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

CALGARY, July 28, 2017 /CNW/ - AKITA Drilling's net loss for the three months ended June 30, 2017 was $4,491,000 (net loss of $0.25 per share basic & diluted) on revenue of $17,986,000 compared to a net loss of $4,062,000 (net loss of $0.23 per share basic & diluted) on revenue of $3,646,000 for the corresponding period of 2016. Funds flow from operations increased to $3,254,000 in the second quarter of 2017 from $2,688,000 in the corresponding period of 2016.

The Company incurred a net loss of $9,466,000 for the six months ended June 30, 2017 ($0.53 per share basic & diluted) on revenue of $37,179,000 compared to net earnings of $14,111,000 ($0.79 per share basic & diluted) on revenue of $45,636,000 ($17,386,000 from direct operations and $28,250,000 from contract cancellation revenue) in the comparative period in 2016. Funds flow from operations for the January to June period of 2017 was $5,078,000 compared to $28,071,000 for the same period in 2016.

Improving crude oil prices beginning in the second quarter of 2016 and continuing through the first quarter of 2017 had a positive effect on activity in the drilling industry. In response to this increase in activity, management's focus for the six months ended June 30, 2017 has been to improve the Company's utilization, with more rigs and employees working. AKITA's utilization increased to 37% for the 6 months ended June 30, 2017 from 13% in the corresponding period of 2016. AKITA's focus on increasing its rig utilization had some downside, as rates in the drilling market continue to be at the bottom range of the cycle impacting the Company's margins which were significantly lower year to date in 2017, compared to the same period in 2016.

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

Introduction and General Overview

Activity levels in the contract drilling industry are highly correlated to the market prices of crude oil and natural gas. The average WTI crude oil prices for the six months ended June 30, 2017 increased 16% compared to the same period in 2016. Natural gas prices, per AECO spot prices, have followed a similar pattern with an increase of 23% in the average price of natural gas for the first 6 months of 2017 compared to the first 6 months in 2016. The increase in both crude oil and natural gas prices had a positive effect on drilling activity in the western Canadian sedimentary basin.

Despite the higher activity levels, however, day rates in the drilling industry remain at the bottom of the cycle as the demand for drilling rigs has not caught up to the supply of rigs available. The impact of these low day rates on the Company's results is detailed subsequently in this MD&A.

In addition to considerations regarding the cyclical nature of AKITA's business, readers should be aware that historically, the first quarter of the calendar year is the most active in the drilling industry.  Lower activity levels that result from spring break-up and associated travel bans on public roads typically characterize the second quarter.  AKITA's second quarter in 2017 was only slightly less active than the first quarter of 2017 due to the number of pad rigs working which are less impacted by travel bans than conventional rigs.

The following table summarizes second quarter and year-to-date utilization for AKITA and industry for 2017 and 2016:

 

During the second quarter of 2017, AKITA's utilization exceeded industry utilization as it typically does due to the high percentage of the Company's rig fleet being pad rigs compared to the industry. Pad rigs can generally drill through spring break-up provided they are already on a pad before road bans begin. Triple pad rigs accounted for 92% of AKITA's operating days for the second quarter of 2017. For the six months ended June 30, 2017, 70% of the Company's operating days were from triple pad rigs, 6% from double pad rigs, 9% from conventional doubles and 15% from conventional singles. 

Fleet and Rig Utilization

At June 30, 2017 AKITA had 28 drilling rigs, including eight that operated under joint ventures (26.750 net to AKITA), compared to 31 rigs (28.225 net) in the corresponding period of 2016 (five rigs decommissioned and two added).  There were no changes to AKITA's rig fleet during the first 6 months of 2017. 

 

Revenue and Operating & Maintenance Expenses

 

Second Quarter Comparatives

During the second quarter of 2017, adjusted revenue increased to $25,269,000 ($27,142 per operating day) compared to $4,964,000 ($41,025 per operating day) during the second quarter of 2016 as a result of increased drilling activity in the industry. The decrease in adjusted revenue per operating day reflects the current pricing environment in the industry where bottom of the cycle pricing is still required to put rigs to work. The effect on day rates of the mix of the rigs working in the second quarter of 2017 compared to the same period in 2016 was minimal, as essentially all drilling days were generated by pad triples. 

Adjusted operating and maintenance costs are tied to operating days and amounted to $19,955,000 ($21,434 per operating day) during the second quarter of 2017 compared to $2,383,000 ($19,694 per operating day) in the same period of the prior year.  The increase in operating and maintenance costs on a total basis resulted from increased drilling activity, and on a "per day" basis more rigs that require larger crews and second rig managers worked in the second quarter of 2017 compared to the same period in 2016.

The adjusted operating margin for the Company increased to $5,314,000 in the second quarter of 2017 from $2,581,000 during the corresponding quarter of 2016.  The increase in adjusted operating margin is a direct result of increased drilling activity as AKITA's operating days increased 669% in the second quarter of 2017 compared to the same period in 2016. On a per day basis, adjusted operating margin decreased to $5,708 in the second quarter of 2017 from $21,331 in the comparative period of 2016.  The decrease was a result of the lower day rates discussed above with no corresponding reduction in operating costs per day.

Year-to-Date Comparatives

During the first six months of 2017, adjusted revenue increased to $50,608,000 from $24,376,000 during the first six months of 2016 as a result of higher drilling activity. Adjusted revenue per operating day decreased to $26,748 during the first six months of 2017 from $33,903 in the comparative six month period of 2016. This decrease is due mainly to a higher percentage of the rigs in 2016 working under term contracts compared to 2017 where most rigs were working for market rates which due to increased competition in the drilling industry are at bottom of the cycle levels.

Adjusted operating and maintenance costs are tied to operating days and amounted to $41,698,000 ($22,039 per operating day) during the first six months of 2017 compared to $14,680,000 ($20,417 per operating day) in the same period of the prior year.  The increase on a per day basis is a result of higher maintenance costs due to more rigs starting up in the first half of 2017 compared to the same period in 2016.

The adjusted operating margin for the Company decreased to $8,910,000 in the first six months of 2017 from $9,696,000 during the corresponding period of 2016. On a per day basis, adjusted operating margin decreased to $4,709 for the six months ended June 30, 2017 from $13,486 in the corresponding period of 2016. This decrease in margin per day is a result of the pricing pressure noted above.

Depreciation and Amortization Expense

 

Depreciation and amortization expense increased to $7,735,000 in the second quarter of 2017 compared to $5,384,000 in the corresponding period of 2016. As AKITA depreciates its rig fleet on a unit of production basis, the increase in the depreciation and amortization expense is directly related to the 669% increase in the number of operating days when comparing the second quarter of 2017 to the corresponding period of 2016. On a per operating day basis depreciation in the second quarter of 2017 ($8,308 per operating day) was significantly lower than the second quarter of 2016 ($44,496 per operating day), as rigs that do not operate are subject to minimum annual depreciation.  

Depreciation and amortization expense for the first six months of 2017 totalled $14,471,000 compared to $11,659,000 for the corresponding period in 2016.  As with the depreciation and amortization expense for the second quarter, higher rig activity levels were the driver behind the higher depreciation and amortization expense in 2017 to date.  In the first six months of 2017, drilling rig depreciation accounted for 97% of total depreciation and amortization expense (2016 - 95%). 

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 venture activities.

Selling and Administrative Expenses

 

Adjusted selling and administrative expenses were 14% of adjusted revenue in the first six months of 2017 compared to 29% of adjusted revenue in the first six months of 2016. The decrease in selling and administrative expenses when compared to adjusted revenue is a result of increased adjusted revenue and 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 54% of these expenses (2016 - 57%). 

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. 

Other Income (Loss)

 

Interest income decreased to $231,000 in the first six months of 2017 from $493,000 in the corresponding period in 2016 primarily due to accrued interest ($394,000) on receivable balances related to a contract cancellation that occurred in the first quarter of 2016.  The remaining balance of interest income consists of interest on cash and term deposit balances.

During the first six months of 2017, the Company incurred interest expense of $84,000 (2016 - $80,000) related to the future cost of the Company's defined benefit pension plan.

During the first six months of 2017, the Company sold some ancillary assets for $167,000 (2016 - $125,000) that resulted in a gain of $140,000 (2016 - $30,000).

Income Tax Expense

 

Income tax expense (recovery) decreased to a recovery of $3,343,000 in the first six months of 2017 from an expense of $5,426,000 in the corresponding period in 2016 mainly due to higher pre-tax earnings resulting from the contract cancellation revenue recorded in the first quarter of 2016.  Deferred taxes for the six months ended June 30, 2017 were lower than the same period in 2016 as the Company incurred higher depreciation expense in the first half of 2017 compared to the first half of 2016.

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

 

During the three months ended June 30, 2017, the Company reported a net loss of $4,491,000 or $0.25 per Class A Non-Voting and Class B Common Share (basic and diluted) compared to a net loss of $4,062,000 or $0.23 per share (basic and diluted) in the comparative quarter of 2016. Lower operating margins per day and increased depreciation were the primary factors for the increased loss in 2017.

Funds flow from operations increased to $3,254,000 during the second quarter of 2017 from $2,688,000 in the corresponding quarter in 2016 due to increased activity in 2017.

The Company incurred a net loss of $9,466,000 or $0.53 per Class A Non-Voting and Class B Common Shares (basic and diluted) for the first six months of 2017 compared to net income of $14,111,000 or $0.79 per share (basic and diluted) in the corresponding period of 2016.  Funds flow from operations decreased to $5,078,000 during the first six months of 2017 from $28,071,000 in the corresponding period in 2016.  The decrease in both net income and funds flow for the six month period ended June 30, 2017 was directly attributable to the contract cancellation revenue recorded in the first quarter of 2016 as well as lower day rates.

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

 

Liquidity and Capital Resources

Cash used for capital expenditures totalled $12,202,000 in the first six months of 2017 (2016 - $1,530,000).  Year to date in 2017, 42% of capital expenditures relate to costs incurred to construct a double pad rig that is expected to be completed in the third quarter. The rest of the capital spending in 2017 year to date relates to routine capital items as did all capital spending in the first six months of 2016.

At June 30, 2017, AKITA's Statements of Financial Position included working capital (current assets minus current liabilities) of $24,557,000 compared to $31,373,000 at June 30, 2016 and $34,907,000 at December 31, 2016.  Readers should 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 $16,951,000 at June 30, 2017 compared to non-cash working capital of $20,675,000 at December 31, 2016. Note that the non-cash working capital amount at December 31, 2016 included $20,068,000 in accounts receivable related to contract cancellation compared to $9,990,000 at June 30, 2017.  Working capital at June 30, 2017 decreased compared to June 30, 2016 as a result of increased capital spending by the Company as noted above.

The Company chooses to maintain a conservative Statement of Financial Position due to the cyclical nature of the industry.  In addition to its cash balances, the Company has an operating loan facility with its principal banker totalling $50,000,000 that is available until 2020.  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 is 1.25% over prime interest rate or 2.5% over guaranteed notes, depending on the preference of the Company.  The Company did not have any borrowings from this facility at June 30, 2017 or at any time during 2016. 

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. 

During the 10 year period since 2007, AKITA has repurchased and cancelled 443,208 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 one rig under a multi-year contract at June 30, 2017 which is due to expire 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, 2017, AKITA provided $2,253,000 in deposits with its bank for those purposes (June 30, 2016 - $4,792,000 and December 31, 2016 - $2,969,000).  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. 

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

The Company reports its joint venture activities in the financial statements in accordance with 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 Joint 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 Joint 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-GAAP financial measures ("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.

Adjusted operating margin, adjusted revenue per operating day, adjusted operating and maintenance expenses per operating day and adjusted operating margin per operating day are not recognized GAAP 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 adjusted revenue and adjusted operating margin indicate pricing strength while adjusted 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 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 item 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, equity income from joint ventures, and income tax amounts paid or recovered 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.

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.