Cathedral Energy Services Corp. (TSX: CET) has announced a significant strategic move to bolster its presence in the United States. The company has entered into a definitive agreement to acquire the directional drilling services business of Altitude Energy Partners, LLC, a portfolio company of Black Bay Energy Capital, LLC. This acquisition, valued at approximately USD $100 million, marks a transformative step for Cathedral, significantly enhancing its market share and operational scale in key US basins.
The deal, finalized on July 4, 2022, and expected to close in early July, involves a combination of cash and Cathedral common shares. Altitude Energy Partners, known for its strong directional drilling services, brings a robust operational footprint primarily in the Permian Basin, with headquarters in Wyoming and executive leadership in Houston. This acquisition positions Cathedral as a major player in the US energy sector, specifically within the directional drilling market.
Key Benefits of the Acquisition for Cathedral and Altitude Energy Partners
This strategic acquisition promises a multitude of benefits, setting the stage for enhanced growth and market leadership for the combined entity, particularly focused around altitude energy partners‘ established strengths.
Increased US Market Share and Permian Presence
The merger immediately elevates Cathedral’s position in the US market. With the inclusion of altitude energy partners‘ operations, the combined entity is estimated to hold a top-tier service provider position with approximately 7% market share in the US. Crucially, this acquisition provides Cathedral with a significant and immediate foothold in the prolific Permian Basin, a region critical to US oil and gas production.
Expansion into Key US Basins
Beyond the Permian, altitude energy partners brings a strong operational presence in other key US basins, including the Haynesville, Bakken, DJ Basin, and Powder River Basin. Furthermore, expansion into the Marcellus shale play is already underway, offering further growth opportunities. This diversified geographic presence mitigates regional risks and allows Cathedral to capitalize on activity across multiple high-potential energy regions.
Experienced Leadership Team
A key asset in this acquisition is the experienced and proven management team from altitude energy partners. Led by current President and CEO of Altitude, Lee Harns, along with COO Tyler Clark, and CFO Alex Bougaieff, the entire Altitude management and operational team will transition to lead Cathedral’s existing US directional drilling business. Their continued leadership ensures operational continuity and leverages their deep industry expertise for future growth, with equity ownership in Cathedral aligning their interests with the company’s long-term success.
Financial Accretion and Cash Flow
The acquisition is projected to be highly accretive to Cathedral across all financial metrics, including cash flow per share and free cash flow per share. The robust cash flow generation from altitude energy partners is anticipated to recover the purchase price in under three years on a standalone basis, demonstrating the strong financial rationale behind the deal.
Technology and Synergies
Significant opportunities exist to expand Adjusted EBITDAS by integrating Cathedral’s existing technologies with altitude energy partners‘ operations. Replacing third-party technology with Cathedral’s proprietary offerings will drive further efficiency and profitability. The complementary asset bases of both companies create substantial synergies, enhancing scale, utilization rates, and service offerings for customers.
Entry into US RSS Market
The acquisition immediately establishes Cathedral in the US Rotary Steerable System (RSS) market. Altitude energy partners brings a proven track record in RSS technology, adding a critical capability to Cathedral’s service portfolio and opening doors to new market segments and higher-value contracts.
Enhanced Scale and Customer Service
The combination of Cathedral and altitude energy partners creates a larger, more robust entity capable of delivering enhanced services at scale. The expanded fleet of downhole mud motors and RSS tools, totaling over 360 mud motors and 13 RSS tools (with 3 more RSS tools on order), provides increased capacity and responsiveness to meet growing customer demands.
Strong Financial Position
The pro forma financial metrics indicate a conservative leverage profile for the combined company. With strong projected cash flow, Cathedral anticipates rapidly reducing debt within 12-18 months post-acquisition, strengthening its financial stability and flexibility for future investments and growth.
Larger Public Entity
The increased scale resulting from the acquisition enhances Cathedral’s profile within capital markets. As a larger public entity, Cathedral gains increased visibility and potentially improved access to capital, supporting its growth trajectory and strategic ambitions in the North American energy sector.
Leadership and Operations Post-Acquisition
Cathedral Energy Services is committed to a seamless integration of altitude energy partners. The company will operate under the Altitude name and brand in the US market, leveraging the established reputation and customer relationships built by altitude energy partners.
Retaining Altitude Management
The decision to retain the entire altitude energy partners management team underscores the value Cathedral places on their expertise and leadership. Lee Harns will continue as President of the Altitude business unit and become an executive officer of Cathedral, ensuring continuity and strategic direction. Key personnel like Tyler Clark and Alex Bougaieff, along with long-standing employees, will also remain integral to the operations, fostering a smooth transition and preserving the operational excellence of altitude energy partners. J.R. Boyles, a director and founder of Altitude, will also be appointed to Cathedral’s board of directors, further solidifying the integration and long-term vision.
Continued Operation under Altitude Brand in the US
Maintaining the altitude energy partners brand in the US market is a strategic decision to capitalize on its existing brand recognition and customer loyalty. This approach allows Cathedral to leverage the positive reputation of altitude energy partners while integrating its resources and technologies to enhance service delivery and expand market reach.
Financial Details of the Acquisition
The acquisition involves a purchase price of approximately USD $100 million, structured with a combination of cash and equity.
Purchase Price and Consideration
The consideration comprises USD $62.675 million in cash, funded through existing cash reserves and expanded credit facilities, and the issuance of 67,031,167 Cathedral common shares to the sellers of altitude energy partners. The share issuance represents approximately 45.4% of Cathedral’s pre-acquisition outstanding shares, demonstrating the significant scale of this transaction. A portion of the shares issued will be subject to resale restrictions and escrow arrangements, aligning the interests of the sellers with the long-term performance of the combined entity.
Debt Financing
To finance the cash portion of the acquisition and refinance existing debt, Cathedral has secured a $99 million credit facility led by ATB Financial and Canadian Western Bank. This three-year facility includes a term loan, an operating facility, and a revolving line of credit, providing ample financial flexibility for the combined operations and future growth initiatives. Despite the acquisition financing, Cathedral projects a rapid deleveraging, aiming for a significantly reduced debt profile by the end of 2023.
Conclusion
The acquisition of altitude energy partners by Cathedral Energy Services is a landmark transaction that creates a stronger, more diversified, and financially robust directional drilling services provider. By combining the strengths of both companies, Cathedral is poised to capture a larger share of the US market, leverage significant operational synergies, and deliver enhanced value to its customers and shareholders. The strategic fit, experienced leadership team, and accretive financial profile position Cathedral for sustained success and leadership in the North American energy sector. This acquisition marks a significant step forward in Cathedral’s North American growth strategy and solidifies its position as a leading independent directional drilling company.
