AKITA Drilling Ltd. Announces Year-to-Date Earnings and Cash Flow

CALGARY, July 25, 2016 /CNW/ - AKITA Drilling Ltd.'s net loss for the three months ended June 30, 2016 was $4,062,000 (net loss of $0.23 per share basic and diluted) on revenue of $3,646,000, compared to net loss of $1,620,000 (net loss of $0.09 per share basic and diluted) on revenue of $22,536,000 for the corresponding period in 2015. Funds flow from operations for the quarter ended June 30, 2016 was $2,688,000 compared to $9,072,000 in the corresponding quarter in 2015.

Net income for the six months ended June 30, 2016 was $14,111,000 ($0.79 per share) on revenue of $45,636,000 which included a contract cancellation fee.  Comparative figures for the corresponding six month period in 2015 were net income of $2,598,000 ($0.14 per share basic and diluted) and revenue of $69,251,000.  Funds flow from operations for the January to June period in 2016 was $28,071,000 compared to $23,131,000 for the comparative period in 2015.

Crude oil and natural gas prices have recovered slightly over the first quarter of 2016 with West Texas Intermediate ("WTI") closing at $48.33 USD at June 30, 2016 which is 31% higher than in the first quarter of 2016. Oil and gas companies remain very cautious with capital spending resulting in limited opportunities for companies in the contract drilling segment. The western Canadian active rig count for the six months ended June 30, 2016 has declined 49% when compared to the same period of 2015. AKITA's rig utilization for the six months ended June 30, 2016 declined 71% with only 719 operating days versus 2,520 operating days in the same period of 2015. This significant decline in activity is the primary driver for AKITA's net loss in the second quarter of 2016.

During these challenging times, management's focus has been to preserve AKITA's strong financial position. Working capital at June 30, 2016 has increased to $31,373,000 from $16,002,000 at December 31, 2015 and cash and cash equivalent balances have increased 140% over the same time frame. Capital spending has been limited to routine capital and totalled $1,530,000 for the six months ended June 30, 2016 compared to $11,874,000 for the six months ended June 30, 2015, which included significant rig construction costs.

Despite small improvements in crude oil and natural gas prices, management anticipates the balance of 2016 and into 2017 to remain very challenging for AKITA and the contract drilling industry as a whole. Despite this challenge, management believes the Company is in a strong position and is poised to pursue opportunities as they arise.

Selected information from AKITA Drilling Ltd.'s Management Discussion and Analysis from the Quarterly Report as follows:

Basis of Analysis in this MD&A, Non-Standard and Additional GAAP Items  

The Company reports its joint venture activities in the financial statements in accordance with International Financial Reporting Standards ("IFRS"), IFRS 11 "Joint Arrangements".  In determining the classification of its joint arrangements, AKITA considers whether the joint arrangements are structured through separate vehicles, if the legal form of the separate vehicles confers upon the parties direct rights to assets and obligations for liabilities relating to the arrangements, whether the contractual terms between the parties confer upon them rights to assets and obligations for liabilities relating to the arrangements as well as if other facts and circumstances lead to rights for assets and obligations for liabilities being conferred upon the parties to the arrangement prior to concluding that AKITA's joint ventures are properly classified as joint ventures rather than joint operations.  Under IFRS 11, AKITA is required to report its joint venture assets, liabilities and financial activities using the equity method of accounting.  However, for purposes of analysis in this MD&A, the proportionate share of assets, liabilities and financial activities is included as non-standard information ("Adjusted") where appropriate.  The Company provides the same drilling services and utilizes the same management, financial and reporting controls for its joint venture activities as are in place for its wholly-owned operations.  None of AKITA's joint ventures are individually material in size when considered in the context of AKITA's overall operations.

During the six months ended June 30, 2016, the Company included a material contract cancellation fee in revenue. The effect of this fee has been excluded in the Company's adjusted revenue and adjusted operating margin analysis.

Operating margin, revenue per operating day, operating and maintenance expenses per operating day and operating margin per operating day are not recognized measures under IFRS.  Management and certain investors may find such operating margin data to be a useful measurement tool, as it provides an indication of the profitability of the business prior to the influence of depreciation, overhead expenses, financing costs and income taxes.  Management and certain investors may find "per operating day" measures for revenue and operating margin indicate pricing strength while operating and maintenance expenses per operating day demonstrates a degree of cost control and provides a proxy for specific inflation rates incurred by the Company.  Readers should be cautioned that in addition to the foregoing, other factors, including the mix of rigs that are utilized between conventional and pad and singles, doubles and triples can also influence these results.  Readers should also be aware that AKITA includes standby revenue in its determination of "per operating day" results.

Funds flow from operations is considered an additional GAAP measure under IFRS.  AKITA's method of determining funds flow from operations may differ from methods used by other companies and includes cash flow from operating activities before working capital changes as well as equity income from joint ventures adjusted for income tax amounts paid during the period.  Management and certain investors may find funds flow from operations to be a useful measurement to evaluate the Company's operating results at year-end and within each year, since the seasonal nature of the business affects the comparability of non-cash working capital changes both between and within periods. 

Revenue and Operating & Maintenance Expenses

 

Second Quarter Comparatives

During the second quarter of 2016, adjusted revenue decreased to $4,964,000 ($41,025 per day) compared to $30,205,000 ($34,130 per day) during the second quarter of 2015 as a result of weak market conditions which affected all rig categories. The increase on a per day basis was a result of the rig mix in the second quarter of 2016 as compared to the same period in 2015 in which a broader mix of rigs were operating as opposed to only triple pad rigs in 2016.

Adjusted operating and maintenance costs are tied to operating days and amounted to $2,383,000 ($19,694 per operating day) during the second quarter of 2016 compared to $18,740,000 ($21,175 per operating day) in the same period of the prior year.  The decrease in operating and maintenance costs, on a total basis resulted primarily from reduced drilling activity while on a "per day" basis, resulted from cost reductions implemented over the previous year.

The adjusted operating margin for the Company decreased to $2,581,000 in the second quarter of 2016 from $11,465,000 during the corresponding quarter of 2015.  The decreased adjusted operating margin is a direct result of decreased drilling activity as AKITA's operating days declined 86% in the second quarter of 2016 compared to the same period in 2015. On a per day basis, adjusted operating margin increased to $21,331 in the second quarter of 2016 from $12,955 in the comparative period of 2015, primarily as a result of the rig mix operating.

Year-to-Date Comparatives

During the first six months of 2016, adjusted revenue decreased to $24,376,000 from $89,707,000 during the first six months of 2015 as a result of lower drilling activity. Adjusted revenue per operating day decreased to $33,903 during the first six months of 2016 from $35,598 in the comparative six month period of 2015. This decrease is due to increased competition in the drilling industry as rigs compete for fewer jobs which has driven day rates lower.

While overall adjusted revenue for the six months ended June 30, 2016 declined by 73% compared to the corresponding period in 2015, unadjusted revenue per the interim financial statements decreased by only 34%. Offsetting the reduction in adjusted revenue was contract cancellation revenue of $28,250,000 (2015 - nil) relating to a multi-year contract that was cancelled in January of 2016 for one of AKITA's pad triple rigs. Payment of the contract cancellation fee was divided into three payments, including the first which was received during the first quarter of 2016. The remaining amounts are included in current and long-term receivables on the Company's Statement of Financial Position. 

Adjusted operating and maintenance costs are tied to operating days and amounted to $14,680,000 ($20,417 per operating day) during the first six months of 2016 compared to $58,249,000 ($23,115 per operating day) in the same period of the prior year.  The decrease on a per day basis is a result of both rig mix and cost controls.

The adjusted operating margin for the Company decreased to $9,696,000 in the first six months of 2016 from $31,458,000 during the corresponding period of 2015. On a per day basis, adjusted operating margin increased to $13,485 for the six months ended June 30, 2016 from $12,483 in the corresponding period of 2015. This increase in margin per day is due to lower costs per day resulting from a change in the rig mix as well as cost controls as noted above.

Other Comments

From time to time, the Company requires customers to make pre-payments prior to the provision of drilling services.  In addition, from time to time, the Company records cost recoveries related to capital enhancements for specific customer related projects.  At June 30, 2016, there was no deferred revenue related to these activities (June 30, 2015 - $79,000).

Depreciation and Amortization Expense

 

Depreciation and amortization expense was 35% lower in the second quarter of 2016 compared to the corresponding quarter of 2015. As AKITA depreciates its rig fleet on a unit of production basis, the decrease in the depreciation and amortization expense is directly related to the 87% decrease in the number of operating days when comparing the second quarter of 2016 to the corresponding period of 2015. On a per day basis depreciation in the second quarter of 2016 ($44,496 per day) was significantly higher than the second quarter of 2015 ($9,351 per day) as rigs are subject to certain minimum annual depreciation (in addition to the unit of production basis for depreciation).  

Depreciation and amortization expense for the first six months of 2016 totalled $11,659,000 compared to $17,344,000 for the corresponding period in 2015.  As with the depreciation and amortization expense for the second quarter, lower rig activity levels were the driver behind the lower depreciation and amortization expense in 2016 to date.  In the first six months of 2016, drilling rig depreciation accounted for 95% of total depreciation and amortization expense (2015 - 96%). 

While AKITA conducts several of its drilling operations via joint ventures, the drilling rigs used to conduct those activities are owned jointly by AKITA and its joint venture partners, and not the joint ventures themselves.  Therefore, the joint ventures do not hold any property, plant, or equipment assets directly.  Consequently, the depreciation balance reported above includes depreciation on assets involved in both wholly-owned and joint ventured activities.

Selling and Administrative Expenses

 

Adjusted selling and administrative expenses were 29% of adjusted revenue in the first six months of 2016 compared to 10% of adjusted revenue in the first six months of 2015. The increase in selling and administrative expenses when compared to adjusted revenue is a result of the fixed nature of the majority of the Company's selling and administrative costs. The single largest component of selling and administrative expenses was salaries and benefits, which accounted for 57% of these expenses (58% in 2015). 

Equity Income from Joint Ventures

 

The Company provides the same drilling services and utilizes the same management, financial and reporting controls for its joint venture activities as are in place for its wholly-owned operations.  The analyses of these activities are incorporated throughout the relevant sections of this MD&A.  Two thirds of AKITA's joint ventures utilize pad drilling rigs.

Other Income (Loss)

 

Interest income increased to $493,000 in the first six months of 2016 from $68,000 in the corresponding period in 2015 primarily due to accrued interest ($394,000) on receivable balances related to the contract cancellation discussed previously, the balance of interest income is interest on cash and term deposit balances.

During the first six months of 2016, the Company incurred interest expense of $80,000 related to the future cost of the Company's defined benefit pension plan.  During the corresponding six month period in 2015, AKITA incurred interest expense of $285,000 primarily as a result of the Company's indebtedness as well as the future cost of the defined benefit pension plan. 

During the first six months of 2016, the Company sold some ancillary assets for $125,000 that resulted in a gain of $30,000.  During the first six months of 2015, the Company disposed of certain non-core assets for $786,000 resulting in an $111,000 loss.

"Net other gains (losses)" of $110,000 for the six months ended June 30, 2016 relate primarily to the discount of the long-term receivable associated with the contract cancellation fee. Approximately 95% of amounts recorded as "Net other gains (losses)" during the first six months of 2015 related to foreign exchange that was associated with rig construction for AKITA's newest triple pad rig. 

Income Tax Expense

 

Income tax expense increased to $5,426,000 in the first six months of 2016 from $2,777,000 in the corresponding period in 2015 mainly due to higher pre-tax earnings resulting from the contract cancellation fee.  Deferred taxes for the six months ended June 30, 2016 were lower than the same period in 2015 as the effect of the 2015 Alberta corporate income tax increase affected the second quarter of 2015, thereby increasing the Company's future tax liabilities.

Net Income (Loss), Funds Flow and Net Cash From Operating Activities

 

During the three months ended June 30, 2016, the Company reported a net loss of $4,062,000 or $0.23 per Class A Non-Voting and Class B Common Share (basic and diluted) compared to a net loss of $1,620,000 or $0.09 per share (basic and diluted) in the comparative quarter of 2015. Two primary factors that contributed to the increased loss in 2016 were the 86% reduction in operating days during the second quarter of 2016 compared to the same period in 2015 and the increase in depreciation resulting from minimum depreciation days for non-operating rigs.

Funds flow from operations decreased to $2,688,000 during the second quarter of 2016 from $9,072,000 in the corresponding quarter in 2015.  Funds flow from operations was negatively affected by weaker drilling activity in the second quarter of 2016 but was not affected by depreciation expense as this is a non-cash item.

Net income increased to $14,111,000 or $0.79 per Class A Non-Voting and Class B Common Shares (basic and diluted) for the first six months of 2016 from $2,598,000 or $0.14 per share (basic and diluted) in the corresponding period of 2015.  Funds flow from operations increased to $28,071,000 during the first six months of 2016 from $23,131,000 in the corresponding period in 2015.  The increase in both net income and funds flow for the six month period ended June 30, 2016 was directly attributable to the contract cancellation fee recorded in the first quarter of 2016. The larger increase in net income than in funds flow in the first six months of 2016 compared to 2015 is a result of higher depreciation and future taxes in 2015 which are non-cash items that do not affect funds flow.

The following table reconciles funds flow and cash flow from operations:

 

Fleet and Rig Utilization  

At June 30, 2016 AKITA had 31 drilling rigs, including nine that operated under joint ventures (28.225 net to AKITA), compared to 36 rigs (32.725 net) in the corresponding period of 2015 (5 rigs decommissioned).  There were no changes to AKITA's rig fleet during the first 6 months of 2016. 

 

Liquidity and Capital Resources  

Cash used for capital expenditures totalled $1,530,000 in the first six months of 2016 (2015 - $11,874,000).  All of the capital spending in 2016 relates to routine items while nearly three quarters of the 2015 capital expenditures related to the completion of a triple pad rig.

At June 30, 2016, AKITA's Statement of Financial Position included working capital (current assets minus current liabilities) of $31,373,000 compared to working capital of $7,414,000 at June 30, 2015 and working capital of $16,002,000 at December 31, 2015.  Readers should also be aware of the seasonal nature of AKITA's business and its effect on non-cash working capital balances.  Typically, non-cash working capital balances reach annual maximum levels at the end of the first quarter or during the second quarter as a result of spring break-up.  Non-cash working capital amounted to $8,800,000 at June 30, 2016 compared to a non-cash working capital of $6,637,000 at December 31, 2015.  Working capital at June 30, 2016 improved compared to June 30, 2015 as a result of cost controls over capital and operating expenses as well as the first payment and receivables associated with the contract cancellation fee.

The Company chooses to maintain a conservative Statement of Financial Position due to the cyclical nature of the industry.  In addition to its cash and term deposit balances, the Company has an operating loan facility with its principal banker totalling $100,000,000 that is available until 2020.  Although the facility has been provided in order to finance general corporate needs, capital expenditures and acquisitions, management intends to access this facility primarily to enable the Company to explore expansion opportunities or to fund new rig construction requirements related to drilling contracts that it might be awarded.  The interest rate on the facility varies based upon the actual amounts borrowed, and ranges from 0.45% to 1.45% over prime interest rates or 1.45% to 2.45% over guaranteed notes, depending on the preference of the Company.  The Company did not have any borrowings from this facility at June 30, 2016 (2015-$2,500,000). 

The Company's objectives when managing capital are:

• to safeguard the Company's ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders; and
• to augment existing resources in order to meet growth opportunities.

The Company manages its capital structure and makes adjustments in light of changes in economic conditions and the risk characteristics of the underlying assets.  In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, repurchase or issue new shares, sell assets or take on long-term debt.  Since 1999, dividend rates have increased eight times with no decreases.  The last dividend increase was declared on March 5, 2014.

During the 10 year period since 2006, AKITA has repurchased 711,408 Class A Non-Voting shares through normal course issuer bids and has issued 122,200 Class A Non-Voting shares upon exercise of stock options.

The Company had two rigs under multi-year contracts at June 30, 2016.  Of these contracts, one is due to expire in 2017 and one in 2018.

From time to time, the Company may provide guarantees for bank loans to joint venture partners in respect of sales of rig interests to joint venture partners.  At June 30, 2016, AKITA provided $4,792,000 in deposits with its bank for those purposes (June 30, 2015 - $8,482,000 and December 31, 2015 - $5,978,000).  AKITA's security from its partners for these guarantees includes interests in specific rig assets.  These balances have been classified as restricted cash on the Interim Statements of Financial Position.

Forward-Looking Statements|

From time to time AKITA makes forward-looking statements.  These statements include but are not limited to comments with respect to AKITA's objectives and strategies, financial condition, results of operations, the outlook for the industry and risk management.

By their nature, these forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, and the risk that the predictions and other forward-looking statements will not be realized.  Readers of this MD&A are cautioned not to place undue reliance on these statements as a number of important factors could cause actual future results to differ materially from the plans, objectives, estimates and intentions expressed in such forward-looking statements.

Forward-looking statements may be influenced by factors such as the level of exploration and development activity carried on by AKITA's customers; world crude oil prices and North American natural gas prices; weather; access to capital markets and government policies.  We caution that the foregoing list of factors is not exhaustive and that investors and others should carefully consider the foregoing factors as well as other uncertainties and events prior to making a decision to invest in AKITA.  Except as required by law, the Company does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by it or on its behalf.

Selected financial information for the Company is as follows:

 

 

 

 

 

SOURCE AKITA Drilling Ltd.