/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, March 5 /CNW/ - Cathedral Energy Services Income Trust (the "Trust" / TSX: CET.UN) is pleased to report its results for 2008 Q4 and the year-end December 31, 2008. 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
--------------------- ---------------------
2008 2007 2008 2007
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Revenues $ 50,506 $ 39,054 $ 178,928 $ 145,106
EBITDAS(1) $ 13,932 $ 13,707 $ 50,873 $ 46,731
Per Trust Unit - diluted $ 0.43 $ 0.43 $ 1.57 $ 1.47
Income before taxes $ 9,086 $ 9,772 $ 34,594 $ 31,990
Net income $ 9,737 $ 10,365 $ 30,139 $ 24,863
Per Trust Unit - basic $ 0.30 $ 0.33 $ 0.94 $ 0.79
Per Trust Unit - diluted $ 0.30 $ 0.33 $ 0.93 $ 0.78
Cash distributions declared
per Trust Unit $ 0.21 $ 0.21 $ 0.84 $ 0.84
Distributable cash (1) $ 10,795 $ 12,043 $ 39,791 $ 38,993
Cash distributions (2) $ 6,842 $ 6,649 $ 27,094 $ 26,405
Payout ratio (1) 63% 55% 68% 68%
Property and equipment
additions $ 21,054 $ 5,205 $ 47,618 $ 19,857
Weighted average Trust Units
outstanding:
Basic ('000) 32,582 30,652 32,215 31,402
Diluted ('000) 32,582 31,836 32,463 31,781
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December December
31 2008 31 2007
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Working capital $ 17,435 $ 16,947
Long-term debt and capital lease obligations
excluding current portion $ 40,233 $ 17,441
Unitholders' equity $ 91,859 $ 79,250
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(1) see "NON-GAAP MEASUREMENTS"
(2) Excludes foreign taxes paid that have been allocated to Unitholders
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 news release specifically 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/Cathedral's business and operations including the Trust/Cathedral's market share and position in the oilfield service market; and other such matters.
The forward-looking statements contained in this news release reflect several material factors, expectations and assumptions including, without limitation: (i) oil and natural gas production levels; (ii) commodity prices and interest rates; (iii) capital expenditure programs and other expenditures by the Trust/Cathedral and its customers; (iv) supply and demand for oil and natural gas; (v) expectations regarding the Trust's/Cathedral's ability to raise capital, generate cash flow and to increase its equipment fleets through acquisitions and manufacture; (vi) schedules and timing of certain projects and the Trust's/Cathedral's strategy for growth; (vii) the Trust's/Cathedral's future operating and financial results; (viii) the Trust's/Cathedral's ability to retain and hire qualified personnel; and (ix) treatment under governmental regulatory regimes and tax, environmental and other laws.
Financial outlook information contained in this news release about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management's assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this news release and certain documents incorporated by reference into this news release should not be used for purposes other than for which it is disclosed herein.
Such forward-looking statements are subject to important risks and uncertainties, which are difficult to predict and that may affect the Trust/Cathedral's operations, including, but not limited to: the impact of general economic conditions in Canada, the United States and Internationally; 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 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 labour unrest; fluctuation in foreign exchange or interest rates; foreign currency controls; 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/Cathedral 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 is available on www.sedar.com.
NON-GAAP MEASUREMENTS
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) "Gross margin %" - calculated as gross margin divided by revenues is
considered a primary indicator of operating performance (see tabular
calculation under Results of Operations);
iii) "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);
iv) "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);
v) "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;
vi) "Payout ratio" - calculated as cash distributions 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
vii) "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
Despite a significant decrease in oilfield services activity during the fourth quarter of 2008, the Trust was able to achieve record annual revenues in 2008. On a year-over-year basis, revenues increased $33,822 or 23.3% to $178,928 from $145,106 in 2007. Much of this increase was due to the directional drilling business in the U.S. EBITDAS for the year ended December 31, 2008 was $50,873 while the comparative figure for 2007 was $46,731, a combined increase of $4,142 or 8.9%. The disproportionate increase in EBITDAS (8.9%) versus the increase in revenues (23.3%) was due mainly to the increase in operating expenses which has also caused the decline in gross margin percentage. For the year ended December 31, 2008, net income was $31,139 ($0.93 per diluted Trust Unit) compared to $24,863 ($0.78 per diluted Trust Unit) for 2007. Considering the decline in market activity in the second half of 2008, management is pleased with the operating results for the year.
RESULTS OF OPERATIONS - 2008 COMPARED TO 2007
Revenues and operating expenses
2008 2007 Change %
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Revenues $ 178,928 $ 145,106 $ 33,822 23
Operating expenses (98,614) (73,482) 25,132 34
Gross margin $ 80,314 $ 71,624 $ 8,690 12
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Gross margin 44.9% 49.4% (4.5%)
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Year ended December 31, 2008
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Directional Production
Revenues drilling(1) Wireline testing Total
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Canada $ 71,886 $ 18,356 $ 13,348 $ 103,590
United States 64,113 7,452 3,773 75,338
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$ 135,999 $ 25,808 $ 17,121 $ 178,928
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Year ended December 31, 2007
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Directional Production
Revenues drilling(1) Wireline testing Total
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Canada $ 69,854 $ 20,892 $ 12,051 $ 102,797
United States 41,519 790 - 42,309
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$ 111,373 $ 21,682 $ 12,051 $ 145,106
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(1) Including rental of related equipment
For 2008 the Trust generated record annual revenues of $178,928 representing an increase of 23.3% over 2007 revenues. The increase was mainly a result of: i) a 1.9% increase in the average day rate for directional drilling services to $9,022 per day (2007 - $8,857) and ii) a 20.3% increase in directional drilling activity days to 14,766 activity days (2007 - 12,274 days).
Canadian directional drilling revenues increased 2.9% to $71,886 in 2008 from $69,854 in 2007. The Trust's 2008 drilling activity days increased to 7,843 days from 7,270 days in 2007, an increase of 7.9%. At the end of 2008 Q3, the drilling days for the Canadian division had increased by 14.7% but due to a slowdown in oil and gas activities in 2008 Q4 the annual increase for 2008 was reduced to 7.9%. The average Canadian day rate has decreased by 4.2%. The Canadian directional drilling division started the year with 55 Measurement-While-Drilling ("MWD") systems and ended the year with 59 MWD systems.
In the U.S., the Rocky Mountain region is the Trust's main area of operations and it experienced significant activity growth in 2008. U.S. directional drilling revenues increased by 54.4% to $64,113 from $41,519. The Trust's activity days in the U.S. increased from 5,004 days in 2007 to 6,923 days in 2008, an increase of 38.3%. The average U.S. day rate increased 11.9% in part due to the strengthening of the U.S. dollar in comparison to Canadian dollar. Due to increased demand in the U.S. market, the number of MWD systems was increased from 23 at the end of 2007 to 35 at the end of 2008.
Advance Wireline and Xtreme Wireline combined to generate revenues of $25,808 for 2008 compared to $21,682 for 2007, a 19.0% increase. The Canadian division began the year with 25 wireline units, had 1 unit return to service after major repairs and transferred an additional 3 units to the U.S. to end the year at 23 wireline units. In Canada, the revenues declined by 12.1% to $18,356 in 2008 from $20,892 in 2007 due to the transfer of units to the U.S. combined with a decline in activity levels.
Late in 2007 Q2, one wireline unit was transferred from the Canadian operations to form the U.S. division of Advance Wireline but revenue generating operations did not commence until 2007 Q3. The U.S. division ended 2007 with 2 wireline units and ended 2008 with 5 wireline units. As a result of the 2008 expansion and operations for an entire year, the U.S. wireline division generated $7,452 in revenues for 2008; an increase of $6,662 from 2007 of $790. In Q1 of 2009 another wireline unit was transferred to the U.S. operations from the Canadian fleet.
The Trust's production testing division, Tier One, contributed $17,121 in revenues during 2008 representing a 42.1% increase from 2007 revenues of $12,051. The division added 2 units in Canada to end the year at 21 units, which contributed to the 10.7% increase in Canadian revenues to $13,348 in 2008 from 2007 of $12,051. One additional production testing unit will be added to the Canadian fleet in 2009 Q1. The production testing division in Canada was adversely affected by the decline in natural gas drilling in 2008. The Trust began production testing operations in the U.S. during 2008 Q3 with 1 production testing unit expanding to 8 units at December 31, 2008; 5 additional units will be added to the U.S. fleet in the first half of 2009. The U.S. division had revenues of $3,773 in 2008.
The gross margin for 2008 was 44.9%, which compares to 49.4% in 2007. The decrease is attributed to a number of factors, but mainly is the result of an increase in the labour costs in all divisions. There was a significant increase in labour costs that began in Q3 of 2007 and continued into 2008 due to the high demand for labour in both Canada and the U.S. for oil and gas field workers. This has caused a 2.9% decline in the gross margin. Another factor contributing to the decline is an increase in the cost of motor and other equipment repairs in the drilling division.
General and administrative expenses
2008 2007 Change % ------------------------------------------------------------------------- General and administrative expenses $ 31,063 $ 25,774 $ 5,289 21 ------------------------------------------------------------------------- -------------------------------------------------------------------------
General and administrative expenses increased from $25,774 in 2007 to $31,063 in 2008, an increase of $5,289. The increase was mainly related to the expansion of operations. As a percentage of revenues, general and administrative expenses were 17.4% in 2008 and 17.8% in 2007. Approximately 45% of the overall increase in general and administrative expenses relates to the start-up of the U.S. production testing division, operating the U.S. Wireline division for a full year, and the establishment of operations in Venezuela. The remaining increases are due to the expansion of operations in the year as evidenced by the increase in revenues.
Depreciation and amortization
2008 2007 Change % ------------------------------------------------------------------------- Depreciation and amortization $ 13,416 $ 12,054 $ 1,362 11 ------------------------------------------------------------------------- -------------------------------------------------------------------------
This increase is related to the Trust's investment in property and equipment over the past 12 months including 20 MWD systems, mud motors and drill collars to complement the increase in MWD systems and the purchase of 7 production testing units. As a percentage of revenues, depreciation and amortization amounted to 7.5% for 2008 and 8.3% for 2007. Despite the increase in the Trust's depreciable asset base over the past 12 months, depreciation on a year-to-year basis did not increase as much as otherwise anticipated due to the change in the accounting method for foreign currency translation of the Trust's U.S. operations (refer to Change in Foreign Currency Translation section).
Interest
2008 2007 Change % ------------------------------------------------------------------------- Interest - long-term debt and capital lease obligations $ 1,158 $ 1,084 $ 74 7 Interest - other $ 422 $ 404 $ 18 4 ------------------------------------------------------------------------- -------------------------------------------------------------------------
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, net of declines in the prime interest rate during the year.
Foreign exchange loss
2008 2007 Change % ------------------------------------------------------------------------- Foreign exchange loss $ 94 $ 492 $ (398) (81) ------------------------------------------------------------------------- -------------------------------------------------------------------------
Effective January 1, 2008, the Trust changed the classification of its U.S. operations to self-sustaining (as opposed to integrated) resulting in the financial statements being translated using the current rate method as opposed to the temporal method (refer to Change in Foreign Currency Translation section).
Unit-based compensation expense
2008 2007 Change % ------------------------------------------------------------------------- Unit-based compensation expense $ 1,705 $ 1,603 $ 102 6 ------------------------------------------------------------------------- -------------------------------------------------------------------------
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
2008 2007 Change % ------------------------------------------------------------------------- Gain on disposal of property and equipment $ 2,138 $ 1,777 $ 361 20 ------------------------------------------------------------------------- -------------------------------------------------------------------------
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
2008 2007 Change % ------------------------------------------------------------------------- Taxes $ 4,455 $ 7,127 $ (2,672) (37) ------------------------------------------------------------------------- -------------------------------------------------------------------------
For 2008, the Trust has a tax expense of $4,455 (effective tax rate of 12.9%) which compares to $7,127 (effective tax rate of 22.3%) in 2007. The 2007 tax provision included a cumulative non-cash adjustment of $2,754 (expense) 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%. In comparing the adjusted 2007 effective tax rate (13.7%) to the 2008 effective tax rate (12.9%), the decrease is mainly attributable to the net result of the continuing growth in the U.S. operations which are taxed at a higher rate and a reduction to future income tax liability for changes in effected tax rates.
Other Comprehensive Income
2008 2007 Change % ------------------------------------------------------------------------- Unrealized foreign exchange gain on translation of self-sustaining foreign operations $ 3,326 $ - $ 3,326 n/a ------------------------------------------------------------------------- -------------------------------------------------------------------------
Other comprehensive income ("OCI") is comprised entirely of the unrealized foreign currency translation gain of the Trust's U.S. self-sustaining subsidiary and reflects the changing value of the Canadian dollar compared to the U.S. dollar.
LIQUIDITY AND CAPITAL RESOURCES
The Trust's principal source of liquidity is cash generated from operations and its credit facility. The Trust also has the ability to fund liquidity requirements through the issuance of debt and/or equity. At December 31, 2008, the Trust had an operating line of credit with a major Canadian bank in the amount of $20,000 (2007 - $12,500) of which $15,406 (2007 - $6,030) was drawn. The Trust has a revolving term loan facility in the amount of $45,000 (2007 - $25,000) of which $40,000 (2007 - $17,000) was drawn as at December 31, 2008. In addition, at December 31, 2008, the Trust had obligations under capital leases in the amount of $222 (2007 - $451) and other long-term debt of $218 (2007 - $283).
Operating activities
Cash flow from operating activities decreased from $39,729 in 2007 to $36,143, a decrease of $3,586 or 9.0%. Funds from operations (see Non-GAAP Measurements) for 2008 were $40,824 which compares to $39,693 for 2007; a marginal increase of $1,131. The Trust has a strong working capital position at December 31, 2008 at $17,435 which compares to $16,947 at the end of 2007.
Investing activities
Cash used in investing activities for the year ended December 31, 2008 amounted to $40,134 compared to $16,607 in 2007. During 2008 the Trust invested an additional $47,618 (2007 - $19,857) in property and equipment. For 2008 the significant property and equipment additions included purchase of land and building for a new Calgary facility, 20 MWD systems, purchase of 10 production testing units and an expansion of the overall mud motor and drill collar fleet to complement the increased directional drilling job capability as well as to reduce equipment rentals. The capital asset additions were funded by a combination of the Trust's cash flow from operations, advances under long-term debt, proceeds from disposal of property and equipment and proceeds on exercise of Trust Unit options. 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 $3,761 (2007 - $3,575) and is mainly related to recovery of downhole equipment costs that were lost-in-hole in 2008 as well as previously expensed depreciation.
During 2008, the Trust enhanced its Electro-Magnetic/MWD system ("EM/MWD") by improving formation impedance matching and concurrently increasing the data signal encoding, detection and filtration. The result has allowed the EM/MWD system to operate effectively in the southeast Saskatchewan market where competitors have not been able to deploy their EM/MWD systems. In conventional markets these improvements have allowed the EM/MWD system to operate at depths greater than the Generation 2 ("G2") modifications made during 2007.
The following is a summary of major equipment owned by Cathedral:
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As at December 31
2008 2007
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Directional drilling equipment -
MWD systems 98 78
Drilling mud motors 496 349
Production testing units 29 19
Wireline units 28 27
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For 2009, the Board of Directors of the Administrator of the Trust has approved a capital budget of $11,100 (reduced from $17,000 budget announced in November 2008) including approximately $500 for maintenance capital. The 2009 capital budget includes $3,600 of capital deferred from Q4 2008 which relates primarily to expansion of the mud motor and drill collar fleet plus progress payments on an additional production testing units to be delivered in 2009. The balance of the capital budget is for the remaining cost on 6 production testing units, upgrades to the Trust's EM/MWD systems to third generation units ("G3") and for renovations to the building located in Calgary that was acquired in Q4 2008. These capital expenditures are expected to be financed by way of cash flow from operations and the Trust's credit facility.
Financing activities
Cash provided by financing activities for the year ended December 31, 2008 amounted to $9,618 which compares to cash used by financing activities $23,370 in 2007, a change of $32,988. During 2008, the Trust received advances of long-term debt in the amount of $23,047 (2007 - $2,228) of which $23,000 (2007 - $2,000) related to an advance on the Trust's revolving term loan facility. The additional long-term debt incurred was used to finance 2008 capital additions. Repayments of long-term debt and capital lease obligations in 2008 amounted to $341 (2007 - $330). As at December 31, 2008, the Trust was in compliance with all covenants under its credit facility. During 2008 the Trust received cash inflows of $4,904 (2007 - $3,065) on the exercise of Trust Unit options.
Distributions for 2008 amounted to $27,432 (2007 - $26,405). Distributions in 2008 include $338 of foreign taxes paid that has been allocated to Unitholders. For 2007 and 2008, the Trust's monthly distributions were $0.07 per Trust Unit (annualized to $0.84 per Trust Unit) and were paid in the form of cash. Effective February 2009, the Trust reduced its monthly cash distributions to $0.04 per Trust Unit.
Distributions paid to Unitholders for 2008 amounted to $27,368 (2007 - $27,903). The decrease in distributions paid is due to an increase in units of outstanding for 2008, net of a reduction in 2008 of $1.549 paid on January 15, 2007 relating to a "special" $0.05 per Trust Unit distribution declared in December 2006. 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.
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, 2008 for the following items:
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There-
Total 2009 2010 2011 2012 2013 after
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Property and
equipment
additions $ 4,793 $ 4,793 $ - $ - $ - $ - $ -
Operating lease
obligations 11,031 3,027 2,200 1,462 1,189 1,045 2,108
Long-term debt
and capital
lease
obligations(1) 40,440 207 10,202 20,031 10,000 - -
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$56,264 $ 8,027 $12,402 $21,493 $11,189 $ 1,045 $ 2,108
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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 with interest only payable for the
first 12 months
The 2009 contractual obligations are expected to be financed by way of cash flow from operations and the Trust's credit facility.
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 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 (subject to adjustments to distribution levels). 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 Measurements). The Trust intends to pay cash distributions to Unitholders but the payment of cash distributions cannot be guaranteed.
The following is a comparison of distributions and certain defined amounts:
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Years ended December 31
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2008 Q4 2008 2007 2006
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Cash flow from operating
activities $ 12,092 $ 36,143 $ 39,729 $ 39,929
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Net income for the period $ 9,737 $ 30,139 $ 24,863 $ 35,348
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Distributable cash $ 10,795 $ 39,791 $ 38,993 $ 45,972
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Cash distributions(1) $ 6,842 $ 27,094 $ 26,405 $ 24,681
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Excess of cash flow from
operating activities over
cash distributions $ 5,250 $ 9,049 $ 13,324 $ 15,248
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Excess (short-fall) of net
income over cash
distributions $ 2,895 $ 3,045 $ (1,542) $ 10,667
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Excess of distributable cash
over cash distributions $ 3,953 $ 12,697 $ 12,588 $ 21,291
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(1) Excludes foreign taxes paid that have been allocated to Unitholders
Net income exceeded cash distributions by $2,895 for the three months ended December 31, 2008 and by $3,045 for the year ended December 31, 2008. Net income includes significant non-cash charges which for the year ended December 31, 2008 were $12,823 (2007-$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 may exceed net income. Management did not consider the excess of cash distributions over net income for the year ended December 31, 2007 to be an economic return of capital. Instead the excess was considered a function of the timing of cash flows versus accounting income.
Currently cash distributions 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.
Effective February 2009, the Trust reduced its monthly cash distributions by $0.03 per Trust Unit to $0.04 per Trust Unit. In light of the current and forecast market conditions, the Administrator of the Trust's operating entities determined that a reduction was a prudent measure to manage liquidity, further strengthen the Trust's strong balance sheet and better position itself to take advantage of opportunistic transactions which may present themselves.
Distributable cash (refer to Non-GAAP Measurements) is calculated as
follows:
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Years ended December 31
2008 Q4 2008 2007
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Cash flow from operating activities $ 12,092 $ 36,143 $ 39,729
Add (deduct): - changes in non-cash
operating working capital(1) (1,168) 4,681 (36)
Less: - required principal repayments on
long-term debt and capital lease
obligations (109) (341) (313)
- maintenance capital expenditures (20) (692) (387)
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Distributable cash $ 10,795 $ 39,791 $ 38,993
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Cash distributions(2) $ 6,842 $ 27,094 $ 26,405
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Payout ratio 63% 68% 68%
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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) Excludes foreign taxes paid that have been allocated to Unitholders
EBITDAS
EBITDAS (refer to Non-GAAP Measurements) is calculated as follows:
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Years ended December 31
2008 Q4 2008 2007
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EBITDAS as reported $ 13,932 $ 50,873 $ 46,731
Add (deduct): - depreciation and
amortization (4,135) (13,416) (12,054)
- interest - long-term
debt and capital lease
obligations (373) (1,158) (1,084)
- unit-based compensation
expense (338) (1,705) (1,603)
- recovery of (provision
for) taxes 651 (4,455) (7,127)
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Net income $ 9,737 $ 30,139 $ 24,863
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FOURTH QUARTER RESULTS
2008 Q4
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Directional Production
Revenues drilling(1) Wireline testing Total
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Canada $ 16,551 $ 4,267 $ 4,347 $ 25,165
United States 19,668 2,725 2,948 25,341
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$ 36,219 $ 6,992 $ 7,295 $ 50,506
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2007 Q4
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Directional Production
Revenues drilling(1) Wireline testing Total
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Canada $ 19,359 $ 4,738 $ 3,370 $ 27,467
United States 11,192 395 - 11,587
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$ 30,551 $ 5,133 $ 3,370 $ 39,054
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(1) Including rental of related equipment
Revenues in Q4 have increased to $50,506 in 2008 from $39,054 in 2007, an increase of $11,452 or 29.3%.
Directional drilling related revenues increased $5,668 from $30,551 in 2007 Q4 to $36,219 in 2008 Q4 due to a 3.0% increase in activity days (2008 Q4 - 3,575 vs. 2007 Q4 - 3,470) and a 15.6% increase in the average day rate (2008 Q4 - $9,939 vs. 2007 Q4 - $8,596). Canadian revenues were down 14.5% from $19,359 in 2007 Q4 to $16,551 in 2008 Q4. This was the result of a 10.0% decline in drilling days falling to 1,801 in 2008 Q4 from 2,003 in 2007 Q4 and a 4.4% decline in the Canadian average day rate. In the U.S., revenues have increased 75.7% to $19,668 in 2008 Q4 from $11,192 in 2007 Q4. U.S. drilling days increased to 1,774 in 2008 Q4 from 1,467 in 2007 Q4, an increase of 20.9%. The average day rate for the U.S. increased 45.7%. A significant portion of the increase in the U.S. average day rate is due to the strengthening of the U.S. dollar in comparison to the Canadian dollar.
The wireline division's combined revenues increased from $5,133 in 2007 Q4 to $6,992 in 2008 Q4. The Canadian wireline division's revenues fell 9.9% to $4,267 in 2008 Q4 from $4,738 in 2007 Q4; this is a result of transferring 3 units from Canada to the U.S. as well as a decrease in activity levels. The U.S. wireline revenues are up to $2,725 in 2008 Q4 from $395 in 2007 Q4 as the U.S. Wireline division commenced operations during 2007 Q4 and only had 2 wireline units in 2007 Q4 compared to its 5 units in 2008 Q4.
With the start of the U.S. production testing division in 2008 Q3, revenues for the quarter increased to $7,295 from $3,370 for just the Canadian division in 2007 Q4; an increase of 116.5%. The Canadian division's revenues have increased 29.0% to $4,347 in 2008 Q4 from $3,370 in 2007 Q4. In 2008 Q4, there were 2 more production testing units in the Canadian fleet than in 2007 Q4.
The consolidated gross margin declined 7.6% to 41.9% for 2008 Q4 from 49.5% in 2007 Q4. The decrease in quarter-over-quarter gross margin was primarily due to increased labour charges in all divisions due to market pressures and an increase in the repair costs for the drilling division.
General and administrative charges increased 30.0% from $6,227 in 2007 Q4 to $8,098 in 2008 Q4. As a percentage of revenues, general and administrative expenses were 16.0% in 2008 Q4 compared to 15.9% in 2007 Q4. The increases were primarily due to the increases in the U.S. production testing and wireline divisions, the costs related to international expansion and increases due to the higher level of activity in 2008 Q4.
For 2008 Q4, the Trust recorded a tax recovery of $651 compared to the 2007 Q4 recovery of $593.
Net income for 2008 Q4 was $9,737 ($0.30 per diluted Trust Unit) which compares to $10,365 ($0.33 per diluted Trust Unit) 2007 Q4.
SUMMARY OF QUARTERLY RESULTS
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2008 2007
------------------------------- --------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
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Revenues $46,253 $29,483 $52,686 $50,506 $42,712 $24,985 $38,355 $39,054
EBITDAS 15,395 4,632 16,914 13,932 14,412 4,837 13,775 13,707
Net
income
(loss) 9,917 189 10,296 9,737 9,787 (2,415) 7,126 10,365
Net income
(loss) per
Trust Unit
Basic 0.31 0.01 0.32 0.30 0.32 (0.08) 0.23 0.33
Diluted 0.31 0.01 0.32 0.30 0.31 (0.08) 0.22 0.33
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A significant portion 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
The contraction in the North American oilfield services activity that commenced in 2008 Q4 has continued into 2009. For oilfield services, the first quarter of each calendar year is typically the busiest quarter in western Canada and, although a pull back in activity levels was expected, the activity levels currently being experienced are significantly lower than what was originally projected. As we come out of spring break-up in western Canada there is a degree of uncertainty as to expected activity levels during the second half of 2009. Low commodity prices combined with the inability for producers to raise capital by way of debt or equity, and an overall global recession, has resulted in producers significantly reducing their development and exploration programs. As a result, the Trust's activity levels may be negatively affected.
In light of the uncertain economic times, the Trust has been proactive and in February 2009 announced a $0.03 reduction in its monthly distribution bringing the current distribution level to $0.04 per Trust Unit. In recognizing the expected lower activity levels, the Trust has taken several initiatives to improve operating results and further strengthen its balance sheet. The initial 2009 capital budget of $17.0 million together with the $3.6 million deferred from 2008 for a total of $20.6 million has been reduced by $9.5 million to $11.1 million. As well, the Trust's operating entities have undertaken a detailed review of all operating costs and general and administrative expenditures starting in December 2008, and have initiated cost reductions to enhance profitability.
Despite a pull back in U.S. activity, 5 production testing units are to be delivered in 2009 Q1/Q2 and are expected to be put in service upon delivery. As well, another wireline unit was transferred from the Canadian fleet to the U.S. market. In early 2009, the Trust's U.S. directional drilling business has expanded its services to the Texas region and is again drilling directional wells in Michigan. During 2009 the U.S. directional drilling division expects to expand into additional U.S. markets.
We continue to roll out our 3rd generation ("G3") EM/MWD system which has been very successful in the southeast Saskatchewan market, which is not an "EM" friendly environment. The deployment of our G3 EM/MWD system in this market has allowed drilling time to be significantly reduced and thereby benefiting our customers by reducing drilling costs.
The Trust continues to pursue providing directional drilling services in Venezuela. An operations base is being set up and the equipment to provide a 3-4 job capability is presently in Venezuela.
Although a challenging environment is expected in the near term, the Trust's management considers the long-term fundamentals for the supply and demand for energy to be positive for the oilfield series sector.
CONSOLIDATED BALANCE SHEETS
December 31, 2008 and 2007
Dollars in '000's
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2008 2007
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Assets
Current assets:
Cash and cash equivalents $ 7,551 $ 1,306
Accounts receivable 43,629 37,359
Taxes recoverable 688 -
Inventory 8,963 3,584
Prepaid expenses and deposits 1,538 781
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62,369 43,030
Property and equipment 101,287 67,639
Intangibles, net of accumulated amortization of
$489 (2007 - $342) 441 588
Goodwill 19,775 19,775
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$ 183,872 $ 131,032
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Liabilities and Unitholders' Equity
Current liabilities:
Bank indebtedness $ 15,406 $ 6,030
Accounts payable and accrued liabilities 27,040 17,203
Distributions payable to Unitholders 2,281 2,216
Taxes payable - 341
Current portion of capital lease obligations 110 194
Current portion of long-term debt 97 99
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44,934 26,083
Capital lease obligations 112 257
Long-term debt 40,121 17,184
Future income taxes 6,846 8,258
Unitholders' equity:
Unitholders' capital 54,311 48,193
Contributed surplus 2,663 2,205
Retained earnings 31,559 28,852
Accumulated other comprehensive income 3,326 -
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91,859 79,250
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$ 183,872 $ 131,032
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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
--------------------- ---------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Revenues $ 50,506 $ 39,054 $ 178,928 $ 145,106
Expenses :
Operating 29,349 19,712 98,614 73,482
General and administrative 8,098 6,227 31,063 25,774
Depreciation and
amortization 4,135 3,245 13,416 12,054
Interest - long-term debt
and capital lease
obligations 373 292 1,158 1,084
Interest - other 132 122 422 404
Foreign exchange loss (gain) 74 (94) 94 492
Unit-based compensation
expense 338 398 1,705 1,603
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42,499 29,902 146,472 114,893
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8,007 9,152 32,456 30,213
Gain on disposal of property
and equipment 1,079 620 2,138 1,777
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Income before taxes 9,086 9,772 34,594 31,990
Taxes:
Current 1,217 506 6,348 3,982
Future (reduction) (1,868) (1,099) (1,893) 3,145
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(651) (593) 4,455 7,127
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Net income for the period 9,737 10,365 30,139 24,863
Retained earnings, beginning
of period 29,002 25,136 28,852 30,394
Less: Distributions (7,180) (6,649) (27,432) (26,405)
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Retained earnings, end of
period $ 31,559 $ 28,852 $ 31,559 $ 28,852
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Net income per Trust Unit:
Basic $ 0.30 $ 0.33 $ 0.94 $ 0.79
Diluted $ 0.30 $ 0.33 $ 0.93 $ 0.78
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND ACCUMULATED OTHER
COMPREHENSIVE INCOME
Dollars in 000's
Three months ended Years ended
December 31 December 31
--------------------- ---------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Net income for the period $ 9,737 $ 10,365 $ 30,139 $ 24,863
Other comprehensive income:
Unrealized foreign exchange
gain on translation of
self-sustaining foreign
operations 1,933 - 3,326 -
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Comprehensive income for the
period $ 11,670 $ 10,365 $ 33,465 $ 24,863
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Accumulated other
comprehensive loss,
beginning of period $ (501) $ - $ - $ -
Adjustment for change in
foreign currency
translation method (note 2) - - (1,894) -
Other comprehensive income 3,827 - 5,220 -
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Accumulated other
comprehensive income, end
of period $ 3,326 $ - $ 3,326 $ -
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in 000's
Three months ended Years ended
December 31 December 31
--------------------- ---------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net income for the period $ 9,737 $ 10,365 $ 30,139 $ 24,863
Items not involving cash:
Depreciation and
amortization 4,135 3,245 13,416 12,054
Future taxes (reduction) (1,868) (1,099) (1,893) 3,145
Unrealized foreign exchange
gain (339) - (405) (195)
Unit-based compensation
expense 338 398 1,705 1,603
Gain on disposal of
property and equipment (1,079) (620) (2,138) (1,777)
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10,924 12,289 40,824 39,693
Changes in non-cash operating
working capital 1,168 212 (4,681) 36
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12,092 12,501 36,143 39,729
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Investing activities:
Property and equipment
additions (21,054) (5,205) (47,618) (19,857)
Proceeds on disposal of
property and equipment 1,912 1,475 3,761 3,575
Changes in non-cash investing
working capital (4,567) 2,377 3,723 (325)
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(23,709) (1,353) (40,134) (16,607)
-------------------------------------------------------------------------
Financing activities:
Advances under long-term debt 13,000 55 23,047 2,228
Repayment of long-term debt (31) (22) (113) (116)
Repayment of capital lease
obligations (78) (48) (228) (214)
Distributions paid to
Unitholders (7,180) (6,646) (27,368) (27,903)
Proceeds on exercise of Trust
Unit options - 149 4,904 3,065
Change in bank indebtedness 8,283 (3,975) 9,376 (430)
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13,994 (10,487) 9,618 (23,370)
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Effect of exchange rate on
changes in cash and cash
equivalents 618 - 618 -
-------------------------------------------------------------------------
Change in cash and cash
equivalents 2,995 661 6,245 (248)
Cash and cash equivalents,
beginning of period 4,556 645 1,306 1,554
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Cash and cash equivalents,
end of period $ 7,551 $ 1,306 $ 7,551 $ 1,306
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%SEDAR: 00018316E