AKITA Drilling Ltd. Announces A Positive Second Quarter

CALGARY, July 27, 2012 /CNW/ - AKITA Drilling Ltd.'s net income for the three months ended June 30, 2012 was $2,092,000 ($0.12 per share) on revenue of $43,784,000 compared to $1,498,000 ($0.08 per share) on revenue of $31,651,000 for the corresponding period in 2011.  Funds flow from operations for the quarter ended June 30, 2012 was $8,364,000 compared to $3,239,000 in the corresponding quarter in 2011.

Net income for the six months ended June 30, 2012 was $15,996,000 ($0.89 per share) on revenue of $122,558,000.  Comparative figures for 2011 were net income of $9,450,000 ($0.52 per share) on revenue of $89,095,000.  Funds flow from operations for the January to June period in 2012 was $28,726,000 compared to $16,952,000 for the comparative period in 2011.

Western Canada experienced an unusually wet spring during the second quarter.  While it is normal for the industry to experience spring break-up, conditions typically improve by mid to late May when conventional operations resume.  This year second quarter opportunities for our conventional fleet were limited due to a very wet June which greatly reduced operations versus 2011.

Pad drilling rigs, of which AKITA has 15, are generally unaffected by spring break-up or rain as these rigs operate on multi-well pads with existing infrastructure such as all-weather roads and stockpiled services.  AKITA's positive results in the second quarter of 2012 were primarily driven by pad rigs and some of its deeper fleet rigs which also operated during break-up and contributed to our results.

As reported in the first quarter, AKITA is adding to its pad fleet with construction of two new pad rigs plus an upgrade conversion of an existing rig, each with multi-year contracts.  Management anticipates that completion of the upgrade will occur early in the fourth quarter and that the first of the new rigs will be completed late in the fourth quarter of 2012, followed by the second new rig early in 2013.

Although the industry appears to be facing a more challenging outlook due to weakening prices for crude oil and related liquids and persistently low gas prices, management anticipates most of our customers will remain active, especially where customized pad rigs are the desired solution.

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

Revenue and Operating & Maintenance Expenses

$ Million	Three Months Ended June 30					Six Months Ended June 30
	2012	2011	Change	% Change		2012	2011	Change	% Change
Revenue(2)	43.8	31.7	12.1	38%		122.6	89.1	33.5	38%
Operating & Maintenance Expenses(2)	30.3	21.6	8.7	40%		79.5	58.2	21.3	37%

$	Three Months Ended June 30					Six Months Ended June 30
	2012	2011	Change	% Change		2012	2011	Change	% Change
Revenue per operating day(2)	37,712	32,133	5,579	17%		33,404	29,679	3,725	13%
Operating & Maintenance Expenses(2)per operating day	26,121	21,883	4,238	19%		21,675	19,388	2,287	12%
Operating margin(1) per operating day	11,591	10,250	1,341	13%		11,729	10,291	1,438	14%

(1)	Operating margin is the difference between revenue and operating & maintenance expenses.
(2)	Revenue, operating & maintenance expenses and operating margin includes the Company's rig construction for third parties. AKITA does not disclose its margin on rig construction activity for competitive reasons.

During the second quarter of 2012, overall revenue increased to $43,784,000 or $37,712 per operating day compared to $31,651,000 or $32,133 per operating day for the corresponding period in 2011.  Increases in rig activity and associated rig rates for the Company's triple and pad rigs in the second quarter of 2012 compared to the second quarter of 2011 were the primary contributors to the increase in the quarterly revenue. In addition, the Company earned $5,557,000 in rig construction revenue (2011 - $Nil).

Operating and maintenance expenses for the second quarter amounted to $30,327,000 or $26,121 per operating day during 2012, compared to $21,555,000 or $21,883 per operating day for 2011, primarily due to increased activity for the Company's triple and pad rigs and general cost increases. Rig inactivity for conventional rigs due to the early start to break-up and the unfavourable wet weather throughout the second quarter created an opportunity to expand the spring maintenance program thereby increasing maintenance costs.

The Company's "per-day" operating margin for the second quarter of 2012 was $11,591 compared to a "per-day" operating margin of $10,250 during the corresponding quarter in 2011.

Revenue increased to $122,558,000 or $33,404 per operating day during the first six months of 2012 from $89,095,000 or $29,679 per operating day during the first six months of 2011 primarily as a result of the strong market conditions in the first quarter for all rig categories and the continued strength in the triple and pad rigs market in the second quarter of 2012 as these two rig categories are less impacted by break-up and wet weather.

Operating and maintenance expenses are tied to activity levels and amounted to $79,527,000 or $21,675 per operating day during the first six months of 2012 compared to $58,202,000 or $19,388 per operating day in the corresponding period of the prior year.  The Company's year to date "per-day" operating margin at June 30, 2012 was $11,728 compared to a "per-day" operating margin of $10,291 during the corresponding period in 2011.

From time to time, the Company requires customers to make pre-payments prior to the provision of drilling services.  At June 30, 2012, the Company had not received any pre-payments from customers for drilling services (June 30, 2011 - $100,000).

Depreciation Expense

$ Million	Three Months Ended June 30					Six Months Ended June 30
	2012	2011	Change	% Change		2012	2011	Change	% Change
Depreciation Expense	5.6	4.3	1.3	30%		12.9	10.0	2.9	29%

The increase in depreciation expense to $5,631,000 during the second quarter of 2012 from $4,296,000 in the corresponding period in 2011 was primarily attributable to the increase in rig activity in addition to a higher average cost base of the Company's pad rigs.  On a quarterly basis, drilling rig depreciation accounted for 96% of total depreciation expense (second quarter of 2011 - 95%).

A similar increase in depreciation expense occurred during the first six months of 2012 compared to the corresponding period in 2011. In the first six months of 2012, drilling rig depreciation accounted for 97% of total depreciation expense (2011 - 96%).

Selling and Administrative Expense

$ Million	Three Months Ended June 30					Six Months Ended June 30
	2012	2011	Change	% Change		2012	2011	Change	% Change
Selling & Administrative Expense	5.1	3.9	1.2	31%		10.0	8.5	1.5	18%

Selling and administrative expenses were 8.2% of total revenue in the first six months of 2012 compared to 9.5% of total revenue in the comparative period of 2011, largely as a result of increased revenue in 2012.  The single largest component was salaries and benefits, which accounted for 58% of these expenses (58% in 2011).

Other Income

$ Million	Three Months Ended June 30					Six Months Ended June 30
	2012	2011	Change	% Change		2012	2011	Change	% Change
Interest Income	0.1	0.2	(0.1)	(50%)		0.2	0.3	(0.1)	(33%)
Gain (Loss) on Sale of Assets and Other Gains and Losses	0.0	0.1	(0.1)	(100%)		1.1	0.2	0.9	450%

The Company invests any cash balances in excess of its ongoing operating requirements in bank guaranteed highly liquid investments.  Interest income for the first six months of 2012 decreased to $221,000 from $342,000 for the corresponding period in 2011, primarily due to holding lower cash and term-deposits balance in 2012 as a result of current capital projects.

The gain on sale of joint venture interests in rigs and other assets totalled $1,062,000 in the first six months of 2012 ($218,000 in the first six months of 2011) and  includes the disposal of the Company's interests in two arctic drilling camps and other non-core assets.  The 2012 second quarter loss on sale of joint venture interests in rigs and other assets of $94,000 (2011- gain of $185,000) resulted from the disposal of non-core assets.

Income Tax Expense

$ Million	Three Months Ended June 30					Six Months Ended June 30
	2012	2011	Change	% Change		2012	2011	Change	% Change
Current Tax Expense	0.3	3.2	(2.9)	(90%)		4.9	6.0	(1.1)	(18)%
Deferred Tax Expense	0.4	(2.5)	2.9	116%		0.5	(2.5)	3.0	120%
Total Income Tax Expense	0.7	0.7	0.0	Nil		5.4	3.5	1.9	54%

Income tax expense increased to $5,422,000 in the first six months of 2012 from $3,523,000 in the corresponding period in 2011, due to higher pre-tax income which was partially offset by a reduction in the Canadian federal tax rate.

Net Income and Funds Flow

$ Million	Three Months Ended June 30					Six Months Ended June 30
	2012	2011	Change	% Change		2012	2011	Change	% Change
Net Income	2.1	1.5	0.6	40%		16.0	9.4	6.6	70%
Funds Flow From Operations(1)	8.4	3.2	5.2	162%		28.7	17.0	11.7	69%

^(1): See commentary regarding non-standard accounting measure.

Net income increased to $2,092,000 or $0.12 per Class A Non-Voting and Class B Common Share (basic and diluted) for the second quarter of 2012 from $1,498,000 or $0.08 per share (basic and diluted) in the second quarter of 2011.  Funds flow from operations increased to $8,364,000 in the second quarter of 2012 from $3,239,000 in the corresponding quarter in 2011.  The increases in net income and funds flow from operations were attributable to the on-going positive results in the pad and triple rig categories.

Net income increased to $15,996,000 or $0.89 per Class A Non-Voting and Class B Common Share (basic and diluted) for the first six months of 2012 from $9,450,000 or $0.52 per share (basic and diluted) in the corresponding period of 2011.  Funds flow from operations increased to $28,726,000 in the first six months of 2012 from $16,952,000 in the corresponding period in 2011.  The 2012 increases in net income and funds flow from operations were directly attributable to higher activity levels and increased operating margins per day versus the corresponding period of 2011, primarily as a result of the record results reported in the first quarter of 2012.

Non Standard Accounting Measure

Funds flow from operations is not a recognized measure under IFRS.  AKITA's method of determining funds flow from operations may differ from methods used by other companies and involves including cash flow from operating activities before working capital changes.  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.  The following table reconciles funds flow and cash flow from operations:

$Million	Three Months Ended June 30			Six Months Ended June 30
	2012	2011			2012	2011
Funds Flow from Operations	8.4	3.2			28.7	16.9
Change in Non-Cash Working Capital	21.2	8.5			14.5	1.7
Non-Cash Income Tax Expense	0.3	3.1			4.9	6.0
Income Tax Paid	(1.6)	(0.3)			(7.1)	(1.1)
Cash flow from operations	28.3	14.5			41.0	23.5

Fleet and Rig Utilization

AKITA had 38 drilling rigs, including eight that operated under joint ventures (35.075 net to AKITA), at the end of the second quarter of 2012 compared to 37 rigs (34.075 net) in the corresponding period of 2011.  At June 30, 2012, all of the Company's rigs were located in Canada.  The Company's utilization results are shown in the table below:

		Three Months Ended June 30				Six Months Ended June 30
		2012		2011		2012		2011
Operating Days		1,161		985		3,669		3,002
Utilization Rate		33.6%		30.0%		53.1%		46.0%

Liquidity and Capital Resources

Cash used for capital expenditures totalled $34,296,000 in the first six months of 2012 (2011 - $22,952,000) and included $26,438,000 for current period expenditures with the balance relating to changes in non-cash working capital.  The most significant expenditures for 2012, including in the second quarter, were construction costs related to completion of two new heavy oil pad rigs and the conversion of a triple rig to a pad rig.  Additional capital included certification and overhaul costs as well as routine capital expenditures.

At June 30, 2012, AKITA's balance sheet included working capital (current assets minus current liabilities) of $44,759,000 compared to working capital of $55,851,000 at June 30, 2011 and working capital of $44,265,000 at December 31, 2011.  The Company has made significant investment in constructing and retrofitting drilling rigs due to the opportunities present in the current drilling environment especially for pad rigs, which are a strategic focus of the Company.  Readers should also be aware of the seasonal nature of AKITA's business and its impact 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 break-up.

The Company chooses to maintain a conservative balance sheet due to the cyclical nature of the industry.  In addition to its cash and term deposit balances, during 2011, the Company established an operating loan facility with its principal banker totalling $50,000,000, having an initial five year term.  Although the facility has been advanced in order to provide financing for a broad range of alternatives, including general corporate purposes, capital expenditures and acquisitions, management intends to access this facility primarily to enable the Company 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 0.4% to 1.4% over prime interest rates or 1.4% to 2.4% over guaranteed notes, depending on the preference of the Company. The Company accessed this facility during the second quarter of 2012 on a short-term basis, having repaid the amount borrowed prior to June 30, 2012.  The Company did not access this facility in 2011 or during the first three months of 2012.

The Company had nine rigs under multi-year contracts at June 30, 2012.  Of these contracts, one is anticipated to expire in 2012, five in 2013 and three in 2014.  In addition to the foregoing, the Company is constructing two additional rigs with associated multi-year contracts and constructing one rig for sale with an associated multi-year labour contract.

During 2011, the Company guaranteed bank loans made to joint venture partners totalling $2,700,000 for a period of four years.  The Company has provided an assignment of monies on deposit totalling $3,000,000 with respect to these loans.  These funds have been classified as "restricted cash" on the balance sheet.  The Company's security from its partners for these guarantees includes interests in specific rig assets.

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 therefore carry 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.

Selected financial information for the Company is as follows:

AKITA Drilling Ltd.
Interim Consolidated Statements of Financial Position
Unaudited		June 30		June 30		December 31
$ Thousands		2012		2011		2011
Assets
Current Assets
	Cash and cash equivalents	$	30,180	$	29,724	$	18,228
	Term deposits	2,500		18,490		9,500
	Accounts receivable	33,794		25,893		48,351
	Prepaid expenses and other	745		794		413
		67,219		74,901		76,492
Non-current Assets
Restricted cash		3,000		-		3,000
Other long term assets		188		-		200
Investment property		613		-		626
Property, plant and equipment		180,328		146,696		166,812
Total Assets		$	251,348	$	221,597	$	247,130
Liabilities
Current Liabilities
	Accounts payable and accrued liabilities	$	20,102	$	13,751	$	27,550
	Deferred revenue	-		100		146
	Dividends payable	1,262		1,267		1,262
	Income taxes payable	1,096		3,932		3,269
		22,460		19,050		32,227
Non-current Liabilities
Deferred income taxes		12,815		10,741		12,264
Pension liability		1,731		1,562		1,535
Total Liabilities		37,006		31,353		46,026
Shareholders' Equity
Class A and Class B shares		23,257		23,393		23,308
Contributed surplus		2,906		2,634		2,758
Retained earnings		188,179		164,217		175,038
Total Equity		214,342		190,244		201,104
Total Liabilities and Equity		$	251,348	$	221,597	$	247,130

 

AKITA Drilling Ltd.
Interim Consolidated Statements of Net Income
and Comprehensive Income
		Three Months Ended				Six Months Ended
Unaudited		June 30		June 30		June 30		June 30
$ Thousands		2012		2011		2012		2011
Revenue		$	43,784	$	31,651	$	122,558	$	89,095
Costs and expenses
	Operating and Maintenance	30,327		21,555		79,527		58,202
	Depreciation	5,631		4,296		12,897		9,959
	Selling and administrative	5,057		3,949		10,020		8,500
Total costs and expenses		41,015		29,800		102,444		76,661
Revenue less costs and expenses		2,769		1,851		20,114		12,434
Other income (losses)
	Interest income	109		175		221		342
	Interest expense	-		(5)		(1)		(8)
	Gain (loss) on sale of joint venture interests in rigs and other assets	(94)		185		1,062		218
	Other gains and losses (net)	10		(43)		22		(13)
Total other income		25		312		1,304		539
Income before income taxes		2,794		2,163		21,418		12,973
Income taxes		702		665		5,422		3,523
Net income for the period attributable to shareholders		2,092		1,498		15,996		9,450
Other comprehensive income (loss)
Cumulative translation adjustment		-		-		-		(50)
Comprehensive income for the period attributable to shareholders		$	2,092	$	1,498	$	15,996	$	9,400
Earnings per Class A and Class B Share
		$	0.12	$	0.08	$	0.89	$	0.52
		$	0.12	$	0.08	$	0.89	$	0.52

 

AKITA Drilling Ltd.
Interim Consolidated Statements of Cash Flow
		Three Months Ended				Six Months Ended
Unaudited		June 30		June 30		June 30		June 30
$ Thousands		2012		2011		2012		2011
Operating Activities
Net income		$	2,092	$	1,498	$	15,996	$	9,450
Non-cash items included in net income:
	Depreciation	5,631		4,296		12,897		9,959
	Deferred income taxes	371		(2,497)		551		(2,494)
	Expense for defined benefit pension plan	98		66		196		133
	Stock options charged to expense	77		61		148		122
	Gain (loss) on sale of joint venture interests in rigs and other assets	95		(185)		(1,062)		(218)
		8,364		3,239		28,726		16,952
Change in non-cash working capital:
	Accounts receivable	28,333		17,930		14,557		7,446
	Prepaid expenses and other	265		299		(332)		(572)
	Accounts payable and accrued liabilities	(7,356)		(9,597)		411		(5,246)
	Deferred revenue	-		(122)		(146)		100
		21,242		8,510		14,490		1,728
		29,606		11,749		43,216		18,680
	Interest paid	-		(2)		(1)		(3)
	Income tax expense - non cash	331		3,162		4,871		6,017
	Income tax paid	(1,573)		(354)		(7,044)		(1,153)
Net Cash from operating activities		28,364		14,555		41,042		23,541
Investing Activities
Capital expenditures		(12,192)		(9,779)		(34,296)		(22,952)
Change in cash restricted for loan guarantees		-		-		-		2,500
Change in term deposits		5,000		(15,990)		7,000		(8,490)
Proceeds on sale of joint venture interests in rigs and other assets		(45)		194		1,112		228
Net Cash used in investing activities		(7,237)		(25,575)		(26,184)		(28,714)
Financing Activities
Dividends paid		(1,263)		(1,267)		(2,524)		(2,539)
Repurchase of share capital		(382)		(478)		(382)		(478)
Net Cash used in financing activities		(1,645)		(1,745)		(2,906)		(3,017)
Effect of exchange rate changes on cash and cash equivalents		-		-		-		(50)
Increase (Decrease) in Cash and Cash Equivalents		19,482		(12,765)		11,952		(8,240)
Cash and cash equivalents, beginning of period		10,698		42,489		18,228		37,964
Cash and Cash Equivalents, End of Period		$	30,180	$	29,724	$	30,180	$	29,724

 

 

 

 

SOURCE: AKITA Drilling Ltd.