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Good morning, ladies and gentlemen. Welcome to the High Arctic Energy Services 2023 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, Luis, and good morning to everyone. Thanks for joining us. Welcome to High Arctic's Second Quarter Conference Call. Today, I'll be providing an update on the press release we issued yesterday, August 3, including discussion of our financial performance for the second quarter of 2023. After our formal comments, we'll open the call to answer any questions that you may have.
Before we begin, though, 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 guaranteed of future performance, and they are subject to certain risks, which could cause actual performance and financial results to vary materially from those contemplated in the forward-looking statements.
For additional information on these risks, please take a look at our management's discussion and analysis and the 2022 Annual Information Form available on our website or on SEDAR plus. Look under the heading Risk Factors.
Starting with operations in PNG. And during the quarter, Rig 103 had a strong operational performance across the full quarter. This represents the first full quarter of drilling activity for the corporation since the suspension of operations in the first quarter of 2020. High Arctic anticipates Rig 103 will operate consistently through the term of the contract, which runs through to July 2025. As well as the full quarter of drilling operations with Rig 103, we've seen strong deployment of rental assets through the quarter including those pulled through by drilling operations as well as rentals to the wider market. High Arctic also provided rental material handling equipment, a 100-man mobile camp and a large quantity of worksite matting to support other ongoing field activities with our 2 main customers in PNG.
Full utilization of our drilling services and asset rentals associated with customer-owned Rig 103 had a significant impact on revenues and earnings, which we anticipate will be the case for the remainder of 2023. While the deferral of other projects pushed redeployment of Rig 115 out from this year, there is a catalog of projects under discussion for potential rig deployment in the coming years. Our optimism for future drilling in PNG remains underpinned by the advancement of the Papua LNG project by French Multinational TotalEnergies. Incidentally, last week, the French President visited Papua New Guinea for the first time, meeting with the Prime Minister of Papua New Guinea and forging stronger ties between France and PNG. The Papua LNG project is expected to be followed by the P'nyang gas field development in the Western province of Papua New Guinea, which is anticipated to result in the addition of further gas liquefaction capacity in the world-class PNG-LNG export facility. State-owned Kumul Petroleum is advancing appraisal of other gas discoveries in PNG recently pursuing seismic contractors for the Kimu and Barikewa discoveries onshore Papua New Guinea to progress their aim to contribute to growing domestic energy needs and additional LNG export processing facilities.
These LNG projects and other large-scale mining and infrastructure projects moving through the pipeline will require tens of thousands of new workers and more skilled and supervisory personnel that do not exist in PNG today. Through PIMS, PNG industry manpower solutions, we have added the provision of recognized safety training, competency verification and equipment licensing services. We have long provided these training and competency solutions in-house. PIMS also taps into our large pool of talent to provide manpower skilled and semi-skilled labor trades qualified personnel and professionals in PNG. We are excited to be playing a significant role in preparing PNG citizens to be job ready.
In Canada, we announced, and this week, closed a transaction to sell our Canadian nitrogen transportation, hauling and pumping services business for cash consideration of $1.35 million. The sale delivers a net gain of approximately $550,000 and contributes approximately $1.24 million of cash after transaction expenses and High Arctic retains associated working capital of the business as of 21 July. Our pressure control focused rentals enjoyed a solid quarter despite the wildfire and other disruptions experienced through the region of our customer base where revenues were relatively flat to the first quarter of 2023. As rentals is fielding inquiries from an increasingly broad range of customers, including contractors and energy companies alike.
Team Snubbing is Canada's largest snubbing provider, and we have a 42% equity stake in team. As is the case each year, the second quarter represents the lowest activity level for snubbing contractors due to the seasonal breakup period. Team saw a contraction in Canadian activity and utilized the available personnel and resources to consolidate into a single facility in Red Deer and prepare for the anticipation of increased field operations in the third quarter, including work on major repairs and maintenance. Team has a 50% interest in an international partnership marketed under Team Snubbing International. This partnership commenced their first services this quarter. Deploying 2 snubbing packages to U.S. independent producers in Alaska. Team Snubbing International are also looking into opportunities in other foreign jurisdictions.
Turning to second quarter financial results. On a consolidated basis, High Arctic generated revenues of $17.2 million, approximately double that achieved during the first quarter and generated EBITDA of $3.8 million, up from $1.3 million in Q1. The company saw a marginal profit from continuing operations during the quarter while we experienced a small loss from the now discontinued operations of the nitrogen business. Our oilfield services operating margins were higher in Q2 2023 at 37.5% and compared with 23.1% in the second quarter of 2022. Year-to-date, we've achieved 36% margins compared to 20.7% in the first half of 2022. The increase is primarily due to strength in demand for rental equipment in both Canada and PNG. The full utilization and charge-out rates associated with Rig 103 operations, and an increase in the supply of High Arctic technical and operational manpower services to customers in PNG.
General and administrative costs were $2.1 million in the second quarter a reduction of 22% when compared to the same period last year. G&A costs represent 11.9% of our second quarter revenues and 15.4% of year-to-date 2023 revenues. We expect this will decrease and trend lower for the remainder of 2023, as the higher revenue from our operations in PNG is sustained. Management will continue to evaluate G&A costs and rightsized support to align with expected operations in both Papua New Guinea and Canada.
Adjusted EBITDA for the second quarter was $4.4 million or 25.6% of revenues as compared to $3 million or 11.9% of revenues in the second quarter of 2022. The largest revenue contributor for High Arctic during the quarter was generated from the Drilling segment. Full utilization of Rig 103 during the quarter helped to drive $13.4 million of revenue in Q2 compared to $6.1 million in the second quarter of 2022. A period when Rig 115 successfully completed a short duration project in [indiscernible] storage. Active drilling in Q2 2023 lifted operating margins to 28.1% and from 24% in Q2 2022. Our ancillary services segment spreads across both PNG and Canada and continues to be our highest operating margin generator. We achieved 70.8% operating margin on $3.8 million of revenues in Q2. We as compared to 60% margin on $3.5 million of revenues in Q2 2022. The improved margin reflects more revenue contribution from low maintenance fully owned assets and management expects the Q2 margins and the activity levels to deliver this to continue through the remainder of the year.
There was no activity in our Production Services segment again this quarter, whereas in 2022, the second quarter was the last full quarter of operations from the well servicing assets sold to precision drilling and snubbing assets sold to team snubbing services. During the quarter, capital expenditures were $700,000, mainly focused on growth in our rental equipment in Papua New Guinea. With the addition of light vehicles and other incidental rental equipment that customers are increasingly needing for field operations in remote parts of the country. We expect to continue with modest capital spending in 2023, mostly focused on maintaining and growing our rental fleet in both Canada and PNG. The company ended the quarter with $45.5 million of cash on hand with approximately $36 million invested in secure interest-bearing short-term investments, which generated $510,000 during the quarter. Interest income partially funded our monthly $0.005 per share dividend, where we returned over $700,000 to shareholders during Q2. Our working capital position increased slightly during the quarter and sat at $61.8 million on June 30.
I'm excited to provide an update on the reorganization of the corporation, consisting of a tax-efficient return of cash to shareholders and the spin-off of the Papua New Guinean business. This separation will address the inefficiencies of managing 2 small businesses on opposite sides of the world with few synergies and will allow senior management to concentrate where they have had the most success in the past. The remaining publicly listed company with Canadian assets and tax pools will create an attractive vehicle for future growth and transactions. Our PNG business has, in our view, being consistently undervalued by the public market, and we believe that the current market conditions make it appropriate to take steps towards unlocking value.
The reorganization is expected to result in. The payout to shareholders of $38.2 million, equivalent to approximately $0.75 per fully diluted share by way of tax-efficient return of capital distribution. The sale of High Arctic International to existing shareholders who opt to participate through issuance by the corporation of a right for shareholders to purchase from the corporation 1 ordinary share of High Arctic Energy Services Cyprus Limited for each common share held in High Arctic. A shareholder election process where shareholders can elect to do nothing and receive their return of capital distribution as cash. Elect to exercise their purchase rights in full or in part. Elect to use some or all of the funds to be received pursuant to the return of capital toward the exercise of any purchase rights and receipt by the corporation of the proceeds of the sale of ordinary shares of High Arctic International.
Through this reorganization, the corporation aims to completely divest its ownership of High Arctic International, an unlisted company incorporated and domiciled in Cyprus, that owns the corporation's interest in its foreign subsidiaries. The corporation expects to announce the exercise price for the purchase of High Arctic International and complete the information memorandum to be circulated to shareholders in September. The potential special shareholder meeting is anticipated to be held in October and the process concluded prior to year-end. I believe our customers and employees in both PNG and Canada will appreciate and benefit from a locally managed business. I will now turn the conference over to Luis, our operator, who will open the line for questions.
[Operator Instructions]. We have a question from Josef Schachter.
Two questions. You've made the comment about the rights and all of that. If somebody owns 25,000 shares, they'll get 25,000 rights. If people don't take up the rights will be people who have the $0.75 can they buy other rights so that they can end up owning more of the International Cyprus company?
Yes. Josef, thanks for joining us again. Short answer to your question is the process we're working through is to enable shareholders to subscribe for additional shares in High Arctic International subject to their availability from other shareholders who may not exercise their rights and to be distributed on a pro rata basis.
So there -- there will be kind of an over-the-counter market for the rights. Is that what we're looking at? I mean people can decide based on that to take down more?
At this stage, and we haven't concluded the work on this. We've not been able to identify a pathway to create an over-the-counter tradable arrangement for the rights. So we are working with our advisers to try and work out what we can do to enable shareholders to potentially transfer those rights.
And my next question relates to the running of the remaining -- well, High Arctic as it is the public company that goes forward in 2024. Is there going to be a different management team? Or are you going to be involved? Are you going to be on the Board? How does this go? Like are you just going to be focused on PNG, the Cyprus company? I'm just trying to get an idea of how the go-forward management process is going to be.
Yes. No, good question, Josef, and I'm sure one that many on the call probably keen to understand the answer of. So the intentions at the moment which will crystallize and be distributed with the information memorandum would be to recruit dedicated management for the Canadian business. But to ensure that there is a transitionary arrangement in place that would enable me to retain the role through a transition, an orderly transition to ensure that incoming management have got the opportunity to come up to speed on the business, understand and be able to enunciate for shareholders what the vision for the Canadian business would be into the future. Fair to, I think, assume that subject to the shareholders actually approving and it's actually going through with the reorganization, I would be more likely to align my interest with the Papa New Guinean business in the long term.
Okay. I look forward to seeing the documents in September and I'll be at the meeting in October. Thanks very much.
Thanks, Josef. Look forward to seeing you there.
Next question is from [indiscernible]. Please go ahead.
Mike, my question is somewhat similar to Josef, but I'll be a little bit more direct here. At this point, do you anticipate having a backstop for the rights offering such that to ensure that the entire company is sold in High Arctic Canada is totally divested?
Yes. Really good question, Franco. And this is one of the key things that we're working on at the moment and is expected to be resolved in a couple of coming weeks. The intention is to fully divest and to fully divest, we will be wanting to sell all of the shares of High Arctic International. That backstop may include the corporation potentially -- sorry, the corporation, the High Arctic international company buying any shortfall of shares that are taken up or subscribed for and may need to find funding to do so.
So at the moment, the intention is to, yes, divest fully. Our hope is that existing shareholders will subscribe to all of the rights that are offered, so that it is divested to its existing shareholder base. And to the extent that we need a backstop, we're investigating options there that we'll deliver that in a fair manner for High Arctic shareholders.
Okay. And with regard to the International operations, and let's just sort of look forward and you're running full out with all your rigs and everything and generating a lot of cash flow. Do you anticipate the business model is to be that cash flow machine paying the dividends like you did a couple of years ago? They were pretty healthy dividend rates that you were paying when you were essentially, before you bought it, the Canadian operations that you had that you divested in European dividends, and is that how you would see the forward business of Papa New Guinea? Or is it going to be a consolidator in that region? Or is that -- am I too early to be even asking that question, I guess so?
Look, I think this is a really important question, and it will be addressed in the information memorandum, like what is the business strategy for these 2 separate entities. I think it would be fair to believe that if Papua New Guinea is able to return the rigs to service realizing operational levels and pricing levels equivalent to its past, say, around the 2013 through '17, '18 years. There were strong years. There was a lot of returns and distributed to shareholders that were driven by that business. I think it's reasonable to assume that is part of our business plan is to turn it into a dividend maker for its shareholders. But I also do believe that it's reasonable that if we were to realize this level of performance that we have may have opportunities to expand our footprint into other parts in the region, the Australasian region, the near Asia region.
And the corporation has, for many years, even including through the COVID period, looks for opportunities to expand its speciality in heli-portable drilling in remote locations into other territories. We haven't actually concluded and secured any work in other jurisdictions to date. So hence, we focus on Papua New Guinea at this point, and our focus on Papua New Guinea is to be as ready as we can to realize opportunities that we are hopeful for optimistic for with a lot of signals coming at the back end of this decade, maybe a lot busier than the front end. So I think it's reasonable for shareholders to expect that either or both of those scenarios could be real.
Right, right. Okay. And last thing I was just going to comment was just having gotten rights in the past from various other issuers there. I have seen where they'll trade on the TSX for 30 days or whatever their expiry is so that may be an option that related to Josef's question as opposed to having to go over the counter there. So I don't know how much it costs or whatever, but I have seen that before so.
Yes. And this is something we did investigate early. Unfortunately, the nature of the rules associated with the listing of rights in -- on the TSX would preclude the transaction that we've outlined in our press release.
Our next question is from Murray Weimer.
Mike, Murray here. Mike, walk me through this transaction. I know it hasn't been finalized yet. But right now, I own, as a shareholder, I own each of the pieces, 1 being $0.75 worth of cash, 1 being the operations in PNG and the other 1 being whatever is left in the public company. So post deal, you go through and I vote on a deal, do I get $0.75? A piece of PNG and a piece of the public company? Because that's what I own collectively today. So walk me through how you think that's going to come together.
Yes. Good question. Murray, So the way in which the transaction is structured is that you would receive the $0.75 of cash, a right to buy a share, an equivalent share in High Arctic's PNG business, the High Arctic, we're calling High Arctic International in our documents that were released yesterday. And you would retain your share that would hold the Canadian business. The sale of PNG would then return the proceeds back into the Canadian business, which you would still own your share of.
Okay. Okay. That was the part I was missing because right now, I own, let's say, I own 1 million shares as an example. Right now, I own 2% of the operations in PNG. So fast forward, if I don't exercise that right, someone else buys it, but that cash equivalent to the value of the PNG operation goes back into the Canadian operation, of which I still own my pro rata share.
That is 100% yes.
Okay. No, that works for me. That's really my only discussion. There was also a comment on the right being traded, virtually every transaction I've ever worked with, the exchange does allow that. So I'm not sure why they wouldn't allow you to list the rights in this case. But you mentioned that you had looked at that and for some reason, it does not apply.
Yes, it would be really very attractive to us and to our shareholders as evidenced by Franco's question, as well, and Josef, to be frank, we would love to be able to do that. As I understand it, as explained to me by the lawyers who are smart enough to properly understand it, because the right is to buy a private company, and it may have something to do with it being foreign as well, but I can't quite remember if that's right. It can't be listed.
I think it's because it's the private entity. That's kind of what it is.
Yes. And so -- and look, we're not -- we are exploring to see all in any available avenues that would enable our shareholders to transfer those, particularly our shareholders who may hold their holding of High Arctic in restricted funds.
Right. And I do think, Mike, because it's private, normally, these transactions are -- you have a right under another public entity and then the exchange can all lift it, but if it's in a private, that's why they can't. The other component of it, maybe we can create a gray market trade somehow on that. I mean, there's probably not a lot of shareholders in the company. So maybe we can put something together like that because it would be good for those that wanted to sell it to be able to sell it or those that wanted to buy a bigger piece to do that. So maybe get a lawyer or someone to look into that as well.
Yes, and I appreciate that, and we will look into it. Thanks, Murray.
[Operator Instructions] Our next question is from Josef Schachter.
Mike, sorry I just look at the balance sheet and had a few more questions. The $7 million of cash, net $45 million minus the $38 million, the accounts receivable of $18 million. Is that staying in the current High Arctic and that will be part of the go-forward strategy there? Or does part of that go into High Arctic International?
Yes. Good question. Thanks for that one, Josef. So our current cash at bank is distributed through the various bank accounts in several different jurisdictions. But the bulk -- the majority of it is here in Canada. The intention would be for the spinout that it would spin out the PNG business with normal levels of working capital. So there would be some cash retained in the PNG business retain its net receivables. But the bulk of the cash that's in there will be distributed to shareholders, and the corporation will be made liquid again through the sale proceeds.
Okay. And the property equipment, the $47 million, is the majority of that going into the PNG company?
Sorry, Josef, a little bit faint on that one. I didn't pick up the part of that question.
The property and equipment, $47.1 million. Most of that will go into the PNG company?
Yes. I think that on the PP&E in the financial statements, you get a breakdown there of the equipment as to what parts or segments of the corporation they sit within. I think we've got $41 million approximately of oilfield equipment, which the lion's share of that book value sits within the PNG business given the sale of a large part of our Canadian oilfield equipment. So I think it's fair to assume that the large majority of that is the PNG assets.
So if you take some working capital, the receivables, which are mostly PNG and that property, plant and equipment and then divide that by $48.7 million, you're looking at over $1 kind of number in PNG International. Am I -- is that correct?
Your math, Josef, but I don't have any reason to do it.
Our next question is from Patrick Tang.
I have 2 questions. Number one, could you talk about the tax implications for the median tax citizens holding this new corporation in Cyprus. I assume there will be a dividend withholding tax or anything else.
Thanks for the question. I'm going to start by saying, I am not a tax adviser and anything that I might say would be purely my speculation. There will be in our information memorandum guidance on potential taxing implications for Canadian residents and for residents of foreign jurisdictions. I would expect that dividends from a foreign entity for a Canadian resident would be subject to the tax rules of that foreign entity. Our High Arctic International is domiciled in Cyprus, and I get -- and that would be subject to tax rules for distributions of dividends from Cyprus. But I would also expect that Canadian residents may have a taxing event for the income in Canada as well.
Okay. Question number two. From what you alluded to earlier, the cash from the rights offering will be going to the Canadian's staff any plan now what would you're going to do with that cash, dividend or buying on the staff? Do you have any [ front ]?
Yes. So good question. And yes, it will be part of our information memorandum is what our business strategy for the Canadian entity will be following the separation of the 2. Our intention would be to build our business, grow our business in Canada. And to the point of where we're generating profits that can be washed through our substantive noncapital tax losses, to provide an efficient return then to the Canadian shareholders.
There are no further questions registered at this time. So I'll return the meeting back over to Mr. Maguire.
Thanks, Louis. I'd like to thank all the participants, who dialed into hear our second quarter 2023 update, for your time. I'd also like to thank the 5 questions -- the 5 questions -- 5 questionist -- 5 participants who raise questions. For your well thought through questions. I encourage those who haven't to please to take a look at our MD&A and financial statements. You'll find them both on the SEDAR plus, if you get really frustrated trying to navigate SEDAR plus, like I found I am, you can find them on our website to under our Investor tab.
Thank you your conference has now, I am sorry, go ahead.
Sorry, Louis, I was just going to invite you to finish the call.
Wonderful. Your conference has now ended. Please disconnect your lines at this time. We thank you for your participation.