High Arctic Reports 2016 Fourth Quarter and Year End Results - Part 1 - Canadian Energy News, Top Headlines, Commentaries, Features & Events

FOR: HIGH ARCTIC ENERGY SERVICES INC.
TSX SYMBOL: HWO

Date issue: March 21, 2017
Time in: 8:39 PM e

Attention:

CALGARY, ALBERTA--(Marketwired - March 21, 2017) -

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High Arctic Energy Services Inc. (TSX:HWO) ("High Arctic" or the "Corporation") is pleased to announce its 2016 fourth quarter and year end results.

Thomas Alford, High Arctic's President and CEO stated: "The fourth quarter saw continued positive performance from our drilling operations in Papua New Guinea, as the integration of our recently acquired Canadian production services platform continued. The financial performance of the Corporation in the quarter and over the full year, combined with our strong balance sheet provides us with the ability to pursue additional growth opportunities as we continue to grow High Arctic's business operations."

Highlights

2016 marked a year of transition for High Arctic as the Corporation utilized the strength of its PNG business to expand the Corporation's business operations during an extended period of weakness in the global oilfield services sector and was able to add additional geographic and product line diversification through the completion of the acquisition of Tervita's Production Services division (the "Tervita Acquisition") in the third quarter of 2016.

Fourth Quarter 2016:

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-- Revenue in the fourth quarter increased 7% to $62.3 million from $58.0

million in the fourth quarter of 2015. Contribution from the Tervita Acquisition offset lower quarter over quarter contribution from the Corporation's Drilling Services segment which benefited from high activity levels in the fourth quarter of 2015 versus the fourth quarter of 2016. -- Integration of the Tervita's Production Services Division was largely completed during the quarter, with focus now transitioning to the achieving of operating and business synergies. -- Due to reduced activity from the Corporation's Drilling Services segment in the quarter versus the fourth quarter of 2015, Adjusted EBITDA declined 12% to $18.3 million from $20.8 million in the fourth quarter of 2015. Rigs 103 and 115 were active throughout the quarter, with Rig 104 commencing drilling operations in November. Rig 116 remained on standby in the quarter. In comparison, the fourth quarter of 2015 saw EBITDA contribution from all four rigs throughout the quarter. -- Subsequent to quarter end, the Corporation received an interim extension of its drilling and related services contract for PNG Rig 103 and 104 until July 31, 2017 and remains in discussions with its customer for long-term renewals of its contracts for Rigs 103 and 104.

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Consistent with the reduced Adjusted EBITDA during the quarter, as well as increased depreciation expense associated with capital investments made in 2015 on the Corporation's drilling rigs as well as assets acquired in the Tervita Acquisition, Adjusted net earnings declined to $8.4 million ($0.15 per share (basic)) in the quarter versus $9.7 million ($0.18 per share (basic)) in the fourth quarter of 2015. On a net earnings basis, the Corporation generated $7.5 million in net earnings in the quarter versus $9.7 million in the fourth quarter of 2015. During the quarter, the Corporation incurred an additional $0.9 million in onetime costs related to the Tervita Acquisition, resulting in net earnings of $7.5 million ($0.14 per share (basic)) versus $9.7 million ($0.18 per share (basic)) generated in the comparative quarter.

Full Year 2016:

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-- Revenue declined 1% to $208.0 million during the year from $209.9

million in 2015. The four months of revenue contribution from the Tervita Acquisition largely offset lower drilling activity in PNG as well as softer activity and pricing for the Corporation's Canadian snubbing and nitrogen operations during the year. -- Additional margin contribution from the Corporation's owned PNG based drilling rigs, combined with proactive cost management allowed Adjusted EBITDA to increase 11% to $70.8 million in 2016 from $64.0 million in 2015. -- High Arctic distributed a total of $17.0 million to shareholders year to date via $10.5 million in dividends, representing 18% of funds provided from operations during the year, and $6.5 million in share buybacks under the Corporation's NCIB.

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Consistent with the year to date increase in Adjusted EBITDA, Adjusted net earnings increased by 9% to $34.7 million ($0.65 per share (basic)) from $31.9 million ($0.58 per share (basic)) for the year ended 2015. Full year net earnings benefited from the recognition of a gain of $12.7 million related to the Tervita Acquisition. This gain represents the difference in appraised value of the net assets acquired in the transaction versus the $42.8 million paid to acquire them. This gain as well as transaction costs associated with the acquisition has been excluded from the Corporation's Adjusted net earnings as these costs are not representative of the earnings associated with the Corporation's ongoing business operations.

Funds provided from operations of $59.8 million during the year (2015 - $52.8 million) combined with $9.0 million generated from the sale of short term investments offset $52.4 million invested in capital assets and the Tervita Acquisition as well as $17.0 million distributed to investors, allowing the Corporation to exit 2016 with no net debt. Through the strength of its balance sheet, High Arctic continues to seek growth opportunities in order to further diversify its business operations and position itself for a future increase in industry activity levels.

Corporate Profile

Headquartered in Calgary, Alberta, Canada, High Arctic provides oilfield services to exploration and production companies operating in Canada and Papua New Guinea ("PNG"). High Arctic is a publicly traded company listed on the Toronto Stock Exchange under the symbol "HWO". As a result of the expansion of the Corporation's service offering following the Tervita Acquisition, High Arctic has organized its business into three business segments: Contract Drilling Services; Production Services; and Ancillary Services.

Contract Drilling

The Contract Drilling segment consists of High Arctic's drilling services in PNG where the Corporation has operated since 2007. High Arctic currently operates the largest fleet of tier-1 heli-portable drilling rigs in PNG, with two owned rigs and two rigs managed under operating and maintenance contracts for one of the Corporation's customers.

Production Services

The Production Services segment consists of High Arctic's well servicing and snubbing operations. These operations are primarily conducted in the Western Canadian Sedimentary Basin ("WCSB") through High Arctic's fleet of well servicing rigs, operating as Concord Well Servicing, and its fleet of stand-alone and rig assist snubbing units. In addition, High Arctic also provides work-over services in PNG with its heli-portable work-over rig.

Ancillary Services

The Ancillary Services segment consists of High Arctic's oilfield rental equipment in Canada and PNG as well as its Canadian nitrogen and abandonment and compliance consulting services.

Select Comparative Financial Information

The following is a summary of select financial information of the Corporation.

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Three Months Ended December 31 Years Ended December 31 ---------------------------------------------------------------------------- $ millions (except per share amounts) 2016 2015 % Change 2016 2015 2014 ---------------------------------------------------------------------------- Revenue 62.3 58.0 7% 208.0 209.9 171.8 EBITDA(1) 18.2 20.0 (9%) 80.7 61.0 47.2 Adjusted EBITDA(1)(3) 18.3 20.8 (12%) 70.8 64.0 49.3 Adjusted EBITDA % of Revenue 29% 36% (18%) 34% 30% 29% Operating earnings 10.9 14.5 (25%) 45.3 45.5 35.3 Net earnings 7.5 9.7 (23%) 45.1 31.9 28.2 per share (basic)(2) 0.14 0.18 (22%) 0.85 0.58 0.54 per share (diluted)(2) 0.14 0.17 (18%) 0.84 0.57 0.53 Adjusted net earnings(1)(3) 8.4 9.7 (13%) 34.7 31.9 28.2 per share (basic)(2) 0.16 0.18 (17%) 0.65 0.58 0.54 per share (diluted)(2) 0.16 0.17 (6%) 0.65 0.57 0.53 Funds provided from operations(1) 15.9 19.8 (20%) 59.8 52.8 42.9 per share (basic)(2) 0.30 0.36 (17%) 1.13 0.96 0.82 per share (diluted)(2) 0.30 0.35 (14%) 1.12 0.94 0.80 Dividends 2.6 2.7 (4%) 10.5 10.9 9.4 per share(2) 0.05 0.05 - 0.20 0.20 0.18 Capital expenditures 2.1 0.6 200% 52.4 40.0 55.7 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- As at December 31 ---------------------------------------------------------------------------- 2016 2015 2014 ---------------------------------------------------------------------------- Working Capital(1) 28.6 43.2 41.6 Total assets 305.1 244.1 188.7 Total non-current financial liabilities 4.2 6.6 0.4 Net (debt) cash, end of period (1) 3.3 11.5 37.2 Shareholders' Equity 230.2 201.2 165.6 Shares outstanding - end of period(2) 53.2 54.4 55.8 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Readers are cautioned that EBITDA, Adjusted EBITDA, Adjusted net earnings, Funds provided from operations, net (debt) cash and working capital do not have standardized meanings prescribed by IFRS - see "non IFRS Measures" for calculations of these measures. (2) The restricted shares held by a trustee under the Executive and Director Incentive Share Plan are included in the shares outstanding. The number of shares used in calculating the net earnings per share amounts is determined differently as explained in the Financial Statements. (3) Adjusted EBITDA and Adjusted net earnings exclude the impact of the $12.7 million gain on acquisition related to the Tervita Acquisition - see "Acquisition Costs and Gain on Acquisition" for further details.

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Tervita Acquisition

On August 31, 2016, High Arctic acquired Tervita's Production Services Division for $42.8 million, payable in cash. Through this acquisition, High Arctic added a fleet of 85 service rigs and related support equipment, a surface equipment rentals division and an engineering services division which provides solutions to assist in the management of abandonment and compliance programs. In addition, the Tervita Acquisition provided High Arctic with seven new operational bases located in key operating areas in Alberta, five of which are owned. Subsequent to the closing of the transaction, High Arctic rebranded the well servicing operations as Concord Well Servicing, returning to the former operating name of this division which has built a strong reputation over its 37 year operating history.

The Tervita Acquisition provides growth to High Arctic's Canadian operations and increased diversification to the Corporation's global operations. Integration activities were largely completed in the fourth quarter to combine the Tervita and High Arctic operations, which includes items such as the transition of systems and processes, integration of health and safety practices, customer contract assignments, and rebranding.

In accordance with IFRS 3 (Business Combinations), the acquired assets were recorded based on an independent fair market appraisal value of $64.0 million, less deferred tax and lease obligations, resulting in a $12.7 million net gain over the $42.8 million paid in cash for the assets. This gain was included in net income during the third quarter, and has been excluded from Adjusted EBITDA and Adjusted net earnings - see "non IFRS measures".

Operating Segments

Drilling Services

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Three Months Ended Year Ended December 31 December 31 ---------------------------------------------------------------------------- ($ millions) 2016 2015 Change % 2016 2015 Change % ---------------------------------------------------------------------------- Revenue 36.8 43.2 (6.4) (15%) 144.6 151.8 (7.2) (5%) Oilfield services expense (1) 23.3 26.8 (3.5) (13%) 89.9 107.0 (17.1) (16%) ---------------------------------------------------------------------------- Oilfield services operating margin (1) 13.5 16.4 (2.9) (18%) 54.7 44.8 9.9 22% ---------------------------------------------------------------------------- Operating margin (%) 37% 38% (1%) (3%) 38% 30% 8% 27% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) See 'non-IFRS Measures'.

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The Corporation owns two heli-portable drilling rigs (Rigs 115 and 116) which commenced earning revenue in March 2015 and August 2015, respectively. These rigs are in addition to Rigs 103 and 104 which High Arctic operates on behalf of a major oil and gas exploration company in PNG.

Fourth Quarter:

Rigs 103 and 115 were active on drilling assignments throughout the quarter, with Rig 104 commencing drilling operations in November. Rig 116 remained on standby during the quarter generating its contract standby rate. As a result of the period of standby for Rig 104 combined with rate concessions provided under a contract assignment, Drilling Services revenue declined 15% in the quarter to $36.8 million from $43.2 million in the fourth quarter of 2015. The fourth quarter of 2015 benefited from full revenue contribution from three rigs drilling throughout the quarter, which did not occur in the current quarter. In addition, initiatives undertaken by the Corporation and its customer during the year to reduce field support services to lower the customer's drilling costs resulted in reduced revenue in the quarter relative to the fourth quarter of 2015.

In conjunction with the reduced field support services being provided to its customer, High Arctic was able to proportionately reduce its field operating costs resulting in operating margin as a percentage of revenue remaining in line with the comparative quarter at 37% versus 38% in the fourth quarter of 2015. Consistent with the decline in revenue during the quarter, operating margin declined to $13.5 million in the quarter from $16.4 million in the fourth quarter of 2015.

Fiscal 2016:

For fiscal 2016, the Drilling Services segment benefited from the full annual contribution of Rigs 115 and 116. The full year revenue contribution from these rigs was partially offset by reduced revenue contribution from Rigs 103 and 104 which had additional drilling services revenue in 2015 which did not continue in 2016. Drilling schedules for these rigs also resulted in an increased amount of lower rate standby days to be incurred in 2016 versus 2015.

Operating margins benefited in 2016 from the increased contribution of Rigs 115 and 116 which are owned by High Arctic and therefore do not incur the rig lease charges incurred on Rigs 103 and 104. In addition, Rig 116 generated standby revenue throughout 2016 with minimal operating costs, which inflates operating margins for the Drilling Services segment. These factors allowed operating margin as a percentage of revenue to increase to 38% in the year versus 30% in 2015. This increased margin contribution offset the reduction in revenue resulting in operating margin to increase to $54.7 million for 2016 in comparison to $44.8 million in 2015.