Good morning, ladies and gentlemen. Welcome to the High Arctic Energy Services 2023 Q3 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, Hossein, and good afternoon to everyone. Welcome to High Arctic's third quarter conference call. Today, I'll be providing an update on the press release we issued a short time ago today, November fifteenth, including discussion of our financial performance for the third quarter of 2023. Following my remarks, I'll hand the call over to our Interim Chief Financial Officer, Lonn Bate. Lonn will be discussing our financial performance for the third quarter. 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 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 amended and restated 2022 annual information form available on our website or on the SEDAR website. Look under the heading, "Risk Factors." Starting with operations in Papua New Guinea. During this quarter, Rig 103 had strong operational performance. This represents the second full quarter of drilling activity for the corporation since the suspension of operations in early 2020. We are currently halfway through the four approved wells in our customers program.
Based on this, we expect the rig to continue to operate and generate revenues into the middle of next year unless additional approved wells are added to the program. The term of the Rig 103 contract runs through to July 2025, with options for the customer to extend it further by two 12-month terms. As well as the full quarter of drilling operations with Rig 103, we have seen strong deployment of rental assets through the quarter, including those pulled through by drilling operations, as well as rentals to the wider market. High Arctic also provided rental material handling equipment, a 100-man mobile camp, and a large quantity of work site matting to support other ongoing field activities with our two main customers in Papua New Guinea.
Full utilization of our drilling services and asset rentals associated with customer-owned Rig 103 had a significant impact on our earnings, which we anticipate will be the case for the remainder of 2023. We are optimistic for future drilling in PNG, and this optimism is based upon expectations that advancement of the Papua LNG project, led by French multinational TotalEnergies, will stimulate exploration and appraisal activity in much the same way as the first PNG LNG project did a decade ago. The Papua LNG project is expected to be followed by the PNG gas field development in the Western Province of PNG, which is anticipated to result in the addition of further gas liquefaction capacity in the world-class PNG LNG export facility. State-owned Kumul Petroleum is advancing appraisal of other gas discoveries in PNG and pursuing seismic contractors for the Kimu and Barikewa discoveries onshore PNG.
This is to progress their aim to contribute to growing domestic energy needs and additional LNG export processing facilities in the future. These LNG projects and other large-scale mining and infrastructure projects moving through the pipeline will require tens of thousands of new workers and more skilled and supervisory personnel that do not exist in PNG today. Through PIMS, PNG Industry Manpower Solutions, High Arctic has added the provision of recognized safety training, competency verification, and equipment licensing services. We have long provided these training and competency solutions in-house. PIMS also taps into our large pool of talent to provide manpower, skilled and semi-skilled labor, trades qualified personnel, and professionals in PNG. We are excited to be playing a significant role in preparing PNG citizens to be job ready for what we expect of the major projects that's anticipated in the second half of this decade and beyond.
In Canada, we closed a transaction to sell our Canadian nitrogen transportation, hauling, and pumping services business for cash consideration of CAD 1.35 million. The sale delivered a net gain of CAD 615,000 and contributed approximately CAD 1.28 million of cash after transaction expenses, and High Arctic harvested the associated working capital of the business at closing. Our pressure control-focused rentals in Canada enjoyed another solid quarter of revenue growth, where revenues are now up 30% over the same period last year. Hayes Rentals is fielding inquiries from an increasingly broad range of customers, including contractors and energy companies alike. Team Snubbing is Canada's largest snubbing provider, and we have a 42% equity stake in Team. Team reaped the rewards of a well-managed breakout period maintenance program in Q3.
Team has realized a record revenue mark in excess of $5 million for the quarter. Team has a 50% interest in international partnership marketed under Team Snubbing International. This partnership commenced their first services this year, deploying two snubbing packages to U.S. independent producers in Alaska. Both of these packages operated almost continuously through the third quarter. Team Snubbing International are also looking into opportunities in other foreign jurisdictions. At this juncture, I'd now like to pass the call over to Lonn Bate, our Interim Chief Financial Officer, to discuss key financial highlights from the quarter in more detail.
Great. Thank you, Mike, and good afternoon to those of you joining on the call today. Now, just before I begin, I, I'd like to mention that all dollar amounts here mentioned on this call are Canadian dollars, unless otherwise stated. Looking at our third quarter results from continuing operations, and on a consolidated basis, High Arctic generated revenues of CAD 17.8 million, up marginally from our second quarter, 2023, and approximately double that achieved during the first quarter of 2023 prior to the commencement of operations with Rig 103 in our PNG drilling service segment. High Arctic generated Adjusted EBITDA of CAD 3.2 million, down from CAD 4.4 million in Q2 2023, but up substantially from the approximately CAD 600,000 in the same quarter of 2022, with Q3 2022.
In this quarter, High Arctic incurred a net loss of CAD 15 million, which, on a per-share basis, equated to a loss of CAD 0.31 per share. This significant net loss recorded in the quarter related to a non-cash impairment charge of CAD 20.5 million, was taken against High Arctic's PNG operations CGU. The net impact of this charge on our net income, after factoring in the associated deferred tax recovery of CAD 3.9 million to CAD 16.6 million. As we've disclosed in our Q3 financial statements, indicators of impairment that were noted in the quarter included our primary customer planning to conclude its drilling after completing the minimum well commitment on their drilling schedule, and also the lack of outstanding customer contract tenders or open bid submissions currently for Heli-Portable Rigs 115 and 116.
These factors have resulted in a reduced activity level, reduced level, pardon me, of anticipated drilling activity in that business. After performing an impairment analysis of the PNG operation, CGU was determined that its recoverable amount was below its estimated carried value of that CGU, and as a result, the corporation recorded the aforementioned impairment. In the quarter, the business performed well, generating CAD 3.2 million in Adjusted EBITDA, and it should be noted that High Arctic would have posted a positive net income number had it not been for the non-cash impairment charge. Customer-owned Rig 103 was fully utilized in Q3 2023, and our ancillary services segment continues to perform at expectations. As a result, High Arctic achieved higher consolidated operating margins of 33% in the quarter versus 26% when compared to the third quarter of last year.
This increase in margin is primarily driven by strength and demand for rental equipment, both in Canada and Papua New Guinea. The full utilization and charge-out rates associated with Rig 103 operations and an increased supply of High Arctic technical and operation manpower, power services to our customers in PNG. G&A costs were CAD 2.7 million in the quarter, which is higher than the CAD 2.5 million from last year's comparable quarter. G&A costs as a percentage of revenue was 15%, which was lower than the 21% in the third quarter of last year. The reason, though, for the increase in absolute G&A spend this quarter is a result of one-time severance costs and also legal professional fees that we've incurred, mostly related to the reorganization initiative.
Management continues to evaluate its G&A costs and cost levels and right size the operations and right size the support in our business to align with expected operations going forward in both PNG and Canada. So our largest revenue contributor for High Arctic in the quarter was generated from our drilling segment. Our drilling services segment, our activities there generated CAD 13.9 million of the revenue achieved in Q3 2023, much higher than the CAD 4.9 million from the segment in Q3 of last year. This increase was due primarily to the fact that our customer-owned Rig 103 was fully utilized in the quarter, whereas in last year's Q3, High Arctic had no owned or customer-owned rigs operating, and most of the revenue was derived from manpower provision.
Q3 2023 operating margins were 23%, roughly in line with last year's 24%. Our ancillary services segment spreads across both Papua New Guinea and Canada and continues to be our highest operating margin generator. We achieved an operating margin of over 69% on CAD 3.9 million in revenue in this quarter, as composed, as compared to 60, at 62% margin on CAD 2.3 million of revenue in Q3 2022. The improved margin reflects higher activity levels and more revenue contribution from low maintenance, fully owned assets. Management expects our Q3 margins and activity levels that delivered this to continue through the remainder of this year and into 2024. There's no top line activity in our production services segment this quarter, with a small expense being booked related to storage and preservation costs for the assets in that segment.
Whereas in 2022, the third quarter results included a stub period of operations from the well servicing assets that we sold to Precision Drilling and the snubbing assets sold on to Team Snubbing. During the quarter, capital expenditures totaled CAD 700,000, mainly focused on growth in our rental equipment in Canada and Papua New Guinea, with the addition of deployable pressure control equipment in Canada, light vehicles, and other incidental rental equipment that customers are looking for in their field operations in parts of PNG. We expect to continue with modest capital spend for the rest of 2023, mostly focused on maintaining and growing our rental fleet, both in Canada and Papua New Guinea. The company ended the quarter with 4.68...
or CAD 46.8 million in cash on hand, with over CAD 37 million of that on-hand balance invested in secure interest-bearing short-term investments, which combined to generate CAD 538 thousand of interest income during the quarter. This interest income was directed at supporting our monthly CAD 0.005 per share dividend. But subsequent to the quarter, High Arctic elected to suspend its dividend with the view that the corporation can optimize its future ability to fund a pending tax efficient return of capital to its shareholders. Our working capital position increased slightly in the quarter from Q2 of this year, and at the end of September, was at CAD 63.5 million. Our only debt on the books is for mortgage financing we have of CAD 3.6 million, which is held against our land and buildings in Alberta.
With that, I'll turn the call back over to Mike.
Thanks, Lonn. Before turning the call over to questions, I believe it appropriate to provide an update on the reorganization of the corporation. As a reminder, in May, we announced an intention to recommend to shareholders a tax efficient return of capital to a maximum of CAD 38.2 million relating to the Q3 2022 sale of High Arctic's Canadian well servicing assets, and a reorganization of the corporation involving the spinoff of the Papua New Guinea business. This separation was aimed at addressing the inefficiencies of managing two small businesses on opposite sides of the world, with few synergies, and allowing senior management to concentrate where they have had the most success in the past.
In August, we provided an update, updated outline that affected the reorganization by way of a purchase rights issuance, whereby all shareholders would be issued the maximum tax efficient, and for most, a tax-free return of capital and proportionate rights to acquire a share of the PNG business's holding company in Cyprus. With the proceeds of sale then used to capitalize and provide liquidity for the corporation to pursue growth. However, the corporation received feedback from several shareholders. The feedback generally related to the unlisted nature of the High Arctic International Holding Company, and concerns about corporate governance and minority shareholder protections in a foreign jurisdiction. We suspended work on that previously announced transaction. We are working with our advisors towards a process that delivers on the shareholder feedback received and the strategic aims of the reorganization.
There is no guarantee that we can achieve all of these aims. We will make further announcements once we have determined the path forward, which may include making no changes at all. In the meantime, we focus on managing and pursuing opportunities for the existing businesses. I'll now turn the conference over to the operator, Hossein, who will open the line for questions.
Thank you, Mr. Maguire. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift 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. If at any time you wish to cancel your question, please press star two. There will be a brief pause while participants register for questions. Thank you for your patience. The first question will be from?
Josef Schachter.
Please go ahead.
Good afternoon, Mike and Lonn. My first question is for Lonn. Thanks for taking the questions and having the conference call. The write down of CAD 20 million for the PNG CGU, if there is a pickup in business in, you know, 2024, 2025, is this a reversible charge or is this, once you've done this, it stays as a write down?
Yeah, thanks for the question there, Joe. And, yeah, we under IFRS and current GAAP, you are allowed to write up your assets in the CGU if you do see, you know, obviously, your future cash flows improve to the point where, you know, it makes sense. And obviously, there is a ceiling in terms of what you can write them back up to, and that ceiling would be CAD 20.5 million that we wrote them down.
Okay, super. So it's like a same kind of reversal for reserves when you get price changes like we see in the E&P side?
Yeah, precisely.
Yeah. Okay, Mike, for you, you mentioned last time on the call that a road was gonna be built for some of the drilling so that the likelihood of getting near-term contracts for the heli-portable was gonna be tougher. Given, you know, the announcements you made today about all the work that's going on, does that change your view on potential upside and business for it? And secondly, would the ancillary business gain a lot of business and that's why you're spending money adding capacity there, providing it to other operators who bring in land rigs that would be able to go through that road that's being built?
Yeah, thanks for the questions, Josef. Addressing the first part, with the road, just to be able to clarify and make sure that it's clear. This is our expectation that the project proponents for Papua LNG will be building roads to the well sites for the wells that will be supplying the gas to the yet-to-be built LNG facility. We expect the roads to be built because the project operator, TotalEnergies, the French super major, has gone to the market seeking tender submissions for the creation of roads.
Assuming that roads are built, which we've had to do now based on that information, we believe our helicopter transportable rigs are less competitive when it comes to securing that drilling work for the, I think it's 11 wells that are expected to be drilled for that project. Insomuch as, while they have a substantive advantage for remote access, exploration, and appraisal, where there is no roads and they can move by helicopters, when there is a road, they're a lot less efficient to assemble, disassemble, and transport because they break down into much smaller pieces. We do... And I wanna remind people, too, we do have history here.
The last four wells, wells four, five, six, and seven, that were drilled in the Antelope Field, were all drilled by High Arctic. We expect that if the project goes ahead, which, that announcement, I think most of our callers would be aware, but I'll just remind people, that announcement, which was anticipated to be around this time, the latter part of 2023, has now been pushed into 2024. And according to the project website, is currently flagged as early 2024. If that project goes ahead, we do expect to see down the track some stimulation of exploration and appraisal drilling that was observed by us back in a decade ago with the first LNG project, PNG LNG.
And, you know, that stimulated activity was what saw us invest in rigs 115 and 116, which were purpose, purpose rebuilt and, engineered to be optimum to move in remote parts of Papua New Guinea, which is a tropical rainforest in the... with a, with a large mountain range. So we've got some optimism there, and, I think my comments today are somewhat consistent with, with, with comments we've been making now for quite some time, with regards to we can see scenarios in the future where we could have, our rigs deployed, and we could be as busy or busier than we've ever been in the past. Those projects yet, yet to materialize.
We're hoping that, and optimistic that, a positive investment decision will be taken on this project early next year, and that, even if we're unable to secure the direct drilling work, that it will lead to work down the track for us in that exploration space. Talking, moving to the second part of the question on ancillaries, yes, Josef, I think you've got a very accurate read through there. We're seeing opportunity for investment in rental equipment and investment in people. And we're able to deploy those at the moment at a measured pace.
These projects that are expected to be coming online or becoming committed to in the second half of the decade will require more mobile equipment, will require more people, skilled, unskilled, and professional. We are taking steps at the moment to position ourselves to play a significant role in providing those services, that equipment, and some of those people.
Super. One last one from me. You mentioned that the whole restructuring and go forward is looking at all the options now, including just a go forward strategy as one company. Are you guys in that process, looking at where you might apply the cash to build the go forward company, if it stays together, either in Canada or build up a bigger operation in Papua New Guinea, including having land rigs that you would operate?
Yeah. So a key aspect of reorg or continuing without reorganizing is our analysis of forward capital needs and access to adequate liquidity to the two independent parts, whether they be separated or still combined, to be able to realize their business strategies and opportunities for growth into the future. As we work through this process, that is front and center of our thinking, to ensure that we will have adequate access there, and at the same time, though, optimize the position that the corporation can be in, to be able to affect a tax-efficient return on capital.
Okay. Thanks for the color on that, and good luck with all of the machinations of coming to a decision at the board level of what- how to move forward. Thank you.
Thank you, Josef.
Once again, please press star one on your device's keypad if you have a question. There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Maguire.
Thanks, Hossein. I'm gonna say that perhaps that's a reflection that we've addressed what most people's questions may have been in the lead-in dialogue between Lonn and myself. You know, we are working to ensure that we're focused on the business that we have, optimizing our chances to pick up additional work and deploy idled assets. I mentioned, I think in the last call, and you would or may, those who've been able to access it, given we posted our results only a short time ago, would note that we've commented in our outlook about the key appointment of Chris Fraser in a business development role for our Papua New Guinean business.
You know, I wanna reassure our investors that while we have been looking at reorganization, at the same time, we've not taken our eye off the ball in, for opportunities to deploy our idled assets and to expand our service offerings in Papua New Guinea and in Canada. I'd like to thank everybody for joining us this afternoon, and wish everyone a pleasant evening.
Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.