Good morning, ladies and gentlemen. Welcome to the HAES 2022 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, Patrick, and good morning, everybody. As you can tell, I might have a little bit of a raspy throat this morning, so you'll probably hear more from Lance than me. Let me begin by saying 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 11. Following my remarks, I'll hand the call over to Chief Financial Officer Lance Mierendorf. Lance will be discussing our financial performances for the second quarter of 2022. After our formal comments, we'll open the call to answer any questions 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 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 2021 annual information form available on our website or on SEDAR. You should look under the heading Risk Factors. After reflection on High Arctic's core strength and our future opportunities, we made the strategic decision to divest certain assets in Canada and focus on resurgent opportunities associated with our existing business in Papua New Guinea. Papua New Guinea is a market where we have a dominant position, a history of high profit margins and free cash flow generation, and where the corporation's future fortunes are inextricably tied.
The sale of our well servicing assets to Precision Drilling Corporation included High Arctic's Canadian well servicing work over fleet, marketed under the Concord Well Servicing brand and comprising 51 marketable rigs and 29 inactive and out-of-service rigs, as well as oilfield rental equipment associated with well servicing, including 17 hydraulic catwalks we purchased in 2021. The transaction saw the transfer of High Arctic's well servicing employees and the large majority of support personnel to Precision. The consideration included CAD 10.2 million paid at closing, and the remaining CAD 28 million dollar payable will be received in January 2023. We expect to realize approximately CAD 3 million in closing working capital collection over the next months. Title to four of our Alberta real estate locations will transfer to Precision on final payment. With High Arctic retaining owned Alberta properties in Whitecourt and Clairmont.
Precision assumes the lease obligation for High Arctic's properties in Cold Lake and Acheson. The snubbing sale to Team Snubbing Services Inc., a private snubbing specialist headquartered in Red Deer, included High Arctic's Canadian snubbing fleet, comprising seven marketable packages and 32 inactive and out-of-service snubbing units under balance hoists and associated support equipment. High Arctic will receive the remainder of the consideration in the form of 420,000 common voting shares in Team, representing 42% of the post-closing total outstanding shares. High Arctic has appointed two directors to the five-person board of Team. As part of the consideration, High Arctic will receive a CAD 3.4 million convertible promissory note. Additionally, an affiliate of Team will enter into a five-year lease in High Arctic's owned property in Clairmont, Alberta. Currently, on current market terms.
The transaction will result in the transfer of High Arctic's Canadian snubbing employees to Team. Post-closing, High Arctic retains its ancillary services segment in Canada, comprised of the nitrogen pumping business and the smaller rentals business focused on pressure control while retaining the HAES Rental Services branding that we have developed over many years. High Arctic also retains its snubbing assets in Colorado, USA. These ancillary businesses will be supported from our Whitecourt, Alberta facility, and the corporation will retain a small corporate headquarters in Calgary, Canada.
The two transactions represent the effective divestment of High Arctic's Canadian production services and allows our management team to streamline and develop a longer-term strategy for the remaining Canadian businesses and focus our attention on the growth opportunities in Papua New Guinea, where we are very excited about the opportunities for our drilling services segment as the next round of gas development projects materialize. We recently announced that we had agreed to terms with our principal customer in Papua New Guinea for a three-year contract renewal covering the customer-owned heli-portable drilling rig 103 and High Arctic's suite of services related to the supply of personnel, camp accommodation, and rental equipment to support drilling operations.
This contract was effective on August 1, 2022, and includes options for the customer to extend the contract on the same terms and conditions beyond July 31, 2025. As a reminder, late last year, High Arctic's principal PNG customer merged with one of the largest energy exploration and production companies operating in the Asia Pacific region to create a regional champion of quality, size, and scale. Both companies have an extensive history in Papua New Guinea. The resulting company has large stakes in the two LNG projects, as well as operatorship of all producing Papua New Guinea oil fields and several gas fields supplying the existing PNG LNG export facility. The contract announcement followed a lot of recent positive developments in Papua New Guinea that highlight the tremendous expansion potential for LNG production.
On July twentieth this year, TotalEnergies, the operator of the Papua LNG joint venture, announced the commencement of upstream FEED studies in Papua New Guinea, targeting a final investment decision on the two-train Papua LNG project by the end of next year, 2023, and commencement of production in 2027. Earlier this year, ExxonMobil, operator of the PNG LNG joint venture, announced the signing of a gas agreement for the development of the P'nyang gas field in the Western Province of Papua New Guinea, which has long been anticipated to result in the addition of another train to the world-class PNG LNG export facility. We are very excited about the potential expansion of our business activities there on the back of the forward movement of these projects.
I'd now like to pass the call over to Lance and grab a drink of water while he discusses the key financial highlights from the quarter in more detail.
Thanks, Mike. Good morning, and thanks for joining us on the call today, everyone. As Mike explained, we closed the sale of our Canadian well servicing and snubbing businesses a few short weeks ago. The particulars of these two transactions are reflected in our Q2 results through the reclassification of assets and liabilities related to the production services segment to held for sale. We also recorded non-cash accounting impairments to reflect the estimated fair value of these transactions. The sale of the well servicing business for CAD 38.2 million in cash saw the company receive CAD 10 million in July, and we will see the remaining CAD 28 million in early 2023. As Mike mentioned, this transaction involved the disposal of Concord Well Servicing as well as vehicles and certain company-owned land and buildings supporting this line of business.
The excess of the net book value of these assets over the fair value of the consideration received resulted in recording a non-cash impairment in Q2 of CAD 8.2 million. Additionally, the sale of the snubbing business saw High Arctic receive non-cash consideration of CAD 11.1 million in the form of a 42% ownership in the acquiring company, and as Mike mentioned, a long-term receivable of CAD 3.4 million. The fair value of this transaction was generally in line with the carrying value, resulting in a small CAD 400 thousand non-cash impairment. With a significant reduction in our presence in Canada, the company's ability to access a large accumulated pool of Canadian loss carryforwards in the near future is reduced. Therefore, the related CAD 7.9 million estimated deferred tax asset was written down to nil in the quarter.
Excluding the non-cash impairment and the deferred tax asset write-down, the company generated a net loss of CAD 3.6 million or eight cents a share during the quarter, which is in line with Q2 2021. On a consolidated basis, the company continued to see improved margins, achieving 23% during the quarter, compared to 20% during the second quarter of 2021. During the first half of the year, the company generated CAD 6.6 million in adjusted EBITDA, triple the amount that was generated in the first half of 2021. In addition, during the same period, High Arctic generated cash flows from operations of CAD 6.4 million.
After experiencing a very challenging 2021 in our drilling services segment, which is focused in Papua New Guinea, we're seeing increased activity in the form of providing drilling personnel to assist with the commencement of additional abandonment well in the country, utilizing a third-party rig, preparing Rig 103 to return to service later in 2022 and supporting well servicing activity for our customers. This has led to improved margins for the segment and achieving 24% in Q2 on revenues of CAD 6.1 million. Ancillary services in PNG and Canada continue to be our highest operating margin segments, where we achieved 55% in Q2 and 59% on a year-to-date basis on revenues of CAD 4.2 million and CAD 9 million respectively.
Prior to the sale of our production services segment, we were seeing improved margins, but this segment lagged behind our other segments, generating operating margins of 13.3% during the quarter and 7.7% on a year-to-date basis. With the improved business conditions and growth in our Papua New Guinea activities in 2022, we were able to reinstate in Q2 a regular monthly dividend of a half cent per share. The company continues to be prudent with its capital management and maintain a strong balance sheet. During the quarter, we grew cash on hand by CAD 3.6 million and ended the quarter with CAD 15.1 million on hand and a working capital ratio of 2.6: 1.
While the company no longer has access to a revolving credit facility, which was undrawn at June 30, 2022, monetization of our Canadian well servicing and production services segment for cash consideration provides liquidity while the company evaluates strategic growth opportunities in Papua New Guinea, Canada, and elsewhere. With that, I'll return it back over to Mike.
Thank you, Lance. The net proceeds of the well servicing transaction provides additional liquidity to the corporation. The timing of the second well servicing transaction payment provides an opportunity for us, management team at High Arctic, to evaluate the need and sources for both working and growth capital in Papua New Guinea. High Arctic has a history of returning surplus cash to shareholders, and we will continue to consider capacity to distribute funds back to shareholders. I'd now like to turn the conference back over to the operator, Patrick, who will open the line for questions.
Thank you. We'll now take questions from the telephone lines. If you have a question and you're using a speakerphone, please pick up your handset before making your selection. If you have a question, please press star one on your device's keypad. When prompted by the system, please clearly state your name to register your question. You may cancel your question at any time by pressing star two. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. We'll take the first question. Please go ahead.
Josef Schachter. Good morning, Mike and Lance. First thing, Mike, I wish you a speedy recovery and that you're feeling better pretty soon. Going first to Papua New Guinea, has any other contracts been let, and has any other equipment been mobilized outside of 103, either in- country or being brought into the country? Is yours really the first of the start of this program?
Yeah. Thanks, Josef, and thanks for the kind remarks. Yes, reflecting on Papua New Guinea, you recall earlier in the year, we had rig 115 doing some work. At the moment, we have that same suite of personnel performing services on a well site with one of our rigs conducting some abandonment activities. We also have the entire personnel suite associated with rig 103, having been working for our primary customer in non-rig activities for the last couple of months, and they now turn their attention to preparing rig 103 to go out to work and recommence the drilling operations that were suspended at short notice back in March 2020.
Now, apart from Rig 103 preparing to go to work at the moment, there is no other rig contracts currently in place in Papua New Guinea, and there has been no further importation or export of any drilling assets.
When things pick up 104, if there's any upgrade work, that'll be paid for by the customer. If you have to do things for 115 and 116 for contracting, is there much that you need to do to upgrade them, pumps, electrical equipment, any other things, drill pipe? Is there a big number potentially of, for instance, that you'll have to spend to get those ready for work in 2023 or 2024?
Yeah. Fabulous question. The answer is there will be a small amount of capital required to put those rigs back to work and to make sure that their equipment is both reliable and current in its technology. You probably remember that back when we imported them they were a state-of-the-art drilling technology for their time, as well as being able to be disassembled and fly under light helicopters. We will have the firm belief that those rigs are ideally designed and capable of drilling any of the exploration wells currently being contemplated through the exploration and production retention licenses that have been granted to Papua New Guinea.
That said, we do need to spend a little bit of capital in the order of between $2 million-$4 million per rig for the purchase of a drill string for the purchase of fluid-contacting components and things that would ensure the reliable service of our rigs as they do go back out to the market.
Okay. One more on PNG. When do you think the comfort will be there for the companies to start activating rigs and putting out tenders for contracting? Is this something mid-2023, second half of 2023? When do you think you'll start seeing that activity pick up for you and, you know, in terms of a competitive bid process?
Yeah. You know, we believe that that's already started. This commitment to get Rig 103 up and running is the first of what we expect will become over the next 18 months, the commencement of several drilling operations. We anticipate based on the timelines and the outward supply to the majors who control the two primary joint ventures and other smaller companies that are contemplating development projects in Papua New Guinea. We expect that timeline to be over the next 12 to 18 months.
Okay. One for Canada. How many units do you have in your nitrogen pumping business, and how old is the equipment? Is this something that others would wanna buy, or is this something that you know, you may have to be, you know, if you wanna sell it, sold overseas?
Yeah. We believe that there's a strong market for nitrogen pumping services here in Canada. The amount of activity increase and plant turnaround requirements, well kicks to bring online and upstream, you know, an upstream pipeline purging activities. We have a strong outlook for services within the nitrogen pumping business. That said, it has for so many years been a small part of our Canadian service offering. We've got five pumping units that are current and active at the moment. We do have a suite of inactive equipment that is sitting in good condition against the fence at the moment, so we have capacity to expand that. All of our pumping equipment has maintained its certification, and we would consider it being current as far as technology for those services.
We have one high volume pumping unit and four low volume pumping units that we're currently operating and marketing, but we have more of both classes sitting against the fence as well.
Super. That does it for me. Thank you very much, and again, wish you a speedy recovery.
Yeah. Thanks, Josef. Appreciate the call and comments.
Thank you. As a reminder, you may press star one if you have a question. We'll take the next question. Please go ahead.
Steve Lambert, Individual Investor. Hi, Mike, hi Lance. Thanks for the update. Most of my questions were answered by, as Josef asked them just before. Just, would you guys be able to talk about, I saw on the, you know, on the balance sheet you do have, sort of the, you know, the changes due to the transaction, but there isn't anything on the, on the income statement side of things. Are you able to talk about pro forma results for the first quarter and first half, with respect to the remaining properties of the company?
The transaction closed in July, so we're gonna be recording in our income statement the activities up to the end of July. As it being an asset sale, it's going to be just an elimination of the assets off the balance sheet. We're not gonna have a pro forma, it's not a discontinued operation.
Steve, may be recalling that we wrote those assets up on purchase back in 2016. We wrote them up by CAD 12.7 million, I think it was at the time. You know, with this impairment, there has to be a credit against the debit and a debit against the credit. Maybe that would be very interesting, Steve.
No, no. I appreciate that. No, I understand that. It was more just taking a look at what the operations would have been like had the only continuing assets been involved in the company during the first half.
Yeah. That would be what would be required for discontinued operations.
That's right.
Yes. Correct.
I'm only asking because some of the, you know, the, obviously, we have the two different segments, but there's some overlap.
Yeah, there's overlap. We have an overlap in our segment that we disposed of in our ancillary services. We disposed of, as Mike mentioned, the rentals associated with our production services we stripped out as well and were sold to Precision Drilling. Yeah. I would say that the Q3 reporting will have a better breakout of what's remaining and what was disposed of in the quarter.
Okay. Great. I guess that change in tactics, looking back at the drilling operations for 103 and 104, I just say is probably also that main client. It looked like in 2016 through 2018, they were drilling about three rigs each, three wells each year, with a larger amount of seven wells drilled in 2019. Do you have a sense what they're looking at? You know, I realize it hasn't started, but what they're aiming at for 2023 in terms of plans there?
Yeah. Steve, we do, and I'm not gonna put words in the mouths of our customers. Like, you know, we really probably answer that in broad terms. In broad terms, Rig 103 was in the midst of drilling a gas development well when it was shut down in 2020. It will return to complete that well. The ongoing campaign for that will be a combination of new wells to maintain production as well as the re-entry on existing wells to improve the productivity from those wells. We anticipate that being both gas wells that are supplying the PNG LNG project as well as oil wells that are feeding through to the oil terminal in the southern part of Property B.
At this point, they're fine with just 103. There's no discussions yet on 104.
That's correct. The current needs are anticipated to be filled by Rig 103 and its leapfrog. The use of the leapfrog substantially reduces the time between finishing one well and the commencement of the next. When we look at the 2016 through 2018 period, Rig 103 and Rig 104 operated predominantly without their leapfrogs. We see, you know, an average three to four wells a year. Adding those leapfrogs in enables the drilling of at least one, if not two more wells on that kind of timeline of complexity of a 3-month well. Some of the wells that it's going to are gonna be shorter duration because of the nature of re-entry and not having to redrill the upper parts of the well.
Great. Thanks. Just one last question, and you discussed this in the press release, but I was wondering if there's maybe any more color on just what, you know, with the environment seeming to be better for Canadian oilfield service companies now, you know, what was sort of the background thinking of the company in terms of choosing now after, you know, the four or five years that the company's been holding these assets to look for sales?
Sure. Happy, Steve, to put a little bit more color to that. It's been our firm belief for some time that consolidation was necessary in the energy services sector in Canada to realize, you know, profitability and actually turn profits into generating cash. Our early thesis was we saw ourselves as being a potential aggregator. Having pursued opportunities and being unable to reach, you know, valuations that led to a transaction in that direction, we were made an offer. There was a cash offer. On reflection, when we looked at our businesses, we determined that the cash that that represented was far in excess of what we could generate out of that business over the next five-year cycle.
Part of the reason for that is not just cost inflation that's being particularly noticed at the moment, where there's a lot of pressure. We're trying to maintain pricing ahead of the growing cost base, but also the requirement then to start investing substantive amounts of maintenance capital into that rig fleet to maintain that level of activity. The other thing that we've been seeing as a trend, not just ourselves, but across the well servicing sector particularly, was a tightening in the labor market that was making it very difficult to realize an aggregate number of active units that would be able to work on the ex.
You know, making profit, making profitable, profit, reaping profits that would expand enough to cover those further investments that would be required then to put additional equipment out to work. When we wrap that up, you know, we would like to have been sitting here telling you about how we've been an aggregator and we're growing our business in Canada. Having not been able to realize those kind of valuations that would made sense to us and reflecting on the fact that Papua New Guinea is the area where we have a genuine advantage in the market and a history of generating good profits, we determined our efforts are now better focused in that area.
Taking our cash for the main part of our Canadian business gives us a lot of optionality as to how to exploit the opportunities that are gonna come there with the growing LNG capacity in the country.
Thanks, Mike. That makes good sense. I guess I'll ask just, you know, Josef had asked you about the capital needs in PNG, and you guys are talking about around, you know, $4 million for each of the two owned rigs to get them back into shape. Is there something else in putting aside any future opportunities, but is there anything else on the current fleet or properties that would require a significant amount of cash infusion? I'm just thinking about you've got the 10, plus the sort of 28 coming in January and a little bit on the balance sheet.
Yeah, no, good question, Steve. Like, you know, we do easily see a scenario where all of the rigs that we have access to are actually deployed and there's more demand. We believe that there is not just growth in the LNG market that sits on Papua New Guinea's doorstep, where they're ideally positioned to supply growing demand in Asia, which would assist the rest of the world in diverting LNG and gas to Europe as they try to wean themselves off of Russian gas. Also in the geothermal energy market, Papua New Guinea sits on a Ring of Fire. There are several companies that have made public statements in recent times about their desire to explore and then develop some of that geothermal energy capacity there.
Geothermal drilling requires the same technology as oil and gas. The size and types of our rigs are ideal for moving through Papua New Guinea and have good, very good efficiency designs for drilling multiple wells on one location, much like would be required for supplying a geothermal plant. You know, it doesn't take us long to realize that if we've got all of the rigs that we have access to deployed, and there's still opportunities to invest then in additional drilling capability, in a growing market, we're gonna need access to capital. Part of what we intend to do now over the next couple of months, as we contemplate that receivable, is to explore all possible options for accessing, getting capital for our Papua New Guinea business.
Okay. That's, it sounds very exciting. I remember the days back when, you know, the company was bringing in, you know, I guess in 2015 and 2016, bringing in CAD 40 million-CAD 50 million free cash flow a year. Obviously that brings in cash and you're thinking about on top of that. Of course, and, you know, it'd be nice to see that cash coming in before further investments, at least from my perspective.
Yeah, Steve, I think that we see the same thing. We're incredibly excited. I'm passionate about Papua New Guinea for many reasons that include but aren't beyond the capacity to generate cash from our operations. Yeah, the deployment of our existing rigs, the two that we own, the rigs that we have access to through leasing agreements, would be enhanced with further capital investment. We also would hope that we can fund a substantive amount of reinvestment in Papua New Guinea out of the cash flow generated there.
Great. Thank you very much. Appreciate the time, wishing you a complete recovery.
Yeah, thanks, Steve. Appreciate that.
Thank you.
Thank you. There are no further questions at this time. I would like to turn the meeting back over to Mr. Maguire.
I'd like to thank everybody who dialed in to listen to our call today. Wish you all very well and have a good weekend. Thanks for your time.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.