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

CALGARY, Oct. 31, 2017 /CNW/ - AKITA Drilling Ltd.'s net loss for the three months ended September 30, 2017 was $3,811,000 (net loss of $0.21 per share basic & diluted) on revenue of $14,908,000 compared to a net loss of $4,668,000 (net loss of $0.26 per share basic & diluted) on revenue of $6,616,000 for the corresponding period of 2016. Funds flow from operations decreased to $1,472,000 in the third quarter of 2017 from $2,197,000 in the corresponding period of 2016.

AKITA incurred a net loss of $13,277,000 for the nine months ended September 30, 2017 ($0.74 per share basic & diluted) on revenue of $52,087,000 compared to net earnings of $9,443,000 ($0.53 per share basic & diluted) on revenue of $52,253,000 ($24,003,000 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 September period of 2017 was $6,549,000 compared to $30,268,000 for the same period in 2016.

AKITA's rig activity has increased significantly in the third quarter of 2017 to 810 operating days or 32% utilization compared to 373 operating days or 13% utilization in the third quarter of 2016. This increase in utilization is attributable to higher crude oil prices which improved 7.5% in the third quarter of 2017 over the same period in 2016. This improvement in activity however, has not been enough to impact day rates in a meaningful way and therefore margins remain low, affecting both funds flow from operations and net earnings. Higher utilization rates across the Canadian market are needed to influence pricing. 

During the third quarter AKITA completed construction of and deployed its newest pad drilling rig, Rig 57. This rig is a 4,000 metre AC heavy pad double drilling rig that is well suited for both the Montney formation and heavy oil drilling. Currently the rig is drilling for heavy oil for one of the Company's core customers in the Fort McMurray area. During the third quarter AKITA also began preparing two rigs to move to Texas where the Company intends to establish a presence in the Southern United States. Both rigs are scheduled to be moved from Canada in the fourth quarter of 2017.  

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. Average West Texas Intermediate crude oil prices for the third quarter of 2017 were 7.5% higher than in the same period of 2016 and 11% higher on a year-to-date basis when comparing the nine months ended September 30, 2017 to the corresponding period in 2016. Increasing crude oil prices have had a positive effect on drilling activity in the western Canadian sedimentary basin.

Although activity levels have improved significantly in the third quarter of 2017 over the same period in 2016, the corresponding increase in day rates has been minimal due to the continued oversupply of rigs in the industry in relation to demand. These low day rates affect the Company's results, as detailed in this MD&A.

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

 

During the third quarter of 2017, AKITA's utilization exceeded industry utilization as it typically does due to the higher than average percentage of pad drilling rigs in AKITA's fleet. Pad drilling rigs are less impacted by the seasonal nature of the Canadian drilling industry, which normally peaks in the first quarter of the year and declines in the second quarter due to road bans associated with spring break-up, and have a higher number of operating days than conventional rigs. Drilling activity typically begins to improve in the third quarter. AKITA's utilization throughout 2017 has remained above 30% for each quarter.

Fleet and Rig Utilization

At September 30, 2017, AKITA had 29 drilling rigs, including eight that operated under joint ventures (27.75 net to AKITA), compared to 31 rigs (28.225 net) in the corresponding period of 2016. AKITA's newest rig, a heavy AC pad double, began operations in the third quarter of 2017. 

 

Revenue and Operating & Maintenance Expenses

 

Third Quarter Comparatives

During the third quarter of 2017, adjusted revenue increased to $20,699,000 ($25,586 per operating day) compared to $11,117,000 ($29,804 per operating day) during the third quarter of 2016 as a result of increased activity in the industry. The decrease in adjusted revenue per operating day is due to an increased number of single and light double rigs, which command lower day rates than pad rigs, working in the third quarter of 2017 compared to the same period in 2016.

Adjusted operating and maintenance costs are tied to operating days and amounted to $16,412,000 ($20,287 per operating day) during the third quarter of 2017 compared to $8,829,000 ($23,670 per operating day) in the same period of the prior year. The overall increase in adjusted operating and maintenance costs, on a total basis, resulted from increased drilling activity. The decrease on a "per operating day" basis, is a result of the change in rig mix noted above. Single and light double rigs require fewer crew members to effectively operate than pad rigs and therefore costs per operating day were lower in the third quarter of 2017 than in the third quarter of 2016.

The adjusted operating margin for the Company increased to $4,287,000 in the third quarter of 2017 from $2,288,000 during the corresponding quarter of 2016. The increased adjusted operating margin is a direct result of increased drilling activity as AKITA's operating days increased 117% in the third quarter of 2017 compared to the same period in 2016. On a "per operating day" basis, adjusted operating margin decreased to $5,299 in the third quarter of 2017 from $6,134 in the comparative period of 2016. The reason for the decrease is the change of the rig mix as noted above.

Year-to-Date Comparatives

During the first nine months of 2017, adjusted revenue increased to $71,307,000 from $35,493,000 during the first nine months of 2016 as a result of higher drilling activity. Adjusted revenue per operating day decreased to $26,400 during the first nine months of 2017 from $32,503 in the comparative nine month period of 2016. This decrease is due primarily to the mix of rigs working during the period as day rates have not changed significantly between the two periods.

Adjusted operating and maintenance expenses are tied to operating days and amounted to $58,110,000 ($21,514 per operating day) during the first nine months of 2017 compared to $23,508,000 ($21,528 per operating day) in the same period of the prior year as a result of more operating days. On a "per operating day" basis there appears to be little change between periods; however, this is the net effect of a decrease in adjusted operating and maintenance expenses because of the mix of rigs working noted above offset by increased costs per operating day due to rig start-up costs in the first half of 2017.

The adjusted operating margin for the Company increased to $13,197,000 in the first nine months of 2017 from $11,984,000 during the corresponding period of 2016 due to the 147% increase in drilling activity. On a "per operating day" basis, adjusted operating margin decreased to $4,886 for the nine months ended September 30, 2017 from $10,975 in the corresponding period of 2016. This decrease in adjusted operating margin is primarily the result of changes in the rigs working between the comparable periods as noted above and rig start-up costs in the first quarter of 2017.

Depreciation and Amortization Expense

 

Depreciation and amortization expense was 10% higher in the third quarter of 2017 compared to the corresponding quarter 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 117% increase in the number of operating days when comparing the third quarter of 2017 to the corresponding period of 2016. On a "per operating day" basis, depreciation in the third quarter of 2017 ($8,096 per operating day) was lower than the third quarter of 2016 ($15,796 per operating day), as rigs are subject to certain minimum annual depreciation (in addition to the unit of production basis for depreciation) and therefore the cost per day decreases as activity increases.  

Depreciation and amortization expense for the first nine months of 2017 totalled $21,020,000 compared to $17,551,000 for the corresponding period in 2016. As with the depreciation and amortization expense for the third quarter, higher rig activity levels were the driver behind the higher depreciation and amortization expense in 2017 to date. In the first nine months of 2017 drilling rig depreciation accounted for 97% of total depreciation and amortization expense in the third quarter of 2017 (2016 - 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 venture activities.

Selling and Administrative Expenses

 

Selling and administrative expenses were 14% of adjusted revenue in the first nine months of 2017 compared to 28% of adjusted revenue in the first nine months of 2016. The decrease 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 expenses, therefore as adjusted revenue increases the percentage of selling and administrative expenses to adjusted revenue decreases. The single largest component of selling and administrative expenses was salaries and benefits, which accounted for 53% of these expenses in the third quarter of 2017 (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 $342,000 in the first nine months of 2017 from $741,000 in the corresponding period in 2016, primarily due to the decrease in accrued interest relating to receivable amounts on contract cancellation revenue recorded in 2016.

During the first nine months of 2017, the Company incurred interest expense of $126,000 (2016 - $121,000) related to the future cost of the Company's defined benefit pension plan.   

During the first nine months of 2017, the Company sold some ancillary assets for $188,000 (2016 - $133,000) that resulted in a gain of $160,000 (2016 - $36,000).

Income Tax Expense (Recovery)

 

Income tax expense decreased to a recovery of $4,633,000 in the first nine months of 2017 from an expense of $3,784,000 in the corresponding period in 2016 mainly due to higher pre-tax earnings resulting from the contract cancellation fee recorded in 2016. Deferred taxes for the nine months ended September 30, 2017 were less than the corresponding period in 2016 due to higher depreciation in 2017.

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

 

During the three months ended September 30, 2017, the Company reported a net loss of $3,811,000 or $0.21 per Class A Non-Voting and Class B Common Share (basic and diluted) compared to a net loss of $4,668,000 or $0.26 per share (basic and diluted) in the comparative quarter of 2016. The reduction in the net loss in 2017 when compared to the same period in 2016 was due to higher activity in 2017.

Funds flow from operations decreased to $1,472,000 during the third quarter of 2017 from $2,197,000 in the corresponding quarter in 2016. The decrease in funds flow from operations compared to the increase in net income is the effect of deferred income tax which increased net income in 2017. However this is removed from funds flow from operations as it is a non-cash item. 

Net income decreased to a loss of $13,277,000 or $0.74 per Class A Non-Voting and Class B Common Shares (basic and diluted) for the first nine months of 2017 from net income of $9,443,000 or $0.53 per share (basic and diluted) in the corresponding period of 2016. Funds flow from operations decreased to $6,549,000 during the first nine months of 2017 from $30,268,000 in the corresponding period in 2016. The decrease in both net income and funds flow for the nine month period ended September 30, 2017 was directly attributable to the contract cancellation fee recorded in the first quarter of 2016.

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

 

Liquidity and Capital Resources  

Cash used for capital expenditures totalled $16,779,000 in the first nine months of 2017 (2016 - $2,637,000). Half of the capital spending year-to-date in 2017 relates to the construction of the Company's newest rig that was completed in the third quarter. Capital spending for the first nine months of 2016 related to routine capital items.

At September 30, 2017, AKITA's Statements of Financial Position included working capital (current assets minus current liabilities) of $20,140,000 compared to working capital of $30,038,000 at September 30, 2016, and working capital of $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 early in the second quarter and decline thereafter as a result of spring break-up and reduced drilling activities. Working capital at September 30, 2017 decreased compared to September 30, 2016, as a result of the decrease in the Company's cash balance due to increased capital spending.

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 September 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 437,908 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 drilling rig under a multi-year contract at September 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 September 30, 2017, AKITA provided $1,890,000 in deposits with its bank for those purposes (September 30, 2016 - $4,262,000 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 Consolidated 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 International Financial Reporting Standards, ("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 expense, 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.