High Arctic Energy Services Inc. (TSX:HWO) ("High Arctic" or the "Corporation") is pleased to announce its 2016 fourth quarter and year end results.
Thomas Alford, High Arctic's President and CEO stated: "The fourth quarter saw continued positive performance from our drilling operations in Papua New Guinea, as the integration of our recently acquired Canadian production services platform continued. The financial performance of the Corporation in the quarter and over the full year, combined with our strong balance sheet provides us with the ability to pursue additional growth opportunities as we continue to grow High Arctic's business operations."
2016 marked a year of transition for High Arctic as the Corporation utilized the strength of its PNG business to expand the Corporation's business operations during an extended period of weakness in the global oilfield services sector and was able to add additional geographic and product line diversification through the completion of the acquisition of Tervita's Production Services division (the "Tervita Acquisition") in the third quarter of 2016.
Fourth Quarter 2016:
Consistent with the reduced Adjusted EBITDA during the quarter, as well as increased depreciation expense associated with capital investments made in 2015 on the Corporation's drilling rigs as well as assets acquired in the Tervita Acquisition, Adjusted net earnings declined to $8.4 million ($0.15 per share (basic)) in the quarter versus $9.7 million ($0.18 per share (basic)) in the fourth quarter of 2015. On a net earnings basis, the Corporation generated $7.5 million in net earnings in the quarter versus $9.7 million in the fourth quarter of 2015. During the quarter, the Corporation incurred an additional $0.9 million in onetime costs related to the Tervita Acquisition, resulting in net earnings of $7.5 million ($0.14 per share (basic)) versus $9.7 million ($0.18 per share (basic)) generated in the comparative quarter.
Full Year 2016:
Consistent with the year to date increase in Adjusted EBITDA, Adjusted net earnings increased by 9% to $34.7 million ($0.65 per share (basic)) from $31.9 million ($0.58 per share (basic)) for the year ended 2015. Full year net earnings benefited from the recognition of a gain of $12.7 million related to the Tervita Acquisition. This gain represents the difference in appraised value of the net assets acquired in the transaction versus the $42.8 million paid to acquire them. This gain as well as transaction costs associated with the acquisition has been excluded from the Corporation's Adjusted net earnings as these costs are not representative of the earnings associated with the Corporation's ongoing business operations.
Funds provided from operations of $59.8 million during the year (2015 - $52.8 million) combined with $9.0 million generated from the sale of short term investments offset $52.4 million invested in capital assets and the Tervita Acquisition as well as $17.0 million distributed to investors, allowing the Corporation to exit 2016 with no net debt. Through the strength of its balance sheet, High Arctic continues to seek growth opportunities in order to further diversify its business operations and position itself for a future increase in industry activity levels.
Headquartered in Calgary, Alberta, Canada, High Arctic provides oilfield services to exploration and production companies operating in Canada and Papua New Guinea ("PNG"). High Arctic is a publicly traded company listed on the Toronto Stock Exchange under the symbol "HWO". As a result of the expansion of the Corporation's service offering following the Tervita Acquisition, High Arctic has organized its business into three business segments: Contract Drilling Services; Production Services; and Ancillary Services.
High Arctic continues to be in the fortunate position of having the benefit of strong cash flows both internationally and domestically, a strong balance sheet and an ongoing desire to expand the Corporation's asset base for the benefit of the Corporation's shareholders.
With the addition of the Concord Well Servicing business operations acquired through the Tervita Acquisition, High Arctic has been able to add additional geographic and product line diversification while substantially growing the Corporation's Production Services segment in Canada. The impact of this diversification is evident in the fourth quarter results which saw Canadian revenue contribution increase to 33% of the consolidated revenue in the quarter from 14% in fiscal 2015. Management believes this increased exposure to the Canadian market provides High Arctic with further revenue and profit growth opportunities as activity levels in the WCSB increase from the recent lows.
Early signs of a recovering market in the WCSB have begun to take hold with a 46% increase in industry drilling activity in the first two months of 2017 versus the comparative period in 2016 (source: CAODC). An increase in industry drilling activity is typically a precursor for increased activity for other services in the oilfield services sector in the WCSB, which is expected to benefit the Corporation's Production Services segment. This increase in industry activity, combined with the expansion of the Concord Well Servicing operations into Grande Prairie has positioned the Concord Well Servicing rigs to achieve a 20% to 30% growth in operating hours in the first quarter of 2017 over the fourth quarter of 2016.
The increase in industry activity is resulting in crew shortages which is beginning to impact the ability for oilfield service companies to meet increasing customer demand. In addition, the prolonged downturn in industry activity has limited the investment in maintenance capital in the industry which is required to maintain equipment. As a result, this may limit equipment availability in the industry. The investment of this previously deferred maintenance capital may be required in order to reactivate idle equipment which may delay the increase in industry capacity as oilfield service companies remain financially constrained following the extended industry downturn.
The above factors are compounding to limit overall supply capacity in the industry which is beginning to result in increased pricing for oilfield services. High Arctic is beginning to see opportunities for improved pricing, however, existing contract pricing arrangements may limit the Corporation's ability to immediately respond. If the current increase in industry activity levels are sustained, management believes meaningful pricing increases will begin to occur in the second half of 2017 and into 2018.
High Arctic continues to progress on the integration of the Tervita Acquisition with focus transitioning to the implementation of long-term operational and support synergies. This process is anticipated to result in operational efficiencies and reduced operating costs.
In PNG, Rigs 115 and 104 remain active on their drilling assignments on Antelope-7 and Muruk-1, respectively.
Rig 115 is expected to complete drilling activity by the end of Q1 and commence demobilisation to Port Moresby where the Corporation anticipates, in the absence of advice from its customer, it will be stacked and remain on standby for the remaining duration of the primary contract term. Rig 103 completed demobilization from its drilling assignment in the Western Province in January and is currently stacked in Kiunga. Rig 116 remains on standby in Port Moresby.
The Corporation has received interim extensions on its existing operating contracts for Rigs 103 and 104 until July 31, 2017. High Arctic continues to progress discussions with its customer over long-term extensions for the contracts for Rigs 103 and 104. Rigs 115 and 116 continue to operate under their existing take-or-pay contracts. With the recent closing of the ExxonMobil acquisition of InterOil, the Corporation anticipates discussions to commence with ExxonMobil regarding future drilling programs for Rigs 115 and 116.
PNG's vast reserves of natural gas continue to be some of the most competitive globally, and High Arctic believes that ExxonMobil's expansion in PNG supports the continued long-term development of PNG's natural gas resources. However, the current low commodity price environment as well as the resulting economic challenges in PNG may curtail industry activity levels in PNG over the short term. Similar to the global oilfield service industry, these lower activity levels in PNG may result in lower pricing for contract renewals.
While PNG continues to be a strong contributor to High Arctic's financial performance, management continues to focus on its strategy to balance High Arctic's global business operations. As part of this strategy, management continues to seek opportunities to position the Corporation to benefit from an anticipated recovery in the North American oilfield services sector. Additional markets may also be considered in order to leverage off High Arctic's existing international presence and redeploy underutilized assets into new markets.
About High Arctic
High Arctic is a publicly traded company listed on the Toronto Stock Exchange under the symbol "HWO". The Corporation's principal focus is to provide drilling and specialized well completion services, equipment rentals and other services to the oil and gas industry.
High Arctic's largest operation is in Papua New Guinea where it provides drilling and specialized well completion services and supplies rig matting, camps and drilling support equipment on a rental basis. The Canadian operation provides well servicing, snubbing services, nitrogen supplies and equipment on a rental basis to a large number of oil and natural gas exploration and production companies operating in Western Canada.
SOURCE: High Arctic Energy Services Inc.
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