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Good morning, ladies and gentlemen. Welcome to the High Arctic Quarterly Results Q4 Conference Call.I would now like to turn the meeting over to Cam Bailey. Please go ahead.
Thank you, and good morning, everyone. Welcome to High Arctic's Year-End 2020 Conference Call. Today, I'll be providing an update on the press release we issued yesterday on Thursday, March 12. And following my remarks, Chris Ames, our Interim Chief Financial Officer, will be discussing the financial performance for the period. After our formal comments, we'll open the call to answers and questions.I'm required to remind you that certain information presented today may include forward-looking statements, and such statements reflect High Arctic's current expectations, estimates, projections and assumptions. These forward-looking statements are not guaranteeing 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 look at our Annual Information Form under the heading Risk Factors.The most recent events related to the COVID-19 and OPEC providing excess crude supply sets an unpredictable and unstable environment for the energy businesses. It becomes increasingly difficult to predict our customers' response. However, a safe prediction will likely be further decline in industry activity.Just as we were beginning to see a return of optimism and industry activity improving as we came out of the Christmas break, producer behavior is now set up for an early and prolonged spring break-up, with many having an expectation of clear views after what the balance of the year might provide. Not only is it difficult to formulate an appropriate response at this time, the information regarding the impact of the events is changing moment by moment.In this respect, it's important to highlight that High Arctic's currently -- that currently -- High Arctic currently has a very strong balance sheet, at year-end, had $9.3 million of cash and working capital of $36 million. Subsequent to year-end, cash balance has increased to approximately $18 million and we've increased our working capital. Based on our current trading prices, our net working capital is greater than the -- than our current market capitalization.As we have mentioned in the past, managing in this difficult and uncertain environment requires vigilant attention to reducing costs and minimizing capital expenditures to preserve our strong balance sheet. We're reviewing all alternatives necessary to configure the business to provide the flexibility to operate in these unsettled times and take advantage of unforeseen opportunities that might emerge.In Papua New Guinea, negotiations between the state and the partners of PNG LNG continue and field activities are winding down until there's a resolution. The proposed expansion of the LNG facility is expected to double the LNG export capacity in PNG and the project partners indicated commencement of LNG shipments from expansion production in 2014. It's now becoming unlikely and time lines are being pushed back. Based on exploration license commitments, we anticipate that the expected ramp-up of drilling activity to be pushed out now into 2021.We're very thankful for the loyalty of our Canadian clients. I'm proud of the work that we have performed for them. Our core clients where we provide services under contract arrangements make up 86% of our revenues, and most of the work is focused on crude oil from heavy and thermal activities in Alberta and Saskatchewan. We believe that the large sunk costs, partly in heat from steaming, will provide ongoing sustained activity as shutdown and reactivation is just not feasible. Over the week, we experienced very little in suggested slowdown of our well servicing activity.In PNG, Rig 103 was active through the year with a leapfrog package and it will remain so until mid-2020. Beyond this time, we do not have a clear vision on activity levels and do not expect to have one until the P'nyang Gas Agreement is actually settled. 102, our hydraulic workover rig, has been prepared to work, commencing in the Q3 on workover and required abandonment work. It could remain active throughout the balance of the year in 2021. However, we remain cautious with our expectations.Rigs 115 and 116 are actively maintained. They can return to work immediately without any delays, be ready to do a possible drilling campaign as required to hold acreage with looming lease expiring -- expiries, needed to be held with drilling activity.We continue to maintain a strong balance sheet, offering considerable financial flexibility, allowing us to navigate these choppy waters and general uncertainty. We endeavor to emerge as an even stronger identity when the environment improves and be able to take advantage of the opportunities that might emerge. A key advantage is our strong relationship with customers we serve and the areas we have chosen to work, which provides us with steady activity, with 86% of our Canadian well service business tied to contract arrangements.I'll now turn the conference over to Chris, who will review our financial information.
Thanks, Cam. During Q4, High Arctic generated $42.8 million in revenues and $185.5 million year-to-date. Similar to the third quarter, we saw in Q4 continued benefit from the expansion of our Production Services segment, which helped offset lower activity in our PNG Drilling Services segment.Revenues in our Production Services division increased 14% to $24.3 million from $21.4 million in the fourth quarter of 2018. This increase was driven by the contribution from the Concord Well Servicing, well servicing and snubbing rigs and, in particular, the growth in U.S. operating hours. During Q4, Concord service rigs in Canada had 27,382 operating hours, slightly up from Q4 2018 and increased utilization of 53% compared to 51% in Q4 2018.In the U.S., service rig hours increased from 517 in Q4 of 2018 to 2,186, resulting in utilization of 119%, up over 100% from the same quarter last year. Our utilization rates were significantly above industry average of 33% for the quarter. Service rig rates per hour of $607 were steady compared to Q3 of 2019 but were down from $616 in Q4 2018. Snubbing operating hours increased by 30% and 33% in each of Canada and the U.S. over the same quarter last year.On a year-to-date basis, Production Services revenues have increased by 9% although our operating margins as a percent of revenue decreased from 14% to 7% due to lower field operating margins in the snubbing business and costs associated with growing the U.S. business during 2019. From a fleet number perspective, at December 31, 2019, High Arctic had 53 marketed service rigs. This is down from 57 rigs at December 31, 2018, and 23 marketed snubbing rigs in our fleet, which was up from 17 at December 31, 2018.Drilling Services revenues decreased by 35% in Q4 of 2019 compared to Q4 of 2018 primarily due to the movement of Rig 104 to Moro Base to be stacked. Similarly, Drilling Services on a year-to-date basis are down 23% due in part to the stacking of Rig 104 but also due to the end of the take-or-pay contract relating to Rig 116, which ended in Q4 2018.Operating margins are lower both in Q4 2019 at 21% compared to Q4 2018 at 27%, and year-to-date 2019 operating margins at 21% versus 2018's operating margins of 40%.Revenue for the Ancillary Services segment declined slightly to $5.6 million in the quarter from $6.4 million in the fourth quarter of 2018. Although the Canadian rental operations and nitrogen services grew, this was offset with decreases in PNG rentals due to the end of the take-or-pay matting rental contract at the end of 2018. These events impacted the year-to-date decrease in -- of revenues by 15% year-over-year. As the lost revenues attracted higher margins, the operating margins associated with Ancillary Services decreased by 34% and 30% for the quarter and year-to-date compared to Q4 2018 and year-to-date 2018.Overall, High Arctic generated $3.6 million in adjusted EBITDA in the quarter for a total of $19.4 million year-to-date. This compares to $6.6 million and $51.6 million in adjusted EBITDA for the comparable periods in 2018.General and administrative costs decreased to $3.7 million in the quarter versus $4.4 million in the fourth quarter of 2018 and decreased from $17 million year-to-date 2018 to $15.8 million at the end of December 2019. This decrease has been through cost control initiatives.The depreciation increased by $1.1 million in the fourth quarter and $2.6 million year-to-date compared to respective 2018 periods as a result of both the adoption of the new IFRS 16 lease standard with the resulting rate of use asset depreciation as well as the additional depreciation associated with acquisitions during the year.Other income of $1.1 million related to the release of a contingent payment, foreign exchange gains increased by $1.1 million. Gains realized on the sale of property increased by $2.7 million and income tax decreased by $8.5 million mainly due to the reduction in current taxes.Cumulatively, we ended the year with a loss per share of $0.18 compared to earnings per share of $0.22, with the fourth quarter accounting for a loss of $0.06 per share.High Arctic returned $15 million to shareholders through dividends paid of $9.9 million and common shares repurchased amounting to $5.1 million. We made capital investments of $4.9 million in Q4 and $14.8 million year-to-date, up from $3.7 million and $9.8 million in the respective 2018 periods.We continue to maintain a strong balance sheet and exited the quarter with $9.3 million in cash, no debt and working capital of $35.8 million. We have a good working relationship with our bank and have an updated facility agreement with them where we are in compliance with all covenants at December 31.With that, let me turn things back over to Cam.
Thanks, Chris. I can't stress enough that our strong balance sheet is going to help us navigate these difficult times and we endeavor to configure our business to ensure that we will be a stronger entity when things become -- when things improve. And again, I can't stress enough that our key advantage is our strong relationships with our customers in the areas that we work.With that, I'll now turn the conference over to the operator, who will open the line for questions.
[Operator Instructions] The first question is from Tim Monachello.
First question here, just wanted to clarify the outlook for Rig 103. It sounds like mid-2020, it's going to work through. Does that mean you expect it to work basically all the way through the second quarter?
Tim, yes, we do. We expect it to work through the end of the second quarter. And as I said, we don't have visibility beyond that time of the certainty of it working. So there's both 103 and the leap frog package that is associated with 103 that, without having certainty, it will -- we'll begin to demobilize the rig.
Okay. So then if you were to look at those operations and say they go to 0 work for -- I don't know, after that for however long it takes for a correction in commodity prices or a positive development on the PNG LNG front and you were to say that the Canadian activity went on your contract base, so 86% of what your revenues are there, would the company still be able to generate positive free cash flow or breakeven free cash flow? Or would there be a cash burn?
Tim, the activity in Papua New Guinea is going to be underpinned at that point by activities of Rig 102, our hydraulic workover rig that is planned to do abandonments and workovers. The work around that is somewhat uncertain at this point, but we have a reasonable expectation that it will commence in the beginning of the third quarter. And then secondly, we do have a significant amount of rentals that will be maintained throughout the year. And as a consequence, we see Papua New Guinea actually contributing positive cash flow for the year. But we're continuing to review circumstances literally day-by-day to make those assessments.
Okay. Are the Canadian-U.S. operations free cash positive at the contract base, though, on their own?
They have. And the caveat to that is our CapEx. And the CapEx that you might have -- that we experienced last year was higher, but our CapEx is being configured to reflect whatever decrease there may -- that we could potentially incur in 2020 to ensure that we are cash flow positive.
How much you think you can take off the CapEx on a dollar basis?
Well, we started the year budgeting. We finished the year last year with $14 million of CapEx. We're going to expect that CapEx will be $8 million prior to events that started the week. And we think that there is still a significant shakeout of reduction of that. Much of that CapEx has actually been incurred, and it was incurred in preparation of -- in getting 102 prepared to go to work in the third quarter. So it's essentially behind us for the year. A great portion of it is behind.
So do you think -- what do you think the actual cash burn over that $8 million would be in the 2020 time period?
It really depends. It's really hard to determine at this point in time depending on -- we'll flex it with rig utilization.
Okay. So I'm getting confused because, Cam, you're saying that some of that was spent in the third quarter already?
No. We said spent in the first quarter. Some of our cash was spent in the first quarter.
Sorry. I missed that. Okay. Got you. Okay. That makes sense then. And then -- so what's, I guess, the threshold for assessing the dividend here. I think it's yielding around 30% of the current market price. And obviously, you guys have throttled back a little bit on the repurchase program. So I'm just curious to understand what that capital allocation strategy is.
We're -- it is something that we're reviewing continually. And so we haven't made any decisions at this point what our capital budgeting plans are going to be going forward.
Okay. Would you guys -- what comes first? Would you guys look to increase leverage a little bit at the expense and keep the dividend? Or would you guys -- is the balance sheet going to be a first priority and not going to let that slip at all?
So the answer to the question just is not determined right now. And as we see things mature and provide a bit more -- get some more clarity of what's -- of the outlook is, we're really deferring that decision.
The following question is from [ Brett Watson ].
Just a bit of a follow-up to the last one. I'm just very curious about the buyback program and what the philosophy on that is going forward. It feels like under the current normal course issuer, we could buy back 10% of the company for not a lot of money. And I'm just curious why the buybacks have dried up.
Yes. The -- we -- with the downturns that we are seeing into the third -- second and third quarter, we suspended the NCIB activities. However, we did renew the NCIB and it's a tool that is remaining in our toolbox. And the -- as I mentioned in the previous question, our capital budgeting with respect to the potential of dividends, CapEx and share repurchases are all under consideration at this point.
[Operator Instructions] The following question is from [ Matthew Wicks ].
My question is just kind of focusing a little bit on operating margins in Production Services. You said part of the reason it was a little bit weaker in 2019 was due to kind of expanding moving units down to the U.S. As we go forward, is there any line of sight for margins in this segment to improve a little bit?
So yes, [ Matthew ], in looking now, we're really analyzing all our cost base with respect to even support costs across the board with Production Services. Cam might be able to give some more flavor with regards to some of our expansion in the U.S., but what we're really focusing on is reducing those support costs and really doing a laser focus on some of our operations of expansion, say, in the United States in the North Dakota area, so a little bit more of a honed approach.
So the -- just to add on that, the -- and I think you touched on some of the issues, but the expansion in the States, the mobilization of equipment and preparation of equipment was all expensed, and it was not that -- there was no capitalized component to that. It was all expense. And that took a hit to our margins. We have only mobilized one additional rig since that time, which took place in the second quarter. So we now have 3 rigs -- 3 service rigs that are operating in the U.S. And we believe much of those costs are behind us and that our margins will start to improve.As Chris mentioned, we're going through a complete reconfiguration of our cost structures so that we can maximize our potential returns and particularly with an anticipation that we will suffer a slowdown, we just don't know how much that may be.
Okay. And just building on that a little bit with what we're seeing in -- the pressure that's being put on U.S. shale producers, do you think there's a possibility that the sort of mobilization plan and maybe what you were planning, say, 2 weeks ago has changed and that mobilization of equipment to the U.S. might slow at this point?
Not so much that our mobilization. We're going to be committed to having 3 rigs there. Two of the rigs are actually focused on production activities. The third rig is the one that's configured for doing completion work. However, we have the flexibility to turn that into Production Services work. The -- and that's what is anticipated with that rig. And our equipment is really being focused in one region, which is the Williston Basin. If you look at the aging wells in the Williston Basin and you use a crude rule of thumb of approximately 5 years for intervention, you start to map out the growth of wells that are required to have workover work to maintain production. So we see that as being -- continuing as a growth area, notwithstanding we may see a period of hiatus of declined activity. So we're trying to configure our business around not completion work but the production side of the equation. That doesn't necessarily hold for our snubbing work because much of our snubbing is on the completion side and that clearly will suffer.
[Operator Instructions] There are no further questions registered at this time. I'll turn the meeting back over to Mr. Bailey.
Okay. Gentlemen, ladies, thank you for your attendance and your interest in High Arctic. And let's -- I wish everybody the best of health, and we all can suffer through these difficult times together. Thank you.
Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.