ACT Energy Technologies Reports 2024 Q3 Interim Results
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, AB, Nov. 7, 2024 /CNW/ - (TSX:ACX) ACT Energy Technologies Ltd, formerly Cathedral Energy Services Ltd., (the "Company" or "ACT") news release contains "forward-looking statements" within the meaning of applicable Canadian securities laws. For a full disclosure of forward-looking statements and the risks to which they are subject, see the "Forward-Looking Statements" section in this news release. This news release contains references to Adjusted gross margin, Adjusted gross margin %, Adjusted EBITDAS, Adjusted EBITDAS margin %, Free cash flow, Working capital and Net capital expenditures. These terms do not have standardized meanings prescribed under International Financial Reporting Standards as issued by the International Accounting Standards Board ("IFRS Accounting Standards") and may not be comparable to similar measures used by other companies. See the "Non-GAAP Measures" section in this news release for definitions and tabular calculations.
2024 Q3 KEY HIGHLIGHTS
The Company achieved the following 2024 Q3 results and highlights:
Revenues of $148.4 million in 2024 Q3, were the highest for any third quarter in the Company's history and increased 2%, compared to $145.6 million in 2023 Q3.
Adjusted EBITDAS (1) of $30.2 million in 2024 Q3 was comparable to $30.1 million in 2023 Q3. Lost-in-hole equipment net reimbursements were lower in 2024 Q3, compared to 2023 Q3.
Canadian operating days increased 34% in 2024 Q3, compared to 2023 Q3, which was favourable to a 12% increase in the Western Canadian rig count (2). ACT remains extremely active in oil plays where wells have a high multilateral count.
U.S. operating days decreased 22% in 2024 Q3, compared to 2023 Q3, mainly due to a 10% decline in the U.S. land rig count (2).
An increase in the Canadian average revenue per operating day of 2% in 2024 Q3, compared to 2023 Q3.
An increase in the U.S. average revenue per operating day of 11% in 2024 Q3, compared to 2023 Q3.
Net income of $26.2 million in 2024 Q3, compared to $5.7 million in 2023 Q3. The increase is mainly due to the recognition of previously unrecorded Canadian tax pools, resulting in a deferred income tax recovery of $11.1 million. Refer to the 'Income tax' section of this news release.
Cash flow - operating activities of $19.4 million in 2024 Q3, compared to $9.1 million in 2023 Q3, mainly attributable to the change in non-cash working capital.
Free cash flow (1) of $8.7 million in 2024 Q3, compared to Free cash flow (1) of $6.1 million in 2023 Q3.
The Company purchased 506,800 common shares of ACT under its Normal Course Issuer Bid ("NCIB") for a total amount of $3.0 million, at an average price of $5.91 per common share. As at September 30, 2024, the Company recognized $1.1 million as an accrued liability for the maximum common shares to be purchased under the plan. Subsequent to September 30, 2024, the Company purchased 179,800 common shares for a total purchase amount of $1.1 million, at an average purchase price of $6.04 per common share.
Loans and borrowings less cash was $49.9 million as at September 30, 2024, compared to $67.9 million as at December 31, 2023. The Company will remain focused on reducing its loans and borrowings and generating Free cash flow (1) for the remainder of 2024.
The Company continues to see a significant opportunity for margin expansion in its U.S. directional business by using Rime Downhole Technologies ("Rime") supplied Measurement-While-Drilling ("MWD") systems to reduce its third-party rental costs. To date, ten Rime MWD systems have been deployed with an additional forty MWD systems expected to be deployed by the first half of 2025.
The Company purchased five additional Rotary Steerable Systems ("RSS") Orbit tools, expanding its U.S. fleet to twenty-six RSS tools.
(1)
As defined in the "Non-GAAP measures" section of this news release.
(2)
Per Baker Hughes and Rig Locator.
PRESIDENT'S MESSAGE
Comments from President & CEO Tom Connors:
"Despite a more challenging market for drilling activity in the U.S., ACT delivered another quarter with solid and consistent results. Consolidated revenues were the second highest for any quarter in the Company's history with Adjusted EBITDA of $30.2 million being among the highest of any quarter to date. Low natural gas prices and market uncertainty provided some headwinds in the quarter, particularly in the U.S. where the land rig count declined 10% (source: Baker Hughes) on a year-over-year basis. The quarter was also impacted by significantly lower lost-in-hole revenue or reimbursements versus historical averages. We believe our positioning and focus on the higher value, high-performance rotary steerable market in the U.S. and the multi-lateral drilling market in Canada helped propel the company to strong and consistent financial performance in the quarter despite these challenges. The benefits of ACT's size and scale strategy continues to produce sound results by leveraging leading technology and exceptional service delivery in the North American directional drilling industry.
"We were one of the most active service providers in the directional market in Canada in the third quarter, resulting in record quarterly revenues of $61.5 million, also a 36% increase from 2023 Q3. Third quarter Canadian revenues also exceeded the $58.4 million generated in 2024 Q1, which is a rare achievement in the seasonal Canadian energy services sector. ACT's activity and performance in the quarter was further buoyed with technology that is ideally suited for multilateral drilling combined with vast field experience that has grown from the onset of this burgeoning method of drilling.
"Due to higher levels of demand and utilization we increased the size of our RSS fleet by five additional tools to a total of twenty-six in our U.S. division in the third quarter. The addition of ten incremental tools this year has allowed us to increase our revenue per operating day by roughly 11% versus the same quarter last year, despite a 22% decrease in operating days year-over-year.
"The successful deployment of a sizable MWD fleet remains the top priority and focus for management in 2024 and 2025, with the potential to further expand our business, improve our margins and EBITDA profile, while generating very attractive returns on our investment. The MWD buildout is expected to provide increased resiliency through expanded margins in a weaker macro environment and position the Company with more flexibility to further pay down debt and potentially initiate return of capital strategy in 2025. The execution of the plan remains on track with delivery of completed MWD tools beginning in 2024 Q4 and continuing into the first half of 2025. With a significant portion of our revenue in our U.S. business going to third-parties to rent essential technology, there is a substantial opportunity to recapture margins even if we are only able to achieve relatively moderate levels of operational success in 2025.
"We continued with our NCIB program in the quarter to return capital back to shareholders at a relatively low purchase price. In 2024, we purchased approximately 0.7 million common shares at an average purchase price of $5.94 per common share as of the date of this news release. Management believes that buying shares at current share price levels represents good value and a sensible use of capital. In addition, we strengthened our balance sheet with reduced debt levels and increased our cash balance which will continue to be a focus into 2025.
"With a constructive outlook in our Canadian business, improving outlook in the longer-term for the U.S., market, improving EBITDA and cash flow profiles, and a clear strategy, I am confident we can deliver higher returns for our shareholders and increasing value for our customers as we go forward. I would like to thank our team for their continued focus, dedication, and exceptional operational execution," stated Tom Connors, ACT President and Chief Executive Officer.
FINANCIAL HIGHLIGHTS
(unaudited)
Canadian dollars in 000's (except for otherwise noted)
Three months ended September 30,
Nine months ended September 30,
2024
2023
2024
2023
Revenues
$ 148,449
$ 145,591
$ 443,702
$ 399,878
Gross margin %
25 %
23 %
23 %
19 %
Adjusted gross margin % (1)
30 %
31 %
28 %
27 %
Adjusted EBITDAS (1)
$ 30,169
$ 30,106
$ 76,223
$ 63,515
Per share - basic (2)
$ 0.86
$ 0.86
$ 2.19
$ 1.88
Per share - diluted (2)
$ 0.78
$ 0.79
$ 1.98
$ 1.81
Adjusted EBITDAS margin % (1)
20 %
21 %
17 %
16 %
Cash flow - operating activities
$ 19,377
$ 9,128
$ 69,243
$ 53,395
Free cash flow (1)
$ 8,654
$ 6,085
$ 9,107
$ 10,372
Net income
$ 26,175
$ 5,650
$ 43,015
$ 8,861
Per share - basic (2)
$ 0.75
$ 0.16
$ 1.24
$ 0.26
Per share - diluted (2)
$ 0.68
$ 0.15
$ 1.12
$ 0.25
Weighted average shares outstanding:
Basic (000s) (2)
34,965
34,939
34,770
33,711
Diluted (000s) (2)
38,772
38,207
38,559
35,137
Balance,
September 30,2024
December 31,2023
Working capital, excluding current portion of loans and borrowings (1)
$ 78,766
$ 74,865
Total assets
$ 442,592
$ 403,733
Loans and borrowings
$ 67,343
$ 78,598
Shareholders' equity
$ 225,825
$ 179,468
(1)
Refer to the "Non-GAAP Measures" section in this news release.
(2)
Restated to reflect the 7:1 share consolidation on July 3, 2024. Refer to the "Share Consolidation" section in this news release.
OUTLOOK
The outlook for global energy demand remains robust in the coming years due to rising intensity of energy use in developing countries and the prospect of a soft landing for economic growth among industrialized nations as central banks co-ordinate to bring interest rates down. The rising prominence of natural gas as the transition fuel for power generation in the decades to come is also supportive even before any additional demand caused by growth in AI-driven datacenters.
In the short term, oil markets continue to be impacted by a number of factors. Bearish factors include a relatively weak Chinese economy and the possibility of OPEC adding more oil production to the market in 2025. Bullish factors include continued solid global gross domestic product growth as noted, low U.S. oil and product inventories in relation to five-year averages and ongoing Middle Eastern tensions that could affect oil supply. The U.S. election is also adding uncertainty as it relates to possible changes to U.S. energy policy. On the whole, WTI oil prices have trended lower by roughly U.S. $10 per barrel since the release of our second quarter results in August 2024, which has caused a slow drift downward in U.S. land drilling levels. By contrast, U.S. natural gas prices have improved over the last three months as the market awaits the beginning of the North American winter heating season as well as the start-up of exports from a number of new U.S. liquified natural gas ("LNG") projects in 2025 and 2026.
Owing to higher levels of uncertainty in both oil and natural gas markets, ACT is seeing varying impact on its job counts in Canada and the U.S. in the fourth quarter of 2024. In Canada, ACT continues to run at levels close to those achieved in the record-setting third quarter. ACT's Canadian exploration and production ("E&P") clients have done an excellent job at repairing balance sheets to withstand oil and gas price volatility and have also been helped by a continued weakening of the Canadian dollar, which increases their realized pricing. We remain very constructive on Canada in the years to come and are encouraged by reports that testing continues with respect to bringing the major LNG Canada project online sometime in 2025. With relatively steady levels of activity forecasted for the Canadian market it is also important to note the fourth quarter is likely to be impacted by budget exhaustion and holiday seasonality in early-to-mid- December.
ACT's U.S. job count has softened modestly in the fourth quarter, in keeping with the continued softness in underlying U.S. rig activity. ACT continues to increase its presence in the premium part of the directional drilling market by way of adding RSS systems to its fleet. Maximizing available revenue per operating day is our immediate focus as well as beginning the margin recapture process as we introduce our new MWD systems to clients. Holiday seasonality also starts to become a factor in late November with the U.S. Thanksgiving holiday. Lower benchmark U.S. oil and gas prices to date in the fourth quarter may also accelerate the timing of the typical end-of-year budget exhaustion process.
2023 ACQUISITION
On July 11, 2023, ACT, through a wholly-owned subsidiary, acquired Rime, a privately-held, Texas-based, engineering business that specializes in building products for the downhole MWD industry (the "Rime acquisition") in exchange for approximately USD $41.0 million (approximately CAD $54.1 million) comprised of: i) the payment of USD $21.0 million in cash (approximately CAD $28.0 million); and ii) the issuance of principal amount of USD $20.0 million (approximately CAD $26.4 million) of subordinated exchangeable promissory notes ("EP Notes") that are exchangeable into a maximum of 3,510,000 common shares of ACT at an issue price of CAD $7.70 per common share. The EP notes have a three-year term and accrue interest quarterly at a rate of 5% per annum. In accordance with International Accounting Standards ("IAS") 32 and IFRS 13, the EP Notes were determined to be a compound instrument and, accordingly, recognized at the fair value of their respective debt component of $23.4 million and equity component of $1.2 million totaling $24.6 million.
RESULTS OF OPERATIONS
Three months ended September 30,
Nine months ended September 30,
2024
2023
2024
2023
Revenues
United States
$ 86,948
$ 100,338
$ 292,579
$ 283,798
Canada
61,501
45,253
151,123
116,080
Total revenues
148,449
145,591
443,702
399,878
Cost of sales
Direct costs
(104,359)
(101,629)
(318,723)
(293,815)
Depreciation and amortization
(6,432)
(10,508)
(24,247)
(29,848)
Share-based compensation
(73)
(429)
(465)
(669)
Cost of sales
(110,864)
(112,566)
(343,435)
(324,332)
Gross margin
$ 37,585
$ 33,025
$ 100,267
$ 75,546
Gross margin %
25 %
23 %
23 %
19 %
Adjusted gross margin % (1)
30 %
31 %
28 %
27 %
(1)
Refer to the "Non-GAAP Measures" section in this news release.
SEGMENTED INFORMATION
United States
Revenues
U.S. revenues were $86.9 million in 2024 Q3, a decrease of $13.4 million or 13%, compared to $100.3 million in 2023 Q3. The Company realized a 22% decrease in operating days to 3,080 days in 2024 Q3, compared to 3,953 days in 2023 Q3. The decrease in operating days was due to a declining market in 2024 Q3. The average revenue per operating day increased 11% to $28,230 per day in 2024 Q3, compared to $25,383 per day in 2023 Q3, mainly due to job mix.
U.S. revenues were $292.6 million in the nine months ended September 30, 2024, an increase of $8.8 million or 3%, compared to $283.8 million for the same period in 2023. The Company realized a 7% decrease in operating days to 10,496 days in the nine months ended September 30, 2024, compared to 11,233 days for the same period in 2023. The decrease is mainly related to a declining market in the nine months ended September 30, 2024. The average revenue per operating day increased 10% to $27,875 per day in the nine months ended September 30, 2024, compared to $25,265 per day for the same period in 2023, mainly due to a change in job mix.
Direct costs
U.S. direct costs included in cost of sales were $64.9 million in 2024 Q3, a decrease of $9.8 million or 13%, compared to $74.7 million in 2023 Q3. The decrease is mainly due to lower third-party rental and labour costs. As a percentage of revenues, direct costs increased to 75% in 2024 Q3, compared to 74% in 2023 Q3 mainly due to higher labour and repair costs as a percentage of revenues.
U.S. direct costs included in cost of sales were $221.3 million in the nine months ended September 30, 2024, an increase of $5.1 million or 2%, compared to $216.2 million for the same period in 2023. The increase is mainly due to higher repairs and manufacturing costs, offset by third-party rental costs. The manufacturing costs are attributable to the Rime acquisition (acquired in July 2023). As a percentage of revenues, direct costs were 76% in both the nine months ended September 30, 2024 and 2023 as a result of higher repair costs, offset by lower labour and rental costs as a percentage of revenues.
Canadian
Revenues
Canadian revenues were $61.5 million in 2024 Q3, an increase of $16.2 million or 36%, compared to $45.3 million in 2023 Q3. The Company realized a 34% increase in operating days to 4,527 days in 2024 Q3, compared to 3,388 days in 2023 Q3. The increase in operating days is mainly attributable to higher market demand in 2024 Q3. The average revenue per operating day increased 2% to $13,585 per day in 2024 Q3, compared to $13,357 per day in 2023 Q3. The increase in the average revenue per operating day is mainly attributed to higher proceeds from lost-in-hole reimbursements from customers and a change in job mix, including higher charges for premium tools.
Canadian revenues were $151.1 million in the nine months ended September 30, 2024, an increase of $35.0 million or 30%, compared to $116.1 million for the same period in 2023. The Company realized a 27% increase in operating days to 11,031 days in the nine months ended September 30, 2024, compared to 8,709 days for the same period in 2023. The increase in operating days is mainly attributable to higher market demand in the nine months ended September 30, 2024. The average revenue per operating day increased 3% to $13,700 per day in the nine months ended September 30, 2024, compared to $13,329 per day for the same period in 2023. The increase in the average revenue per operating day is mainly attributed to higher proceeds from lost-in-hole reimbursements from customers and a change in job mix, including higher charges for premium tools.
Direct costs
Canadian direct costs included in cost of sales were $39.5 million in 2024 Q3, an increase of $12.5 million or 46%, compared to $27.0 million in 2023 Q3. The increase is mainly due to higher labour, repair, and third-party rental costs in 2024 Q3. As a percentage of revenues, direct costs were 64% in 2024 Q3, compared to 60% in 2023 Q3 mainly due to higher rental costs as a percentage of revenues.
Canadian direct costs included in cost of sales were $97.4 million in the nine months ended September 30, 2024, an increase of $19.8 million or 26%, compared to $77.6 million for the same period in 2023. The increase is mainly due to higher labour, repair, and third-party rental costs in the nine months ended September 30, 2024. As a percentage of revenues, direct costs were 64% in the nine months ended September 30, 2024, compared to 67% for the same period in 2023 mainly due to lower labour and repair costs as a percentage of revenues.
CONSOLIDATED
Revenues
The Company recognized $148.4 million of revenues in 2024 Q3, an increase of $2.8 million or 2%, compared to $145.6 million in 2023 Q3. The increase is due to a 4% increase in operating days (2024 - 7,607 days; 2023 - 7,341 days), offset by a decrease of 2% in the average revenue per operating day (2024 - $19,515; 2023 - $19,833). The decrease in the average revenue per operating day is mainly due to lower lost-in-hole reimbursements from the Company's customers.
The Company recognized $443.7 million of revenues in the nine months ended September 30, 2024, an increase of $43.8 million or 11%, compared to $399.9 million for the same period in 2023. The increase is due to an 8% increase in operating days (2024 - 21,527 days; 2023 - 19,942 days) and an increase of 3% in the average revenue per operating day (2024 - $20,611; 2023 - $20,052).
Direct costs
The Company recognized $104.4 million of direct costs in 2024 Q3, an increase of $2.8 million or 3%, compared to $101.6 million in 2023 Q3. The increase is mainly due to higher repair and labour costs related to an increase in operating days, offset by lower third-party rental costs.
The Company recognized $318.7 million of direct costs in the nine months ended September 30, 2024, an increase of $24.9 million or 8%, compared to $293.8 million for the same period in 2023. The increase is mainly due to higher repairs and labour costs related to the increase in operating days, and the inclusion of manufacturing costs related to Rime (acquired in July 2023), offset by lower third-party rental costs.
Direct costs as a percentage of revenues was 70% in 2024 Q3, which is comparable to 2023 Q3. Direct costs as a percentage of revenue decreased to 72% in the nine months ended September 30, 2024, from 73% for the same period in 2023, mainly due to decreased labour and third-party rental costs as a percentage of revenues.
Gross margin and adjusted gross margin
The Gross margin % increased to 25% in 2024 Q3, compared to 23% in 2023 Q3. The Gross margin % increased to 23% in the nine months ended September 30, 2024, compared to 19% for the same period in 2023.
The Adjusted gross margin % decreased to 30% in 2024 Q3, compared to 31% in 2023 Q3. The Adjusted gross margin % increased to 28% in the nine months ended September 30, 2024, compared to 27% for the same period in 2023.
Depreciation and amortization expense
Depreciation and amortization expense included in cost of sales decreased to $6.4 million and $24.2 million in 2024 Q3 and the nine months ended September 30, 2024, compared to $10.5 million and $29.8 million for the same periods in 2023, respectively. The decrease is mainly due to a change in depreciation methodology, as described below.
In 2024 Q1, the Company assessed its depreciation methodology related to its property, plant and equipment. As a result, the Company determined that using a straight-line method of depreciation, rather than the declining balance method, more accurately reflects the future economic benefits of the related assets. The depreciation expense included in cost of sales decreased due to the change in methodology.
Depreciation and amortization expense included in cost of sales as a percentage of revenues was 4% and 5% in 2024 Q3 and the nine months ended September 30, 2024, compared to 7% for the same periods in 2023, respectively.
Selling, general and administrative ("SG&A") expenses
Three months ended September 30,
Nine months ended September 30,
2024
2023
2024
2023
Selling, general and administrative
expenses:
Direct costs
$ 13,147
$ 11,611
$ 43,981
$ 37,701
Depreciation and amortization
2,630
2,299
7,439
5,307
Share-based compensation
311
1,731
1,960
3,179
Selling, general and administrative
expenses
$ 16,088
