment to the extent the
replacement equipment is financed from the proceeds on disposal of
the equipment lost-in-hole;
v) "Payout ratio" - calculated as cash distributions declared divided
by distributable cash, is an indicator of the Trust's ability to
fund its distributions from the Trust's ongoing operations excluding
changes in non-cash working capital (see tabular calculation under
Distributions) (see distributable cash definition above); and
vi) "Funds from operations" - calculated as cash flow from operating
activities before changes in non-cash working capital is considered
an indicator of the Trust's ability to generate funds flow from
operations but excluding changes in non-cash working capital which
is financed using the Trust's bank indebtedness/line of credit
facility.
OVERVIEW
Cathedral Energy Services Income Trust is pleased to report results for both the fourth quarter of 2007 and the year-ended December 31, 2007. Despite a significant decrease in oilfield services activity in western Canada, the Trust was able to achieve a quarter-over-quarter increase in revenues as well as record annual revenues in 2007. Revenues for Q4 increased $3,727 or 10.6% 39,054 from $35,327 in the comparative period in 2006. On a year-over-year basis, revenues increased $6,852 or 5.0% to $145,106 from $138,254 in 2006. This increase was led by our directional drilling business in both Canada and the U.S. 2007 Q4 EBITDAS was $13,707 which compares to $13,046 in 2006. EBITDAS for the year ended December 31, 2007 was $46,731 while the comparative figure for 2006 was $52,793.
Net income for the three months ended December 31, 2007 was $10,365 ($0.33 per diluted Trust Unit) which compares to $8,127 ($0.26 per diluted Trust Unit) in the same quarter of 2006. For the year ended December 31, 2007, net income was $24,863 ($0.78 per diluted Trust Unit) which compares to $35,348 ($1.12 per diluted Trust Unit) for 2006. Considering the environment in which the Trust operated in 2007, management is pleased with the operating results for the year.
RESULTS OF OPERATIONS - 2007 COMPARED TO 2006
Revenues and operating expenses
2007 2006 Change %
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Revenues $ 145,106 $ 138,254 $ 6,852 5
Operating expenses (73,482) (64,886) 8,596 13
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Gross margin - $ $ 71,624 $ 73,368 $ (1,744) (2)
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Gross margin - % 49.4% 53.1% 3.7%
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For 2007 the Trust continued to generate record annual revenues of $145,106 which represented an increase of 5.0% over 2006 revenues. The increase was mainly a result of: i) a 4.6% increase in the average day rate for directional drilling services to $8,857 per day (2006 - $8,470) and ii) a 11.1% increase in directional drilling activity days to 12,274 activity days (2006 - 11,046 days). The largest portion of the increase in the average day rate is related to a shift towards providing premium and specialized services as opposed to an increase in the overall base day rate. In Canada the Trust's 2007 activity levels decreased by 2.5% which was significantly less than the overall decline in drilling activity in the Canadian market. Despite the decline in natural gas drilling in western Canada, the Trust was able to minimize the market decline from prior year activity levels due to the continuing strength of the Trust's client base, involvement in multi-well programs and an increase in the percentage of wells drilled in western Canada that are horizontal or directional versus vertical in nature. The Rocky Mountain region of the United States is the Trust's main area of operations in the U.S. and it remains a very active area. The Trust's U.S. operations have now been expanded to provide directional drilling services in North Dakota and Michigan. The Trust's directional revenues from the U.S. were $41,519 in 2007, an $11,272 (37.3%) increase from 2006 revenues of $30,247. Due to demand in the U.S. market, 5 Measurement-While-Drilling ("MWD") systems were transferred to the U.S. in 2007 and an additional MWD system was transferred to the U.S. in early 2008; the Trust now has 24 MWD systems in the U.S. market. The Trust's geographic diversification, by way of providing directional drilling services in southeast Saskatchewan and U.S., has been a significant factor in its ability to organically grow its revenues within the directional drilling division.
In 2007, a competitor of the Trust purchased the ranging tool technology used by the Trust in drilling SAGD wells. During 2007 Cathedral was allowed to use this technology to complete projects it had in place but effective in 2008 this technology will not be available to Cathedral. In 2007 SAGD related revenues were $1,863 (2006 - $nil). Cathedral is currently pursuing alternative technologies to allow it to return to the SAGD market.
The continued decline in natural gas drilling expenditures in the western Canada market resulted in lower revenues for both of the Trust's production testing and wireline divisions. The Trust's production testing division, Tier One, contributed $12,051 in revenues during 2007 which is a 24.0% decline from 2006 revenues of $15,847. Advance Wireline and Xtreme Wireline combined to generate total Canadian and U.S. revenues of $21,682 for 2007 compared to $26,188 for 2006, a 17.2% decrease. Late in 2007 Q2, one wireline unit was transferred from the Canadian operations to the newly formed U.S. division of Advance Wireline but revenue generating operations did not commence until 2007 Q3. A second wireline unit was transferred to the U.S. in 2007 Q3 and in early 2008 Q1 a third wireline unit was also transferred. As result of this expansion the U.S. wireline division generated $790 in revenues for 2007.
The gross margin for 2007 was 49.4%, which compares to 53.1% in 2006. The decrease is attributed to a number of factors including: i) shift to providing more horizontal drilling services (versus directional) which provide a lower gross margin than from directional drilling; ii) increases in directional field labour rates; iii) increase in wireline field labour costs as a percentage of revenues due to of a portion of these labour charges being fixed in nature; and iv) offsetting the previous items was an increase in the average day rate for directional drilling services.
General and administrative expenses
2007 2006 Change %
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General and administrative
expenses $ 25,774 $ 22,066 $ 3,708 17
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General and administrative expenses increased from $22,066 in 2006 to $25,774 in 2007 - an increase of $3,708. The increase was mainly related to the Trust's directional/horizontal drilling business and the contributing factors to that increase were the result of increased personnel and facility rental costs as well as an overall increase in directional drilling activity level of the U.S. directional drilling operations. Other items contributing to the overall increase were: i) a $630 increase in costs related to bad debt write-offs; ii) costs related to the set-up of the U.S. wireline division in 2007; iii) approximately $300 of professional fees incurred in 2007 Q3 related to an aborted corporate acquisition, and iv) costs associated with pursuing international business opportunities. As a percentage of revenues, general and administrative expenses were 17.8% in 2007 and 16.0% in 2006.
Depreciation and amortization
2007 2006 Change %
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Depreciation and
amortization $ 12,054 $ 10,692 $ 1,362 13
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This increase is related to the Trust's investment in property and equipment over the past 12 months including 10 MWD systems along with the expansion of the mud motor and drilling collar fleet to complement the increase in directional drilling job capacity, upgrade of low pressure production testing units to higher pressure units and the purchase of 7 wireline units (one older wireline unit was sold in 2007) and auxiliary wireline equipment. As a percentage of revenues, depreciation and amortization amounted to 8.3% for 2007 and 7.7% for 2006.
Interest
2007 2006 Change %
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Interest - long-term debt
and capital lease
obligations $ 1,084 $ 936 $ 148 16
Interest - other $ 404 $ 482 $ (78) (16)
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The main contributing factor to the increase in interest related to
long-term debt and capital lease obligations is an increase in the average
level of debt outstanding on a year-over-year basis. The $78 decrease in other
interest expense is related to the Trust's decreased utilization of its
operating line of credit.
Foreign exchange loss (gain)
2007 2006 Change %
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Foreign exchange loss
(gain) $ 492 $ (27) $ 519 n/a
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The Trust derives revenues from the U.S. which are denominated in the local currency and a significant portion of the U.S. operations costs are also denominated in the same local currency. In addition, the Trust's Canadian operations are subject to foreign currency exchange rate risk in that some purchases for parts, supplies and components in the manufacture of equipment are denominated in U.S. dollars. On a consolidated basis, the Trust has an exposure to foreign currency fluctuations related to its net monetary investment in its U.S. subsidiary. The 2007 foreign exchange loss is due mainly to the U.S. dollar weakening significantly against the Canadian dollar in 2007 versus 2006 and the Trust's net monetary investment in its U.S. subsidiary.
Non-cash compensation expense
2007 2006 Change %
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Non-cash compensation
expense $ 1,603 $ 1,486 $ 117 8
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The Trust Unit options granted are valued using the Black-Scholes option
pricing model and such value is being amortized against income over their
three-year vesting period.
Gain on disposal of property and equipment
2007 2006 Change %
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Gain on disposal of
property and equipment $ 1,777 $ 1,946 $ (169) (9)
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The gain on disposal of property and equipment can vary significantly from
year-to-year as almost all of the disposals relate to downhole equipment
lost-in-hole. Cathedral recovers lost-in-hole equipment costs including
previously expensed depreciation on the related assets.
Taxes
2007 2006 Change %
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Taxes $ 7,127 $ 4,331 $ 2,796 65
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For 2007, the Trust had a tax expense of $7,127 (effective tax rate of 22.3%) which compares to $4,331 (effective tax rate of 10.9%) in 2006. The 2007 tax provision includes a cumulative non-cash adjustment of $2,754 ($0.09 per diluted Trust Unit) related to the substantive enactment of the previously announced changes to the taxation of income and royalty trusts, other than real estate investment trusts. Removing the 2007 adjustment noted above the effective tax rate for 2007 was 13.7%. The adjusted effective tax rate has increased 10.9% in 2006 to 13.7% in 2007 due mainly to the continuing growth in the U.S. operations which are taxed at a higher rate as well as some expenses not being deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Trust's principal source of liquidity is cash generated from operations and also has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity. At December 31, 2007, the Trust had an operating line of credit with a major Canadian bank in the amount of $12,500 (2006 - $12,500) of which $6,030 (2006 - $6,460) was drawn. The Trust has a non-reducing revolving term loan facility in the amount of $25,000 (2006 - $25,000) of which $17,000 (2006 - $15,000) was drawn as at December 31, 2007. In addition, at December 31, 2007, the Trust had obligations under capital leases in the amount of $451 (2006 - $664) and other long-term debt of $283 (2006 - $171).
Operating activities
Cash flow from operating activities decreased from $39,929 in 2006 to $39,729 - a decrease of $200 or 0.5%. Funds from operations (see Non-GAAP Measures) for 2007 was $39,693 which compares to $46,831 for 2006; the decline of $7,138 is attributable to a decline in operating profits due to compression of the gross margin realized in 2007 and an increase in general and administrative expenses. The Trust has a strong working capital position at December 31, 2007 at $16,947 which compares to $15,051 at the end of 2006.
Investing activities
Cash used in investing activities for the year ended December 31, 2007 amounted to $16,607 compared to $24,366 in 2006. During 2007 the Trust invested an additional $19,857 (2006 - $26,436) in property and equipment. For 2007 the significant property and equipment additions included progress payments on construction of a new mud motor repair facility in Nisku, Alberta, 10 MWD systems along with the expansion of the mud motor and drilling collar fleet to complement the increase in directional drilling job capacity, upgrade of low pressure production testing units to higher pressure units and the purchase of 7 wireline units (one older wireline unit was sold in 2007) and auxiliary wireline equipment. With the exception of the $2,000 draw on non-reducing revolving term loan facility which was used to finance the construction of the Nisku mud motor repair facility, and the $228 of 0% financing for automotive equipment additions, all of the 2007 additions to property and equipment have been financed from cash flow from operations. Fluctuations in non-cash working capital related to investing activities are a function of when proceeds on disposal of property and equipment are received and when payments for property and equipment purchases are made.
Proceeds on disposal of property and equipment amounted to $3,575 (2006 - $3,277) and is mainly related to recovery of downhole equipment costs that were lost-in-hole in 2007 as well as previously expensed depreciation.
In late 2007 the Trust competed field testing and put the 2nd generation ("G2") of its Electro-Magnetic MWD ("EM-MWD") tool into commercial use. The G2 EM-MWD tool enhancements will allow the tool to be operated at deeper levels with increased efficiency and power management. The G2 EM-MWD system includes bi-directional (talk down) communication which allows for surface control of the tool to change data rates, power levels and data formats. The result is increased efficiency and power management, which by default, allows for greater depth capability.
The following is a summary of major equipment owned by Cathedral:
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As at December 31
2007 2006
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Directional drilling equipment -
MWD systems 78 68
Drilling mud motors 349 299
Production testing units 19 19
Wireline units 27 21
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For 2008, the Board of Directors of the Administrator of the Trust has approved a capital budget of $12,300 including approximately $400 for maintenance capital. The 2008 capital budget is targeted for expanding the current fleet of directional drilling equipment including at least 10 G2 EM-MWD systems to meet the Trust's additional demand as well as 5 production testing units which will be deployed in the U.S. market. The Trust will also be adding to its mud motor and drill collar fleet to complement the expanded directional drilling job capacity. Three of these MWD systems will be allocated to the U.S. operations. These capital expenditures are expected to be financed by way of cash flow from operations.
Financing activities
Cash used in financing activities for the year ended December 31, 2007 amounted to $23,370 which compares to $16,100 in 2006 - a change of $7,270. During 2007, the Trust received advances of long-term debt in the amount of $2,228 (2006 - $3,109) of which $2,000 (2006 - $3,000) related to an advance on the Trust's non-reducing revolving term loan facility. Repayments of long-term debt and capital lease obligations in 2007 amounted to $330 (2006 - $626). As at December 31, 2007, the Trust was in compliance with all covenants under its credit facility. During 2007 the Trust received cash inflows of $3,065 (2006 - $2,734) on the exercise of Trust Unit options.
The capital asset additions in 2007 were financed by way of a combination of cash flow from operations, working capital, proceeds from the disposal of property and equipment, proceeds on exercise of Trust Unit options and $2,228 of long-term debt.
Distributions declared for 2007 amounted to $26,405 (2006 - $26,719). All of the 2007 distributions declared were cash in nature while the 2006 distributions included a non-cash in-kind distribution of $2,038. Pursuant to the Trust's Declaration of Trust, the Trust is required to allocate all of its taxable income to Unitholders and in order to allocate all of its taxable income to Unitholders a non-cash in-kind distribution in the form of additional Trust Units was allocated to Unitholders of record on December 31, 2006. The December 31, 2006, non-cash in-kind distribution was $0.06582 per Trust Unit for a total of $2,038. The Declaration of Trust also requires there is an immediate consolidation of the Trust Units issued such that each Unitholder has the same number of Trust Units after the consolidation as they had prior to the non-cash in-kind distribution. Based upon a December 31, 2006 Trust Unit price of $9.96 per Trust Unit the 2006 in-kind distribution represented the issuance of 204,667 Trust Units which were immediately consolidated. For the year-ended December 31, 2007 the Trust did not have a non-cash in-kind distribution.
Distributions paid to Unitholders for 2007 amounted to $27,903 (2006 - $22,467). The increase in distributions paid is related to a combination of: i) increases in the per Trust Unit "regular" distribution level during 2006; ii) the payment of a "special" $0.05 per Trust Unit cash distribution declared in December 2006 ($1,549) and paid on January 15, 2007; and iii) an increase in the number of Trust Units outstanding. Since January 2006 the Trust has increased its per month Trust Unit distribution level from $0.05 per Trust Unit to $0.07 per Trust Unit for December 2007 (increased to $0.07 level in September 2006) - a 40% increase. Cash distributions paid have been financed from funds from operations and management currently expects future cash distributions will also be financed by way of funds from operations.
The following is a summary of distributions declared in 2007 and 2006:
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2007 2006 Change %
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Declared
Cash $ 26,405 $ 24,681 $ 1,724 7
In-kind - 2,038 (2,038) (100)
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Total $ 26,405 $ 26,719 $ (314) (1)
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Declared per Trust Unit:
Cash $ 0.84000 $ 0.80500 $ 0.03500 4
In-kind - 0.06582 (0.06582) (100)
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Total $ 0.84000 $ 0.87082 $(0.03082) 4
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Contractual obligations
In the normal course of business, the Trust's operating entities incur
contractual obligations. The following is a summary of the Trust's contractual
obligations as at December 31, 2007 for the following items:
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There-
Total 2008 2009 2010 2011 2012 after
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Capital
asset
additions $ 2,802 $ 2,802 $ - $ - $ - $ - $ -
Operating
lease
obligations 9,962 2,594 1,945 1,576 899 567 2,381
Long-term
debt and
capital
lease
obliga-
tions(1) 17,734 293 3,049 5,866 5,693 2,833 -
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$30,498 $ 5,689 $ 4,994 $ 7,442 $ 6,592 $ 3,400 $ 2,381
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(1) - Minimum principal amounts to be paid under long-term debt assumes
the Trust elects prior to the maturity date of the revolving term
loan to repay the loan over 36 months.
The 2008 contractual obligations are expected to be financed by way of cash flow from operations.
DISTRIBUTIONS
The Administrator of the Trust reviews the level and nature of distributions (cash, in-kind or a combination of cash and in-kind) on an on-going basis giving consideration to current performance, historical and future trends in the business, the expected sustainability of those trends and enacted tax legislation which will affect future taxes payable and as well as required long-term debt repayments, maintenance capital expenditures required to sustain performance and future growth capital expenditures. Despite the seasonality of the Trust's business, it is the Trust's policy to pay consistent distributions throughout the year. The Trust's operations in western Canada are subject to seasonality as activity levels in the oilfield services industry are generally lower during "spring breakup" which normally commences in late March and continues through to May (mainly in the 2nd quarter of the fiscal year). The net result of the Trust's policy to pay consistent distributions throughout the year despite the seasonality of its operations is that in Q2 cash distributions declared may exceed net income, cash flow from operating activities and/or distributable cash for the quarter.
Distributable cash is a supplemental non-GAAP measurement that management considers a key measure in demonstrating the Trust's ability to generate the cash necessary to pay distributions, fund future capital investments and the repayment of long-term debt and capital lease obligations. Distributable cash as presented is not intended to represent operating profit for the period nor should it be viewed as an alternative to operating profit, net income or other measures of financial performance calculated in accordance with Canadian GAAP. Distributable cash does not have any standardized meaning within Canadian GAAP and therefore may not be comparable to similar measures presented by other trusts (refer to Non-GAAP Measures).
The Trust intends to pay cash distributions to unitholders but the payment of cash distributions cannot be guaranteed.
The following is a comparison of cash distributions declared and certain defined amounts:
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Years ended December 31
-----------------------------------
2007 Q4 2007 2006 2005
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Cash flow from operating
activities $ 12,501 $ 39,729 $ 39,929 $ 21,609
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Net income for the period $ 10,365 $ 24,863 $ 35,348 $ 21,807
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Distributable cash $ 12,043 $ 38,993 $ 45,972 $ 27,551
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Cash distributions
declared $ 6,649 $ 26,405 $ 24,681 $ 11,162
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Excess of cash flow from
operating activities over
cash distributions
declared $ 5,852 $ 13,324 $ 15,248 $ 10,447
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Excess (short-fall) of net
income over cash
distributions declared $ 3,716 $ (1,542) $ 10,667 $ 10,645
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Excess of distributable
cash over cash
distributions declared $ 5,394 $ 12,588 $ 21,291 $ 16,389
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Net income exceeded cash distributions declared by $5,852 for the three months ended December 31, 2007 and cash distributions declared exceeded net income by $1,542 for the year ended December 31, 2007. Net income includes significant non-cash charges which for the three months ended December 31, 2007 were $2,544 and for the year ended December 31, 2007 were $16,607 that do not impact cash flow. Included in these non-cash charges is a provision for depreciation that is not a reasonable proxy for the cost of maintaining existing levels of service (i.e. maintenance capital expenditures). Therefore, in certain periods cash distributions declared may exceed net income. Management does not consider the excess of cash distributions declared over net income for the year ended December 31, 2007 to be an economic return of capital. Instead the excess is considered a function of the timing of cash flows versus accounting income.
Currently cash distributions declared are less than distributable cash as the Trustees, on the recommendation of management of the Administrator, have decided to retain a portion of distributable cash to finance capital expenditures and debt repayment. It is not management's intent to distribute 100% of distributable cash.
Distributable cash (refer to Non-GAAP Measures) is calculated as follows:
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Three months ended Years ended
December 31 December 31
2007 2006 2007 2006
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Cash flow from operating
activities $ 12,501 $ 14,003 $ 39,729 $ 39,929
Add (deduct): - changes in
non-cash
operating
working
capital(1) (212) (2,461) (36) 6,902
Less: - required
principal
repayments
on long-
term debt
and capital
lease
obligations (70) (156) (313) (549)
- maintenance
capital
expenditures (176) (103) (387) (310)
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Distributable cash $ 12,043 $ 11,283 $ 38,993 $ 45,972
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Cash distributions
declared $ 6,649 $ 8,026 $ 26,405 $ 24,681
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Payout ratio 55% 71%(2) 68% 54%(2)
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(1) Changes in non-cash operating working capital have been added back
(deducted) as such changes are financed using the Trust's bank
indebtedness/line of credit facility. In addition, if changes in
non-cash operating working capital were not excluded from the
calculation of distributable cash it would introduce cash flow
variability and affect underlying cash flow from operating
activities.
(2) Payout ratio is 57% for 2006 Q4 and 50% for the year ended
December 31, 2006 if the December 2006 "special" cash distribution of
$0.05 per Trust Unit is excluded.
EBITDAS
EBITDAS (refer to Non-GAAP Measures) is calculated as follows:
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Three months ended Years ended
December 31 December 31
2007 2006 2007 2006
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EBITDAS as reported $ 13,707 $ 13,046 $ 46,731 $ 52,793
Add (deduct):
- depreciation and
amortization (3,245) (2,937) (12,054) (10,692)
- interest - long-term
debt and capital
lease obligations (292) (264) (1,084) (936)
- non-cash compensation
expense (398) (272) (1,603) (1,486)
- recovery of (provision
for) taxes 593 (1,446) (7,127) (4,331)
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Net income $ 10,365 $ 8,127 $ 24,863 $ 35,348
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FOURTH QUARTER RESULTS
The 10.6% or $3,727 increase in revenues from $35,327 in 2006 Q4 to $39,054 in 2007 Q4 is the net result of increased revenues from the Trust's directional drilling division in Canada and the U.S. and revenue declines for the production testing and wireline divisions. Directional related revenues increased due to a 27.9% increase in activity days (2007 Q4 - 3,470 vs. 2006 Q4 - 2,713) which was offset by a 2.6% decrease in the average day rate (2007 Q4 - $8,596 vs. 2006 Q4 - $8,825). Revenue for 2007 Q4 by division is as follows: directional drilling $30,551 (2006 - $24,616); wireline $5,133 (2006 - $6,702) and production testing $3,370 (2006 - $4,009). The decreases realized in production testing and wireline revenues are a direct result of the decline in drilling activity in western Canada due to low natural gas prices.
The consolidated gross margin compressed 2.8% to 49.5% for 2007 Q4 from 52.3% in 2006 Q4. The decrease in quarter-over-quarter gross margin was primarily due to increased labour charges in the wireline division as a portion of the field labour charges are fixed in nature and did not decrease the same percentage as sales decreased and higher directional drilling field labour costs due to market pressures.
General and administrative charges increased 5.8% from $5,886 in 2006 Q4 to $6,227 in 2007 Q4 due to an increase in bad debt write-offs, facility rental costs and costs associated with exploring international business opportunities which were offset by a decrease in employee related incentive expenses. As a percentage of revenues, general and administrative expenses were 15.9% in 2007 Q4 compared to 16.7% in 2006 Q4.
Quarter-over-quarter EBITDAS increased $661 or 5.1% from $13,046 in 2006 to $13,707 in 2007.
The payout ratio for Q4 of 2007 was 55% (2006 Q4 - 71%) while the ratio for the year ended December 31, 2007 was 68% (2006 - 54%). The payout ratio for Q4 of 2006 includes the $0.05 per Trust Unit "special" cash distribution declared in December 2006. If this "special" cash distribution was excluded from the payout ratio calculation then the ratio for 2006 Q4 and 2006 would have been 57% and 50%, respectively.
For 2007 Q4, the Trust recorded a tax recovery of $593 which compares to a tax expense of $1,446 in 2006. The 2007 Q4 recovery was primarily the result of Federal income tax rate reductions that were substantively enacted in December 2007 as well as a reduction in the cumulative non-cash adjustment related to the substantive enactment of the previously announced changes to the taxation of income and royalty trusts, other than real estate investment trusts to reflect changes in timing differences that are expected to exist as at December 31, 2010.
Net income for 2007 Q4 was $10,365 ($0.33 per diluted Trust Unit) which compares to $8,127 ($0.26 per diluted Trust Unit) 2006 Q4.
SUMMARY OF QUARTERLY RESULTS
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2007 2006
-------------------------------- --------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
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Revenues $42,712 $24,985 $38,355 $39,054 $38,682 $26,204 $38,041 $35,327
EBITDAS 14,412 4,837 13,775 13,707 15,367 8,370 16,010 13,046
Net income
(loss) 9,787 (2,415) 7,126 10,365 10,862 4,963 11,396 8,127
Net income
(loss) per
Trust Unit
Basic 0.32 (0.08) 0.23 0.33 0.36 0.16 0.37 0.26
Diluted 0.31 (0.08) 0.22 0.33 0.35 0.16 0.36 0.26
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The majority of Cathedral's operations are carried on in western Canada where activity levels in the oilfield services industry are subject to a degree of seasonality. Operating activities in western Canada are generally lower during "spring breakup" which normally commences in late March and continues through to May. Operating activities generally increase in the fall and peak in the winter months from December till late March. Activity levels in the Rocky Mountain and Williston Basin regions of the U.S. are not subject to the seasonality to the extent that it occurs in the western Canada region.
OUTLOOK
Going forward management is expecting the Trust's directional drilling division, which accounted for 77% of 2007 consolidated revenues, to continue to show strong financial results and as natural gas prices improve, the financial results of the wireline and production testing divisions should improve accordingly. During 2007 the Trust expanded its wireline division to the Rocky Mountain region of the U.S. with 2 wireline units transferred from the western Canada operations. In early 2008 our U.S. wireline expansion moved into the Williston Basin region with the establishment of an operating facility in North Dakota and an additional wireline unit was transferred to the U.S. operations. As demand in the U.S. market increases we will consider transferring additional units to this area or building new units.
As previously announced the Trust's current 2008 capital budget is at $12,300 and includes at least 10 G2 EM-MWD systems along with the expansion of the mud motor and drill collar fleet to complement the expanded directional drilling job capacity and 5 production testing units. Three of these MWD systems will be allocated to the U.S. operations. The 5 production testing units will be deployed in the Rocky Mountain region of the U.S. and will be the Trust's first expansion of its production testing division to the U.S. Cathedral is pursuing directional drilling business opportunities in South America and in the near term expects to provide guidance on the status thereof.
In 2007 significant technology enhancements were made to the Trust's EM-MWD system and this resulted in the commercialization of its G2 version. As part of the Trust's continuing drive to provide state-of-art technology to its customers we are currently working on further enhancements to the overall EM-MWD platform.
The Trust continues to actively pursue opportunities to offer an expanded range of services to its customers, increase its market share, enter new geographic territories and make strategic acquisitions.
CONSOLIDATED BALANCE SHEETS
December 31, 2007 and 2006
Dollars in '000's
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2007 2006
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Assets
Current assets:
Cash and cash equivalents $ 1,306 $ 1,554
Accounts receivable 37,359 37,693
Inventory 3,584 3,050
Prepaid expenses and deposits 781 892
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43,030 43,189
Property and equipment 67,639 61,488
Intangibles, net of accumulated amortization of
$342 (2006 - $194) 588 736
Goodwill 19,775 19,775
Other asset - 33
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$ 131,032 $ 125,221
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Liabilities and Unitholders' Equity
Current liabilities:
Bank indebtedness $ 6,030 $ 6,460
Accounts payable and accrued liabilities 17,203 16,446
Distributions payable to Unitholders 2,216 3,717
Taxes payable 341 1,232
Current portion of capital lease obligations 194 212
Current portion of long-term debt 99 71
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26,083 28,138
Capital lease obligations 257 452
Long-term debt 17,184 15,100
Future income taxes 8,258 5,308
Unitholders' equity:
Unitholders' capital 48,193 44,667
Contributed surplus 2,205 1,162
Retained earnings 28,852 30,394
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79,250 76,223
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$ 131,032 $ 125,221
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CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Dollars in 000's except per Trust Unit amounts
Three months ended Years ended
December 31 December 31
---------------------- ----------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Revenues $ 39,054 $ 35,327 $ 145,106 $ 138,254
Expenses :
Operating 19,712 16,831 73,482 64,886
General and
administrative 6,227 5,886 25,774 22,066
Depreciation and
amortization 3,245 2,937 12,054 10,692
Interest - long-term
debt and capital lease
obligations 292 264 1,084 936
Interest - other 122 124 404 482
Foreign exchange loss
(gain) (94) (84) 492 (27)
Non-cash compensation
expense 398 272 1,603 1,486
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29,902 26,230 114,893 100,521
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9,152 9,097 30,213 37,733
Gain on disposal of
property and equipment 620 476 1,777 1,946
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Income before taxes 9,772 9,573 31,990 39,679
Taxes:
Current 506 810 3,982 3,093
Future (reduction) (1,099) 636 3,145 1,238
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(593) 1,446 7,127 4,331
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Net income for the period 10,365 8,127 24,863 35,348
Retained earnings,
beginning of period 25,136 32,331 30,394 21,765
Less: Distributions
declared (6,649) (10,064) (26,405) (26,719)
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Retained earnings, end of
period $ 28,852 $ 30,394 $ 28,852 $ 30,394
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Net income per Trust Unit:
Basic $ 0.33 $ 0.26 $ 0.79 $ 1.16
Diluted $ 0.33 $ 0.26 $ 0.78 $ 1.12
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in 000's
Three months ended Years ended
December 31 December 31
---------------------- ----------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net income for the period $ 10,365 $ 8,127 $ 24,863 $ 35,348
Items not involving cash:
Depreciation and
amortization 3,245 2,937 12,054 10,692
Future taxes (reduction) (1,099) 636 3,145 1,238
Unrealized foreign
exchange gain - 46 (195) 13
Non-cash compensation
expense 398 272 1,603 1,486
Gain on disposal of
property and equipment (620) (476) (1,777) (1,946)
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12,289 11,542 39,693 46,831
Changes in non-cash
operating working capital 212 2,461 36 (6,902)
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12,501 14,003 39,729 39,929
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Investing activities:
Property and equipment
additions (5,205) (4,448) (19,857) (26,436)
Proceeds on disposal of
property and equipment 1,475 905 3,575 3,277
Changes in non-cash
investing working
capital 2,377 80 (325) (1,207)
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(1,353) (3,463) (16,607) (24,366)
-------------------------------------------------------------------------
Financing activities:
Advances under long-term
debt 55 109 2,228 3,109
Repayment of long-term debt (22) (84) (116) (321)
Repayment of capital lease
obligations (48) (72) (214) (305)
Distributions paid to
Unitholders (6,646) (6,463) (27,903) (22,467)
Proceeds on exercise of
Trust Unit options 149 19 3,065 2,734
Increase (decrease) in bank
indebtedness (3,975) (3,310) (430) 1,150
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(10,487) (9,801) (23,370) (16,100)
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Change in cash and cash
equivalents 661 739 (248) (537)
Cash and cash equivalents,
beginning of period 645 815 1,554 2,091
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Cash and cash equivalents,
end of period $ 1,306 $ 1,554 $ 1,306 $ 1,554
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%SEDAR: 00018316E