This conference is being recorded.
All participants, please stand by. Everything's ready to begin. Good afternoon, ladies and gentlemen. Welcome to the High Arctic Energy Services 2022 Q4 results conference call. I would now like to turn the meeting over to High Arctic's Chief Executive Officer, Mike Maguire. Please go ahead.
Thank you, Chris, and good morning, everyone, or good afternoon to those in Canada. I'm talking to you from Brisbane at the moment, and thank you for your patience waiting for us to begin as I experienced a few technical difficulties getting online. Welcome to High Arctic's fourth quarter conference call. Today I'll be providing an update on the press release we issued earlier this morning, March 28th. Following my remarks, I'll hand the call over to our Chief Financial Officer, Lance Ehrentreu, and Lance will be discussing our financial performance in the fourth quarter of 2022. After our formal comments, we'll open the call to answer any questions that 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 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 discussion and analysis in the 2022 annual information form available on our website or on SEDAR. Look under the heading Risk Factors. From the following the divestments of our Canadian Production Services segment in the third quarter, we now focus on Papua New Guinea in this fourth quarter. PNG is a market where we have a dominant energy services position, a history of high profit margins, and free cash flow generation. Papua New Guinea is now central to High Arctic's long-term business strategy.
During the fourth quarter, we ramped up both our deployed operational personnel and crews as we readied Rig 103 to commence operations and filled key managerial and support positions within our PNG operations. We took a deep dive into the large inventory of spare parts, equipment, and consumables to ensure we have a solid understanding of our capacity to support our growing operations in PNG. We also progressed preparation for Rig 103 to commence drilling activity with a work scope that was expanded to include an upgrade of the top drive. I'm pleased to confirm the upgraded rig is currently operating again, having returned to the well that drilling was suspended on back at the beginning of the COVID travel restrictions in 2020.
High Arctic anticipates Rig 103 will operate consistently through the term of the contract, which runs through to July 2025. This recommencement of drilling operations follows the recent announcement in PNG that the TotalEnergies-led Papua LNG project has commenced downstream front-end engineering and design work, or FEED. This follows certain upstream FEED work that commenced last year and continues the progress towards a final investment decision expected later this year. Indications suggest the Papua LNG project will be based on four electric-driven LNG liquefaction trains powering the existing export facility in Port Moresby, the capital city of Papua New Guinea. This facility is operated by Papua LNG partner, ExxonMobil, for the country's other LNG project. TotalEnergies has recently outlined plans to bury almost 1 million tons per annum of carbon dioxide with the Papua LNG project and a major tree planting project to boot.
We expect the sequestration of CO2 to require additional wells to be drilled on top of those planned for gas production. Last week, Mr. Wapu Sonk, the Managing Director of the national oil company, Kumul Petroleum, was quoted as stating that they are in early talks with potential partners to build their own LNG processing unit. Mr. Sonk said the proposed 1 million ton a year unit would be in addition to the new units to be built by the Papua LNG venture and would be fed from undeveloped gas that Kumul Petroleum have secured retention licenses over. These developments support management's optimistic outlook on the gas development activities in PNG, which are expected to lead to increased demand for drilling and related services. Now I'd like to pass the call over to Lance to discuss key financial highlights from the quarter in more detail.
Thank you, Mike, and good afternoon to those joining on the call today. Our fourth quarter results are the first complete quarter without contribution from the Production Services segment, which was divested in July of 2022. On a consolidated basis, High Arctic generated revenues of CAD 13 million and incurred a net loss of CAD 9.1 million or CAD 0.19 a share in Q4. Q4 oilfields operating margins were significantly impacted by inventory adjustments, which led to an operating loss of CAD 2.4 million, while on a full year basis, the oilfield operating margin was CAD 11.9 million or 15% of revenue. During Q4, we recorded a net provision of CAD 3.9 million stemming from an extensive evaluation and counting of inventory, materials, and supplies located at various sites in Papua New Guinea. The adjustment included fourteen...
CAD 4.5 million inventory write down, offset by a CAD 600,000 reversal of a provision for obsolescence. Not only did we examine and assess our own inventory, we conducted extensive counts of inventory that we manage on behalf of a main customer in Papua New Guinea. We plan to utilize this, some of this inventory, both from our stock and from our customers to own stock on the ongoing operations of Rig 103. In Q4, we recognized a liability of CAD 3.3 million relating to customer inventory, which we were obliged to replenish pursuant to contractual obligations. This liability forms part of the total contingent liability of CAD 8.3 million, which we've reflected in the notes to our financial statements in the contingency section.
Following this evaluation, and again, as Mike pointed out, we are confident that we have sufficient and appropriate materials and supplies on hand and at present to support our ongoing operations in Papua New Guinea. The company recorded negative CAD 892,000 of adjusted EBITDA in the quarter and generated CAD 5.7 million, sorry, of adjusted EBITDA for 2022, up from CAD 4.9 million in 2021. 2022, Hiarc experienced a CAD 0.75 loss per share, of which CAD 0.44 relates to non-cash items of impairment, a reversal of deferred income tax, asset, and inventory provision. During the fourth quarter, Hiarc provided personnel, materials handling equipment, and associated rental equipment, including a 100-man camp and a large quantity of Dura-Base mats in support of customers' field operations with our two primary customers in Papua New Guinea.
In addition, we increased drilling personnel deployed to prepare Rig 103 for the recommencement of development drilling activities. These activities in our Drilling Services segment generated CAD 10.1 in the quarter. We surpassed CAD 30 million of drilling service equipment for the year. The Drilling Services segment margins have been impacted by the previously discussed inventory adjustments and low margin reversible cost contribution associated with the supplying and installing the top drive on Rig 103. When adjusted to back out the impact of the provision of inventory write-down, the Drilling Services segment margin increases from 4.4% to 15.4%. I figure that's comparable to 15.6% experienced in 2021. Our Ancillary Services segment spreads across both PNG and Canada and continues to be our highest operating margin generator.
We achieved 44% operating margin during the quarter and 54% across 2022 on revenues of CAD 2.9 million and CAD 14.9 million respectively. With increased activity from PNG and consistent demand for pressure control rentals and nitrogen services in Canada, we do anticipate this segment to continue to grow our revenue as we move through 2023. The company continues to be prudent with its capital management and maintains a strong balance sheet. During the quarter, capital expenditures were limited to under CAD 100,000. We spent CAD 4.1 million on capital during the year. We expect modest capital spending in 2023, mostly focused on maintaining rental equipment and our drilling fleet.
With the cash proceeds from the sale of the well servicing business last July, the company ended the year with CAD 19.6 million cash on hand and cash equivalents. Inclusive of the Precision receivable, our working capital ratio increased to 7.7 to 1 at the end of the year. This year and following year, we did collect the CAD 20 million from the sale of the well servicing to Precision, and we placed that in interest-bearing accounts, earning between 4.5% and 5%. High Arctic continues to pay a monthly dividend of half penny per share, and in Q4 2022, we've renewed our NCIB to repurchase shares throughout 2023. We continue to assess financial options in line with our strategic objectives moving forward.
The company has a history of returning surplus cash to shareholders and will continue to consider our capacity to distribute surplus funds while exploring opportunities to invest in strategic growth activities as they emerge. With that, I'll pass it back over to Mike. You on mute there, Mike?
Thank you, Lance.
Yeah. All good.
HWO continued to take instrumental actions in 2022, which will allow the corporation to focus on the emerging opportunities to deploy drilling assets in Papua New Guinea while maintaining exposure to the Canadian energy services market. HWO believes that the fundamentals of sustained high LNG demand, particularly in Asia, positions PNG for sustained liquefied natural gas export growth. The contemplated expansion pro-projects are progressing. While the restart in drilling activity has been slower than we expected, HWO is optimistic for future drilling contracts in the coming activity cycle associated with the major project advancements. HWO maintains active dialogue with the management of all active energy companies in PNG towards understanding their project timeframes and plans for drilling activity and the potential for utilization of HWO's drilling assets.
We've now realized the drilling rig deployment in the first half of 2023 and expect to continue to increase deployment of rentable assets and ancillary services through 2023. We expect that as the major projects move into execution, the demand for drilling has the potential to exceed our past activity peaks. I will now turn the conference call over to the operator, who will open the line for questions.
Thank you. We'll now take questions from the telephone lines. If you have a question using a speakerphone, please mute 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 participant recommended by if you have a question. On your device's keypad if you have a question. Our first question is from
Joseph Schnatter. Hi, Mike and Lance. Just kind of going at the macro level, how much BCF would go through on four electric-driven trains, and how much, you know, capacity with gas goes through right now on the current system to get an idea of the scale of the ramp up? If, you know, one of these companies decides they want to start drilling a little quicker, Lance mentioned that the CapEx for 2023 might be less than 2022. Could there be an announcement of, you know, 2, 3, 2, 4 if there is a ramp up where your CapEx budget would go up, you know, quite a bit, and you wanna more husband the cash for putting all the equipment to work and doing whatever upgrading you need to meet the client's requirements?
Yeah, thanks, Joseph. Start with the first part of the question, on the throughput of the facility. I don't have the figures to hand in BCF, the total annual numbers are top of mind. The current facility with its two, what we'd call, I guess, conventional gas-driven trains, put out, currently put out 8.4 million tons per annum. The electric trains are to be smaller in scale. I understand that they're expected to put through somewhere around 1 million tons per annum. With four of those for the Papua LNG project expansion, that gives them capacity of 4 million tons per annum.
I would bear in mind that the nameplate capacity of the PNG LNG 2 train export facility is 6.4 million tons per annum. It has operated sustainably around being at 25% above capacity since day one. The electric trains, I'm not sure how much additional capacity they may have above that design target of 1 million tons per year. That's the figure that was quoted by the managing director of Kumul Petroleum. The second question relating to the capital expenditures, we have revised our budgets for 2023 with a slow start-up that we've seen and experienced to date, and expectations that the customers are deferring drilling activities into 2024 and 2025.
We don't expect to have to incur substantive capital expenditures this year, based on the expectation of only having the one Rig 103 out at work. That's one of those other projects that should start to come forward in the back half of the year from current expectations of 2024. Where we do expect to spend some capital is in the growth of deployment of ancillary rentable equipment items such as the durable matting product and our fleet of material handling equipment has started to experience some standing upswing in requests for service. We have projected to spend a modest amount of capital in growing that fleet of equipment through 2023.
If I can add one more on the overview. If they do FID everything, are we looking at 2027, 2028, 2029, 2030 for when they'll be on the trains starting up? Just wanna get an idea of the timeline that we're looking at.
I haven't seen a specific date mentioned by the project proponents, but there is discussion around a lot of the quoted statements in the media, which indicates a 2027 online first gas on the new project.
Okay, super. That does it for me. Thanks so much. Thanks for the answers.
Thanks, Joseph.
Thanks, Joseph.
Thank you. The next question is from.
Steve Dalton. Hi, Mike, Lance. Would you be able to break down, just, there's a large difference? If you could break down the CAD 8 million fund flow used in operations during the quarter and compare that to the adjusted EBITDA of negative about CAD 1 million. If I can understand the timing and the cash impacts there.
Sure. I'll let Lance answer that question too.
Yeah. Question three. I mean, I was about to do some digging on that one. What was the question again?
Sure. It's I think you guys had for the quarter about CAD 8 million fund flow used in operation versus the adjusted EBITDA of about negative CAD 1 million.
Yeah. Okay. Well, I'll pull it up real quick here. Maybe we can go on to the next question. I'll pull it up real quick.
Sure. Would you guys be able to discuss, if any results at Team Snubbing? I know that's not consolidated into the company but.
Yeah, I'll have to let, Lance answer that one as well. While he's looking up those numbers, I can give more of a qualitative answer in that Team Snubbing has, and I think I said this at the conference call in November, that they had immediately. The aggregation of the two businesses, expanded their service offerings in Canada to greater than what the sum of the two parts were coming together. They've maintained that all the way through the first quarter. They're also now contemplating and moving equipment up to Alaska as part of their international partnership, of which they have a 50% of. There's a 50% partnership there in snubbing international operation up in, I guess it's the USA, right, but Alaska. They're mobilizing equipment up there, which includes some of the snubbing packages that were acquired from High Arctic as well.
Sounds good. Just maybe one other sort of bigger picture question. If High Arctic has only the drilling rig 103 in regular consistent activity during the year, do you expect that that on its own, along with the ancillary rental equipment, would allow the company to be profitable for the year?
Yeah. Our projection is profitable on a cash basis. If I knock out the depreciation expense, which is still quite a large number, given that we're still depreciating the drilling assets at PNG, we expect to make cash profits, but probably a modest financial loss.
Okay. Thanks. I got the... While waiting, I just, you guys had mentioned that there's still a consideration as what to do with the net sale proceeds. Earlier I think there was an indication that there would be consideration of potential distributions of the cash to shareholders about the time of the final payments, which I guess was earlier this January. Has there been further discussion among the board and about that?
The management has undertaken extensive analysis of our forward needs and have explored several different scenarios for the use of those proceeds, none of which have matured to a point where we can say something specifically about it at this point. It is front of mind.
Great. Okay. Well, I guess we'll keep listening for that.
All right.
Sorry. Lance here. I think the recognition is that we didn't have any activity from our operations in Canada, right?
Right.
We did have much lower margins in PSG for reimbursement. reimbursement costs. We did a lot of spending on costs that we spend for purchases on behalf of the customer and then acquire them and then acquire them, transfer them and install them. There's a lower margin % on that.
Got it. Is the four and a half million dollar inventory adjustment, is there a related cash outflow on that or not at this time?
No, absolutely not. No. For people. That there's, like I said, there's sufficient sorry, inventory on hand. We're w e did not make any additional purchases at all, and we don't anticipate making any purchases of large quantities of inventory. It's all on hand and in country. some of the, you see, as I mentioned, an obligation to replenish inventory. that's where we just need, we, o f course, over time, certain types of supplies and equipment, it changes over time, depending on the, you know, technological advancements of the rig and the design of the drilling programs that we do for our customers. certain equipment changes over time.
That's where we have in our inventory, you know, items that meet that specification. We work with our customer to draw some of the inventory from theirs and from ours to fulfill our drilling obligations, to fulfill our drilling operations. You know, This adjustment was really just to verify what we've done with these counts is to verify all of that inventory in hand and on hand, and what can be usable in the future, and what's relevant and what we need to replenish from what we've combined used within our operations over the last number of years.
Great. Thank you very much. That's clear.
Yeah. Thanks.
Thanks.
Thank you. Once again, please press star one on your devices keypad if you have a question. Do you have our next question? Please go ahead.
Marty Weiner, Lightyear Capital. Hey, gentlemen. How you doing?
Good, thanks, Marty.
Very good.
Excellent. Hey, just really quickly. Mike, what other assets, what do we have in Canada at this point in time? You know, outside of you have an investment, you have a receivable. What else exists in Canada?
We have a Nitrogen Pumping service line that consists of five active low rate pumpers, one high rate pumper, and a fleet of support equipment involved for transport of nitrogen. They provide services mostly through the northwest of Alberta to an array of customers that include both service companies and oil operating companies. We have a rentals business which is centered around the provision of pressure control equipment, which includes things like blowout preventers, but also high-pressure iron, valves and other pressure control equipment. As well as a small bit board of other ancillary rentable items from generators and office trailers through to heating units, space heaters and oil field handling equipment. It also has an array of customers that include both service companies and oil and gas, E&P companies.
Okay. What's.
there's the... I'm sorry?
Sorry, I'll let you finish there first.
All right. There's 5 dormant snubbing units in Colorado that we have essentially decided to divest and we're looking for a buyer to take those units. You were gonna ask another question, I think, about real estate, was it?
Yeah. Yeah. Yeah. I know, like, year-end, there was still a mortgage, but I don't know if that went with the Precision asset.
Yeah. There were some owned and some leased properties that transferred across to the sale of our well servicing business to Precision Drilling. We retained owned properties at Whitecourt, which is now the our Canadian headquarters, where our rental business is operated out from. A larger facility in Clairmont, just outside Grande Prairie. That facility has been leased on a long-term basis to an affiliate of Team Snubbing and we've basically become landlord there. Both of those properties have got a mortgage on them of an approximate value, I believe, Lance, at the moment around CAD 3.7 million.
Yeah. About 4.2 right now, Mike.
Yeah. It's around 75% of the value of the of those properties.
Okay. Okay. Thank you. Before I pass things back to Papua New Guinea one of the questions Joseph had was on expenditures, and you said, you know, it's not significant for this year. If and when the operations pick up, I wanna, I'm gonna pick 25, 24, 25. Is it a material amount of expenditure, capital outlay that you would have to incur in order to get the other rigs up? I remember they were, they're stacked, but one of them I don't think had ever worked, so it should be in relatively good shape. Is there gonna be a, you know, a material, and I'll use material as $5 million-$10 million CapEx in order to put those units to work?
Yeah, there would be some money needing to be spent to return equipment to work. There's nothing near the band that you just outlined as material. We expect the cost to put any of the rigs that we have sitting idle and responsible for at the moment to work, we would expect capital expenditures of sub CAD 3 million, depending on which one it was.
Okay. Do you see any other competitors right now in PNG, or are you still really the only game in town for heli-portable?
We're the only company that owns or operates any heli-portable drilling units in Papua New Guinea at the moment.
Okay. That's all I have. Thank you, gentlemen. I'll take the rest offline.
Thanks, Mark.
Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Maguire.
Thanks, Chris. I'd like to thank the participants who joined us today and, the thoughtful questions that were put to us and wish everybody, a good day.
Thank you. The conference is now ended. Please disconnect your lines at this time. Thank you for your participation.
Mike, you still there?
Yeah. Yeah.
Okay. I think Jay was on-
How many?
Oh, yeah, I didn't.
How many lines?
Okay. He was on earlier. He helped get us all set up at the back, so... I'm not sure if.
Yeah.
Is Mark, the conference moderator? Hello?
Yeah. I guess, are you still on the line?
I'm still there. If you're gonna continue to talk, I'll just pass you back into the free conference.
No, no. We're finished with the call.
Oh. Oh, okay.
I just wanted to know if how many callers were on the line?
Sure. We had a total of 25.
25. Okay. Good number.
Okay. Thanks everyone. Thanks so much, Chris. Thanks for having me.
You're welcome.