/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/ CALGARY, AB, May 9, 2024 /CNW/ - Cathedral Energy Services Ltd.'s (the "Company" or "Cathedral") news release contains "forward-looking statements" within the meaning of applicable Canadian securities laws. For a full disclosure of forward-looking statements and the risks to which they are subject, see the "Forward-Looking Statements" section in this news release. This news release contains references to Adjusted gross margin, Adjusted gross margin %, Adjusted EBITDAS, Adjusted EBITDAS margin %, Free cash flow, Working capital and Net capital expenditures. These terms do not have standardized meanings prescribed under International Financial Reporting Standards as issued by the International Accounting Standards Board ("IFRS Accounting Standards") and may not be comparable to similar measures used by other companies. See the "Non-GAAP Measures" section in this news release for definitions and tabular calculations. 2024 Q1 KEY HIGHLIGHTS The Company achieved the following 2024 Q1 results and highlights: Revenues of $165.0 million in 2024 Q1 is the highest quarterly revenues in the Company's history and represents an increase of 24%, compared to $132.9 million in 2023 Q1. Adjusted EBITDAS (1) of $28.8 million in 2024 Q1 increased 89%, compared to $15.2 million in 2023 Q1, and is among the highest levels achieved in any quarter for Cathedral. Canadian operating days increased 20% in 2024 Q1, compared to 2023 Q1, despite a 1% decline in the Western Canadian rig count (2). Cathedral remains extremely active in oil plays where wells tend to have a high multilateral count. U.S. operating days increased 11% in 2024 Q1, compared to 2023 Q1, despite a 19% decline of overall industry land rig counts (2). An increase in the Canadian average revenue per operating day of 2% in 2024 Q1, compared to 2023 Q1. Net income of $11.6 million in 2024 Q1, compared to $0.8 million in 2023 Q1. Cash flow - operating activities of $15.7 million in 2024 Q1, compared to $27.9 million in 2023 Q1, mainly attributable to the change in non-cash working capital. Free cash flow (1) of $3.5 million in 2024 Q1, compared to a Free cash flow deficit (1) of $0.8 million in 2023 Q1. The Company purchased 2,471,700 common shares of Cathedral under its normal course issuer bid ("NCIB") for a total amount of $2.1 million at an average price of $0.84 per common share. Loans and borrowings less cash was $75.6 million as at March 31, 2024, compared to $67.9 million as at December 31, 2023. The Company will remain focused on reducing its loans and borrowings and generating Free cash flow (1) for the remainder of 2024. The Company continues to see a significant opportunity for margin expansion in its U.S. directional business by using Rime Downhole Technologies ("Rime") supplied Measurement-While-Drilling ("MWD") systems to reduce its third-party rental costs. To date, ten Rime MWD systems have been deployed with an additional forty MWD systems expected to be deployed by the end of the year. The Company purchased three additional Rotary Steerable Systems ("RSS") Orbit tools, expanding its U.S. fleet to nineteen RSS tools. (1) As defined in the "Non-GAAP measures" section of this news release. (2) Per Baker Hughes and Rig Locator. PRESIDENT'S MESSAGE Comments from President & CEO Tom Connors: "Cathedral achieved its highest quarterly revenue ever while generating its third consecutive quarter of strong Adjusted EBITDAS. Adjusted EBITDAS this quarter of $28.8 million was up 89% from the $15.2 million of a year ago driven by stable job counts in the U.S. relative to industry activity, an increase in higher value work utilizing RSS, an increase in lost-in-hole reimbursements from customers and record active job counts in the Canadian market.    "Our performance in the first quarter relative to industry activity in both the U.S. and Canada was a significant achievement leading to another consecutive quarter with consistently solid financial performance. Our U.S. division Altitude Energy Partners ("Altitude") maintained its job count and activity levels throughout 2023 and into the first quarter of 2024 while the industry rig count bottomed near 620 rigs by the fourth quarter of 2023 from a peak of 775 rigs during the first quarter of 2023 (source: Baker Hughes).  The increase in activity levels is much more noticeable on a year-over-year basis with operating days up almost 11% from the first quarter of 2023. Altitude's continued strong presence with larger clients and in U.S. plays with better economics have helped it weather rapidly changing conditions. Overall equipment utilization was lower in 2024 Q1 as compared to 2023 Q4 in our mud motor technology rental business with the decline in activity levels impacting incremental demand for many of our competitors and customers.  "In Canada, Cathedral achieved very strong results driven by 20% growth in operating days on a year-over-year basis while the overall market activity was relatively flat during the same period. The expansion of multilateral drilling, propelled by attractive customer economics, plays to our strengths as a company and looks to remain one area of steady activity through the remainder of 2024. "We remain focused on the opportunity to deploy our internally developed MWD technology to further strengthen our U.S. business and drive meaningful margin expansion for a relatively modest capital investment. To date, we have deployed ten systems through our technology company, Rime, and expect to have a total of fifty systems built by the end of the year. Full deployment will happen in various stages throughout the year as the build-out continues, allowing us to partially offset third-party rental expense in 2024 and positioning the company to significantly reduce those expenses in 2025.   "Seasonally, the first quarter is typically the most active for the year in Canada and usually requires some working capital investments to fund increased levels of activity. With heightened activity levels in the first quarter, this year was no different and as such Cathedral saw a small increase in overall leverage versus year-end 2023 levels owing to those investments. We remain focused on the reduction of Loans and borrowings to less than 0.5x Adjusted EBITDAS by year-end 2024, which strengthens our balance sheet further and positions us well to pursue a number of options that drive shareholder value, including further growth through acquisition and/or a shareholder return strategy via a more defined return of capital program. Cathedral continued with its NCIB program, having bought 2.5 million shares in the quarter. Management believes that buying shares at current share price levels continues to represent good value and a sensible use of capital while also staying focused on executing our capital program weighted to the first half of the year and paying down debt built up from the strategic acquisitions of Altitude and Rime. "With a relatively stable to positive outlook, the opportunity to expand our margins through internally developed technology, combined with relatively modest but reducing debt levels, 2024 presents a number of significant opportunities to further strengthen the Company and position us for growth into 2025. "Becoming a significant player in the North American directional drilling space could not have happened without the combined efforts of the entire team, I would like to thank everyone for their dedication and effort as we continue our journey to build a great company that creates value for employees and shareholders alike," stated Tom Connors, Cathedral's President and Chief Executive Officer. FINANCIAL HIGHLIGHTS Canadian dollars in 000's except for otherwise noted Three months ended March 31, 2024 2023 Revenues (2) $       164,956 $      132,948 Gross margin % (2) 22 % 16 % Adjusted gross margin % (1)(2) 29 % 23 % Adjusted EBITDAS (1) $         28,752 $        15,187 Adjusted EBITDAS margin % (1) 17 % 11 % Cash flow - operating activities (2) $         15,746 $        27,860 Free cash flow (deficit) (1)(2) $           3,453 $            (826) Net income $         11,584 $             794 Per share - basic $             0.05 $               — Per share - diluted $             0.04 $               — Weighted average shares outstanding: Basic (000s) 240,679 224,561 Diluted (000s) 269,468 236,386 Balance, March 31,2024 December 31,2023 Working capital, excluding current portion of loans and borrowings (1) $           82,276 $           74,865 Total assets $         435,041 $         403,733 Loans and borrowings $           82,528 $           78,598 Shareholders' equity $         191,806 $         179,468 (1) Refer to the "Non-GAAP Measures" section in this news release. (2) Refer to the "Reclassifications" section in this news release. OUTLOOK The longer-term outlook for North American energy-related activity is positive and global demand continues to rise while geopolitical events continue to increase uncertainty around supply. In Canada, the initiation of the Trans Mountain pipeline expansion, followed by LNG Canada, will provide significant tidewater and global market access for both Canadian crude and natural gas. Both projects should translate to more consistent and slightly improved activity levels for oilfield service providers over time. LNG also represents a significant area of growth for the U.S. market as approximately 12 bcf per day of export capacity will be added in the coming years supporting incremental growth in drilling activity and less volatility in activity related to the cyclicality of domestic gas prices. The overall 2024 outlook for activity in North America remains relatively flat. It is somewhat nuanced in that activity in the Canadian market in the next three quarters is anticipated to be biased upwards slightly over the same periods in 2023 and biased flat to slightly down in the U.S. market driven by a number of factors. Specific to the second quarter of 2024, Cathedral is seeing a continuation of roughly flattish activity trends in the U.S. combined with the typical seasonal slowdown in Canada related to spring break-up. Cathedral's 2024 Q2 U.S. job count remains generally consistent with Q1 levels. In Canada, the second quarter represents a seasonal low for the industry due to road bans, however, early rig counts for the sector in 2024 Q2 have been running in the 120 range (source: Rig Locator), which is up over 20% from levels for the same period last year. Accordingly, Cathedral's Canadian 2024 Q2 job count to date has also been markedly higher than one year ago and we believe this solid operating momentum will continue in the third quarter. 2023 ACQUISITION On July 11, 2023, Cathedral, through a wholly-owned subsidiary, acquired Rime, a privately-held, Texas-based, engineering business that specializes in building products for the downhole MWD industry (the "Rime acquisition") in exchange for approximately USD $41.0 million (approximately CAD $54.1 million) comprised of: i) the payment of USD $21.0 million in cash (approximately CAD $28.0 million); and ii) the issuance of principal amount of USD $20.0 million (approximately CAD $26.4 million) of subordinated exchangeable promissory notes ("EP Notes") that are exchangeable into a maximum of 24,570,000 common shares of Cathedral ("EP Shares") at an issue price of CAD $1.10 per common share.  In accordance with International Accounting Standards ("IAS") 32 and IFRS 13, the EP notes were determined to be a compound instrument and, accordingly, recognized at the fair value of their respective debt component of $23.4 million and equity component of $1.2 million totaling $24.6 million. RECLASSIFICATIONS The Company has changed the presentation of certain figures in 2023 Q1 related to equipment lost-in-hole reimbursements collected from customers and the corresponding derecognition of the property, plant and equipment ("PP&E"). More specifically, the Company reclassified its gain on disposal of PP&E as follows: a) reclassified the proceeds on disposal of PP&E, related to lost-in-hole equipment, to revenues and b) recognized a write-off of PP&E for the net book value of the lost-in-hole equipment on the condensed consolidated statement of comprehensive income. In addition, the lost-in-hole proceeds were reclassified from the Company's cash flows - investing activities to the cash flows - operating activities on the condensed consolidated statement of cash flows. The Company has changed its judgement regarding equipment lost-in-hole events that are contracted with its customers in that these events are now considered to be part of its ordinary business activities. The changes are reflected in the current and prior periods, as described above. These reclassifications recognized in 2023 Q1 are summarized below: Condensed Consolidated Statement of Comprehensive Income (Excerpt) Three months ended March 31, 2023 Reported Adjustment Adjusted Revenues: United States 82,321 2,631 84,952 Canada $             45,344 $               2,652 $             47,996 Total revenues 127,665 5,283 132,948 Cost of sales (110,601) (1,339) (111,940) Gross margin 17,064 3,944 21,008 Write-off of PP&E — (976) (976) Gain on disposal of PP&E $               3,044 $             (2,968) $                   76 Condensed Consolidated Statement of Cash Flows (Excerpt) Three months ended March 31, 2023 Reported Adjustment Adjusted Cash flow provided by (used in): Operating activities Write-off of PP&E $                    — $                 976 $                 976 Gain on disposal of PP&E (3,044) 2,968 (76) Cash flow - operating activities 23,916 3,944 27,860 Investing activities PP&E additions (13,751) 1,329 (12,422) Proceeds on disposal of PP&E 5,572 (5,278) 294 Cash flow - investing activities (10,230) (3,949) (14,179) Effect of exchange rate on changes on cash $                  (54) $                     5 $                  (49) RESULTS OF OPERATIONS Three months ended March 31, 2024 2023 Revenues United States (2) $      106,562 $        84,952 Canada (2) 58,394 47,996 Total revenues (2) 164,956 132,948 Cost of sales Direct costs (2) (117,600) (102,571) Depreciation and amortization (11,635) (9,225) Share-based compensation (223) (144) Cost of sales $     (129,458) $     (111,940) Gross margin (2) $        35,498 $        21,008 Gross margin % (2) 22 % 16 % Adjusted gross margin % (1)(2) 29 % 23 % (1) Refer to the "Non-GAAP Measures" section in this news release. (2) Refer to the "Reclassifications" section in this news release. SEGMENTED INFORMATION United States Revenues U.S. revenues were $106.6 million in 2024 Q1, an increase of $21.6 million or 25%, compared to $85.0 million in 2023 Q1. The Company realized an 11% increase in operating days to 3,670 days in 2024 Q1, compared to 3,317 days in 2023 Q1. The increase is mainly related to the Company realizing higher activity, despite a declining market in 2024 Q1. The average revenue per operating day increased 13% to $29,036 per day in 2024 Q1, compared to $25,611 per day in 2023 Q1, mainly due to job mix and higher lost-in-hole reimbursements from customers in 2024 Q1.  Direct costs U.S. direct costs included in cost of sales were $81.3 million in 2024 Q1, an increase of $13.3 million or 20%, compared to $68.0 million in 2023 Q1. The increase is mainly due to higher repairs, third-party rentals and labour costs. As a percentage of revenues, direct costs decreased to 76% in 2024 Q1, from 80% in 2023 Q1, mainly due to lower labour and equipment rental costs as a % of revenues.  Canadian Revenues Canadian revenues were $58.4 million in 2024 Q1, an increase of $10.4 million or 22%, compared to $48.0 million in 2023 Q1. The Company realized a 20% increase in operating days to 4,374 days in  2024 Q1, compared to 3,659 days in 2023 Q1. The increase in operating days is mainly attributable to higher market demand in the 2024 Q1. The average revenue per operating day increased 2% to $13,350 per day in 2024 Q1, compared to $13,117 per day in 2023 Q1. The increase in the average revenue per operating day is mainly attributed to a change in job mix, including higher charges for premium tools. Direct costs Canadian direct costs included in cost of sales were $36.3 million in 2024 Q1, an increase of $1.7 million or 5%, compared to $34.6 million in 2023 Q1. The increase is mainly due to higher labour costs, offset by lower repair costs and third-party rental costs in 2024 Q1. As a percentage of revenues, direct costs were 62% in 2024 Q1, compared to 72% in 2023 Q1. CONSOLIDATED The Company recognized $165.0 million of revenues in 2024 Q1, an increase of $32.1 million or 24%, compared to $132.9 million in 2023 Q1. The increase is due to a 15% increase in operating days (2024 - 8,044; 2023 - 6,976) and an 8% increase in the average revenue per operating day (2024 - $20,507; 2023 - $19,058). The Company recognized $129.5 million of cost of sales in 2024 Q1, an increase of $17.6 million or 16%, compared to $111.9 million in 2023 Q1. The increase is mainly due to higher repairs and labour costs related to the increase in operating days and the inclusion of manufacturing costs related to Rime (acquired in July 2023). Cost of sales as a percentage of revenues decreased to 78% in 2024 Q1 from 84% in 2023 Q1. The Gross margin % increased to 22% in 2024 Q1, compared to 16% in 2023 Q1.  The Adjusted gross margin % increased to 29% in 2024 Q1, compared to 23% in ...