Release Date: August 15, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Successful reorganization and spin-out of PNG business into a new entity, SpinCo, trading on the TSX Venture Exchange.
- Strong performance from the Canadian rental business, particularly after the acquisition of Delta Rental Services, leading to increased revenues and positive cash flow.
- High Arctic Energy Services Inc (HGHAF, Financial) has a solid financial position with positive working capital and minimal debt.
- Optimism for future drilling activities in PNG, driven by the anticipated Papua LNG project.
- The company has a strategic vision for growth through selective and opportunistic investments, leveraging existing assets and tax loss carry forwards.
Negative Points
- Disappointment over the delay in the final investment decision for the Papua LNG project, now expected in late 2025 or early 2026.
- Softening in the deployment of rental assets due to the cessation of drilling operations in PNG.
- Increased G&A costs related to the reorganization, impacting overall financial performance.
- Low activity levels in the snubbing services segment due to seasonal factors and extreme weather events in Alaska.
- Significant costs incurred by Team Snubbing International, leading to a net after-tax loss for the quarter.
Q & A Highlights
Q: Mike, one question for each side of the two businesses. You mentioned that the Board is in the process of putting together the management team, CEO for the Canadian operations and then coming up with the go-forward strategy. Is that something that we could look forward to hearing imminently in the next few months? Or is this something that could drag until early next year?
A: Thanks, Joseph, and good afternoon to you, too. Yes, the Board searches for a permanent CEO to replace myself and for the Canadian business is something that's ongoing. We have several candidates and have spoken with some who have interesting visions for the corporation. The Board is not in a hurry and will work methodically to determine an appropriate person to lead the business into its long-term future and realize its vision.
Q: Next question on SpinCo. With that significant amount of cash and things being, as you said, a pretty slow period in PNG, do you look at maybe doing acquisitions in the area of other countries in Southeast Asia or Southern Asia, where you could maybe mobilize those cash flows, those financial resources and build the company up quicker? Is that something that you're contemplating?
A: Short answer to that would be yes. We need to maintain a reasonable cash balance in Papua New Guinea for the recommencement of operations and the restart of drilling. We are also looking to seek out opportunities to expand and enrich our business in that region, which could include M&A activity in Papua New Guinea or in nearby countries.
Q: Can you provide more details on the financial performance of the Delta rentals business?
A: The Delta rentals business, which is centered on pressure control equipment, has increased our revenues approximately 3x for both the three and six-month periods ended June 30, 2024, versus the comparable periods in 2023. High Arctic revenues were $2.5 million in Q2 2024 and $5.5 million for the first half of this year, with strong operating margin performance consistently in the high 40% range.
Q: What are the financial implications of the reorganization on High Arctic's balance sheet?
A: For the remaining Canadian business, we have positive working capital of approximately $5 million, inclusive of $4 million cash on hand. The only debt held is $3.4 million in mortgage debt, which is well secured with our Whitecourt and Claremont properties. SpinCo's standalone PNG business starts with no long-term debt and positive working capital of approximately USD19 million, inclusive of USD13 million in cash.
Q: How did the reorganization impact the financial statements and MD&A?
A: With the near certainty of completing the reorganization achieved in the past quarter, our consolidated financial statements and MD&A classify the PNG business as assets and liabilities held for distribution. This change makes our consolidated statements and MD&A considerably different from the past, showing only the details of our continuing operations, which is our Canadian rentals business plus equity accounting for our investment in team snubbing.
Q: What are the future plans for the Canadian rentals business?
A: The Canadian rentals business is managed by a capable and experienced team. Our vision includes focusing on Canadian business activity, growing the core business through selective and opportunistic investments, leveraging existing assets, and building up the business with accretive acquisitions. We aim to optimize our available tax loss carry forwards, which are in the vicinity of CAD130 million, and consider transactions that would create value for shareholders.
Q: Can you elaborate on the performance of Team Snubbing Services?
A: High Arctic has a 42% equity stake in Team Snubbing Services. The second quarter is traditionally a low activity period for snubbing in Canada due to seasonal breakup and road bans. This year has been no different, with activity levels down from the record first quarter. Team also completed the reorganization of its international partnership, resulting in a more efficient overall corporate and management structure.
Q: What are the expectations for future drilling in PNG for SpinCo?
A: We are optimistic for future drilling in PNG for SpinCo, based on the expectation that the advancement of the Papua LNG project will stimulate exploration and appraisal drilling. However, we are disappointed that the final investment decision on the Papua LNG project has been pushed out into 2025 or potentially as late as the first quarter of 2026.
Q: How did the cessation of drilling operations in PNG impact the financial results?
A: Revenue from the PNG business was down in the quarter, from $16.6 million in Q2 of last year to $10.4 million this year. This decrease is due to the cessation of drilling operations for Rig one of three and the accompanying rental revenue. Additionally, G&A costs from continued operations totaled $1.8 million in the quarter, higher than the $1.3 million incurred in Q2 2023, due to professional and other fees related to the reorganization.
Q: What are the capital expenditure plans for 2024?
A: Capex spend in Q2 2024 totaled $450,000, focused on growth and capital upgrades to our rental fleet and building out our financial and operational systems. We expect to continue with modest capital spending in 2024, focusing on maintaining and growing our rental fleet.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
