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High Arctic Energy Services Inc. (“High Arctic” or the “Company”) (TSX: HWO ) is pleased to provide an operational and financial update on its International Operations in Papua New Guinea (“PNG”). Following several contract extensions in relation to heli-portable rigs that are managed for a significant customer, High Arctic is now in a position to provide additional details on developments towards solidifying its position as the leading drilling services provider in PNG.
High Arctic has been providing drilling services and related rentals to exploration and production companies in PNG for over ten years. PNG is one of the global low cost producers of liquid natural gas (“LNG”) and it continues to be one of the most competitive and geographically advantaged sources of LNG supply in a challenged hydrocarbon environment. High Arctic’s business in PNG is in a strong position, and the Company is committed to continuing to strengthen its position as a top service provider to its customers in this strategic market.
The Company has been in productive discussions with key stakeholders about how to meet its client’s needs for effective rig management and availability between its owned and operated rigs and potential new rig and service requirements in the country. This discussion has been against a backdrop of strengthening High Arctic’s business in the PNG market. The global downturn in the energy economy has further impacted these discussions as High Arctic sought to simultaneously streamline its cost structure in order to deliver significant savings to its clients.
New Joint Company and Contract Update
High Arctic is pleased to announce that it has entered into formal and exclusive negotiations to exchange an equal share of its owned rigs (rigs 102, 115 and 116) for an equal share of the rigs that it has historically managed for its key customer under long term management agreements (rigs 103, and 104) in a company to be jointly owned by High Arctic and its customer. High Arctic will provide the management of this joint company. As part of the proposed arrangements, High Arctic will operate the rigs under a minimum three year exclusive call rig services agreement.
As part of High Arctic’s continuing efforts to reduce costs and provide efficient operations to its customers to remain competitive in the current commodity environment, High Arctic has committed to reducing operating costs in the joint company. Correspondingly first year rates under the new rig services contract are likely to be approximately 20% to 23% less than under the previous contract. It is contemplated there will be scope within the agreement for rates to rebalance in the event that the commodity environment recovers. These rate reductions will not impact the Corporation’s existing contracts for rig 116 or High Arctic’s rental equipment in PNG.
High Arctic also contemplates that the agreement will include two-way option clauses which would allow or require High Arctic to increase its interest in the proposed joint company over time.
The proposed joint company will focus exclusively on rig ownership and High Arctic will focus on operational efficiencies and optimal rig performance. The Company’s significant business of providing rental equipment (e.g. rig mats, heavy and light equipment, etc.) to its customers in the oil and gas, mining and civil engineering sectors (including the proposed joint company) will continue to be wholly owned by High Arctic and will not be part of the proposed transaction. It is anticipated that the discussion on the joint company could be concluded as soon as year-end, and High Arctic will provide additional details as they become available. In the interim, the current contracts for the operation of rigs 103 and 104 are expected to be extended for one year at the new rates.
Mike Maguire, President International commented, “This joint company is an innovative solution to meeting our key customer’s chief driver of reducing well costs and providing cost efficient drilling solution in PNG. The PNG market is an extraordinary long-term energy sector opportunity. High Arctic has become the local domain expert delivering top tier drilling services in a challenging logistics region. We are excited to complete negotiations on this complex transaction, as early as year-end to cement our position as a long term player in this market.”
The agreements required to effect the proposed transaction will be subject to approval by High Arctic’s and the customer’s respective Boards of Directors.
Fast Moving Rig Contract
The Company is pleased to announce that its major client accepted a proposal for a new highly mobile land rig, subject to finalization of lease and drilling services agreements. This rig is expected to start working this fall on an initial six month term. The project is to prove the efficacy of a small footprint rig for field optimization work in areas with or close to existing roads. With success, the contract proposal has terms for extension and would roll in to the joint company.
Foreign Currency Controls
As the Company has previous disclosed in its Management’s Discussion and Analysis for the three months ended March 31, 2017 and 2016, High Arctic’s US dollar bank account has been re-approved under a Bank of Papua New Guinea review of its currency control regulations. This will allow High Arctic to continue to operate in PNG on a US dollar basis and in Kina, the local PNG currency as appropriate and outlined under the regulations, provided that High Arctic seeks approval from the Bank of PNG for future customer contracts to be settled in US dollars on a contract by contract basis.
Michael Binnion, Chairman commented further, “We have been working in PNG for over ten years and we are a material source of foreign exchange, taxes and employment. Our local knowledge, contacts and reputation is well reflected in this recent affirmation of our positive contribution to the country and its people.”
Safety Performance
High Arctic values and prioritizes its culture of safety and focus on safe operations for our employees and customers across our business. In relation to our International Business, the 2016 annual safety statistics for the Australasian Chapter were released recently. High Arctic represents approximately 25 percent of the work hours in the Australian markets. Our safety statistics continue to outperform the regional average. Top tier safety results, in a very difficult operating environment, continue to be a key competitive advantage of the Company.
Rig Activity Updates
Rig 104 is currently on warm stack upon completing work on the exciting new discovery at Muruk. It is anticipated that Rig 104 will either move to an exploration or appraisal well in the highlands later this year.
Rig 115 was successfully demobilized exclusively with Mill 8 helicopters. It was on standby until the end of June and is currently stacked in Port Moresby. The lack of availability of Chinook helicopters validated the value of this light load heli portable rig. Our client achieved significant savings on the demobilization as result.
Rigs 102 and 103 are on cold stack and Rig 116 is on standby. High Arctic anticipates Rig 103 will mobilize in the second half of 2017 to drill a new well in the Western Province.
A major client recently announced a significant exploration farm-in agreement with a “super major” oil and gas company in PNG that has promise to lead to future work for High Arctic and the joint company.
Tom Alford, Interim President and CEO said, “Our strategy is to build and grow the Company to provide superior shareholder returns in a challenging commodity price environment. Our Canadian and International businesses provide diversification and resilience while we seek additional growth opportunities in our core businesses. We will seek to continue to build our Canadian service offering following the completion of the acquisition of Tervita’s Production Services Division.”
Forward-Looking Statements
This Press Release contains forward-looking statements. When used in this document, the words “may”, “would”, “could”, “will”, “intend”, “plan”, “anticipate”, “believe”, “seek”, “propose”, “estimate”, “expect”, and similar expressions are intended to identify forward-looking statements. Such statements reflect the Corporation’s current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause the Corporation’s actual results, performance or achievements to vary from those described in this Press Release. Should one or more of these risks or uncertainties materialize, or should assumptions underlying forward-looking statements prove incorrect, actual results may vary materially from those described in this Press Release as intended, planned, anticipated, believed, estimated or expected. Specific forward-looking statements in this Press Release include, among others, the Corporation’s ability to negotiate and execute agreements to effect the proposed joint company and the fast moving rig project with its key customer; the results of the Corporation’s discussions with its key customer regarding extensions for drilling and related services contracts for Rigs 103 and 104; commodity prices and the impact they have on industry activity; projections of market prices and costs; the Corporation’s ability to finance a possible purchase of the customer’s interest in the proposed joint company, treatment under governmental regulatory regimes and political uncertainty and civil unrest; and the Corporation’s ability to have contracts settled in US dollars and repatriate excess funds from PNG as approval is received from the Bank of PNG. In addition to the risk factors set out above and elsewhere in this Press Release, readers are directed to the additional risk factors set out in the Corporation’s most recent Annual Information Form filed on SEDAR at www.sedar.com.
The forward-looking statements contained in this Press Release are expressly qualified in their entirety by this cautionary statement. These statements are given only as of the date of this Press Release. The Corporation does not assume any obligation to update these forward-looking statements to reflect new information, subsequent events or otherwise, except as required by law.
About High Arctic High Arctic is a publicly traded company listed on the Toronto Stock Exchange under the symbol “HWO”. The Corporation’s principal focus is to provide drilling and specialized well completion services, equipment rentals and other services to the oil and gas industry.
High Arctic’s largest operation is in Papua New Guinea where it provides drilling and specialized well completion services and supplies rig matting, camps and drilling support equipment on a rental basis. The Canadian operation provides well servicing, well abandonment, snubbing and nitrogen services and equipment on a rental basis to a large number of oil and natural gas exploration and production companies operating in Western Canada.
For more information, please contact: Thomas Alford Interim President & CEO Phone: 587-318-3826 Email: tom.alford@haes.ca Brian Peters Chief Financial Officer Phone: 587-318-2218 Email: brian.peters@haes.ca
