Cathedral Energy Services Ltd. (TSX: CET) (“Cathedral” or the “Company” or “CET”) today announced that it has entered into an agreement (the “Agreement”) to acquire the directional drilling services business (the “Acquired Business”) of Altitude Energy Partners, LLC (“Altitude”), a portfolio company of Black Bay Energy Capital, LLC (“Black Bay”), for a purchase price of approximately USD $100 million (the “Acquisition”) payable in a combination of cash and common shares of Cathedral (“Acquisition Shares”). Altitude is a privately-held, U.S.-based, directional drilling services business with headquarters in Wyoming, executive leadership based in Houston, and significant operations in Texas, most prominently in the Permian Basin.
The Acquisition is expected to close in early July 2022. The terms of the Acquisition were negotiated at arm’s length.
Benefits of the Acquisition
- The combined US market share among the top service providers is estimated at 7%, with a significant Permian presence
- Immediate presence in the Permian, Haynesville, Bakken, DJ, and Powder River with expansion into the Marcellus in progress
- Experienced, proven management aligned for future growth with equity ownership in Cathedral
- Highly accretive deal for Cathedral on every metric including cash flow per share and free cash flow per share 1
Cumulative free cash flow 1 generated from the Acquisition, on a stand-alone basis, is expected to exceed the purchase price in less than three years - Significant opportunity to expand Adjusted EBITDAS1 by replacing third-party-supplied technology providing additional upside to Cathedral shareholders
- Establishes Cathedral into the US rotary steerable system (“RSS”) market with a proven Altitude track record
Highly-complementary asset bases provide for enhanced scale, utilization, efficiencies, and expanded services for our customers - Conservative pro forma leverage metrics and visibility to a very low debt profile within 12-18 months
- Creates a larger scale public entity with increased capital market
“Cathedral has been actively engaged in a North American strategy to build size and scale and Altitude represents a major step forward in that plan. Each acquisition to date has brought Cathedral highly-experienced people, diversity of regional exposure, or in certain cases, technologies that are additive to our offering,” said Tom Connors, President, and CEO of Cathedral. “This transaction with Altitude represents a transformative step forward by Cathedral, with a combined US market share of approximately 7%, providing immediate size and scale and placing us firmly on the road to becoming a leading independent directional drilling company in both the US and Canada.”
Mr. Connors continued “The cash flow generated by Altitude is expected to pay back in under three years, similar to our recent transactions, and is highly accretive to shareholders on every metric including cash flow per share and free cash flow per share (see Non-GAAP measures). We also see tremendous opportunity to grow the business and drive substantial incremental Adjusted EBITDAS (see Non-GAAP measures) by replacing third-party provided technology over time with existing Cathedral MWD and drilling technologies. As we expand our technology platform going forward, accelerated with the recent addition of Axel Schmidt and LEXA Drilling Technologies, Altitude will also help provide a wider distribution channel to grow market share more rapidly in the US.”
The company plans to operate under the Altitude name and brand in the US. Further, the Altitude management team and its people will lead and operate Cathedral’s existing US directional drilling business. Mr. Lee Harns, the current President and CEO of Altitude, will remain as President of the business unit. Joining Mr. Harns will be Tyler Clark, the current COO, and Alex Bougaieff, the current CFO, along with several key long-standing employees and the entire Altitude operational team. Mr. Connors added: “This is a people business. We were very impressed with the depth, experience, professionalism, and dedication of the Altitude team as a whole and are excited about the opportunities our combined strengths will provide”. It is important to note the founding group of investors and several key employees of Altitude have agreed to accept a large portion of their transaction consideration in the form of equity that will be restricted for various periods of time. “We believe this shows incredible conviction in the growth strategy we have outlined for the combined businesses”, says Mr. Connors.
Altitude owns and deploys 360 downhole high-performance mud motors and 13 RSS tools, with 3 additional RSS tools expected for delivery in the back half of this year, across its operations. Cathedral expects to achieve further deal accretion on real estate and general and administrative (G&A) synergies, but these are not included in the forecast or deal valuation. The company expects operational synergies and expanded capacity with the addition of Altitude’s mud motor technology fleet, which shares the same design as Cathedral’s fleet of mud motors, recently acquired through Discovery Downhole Services. Cathedral’s existing proprietary mud motor technology can also be deployed by Altitude, to enhance our capabilities and capacity to pursue opportunities in areas such as the Marcellus, in the Northeast US.
Lee Harns, President, and CEO of Altitude Energy Partners expanded, “Altitude has always been performance and client-driven organization with the mission to provide our customers with enhanced, customized, directional drilling solutions, and at the heart of this mission is our people. We want to thank our resilient and professional team for their hard work and immense contributions to date. Altitude and Cathedral are aligned in our core values and we look forward to achieving new heights as a combined organization. We’re proud to have the brand we’ve built as Altitude continue on under the Cathedral umbrella and are confident the addition of Cathedral’s, technology, strong complementary market presence, and public market support will only help propel our market share further and help us firmly establish ourselves as one of the pre-eminent independent directional drillers in the US as well as Canada.”
Key Personnel Being Retained
Under the terms of the Agreement, Cathedral will retain key Altitude personnel under employment and consulting contracts to ensure a seamless customer service experience, successful integration, and long-term alignment with Cathedral’s strategy.
Mr. Lee Harns, the current President and CEO of Altitude, will enter into an employment agreement to continue as President of the Altitude business unit after the Acquisition, and accordingly will become an executive officer of Cathedral. Following the completion of the Acquisition, Mr. Harns is expected to exercise control over approximately 13,203,103 Common Shares representing approximately 6.2% of the issued and outstanding Common Shares.
Mr. J.R. Boyles, a director and founder of Altitude, will be appointed to Cathedral’s board of directors, subject to the completion of ordinary course due diligence prior to the closing of the Acquisition. Following the completion of the Acquisition, it is expected that Mr. Boyles will exercise control over approximately 19,449,197 Common Shares, representing approximately 9.1% of the issued and outstanding Common Shares.
Select Pro Forma Financial Information
The issuance of approximately 67,031,167 Acquisition Shares under the Agreement to the sellers of the Acquired Business would represent approximately 45.4% of the issued and outstanding common shares of Cathedral (“Common Shares”) on a non-diluted basis, prior to the Acquisition (based on 147,559,328 Common Shares outstanding prior to the Acquisition on a non-diluted basis). See the section below entitled “Consideration” for more details. Select pro forma financial information appears in the table below.
The Acquisition is not anticipated to materially affect control of Cathedral. No new control person is created as a result of the Acquisition.
Consideration
In connection with the Acquisition, the Company expects to pay the consideration (“Purchase Price”) as follows:
- Cash consideration of USD $62,675,000 (the “Cash Consideration”) which will be funded through cash on hand and expanded credit availability under the Company’s term and revolving credit facilities; and
the issuance of 67,031,167 Acquisition Shares at a deemed price of $0.7127 per share, which represents approximately 45.4% of the Company’s outstanding Common Shares, pre-transaction, on a non-diluted basis; and - The deemed price per share of $0.7127 for the Acquisition Shares issuable pursuant to the Acquisition would represent a 12.3% premium to the 5-day VWAP of the Common Shares for the 5-day period ended Monday, June 27, 2022.
Resale Restrictions
- Approximately 41,888,781 Acquisition Shares issued will be subject to contractual resale restrictions which expire as to 1/3 on the dates which are 12 months, 24 months, and 36 months following the date of completion of the Acquisition (the “Closing Date”).
- Approximately 11,673,188 Acquisition Shares issued will be subject to contractual resale restrictions which expire as to 1/3 on the dates which are 4 months, 6 months, and 8 months following the Closing Date, (with such restrictions to be fully or partially lifted, as the case may be, (i) upon the prior consent of Cathedral, not to be unreasonably withheld, taking into account Cathedral’s status as a publicly-traded company, or (ii) following the date when the aggregate number of Acquisition Shares subject to this clause has been reduced, in compliance with the terms and conditions set forth in the Agreement.
- Approximately 13,469,198 Acquisition Shares will be placed into escrow (the “Escrow Shares”) and released from escrow as to 20% every 12 months for a period of 5 years.
- The escrow restrictions on the Escrow Shares may be lifted early if the Acquired Business has achieved $150 million USD in Adjusted EBITDAS (see Non-GAAP measures) within 36 months following the closing date.
Cash Consideration and Debt Financing
In concert with the Agreement, Cathedral has signed a binding arrangement with ATB Financial (“ATB”) as lead arranger and administrative agent, and Canadian Western Bank (“CWB”) to provide the Company with committed financing by way of a three-year $99 million credit facility available at closing (the “Credit Facility”), comprised of a C$74 million term loan (the “Term Loan”), a C$15 revolving borrowing base loan (the “Operating Facility”) and a C$10 million revolving line (the “Line Facility”). The Credit Facility will be utilized to replace and repay Cathedral’s existing term loan and operating facility. As at the close of the acquisition, we expect net debt (see Non-GAAP measures) to be C$98 million, inclusive of lease liabilities. Mr. Connors stated, “With the strong visibility in activity over the next 18 months and with conservatively projected cash flow from the combined entity, we anticipate we will have the capacity to substantially reduce an already conservative debt profile by the end of 2023.”
Other Terms of The Agreement
The Purchase Price assumes that the Acquired Business will be purchased on a cash-free and debt-free basis and provides for a purchase price adjustment 90 days after closing based on working capital.
The Agreement may be terminated by the mutual agreement of the parties thereto or if the Acquisition is not closed within 30 days of the date of the Agreement.
Requirements of the TSX
The Acquisition Shares to be issued to the shareholders of Altitude in partial satisfaction of the Purchase Price will exceed 25% of the issued and outstanding Common Shares of the Company, on a non-diluted basis, prior to completion of the Acquisition. Therefore, under Section 611(c) of the rules of the TSX, shareholder approval of the Acquisition is required. The Corporation is relying on the exemption in Section 604(d) of the rules of the TSX, whereby instead of holding a shareholder meeting, the Corporation has obtained the written consent for the Acquisition of shareholders of the Corporation holding greater than 50% of the issued and outstanding Common Shares of the Corporation.
In accordance with TSX policies, the Acquisition will not close until the date which is five (5) Business Days from the date of this announcement or shortly thereafter.
Advisors
Peters & Co. Limited is acting as financial advisor to Cathedral with respect to the Acquisition and has provided its opinion to the board of directors of Cathedral that, based upon and subject to the assumptions, limitations, and qualifications set forth therein, the consideration to be paid by Cathedral pursuant to the Acquisition is fair, from a financial point of view to Cathedral.
Acumen Capital Finance Partners Limited has also provided an opinion to the board of directors of Cathedral that, based upon and subject to the assumptions, limitations, and qualifications set forth therein, the consideration to be paid by Cathedral pursuant to the Acquisition is fair, from a financial point of view to Cathedral.
ATB Capital Markets, Canaccord Genuity Corp., Cormark Securities Inc., and Stifel FirstEnergy are acting as strategic advisors to Cathedral with respect to the Acquisition.
DS Lawyers Canada LLP, Porter Hedges LLP, and Gordon Lusky LLP acted as legal counsel to Cathedral.
Parks Paton Hoepfl & Brown, LLC (PPHB) acted as Altitude and Black Bay’s financial advisor and investment bank with respect to the Acquisition. Fishman Haygood and Stikeman Elliot acted as legal counsel to Altitude and Black Bay.
Certain U.S. Legal Matters
This news release does not constitute an offer to sell or a solicitation of an offer to sell any of securities in the United States. The securities have not been and will not be registered under the United States Securities Act of 1933, as amended (the “U.S. Securities Act”) or any state securities laws and may not be offered or sold within the United States or to, for the account or benefit of, U.S. Persons (as such term is defined in Regulation S under the U.S. Securities Act) unless registered under the U.S. Securities Act and applicable state securities laws or an exemption from such registration is available. This news release shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities, in any jurisdiction in which such offer, solicitation or sale would be unlawful.
