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All participants, please standby, your meeting is ready to begin. Good morning, ladies and gentlemen. Welcome to the High Arctic Energy Services 2021 Q2 Results Conference Call. I would now like to turn the meeting over to High Arctic's Chief Executive Officer, Mike Maguire. Please go ahead, Mr. Maguire.
Thank you, Eric, and good morning to everyone. Welcome to High Arctic's Second Quarter Conference Call.Today, I'll be providing an update on the press release we issued after market yesterday, August 12. And following my remarks, Lance Mierendorf, who's filling Chief Financial Officer duties of High Arctic on an interim basis, will be discussing our financial performance for the second quarter of 2021.After our formal comments, we'll open the call to answer any questions that you may have. Before we begin, I'd like to remind you that certain information presented today may include forward-looking statements. Such statements reflect High Arctic's current expectations, estimates, projections and assumptions. These forward-looking statements are not guarantees of future performance, and they're subject to certain risks, which could cause actual performance and financial results to vary materially from those contemplated in the forward-looking statements. For additional information on these risks, please take a look at our 2020 annual information form under the heading of Risk Factors.With the continued 2021 rally in oil and gas prices, the outlook for energy -- for the energy services sector continues to improve. High Arctic is well positioned to take advantage of better market conditions with its strong balance sheet position.In the second quarter, utilization of High Arctic services in Canada have exceeded our expectations. We saw across the board, utilization rates increase in our Canadian Production Services segment, where our Concord Well Servicing fleet utilization was 44% in the quarter versus industry utilization of 29% and was 12% up on utilization rates in the second quarter last year.Our High Arctic snubbing package utilization increased to 19% in the second quarter compared to only 8% during the same period last year. Given the improving economic environment, in the short to medium term, High Arctic expects activity to increase in its 3 operating segments and in its operating geographies of Canada and Papua New Guinea.With that being said, COVID-19 continued to hamper activity during the quarter, especially in High Arctic's International Papua New Guinea operation. Only recently, have Papua New Guinea travel bans receded since the cases of COVID-19 spiked in April. High Arctic has started making preparations for the mobilization of Rig 115, heli-transportable camps and associated support equipment, which is expected to take place later in Q3 to commence work on a remote exploration well abandonment project that will provide revenues into the first quarter of 2022. It remains my firm belief that High Arctic's commitment to Papua New Guinea will, in time, provide significant upside for our shareholders.In Canada, we are focused on identifying strategic assets and opportunities that will enhance our growth ambitions. In July this year, High Arctic announced investments in highly mobile, automated tubular handling catwalk machines of $1.1 million, which represents a low risk investment in the growth of our HAES Rentals brand. Catwalks will be upgraded over the remaining period of 2021 and High Arctic will take sole control from the beginning of next year.Key achievement this year for High Arctic has been the finalization of work on a practical process to convert existing Concord Well Servicing rigs to reliable, efficient and inexpensive electric drive. During the second quarter, we had dialogue with select customers on possible field trials and hope to lock one in soon. We see tremendous opportunity for deployment in Western Canada, particularly on thermal well pads, where existing supply of electric power of adequate capacity is already available. The upgrade is estimated to reduce the carbon dioxide emissions of a well service rig went over the wellbore by more than 35% compared to current diesel-powered units.High Arctic will continue to develop its technologies. We will also continue to explore opportunities to make acquisitions that strengthen our service base and enhances value to shareholders. With our strong balance sheet position, we will carefully review strategic mergers that would strengthen both parties.With that, I'd now like to pass the call over to Lance to discuss our financial results in more detail.
Thank you, Mike. I'll briefly discuss the key highlights of High Arctic's financial performance.As Mike mentioned, the second quarter of 2021 saw higher activity in Canada's Production Services segment, offset by lower drilling-related activity in Papua New Guinea. On a consolidated basis, High Arctic generated $800,000 of adjusted EBITDA during the second quarter, which is slightly lower than the $1.3 million generated during Q2 2020. During the first half of 2021, High Arctic's adjusted EBITDA was $1.7 million. The company continues to access all available government support programs, so far receiving $2 million in wage and rent subsidies during 2021.In our Production Services division, revenue increased 40% to $13.3 million from $9.6 million in Q2 2020 due to higher operating hours as the Q2 breakup period in Canada was earlier and shorter than experienced in prior years. Despite higher revenues, our oilfield operating margin of 16.4% in Q2 2021 was lower than the 23.3% in the same period in the prior year, where it was benefited more from the high level of government grants administered shortly after the beginning of the COVID-19 pandemic.On a year-to-date basis, High Arctic's operating margin was 16.1%. The company's Canadian well service rigs generated 85% of the activity within this division or $11.3 million of revenue on 19,469 operating hours with an average revenue per hour of $582.Our fleet of 19 registered Concord service rig achieved 44% utilization rate in the quarter, a full 15% higher compared to the CAODC's registered rigs. Our Canadian snubbing packages generated the remaining 15% or $2 million of revenue in the division on operating hours of 1,400, up substantially from 574 operating hours during the second quarter of 2020.Snuffing activity was consistent throughout the spring break up in Canada as gas well completion work was prioritized by customers due to strong gas prices and demand. Lastly, due to the continuing challenging market conditions in our focus areas in the United States, our equipment remains idle and expenditures are being maintained at a minimal level in the United States.Moving to the Ancillary Services segment. Revenue increased to $2.6 million in the quarter, up from $1.6 million in the second quarter of 2020. Higher revenues were due to higher demand for High Arctic's rental and nitrogen services in Canada, which more than offset lower rental revenue in Papua New Guinea. This resulted in a segment operating margin of 42.1% in the quarter versus 36% in Q2 2020.On a year-to-date basis, revenues decreased to $4.8 million from $6.1 million in the prior year. The decline was largely driven by a reduction in wellsite associated rentals in Papua New Guinea, including the contraction of wellsite matting needs.Revenue from our -- for our Drilling Services segment continues to be significantly impacted by the ongoing cessation of drilling activity in PNG thus limiting our revenue potential to minor services related to critical activities. Rigs 103, 104, 115 and 116 all remain cold stacked whereas during the first half of 2020, Rig 103 was operational. We are starting to see improvements in the business environment in Papua New Guinea and now have line of sight on the mobilization of Rig 115 in Q3, and anticipation of the commencement of operations later in Q4.General and administrative costs decreased by 21% to $2.5 million in the second quarter versus $3.1 million in Q2 2020. The overall decrease of $600,000 is mainly due to reduced compensation costs as a result of targeted reductions in corporate administrative personnel, which took place over the past 12 months.As reflected in the reduction in G&A, High Arctic remains committed to ensuring these costs are managed and in line with activity and the overall strategic plan of the corporation. Continued lower activity, especially in the Papua New Guinea led to the company incurring a consolidated net loss of $4 million or $0.08 per share in the quarter compared to $6.1 million loss or $0.12 per share in Q2 2020.We continue to maintain a strong balance sheet and exited Q2 with $21.7 million cash on hand, no debt and working capital ratio of 4:1. In Q1, the company repaid the outstanding debt it had on its revolving credit facility of $10 million. And the facility itself was extended to August 2023 on favorable terms.Cash flow from operations was $2 million during the quarter, and capital expenditures were limited to $685,000. As Mike mentioned earlier, we did spend $1.1 million on capital expenditures in July, acquiring catwalks that are currently deployed in the field.With that, I'll turn it back over to Mike.
Thanks, Lance. Throughout this recent severe period, it's been pleasing that our Canadian operation has been able to offset losses from Papua New Guinea and maintain a healthy cash balance. Here, we set a strategic focus on the quality of people, systems and productivity to strengthen underlying service processes to customers. As High Arctic's business activity in Canada continues to recover operating cash flow has returned to above breakeven.As service demand increases, there is a need for higher prices to restore profit margins, enable reinvestment in equipment and provide a return on shareholders' equity. In Canada, COVID-19 vaccination rates reached world-leading levels in July. And consequently, the reported new COVID cases and serious hospitalizations dropped to levels that have allowed for the relaxation of many government-imposed social and economic restrictions.In Papua New Guinea, the spike in COVID-19 cases has receded and major corporations have begun returning personnel to work. However, there remains uncertainty from the possible ongoing impacts of the virus and in particular, the rising case numbers of the delta variant. Recent positive steps taken by governments within Canada and around the world towards reopening economies may moderate or reverse course and in process may impair our current favorable outlook.That concludes my comments, and I'll now turn the conference back over to Eric who will open the line for questions.
[Operator Instructions] And we have the next question, the first question. Please go ahead. And we have the next question. Please go ahead.
Tim Monachello with ATB Capital Markets. Just curious about the Oil Search and Santos merger. Can you speak a little bit to your track record with Santos in PNG?
Sure, Tim. Yes, thanks for raising the question. So Santos has been in recent times and since High Arctic commenced operations in PNG in 2007, a nonoperator present, actively present in PNG. They've been involved in many joint ventures where High Arctic has provided services both through its Drilling Services segment, drilling wells for JVs that they've been partners in. And in our Ancillary Services segment, where we have provided substantive amount of rental equipment, including worksite matting to the joint ventures that Santos has been a participant in. That would be the extent of our experience with Santos given that it's only in Papua New Guinea where Santos and ourselves are both present.
Got it. Got it. Do you see any potential risk the relationship from that merger? I mean you guys have a pretty dominant position in PNG. So I'd imagine that fairly safe, but is there anything that maybe could be an exposure?
Yes. So Tim, I don't think that we see any potential negatives there. Santos is one of the original partners in the PNG LNG project. They've been active participants in that as well as in the exploration sector, in the license blocks where they are the nonoperated joint venture partner. They've got an extensive experience in Australasia and have been terribly successful over the last 10 years in building their business up in LNG supply as well as liquids production in Australia.They have an active presence in the business community in Port Moresby, where they've got participation on many of the chambers, both commerce and petroleum. And I believe that if this merger does close, that it should be generally neutral for High Arctic and that we expect to be continue to work for the same people within Oil Search who would then be wearing a Santos shirt assuming that Santos shirt assuming that Santos won't rebrand after the merger.
Okay. Understood. Switching a little bit to Canada. Can you -- I mean, just talk a little bit about the dynamics you're seeing in terms of pricing?
Yes. Look, great question. I'm sure that a lot of people in our shoes, in our segment are getting that same question. What we've seen this quarter is that there's been pressure on personnel. And with the pressure on personnel, we've seen rate increases. As an industry, we've done our piece to try and attract people back to boots on the ground jobs in the energy sector where the energy services division of companies is by far and away the largest employer.So that's been the driver of movements in the quarter to date. As I indicated in my closing remarks there, we do expect to see in the coming quarters rate improvement, not just because of personnel constraints but also because of the requirement now for companies like ourselves and our peers to reinvest in equipment to being able to provide quality services, both with demand or cruise and capable equipment.
Okay. Got it. Are you guys able to pass through any cost inflation you're seeing today? Or is that a struggle?
No, we've not had any struggle with the pass-through of cost inflation to date and this quarter has been the active quarter with that adjustment. So we've seen our hourly rate, our hourly revenue numbers going up, and we've also been able to maintain margin.
[Operator Instructions] And we have a question from the next participant.
Josef Schachter. Mike, I got caught up in the dialing in for the question. So I had to redial in.
Glad you could join us.
Yes. When you talk about the PNG abandonment is for the 2 quarters, Q4 and Q1, how material is that? And then when you go into 2022, '23, how do you see the potential for the amount of drilling that starts happen in country to start meeting the growth that's needed a number of years down the road when the trains come on.When do you -- how do you see the ramp-up occurring? Do you need to drill, let's say, a few wells, 2, 3 wells in '23; 4 or 5 wells in '24. How do you see that ramp up so that you can see potential where you might have chances to bid for business on the 4 rigs.
Yes. So again, really great questions. So Josef, the work for Rig 115 in the abandonment, we expect it to be operating on site through the latter part of Q4 into the early part of Q1. And we have seen revenue for that coming in for several months, either side as the challenges of mobilizing and moving equipment to a substantive amount of equipment by barge and helicopter, et cetera, in Papua New Guinea. So while our project may not be particularly long on the well side itself, the overall period of revenue will come in around somewhere between 7 or 8 months.Coming to the second part of the question, what do we see for a ramp-up in drilling activity. So I'm looking into my crystal ball, and I think the drilling activity in the latter part of '22 is highly likely given the lack of any activity since the end of the first quarter last year. And remember that we have a rig rigged up over a well that was suspended midway at that point in time and another rig that we were rigging up on another well site to follow that drilling on the well site where we're on at the time.We would expect to return to those wells latter part of next year, and we would expect them to see a steady increase in drilling activity driven by the LNG projects and the commitment wells for the holders of exploration license blocks and retention license blocks. So we would expect that these commitments that need to be honored getting towards the mature end of the license period and that there will be only a limited amount of ability for the customer base to try and move those into future periods unless they've committed to a drilling rig.
And will those rigs need to be heli portable for most of that work? Or would other rigs, the land rigs would be able to be moved in on roads? Or i.e., do you have a natural advantage because of the rigs?
Yes, a really important question, Josef. And the answer is that we can see that the majority of the drilling associated with that kind of work I was talking about will require helicopter access because it will be in remote and undeveloped areas. However, there will be some drilling -- sorry, it's a bit too much clarity. I would say we expect to see some drilling in backfilling the existing LNG facility, which then could be accessible by road moving rigs because of the infrastructure that exists there. That would not represent the larger portion of the drilling we expect to see maturing through latter part '22 into '23, '24.
Okay. And lastly for me the government agreements with the energy companies, is that all settled? And do they have the agreements on royalties, revenue sharing and everything so that it doesn't come back as that whole battle has to be refiled again, a year or 2 down the road?
Yes. Once again, you're well informed and good question. So the Papua LNG project, 2 trains for the expansion of the existing facility, but from separate joint venture. That gas agreement is settled and agreed and moving forward, and we saw -- and I think I mentioned in our last update after the Q1 results that the Papua New Guinean government and French super major Total Energies have committed for the remobilization of personnel and to move into the FEED study aiming at a final investment decision in the near future. So that one looks like it's a lock.Then when we look at the other -- well, there's 2 other major petroleum projects that are being considered and both of them for some time now and are probably well known to those on the call. The PNG LNG expansion using gas from P'nyang, we're pleased to see the government saying that they're actively reengaged in discussions with the operator, ExxonMobil. We think that's a very positive development, given that 18 months ago, the 2 parties seem to have arrived at an impasse and walk away. So we're watching this space to see how that develops.And the other project is the project in the offshore in the Gulf of Papua with a company called Twinza, who have a development license for Pasca field. Pasca is a gas and condensate discovery. They looked like only 3 or 4 weeks ago that they had reached agreement on terms there for a gas agreement for development of that field. But we noted some press that was seen late last week, which indicated that Twinza had received a markup of the actual gas agreement that looked like the negotiating team for the state has started pulling the sheets to their side of the better bid.
Okay. One more for me. In Canada, of course, we're seeing a lot of companies talking about their work and their involvement with indigenous groups, bringing them in as partners, bringing them subcontracting work to them. Is that something that's a big issue in the PNG? And are you working with local groups? And how does that work in there versus what we see going on in Canada?
Yes. I'm going to try and keep this truncated because I'm sure everyone's got things to do and I can talk a lot about it. But in a nutshell, in Papua New Guinea, we do, from time to time, work with various landholder groups, which should be, I guess, somewhat equivalent to a First Nation in Canada. And some of these groups have got companies they can provide various services, and we do engage with them and our customers engage with them, and we see those only being a good corporate citizen, working to the benefit of the communities where we work.When it comes to our service offering, technically mature drillings, high capital. We don't have an active local partnership when it comes to that. But we have, from time to time, obtained labor from various different landholder companies in the areas where we work so that there's some involvement from that perspective.We have engaged in a discussion with local businesses to determine if there was something we could do in the area of partnerships along the lines of something similar to what we've done here with our Seh' Chene partnership in the Saa Dene Group. We continue to keep a dialogue with the business community there. We have nothing that we're actively discussing at the moment. But if opportunities to do something there that would -- we believe would be beneficial to all parties does come up, we would not exclude some form of partnership in PNG in the future.
There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Maguire.
Okay. So I think that brings us to the end of the call, and I'd just like to thank participants for joining us today. And with that, I'll turn the call back to Eric and say, I wish everybody well.
Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.