AKITA Drilling Ltd. is pleased to report third quarter results

CALGARY, Oct. 26, 2012 /CNW/ - AKITA Drilling Ltd.'s net income for the three months ended September 30, 2012 was $4,331,000 ($0.24 per share) on revenue of $52,111,000 compared to $6,926,000 ($0.38 per share) on revenue of $54,874,000 for the corresponding period in 2011.  Funds flow from operations for the quarter ended September 30, 2012 was $10,800,000 compared to $12,825,000 in the corresponding quarter in 2011.

Net income for the nine months ended September 30, 2012 was $20,327,000 ($1.13 per share) on revenue of $174,669,000.  Comparative figures for 2011 were net income of $16,375,000 ($0.90 per share) on revenue of $143,969,000.  Funds flow from operations for the January to September period in 2012 was $39,527,000 compared to $29,776,000 for the comparative period in 2011.

Rig activity declined during the third quarter of 2012 to 1,529 operating days or 43.7% utilization compared to 2,140 operating days or 62.9% utilization for the corresponding quarter in 2011.  This decline was attributable to weakened market conditions for AKITA's conventional single and double capacity rigs.  By contrast AKITA's conventional triples and pad rigs continue to achieve strong utilization.

Management anticipates completion of the first of two pad rigs under construction later in the fourth quarter of 2012 with the second rig being completed early in 2013.  These rigs are contracted for either four years or five years.  In addition, the Company recently completed the conversion of a conventional triple into a pad rig.  This rig is set to recommence operations during the fourth quarter of 2012 under a two-year contract.  The Company has entered into a contract with a third party to build a rig and upon completion, estimated to be in the fourth quarter of 2012, the third party will purchase the rig.  The third party has contracted with AKITA to provide multi-year labour services to operate the rig.

Although the weak natural gas and associated natural gas liquids prices are having a negative impact on conventional drilling activity, management remains optimistic on ongoing pad rig activity as well as opportunities to continue drilling with conventional triples.  It appears that no significant increase in activity levels for singles and doubles will occur prior to the upcoming winter drilling season.

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

Revenue and Operating and Maintenance Expenses
$ Million	Three Months Ended September 30					Nine Months Ended September 30
	2012	2011	Change	%Change		2012	2011	Change	%Change
Revenue (1)	52.1	54.9	(2.8)	(5%)		174.7	144.0	30.7	21%
Operating & Maintenance Expenses (1)	36.3	35.8	0.5	1%		115.8	94.0	21.8	23%
Operating Margin (2) (3)	15.8	19.1	(3.3)	(17%)		58.9	50.0	8.9	18%
$ Dollars	Three Months Ended September 30					Nine Months Ended September 30
	2012	2011	Change	%Change		2012	2011	Change	%Change
Revenue per operating day (3)	34,104	25,642	8,462	33%		33,687	26,078	7,609	29%
Operating & Maintenance Expenses per operating day (3)	23,727	16,736	6,991	42%		22,330	17,896	4,434	25%
Operating margin per operating day (2) (3)	10,377	8,906	1,471	17%		11,357	8,182	3,175	39%

Notes:

(1)     Revenue, operating & maintenance expenses and operating margin include the Company's rig construction for third parties.  AKITA does not disclose its operating margin on rig construction activity separately for competitive reasons.

(2)     Operating margin is the difference between revenue and operating & maintenance expenses.

(3)     Operating margin, revenue per operating day, operating & maintenance expenses per operating day and operating margin per operating day are non-standard accounting measures.  See commentary regarding non-standard accounting measures.

During the third quarter of 2012, overall revenue decreased to $52,111,000 compared to $54,874,000 for the corresponding quarter in 2011 while revenue per operating day increased to $34,104 during the third quarter of 2012 compared to $25,642 per operating day during the third quarter of 2011.  Decreased rig activity for conventional rigs was the primary contributor to the drop in overall third quarter revenue.  Pad rigs were more active in the third quarter of 2012 compared to the corresponding quarter in 2011 and earned higher day rates thus resulting in a higher per operating day revenue measurement.

Operating and maintenance costs are tied to activity levels and amounted to $36,255,000 or $23,727 per operating day during the third quarter of 2012, compared to $35,814,000 or $16,736 per operating day for 2011.  Although AKITA's fleet was not as active during the third quarter of 2012 compared to the corresponding quarter in 2011, the reduction in activity was associated with conventional doubles and singles, thereby resulting in a higher operating cost per day since these two rig categories have lower operating costs than pad rigs or conventional triples.

The Company's operating margin decreased to $15,856,000 during the third quarter of 2012 compared to $19,060,000 during the third quarter of 2011.  This reduction was entirely associated with weaker market conditions for the Company's conventional singles and doubles.  Continuing strength for both pad rigs and conventional triples resulted in per operating day margins increasing to $10,377 during the third quarter of 2012 compared to $8,906 for the corresponding quarter in 2011.

Overall revenue increased to $174,669,000 or $33,687 per operating day during the first nine months of 2012 from $143,969,000 or $26,078 per operating day during the first nine months of 2011 due to stronger market conditions for conventional singles and doubles during the first quarter of 2012 and ongoing strong market conditions for pad rigs and conventional triples.  Since the first quarter of 2012, market conditions for conventional singles and doubles have weakened relative to 2011.

Operating and maintenance costs amounted to $115,782,000 or $22,330 per operating day during the first nine months of 2012 compared to $94,017,000 or $17,896 per operating day in the corresponding period of the prior year.  The rise in operating and maintenance costs and operating maintenance costs per operating day is consistent with the increase in revenue and the shift to increased pad rig and conventional triple activity, both forms of drilling associated with increased costs relative to conventional singles and doubles.

On a nine month basis, the Company's operating margin was $58,887,000 or $11,357 per operating day during 2012, compared to an operating margin of $49,952,000 or $8,182 per operating day during the corresponding period in 2011.  The increase in operating margin and operating margin per day was due mainly to the impact of a strong first quarter for all classes of rigs as well as ongoing market strength for pad rigs and conventional triples.

In addition to revenue and operating and maintenance costs achieved from drilling activities, the Company earned $11,308,000 in rig construction revenue during the first nine months of 2012 including $5,750,000 in the third quarter.  The Company does not disclose its construction costs or operating margin separately for this activity for competitive reasons.

From time to time, the Company requires customers to make pre-payments prior to the provision of drilling services.  At September 30, 2012, the Company did not hold any drilling service prepayments (September 30, 2011 - $815,000).

Non Standard Accounting Measures

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

Depreciation Expense
$ Million	Three Months Ended September 30					Nine Months Ended September 30
	2012	2011	Change	% Change		2012	2011	Change	% Change
Depreciation Expense	5.6	5.6	(0.0)	(0%)		18.5	15.6	2.9	19%

Depreciation expense of $5,578,000 during the three months ended September 30, 2012 was comparable to $5,647,000 for the corresponding period in 2011.  Drilling rig depreciation is calculated based upon usage and accounted for 96% during the quarter of total depreciation expense (three months ended September 30, 2011 - 96%).  Although the overall number of drilling days was lower in the third quarter of 2012 compared to the third quarter of 2011, the most active rigs were also rigs in AKITA's fleet with the highest average cost base per rig.

Year-to-date depreciation expense of $18,475,000 for the Company was higher in the first nine months of 2012 compared to depreciation expense of $15,606,000 during the corresponding period in 2011, primarily as a result of a higher average cost base for drilling rigs.  In the first nine months of 2012, drilling rig depreciation accounted for 97% of total depreciation expense (2011 - 96%).

Selling and Administrative Expense
$ Million	Three Months Ended September 30					Nine Months Ended September 30
	2012	2011	Change	%Change		2012	2011	Change	%Change
Selling & Administrative Expense	4.6	4.2	0.4	10%		14.6	12.7	1.9	15%

Selling and administrative expenses were 8.4% of total revenue in the first nine months of 2012 compared to 8.8% 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 60% of these expenses (60% in 2011).

Other Income
$ Million	Three Months Ended September 30						Nine Months Ended September 30
	2012	2011	Change		% Change		2012	2011	Change	% Change
Interest Income	0.1	0.2	(0.1)		(50%)		0.3	0.5	(0.2)	(40%)
Gain on Sale of Other Assets	0.0	0.0	(0.0)		N/A		1.1	0.3	0.8	267%
Other Income (Losses)	0.1	0.2	(0.1)		(50%)		1.4	0.8	0.6	75%

The Company invests any cash balances in excess of its ongoing operating requirements in bank guaranteed highly liquid investments.  Interest income for the first nine months of 2012 decreased to $325,000 from $505,000 for the corresponding period in 2011 as a consequence of having lower cash and term-deposit balances in the current year as a result of capital expenditures.

The gain on sale of joint venture interests in rigs and other assets totalled $1,066,000 in the first nine months of 2012 ($275,000 in the first nine months of 2011) and includes the disposal of the Company's interests in two arctic drilling camps and other non-core assets.

Income Tax Expense
$ Million	Three Months Ended September 30					Nine Months Ended September 30
	2012	2011	Change	% Change		2012	2011	Change	% Change
Current Tax Expense	0.8	2.3	(1.5)	(65%)		5.6	8.3	(2.7)	(33%)
Deferred Tax Expense	0.7	0.2	0.5	250%		1.3	(2.2)	3.5	159%
Total Income Tax Expense	1.5	2.5	(1.0)	(40%)		6.9	6.1	0.8	13%

Income tax expense increased to $6,900,000 in the first nine months of 2012 from $6,050,000 in the corresponding period in 2011, due to higher pre-tax income which was partially offset by a reduction in the Canadian federal income tax rate.  AKITA's significant capital expenditure program has resulted in a larger proportion of the Company's income tax expense being classified as deferred.

Net Income and Funds Flow
$ Million	Three Months Ended September 30					Nine Months Ended September 30
	2012	2011	Change	% Change		2012	2011	Change	% Change
Net Income	4.3	6.9	(2.6)	(38%)		20.3	16.3	4.0	25%
Funds Flow From Operations(Note)	10.8	12.8	(2.0)	(16%)		39.5	29.8	9.7	33%

Note: See commentary regarding additional GAAP measure

Net income decreased to $4,331,000 or $0.24 per Class A Non-Voting and Class B Common Share (basic and diluted) for the third quarter of 2012 from $6,926,000 or $0.38 per share (basic and diluted) in the third quarter of 2011.  Funds flow from operations decreased to $10,800,000 in the third quarter of 2012 from $12,825,000 in the corresponding quarter in 2011.  The lower income and funds flow that occurred in the third quarter of 2012 compared to the corresponding period in 2011 were directly attributable to decreased demand for AKITA's conventional single and double rigs.

Net income increased to $20,327,000 or $1.13 per Class A Non-Voting and Class B Common Share (basic and diluted) for the first nine months of 2012 from $16,375,000 or $0.90 per share (basic and diluted) in the corresponding period of 2011.  Funds flow from operations increased to $39,527,000 in the first nine months of 2012 from $29,776,000 in the corresponding period in 2011.  Higher income and funds flow from operations that occurred in 2012 were directly attributable to increased operating margins per day as the Company increased its percentage of drilling services from pad rigs and conventional triples.  During the third quarter of 2012 operating margins declined due to lower activity levels, although operating margins per operating day remained higher than during the corresponding quarter in 2011.

A reconciliation from funds flow to cash flow is included in the following section of this MD&A.

Additional GAAP Measure

Funds flow from operations is considered as an additional GAAP 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 September 30			Nine Months Ended September 30
	2012	2011		2012	2011
Funds Flow from Operations	10.8	12.8		39.5	29.8
Change in Non-Cash Working Capital	(5.8)	(11.7)		8.7	(5.6)
Non-Cash Income Tax Expense	0.8	2.4		5.7	8.4
Income Tax Paid (Net of Recoveries)	(2.4)	(4.0)		(9.4)	(6.2)
Cash flow from operations	3.4	(0.5)		44.5	26.4

Fleet and Rig Utilization

AKITA had 38 drilling rigs, including eight that operated under joint ventures, (35.025 net to AKITA) at the end of the third quarter of 2012 compared to 37 rigs (34.075 net) in the corresponding period of 2011.

Utilization rates expressed In percentages		Three Months Ended September 30				Nine Months Ended September 30
		2012	2011			2012	2011
Operating Days		1,529	2,140			5,198	5,142
Utilization Rate		43.7%	62.9%			49.9%	51.9%

It should be noted that AKITA calculates utilization rates based upon rigs actively operating.  From time to time, AKITA has rigs receiving standby revenue.  Those rigs are not considered as contributing to the utilization statistic in AKITA's calculations.

Liquidity and Capital Resources

Cash used for capital expenditures totalled $46,501,000 in the first nine months of 2012 (2011 - $35,420,000).  The most significant capital expenditures for 2012 to date, including in the third quarter, were costs related to the construction of two new heavy oil pad rigs and the conversion of a conventional triple rig into a pad rig.  Additional capital included certification and overhaul costs as well as routine capital expenditures.

At September 30, 2012, AKITA's balance sheet included working capital (current assets minus current liabilities) of $33,722,000 compared to working capital of $53,730,000 at September 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 and decline thereafter annually as a result of increased drilling activity.

During the third quarter of 2012, the Company repurchased 62,603 Class A Non-Voting Shares (2011 - 49,420 shares) at an average cost of $10.68 per share pursuant to its Normal Course Issuer Bid.  On a year-to-date basis, AKITA repurchased 98,306 Class A Non-Voting Shares at an average cost of $10.40 per share.

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 relating to drilling contracts that it might be awarded.  The interest rate on the facility varies depending 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 at other times during 2012.

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.  Except as required by law, the Company does not undertake to update any forward-looking statement, 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:

AKITA Drilling Ltd. Interim Consolidated Statements of Financial Position
Unaudited $ Thousands			September 30 2012	September 30 2011	December 31 2011
Assets
Current Assets
	Cash and cash equivalents		$ 13,620	$ 18,288	$ 18,228
	Term deposits		2,500	12,991	9,500
	Accounts receivable		49,072	45,390	48,351
	Prepaid expenses and other		410	608	413
			66,107	77,277	76,492
Non-current Assets
Restricted cash			3,000	-	3,000
Other long term assets			187	-	200
Investment property			607	-	626
Property, plant and equipment			194,719	154,253	166,812
Total Assets			$ 264,620	$ 231,530	$ 247,130
Liabilities
Current Liabilities
	Accounts payable and accrued liabilities		$ 31,128	$ 19,216	$ 27,550
	Deferred revenue		-	815	146
	Dividends payable		1,257	1,264	1,262
	Income taxes payable		-	2,252	3,269
			32,385	23,547	32,227
Non-current Liabilities
Deferred income taxes			13,536	10,922	12,264
Pension liability			1,829	1,628	1,535
Total Liabilities			47,750	36,097	46,026
Shareholders' Equity
Class A and Class B shares			23,194	23,323	23,308
Contributed surplus			2,983	2,696	2,758
Retained earnings			190,693	169,414	175,038
Total Equity			216,870	195,433	201,104
Total Liabilities and Equity			$ 264,620	$ 231,530	$ 247,130

AKITA Drilling Ltd. Interim Consolidated Statements of Net Income and Comprehensive Income
			Three Months Ended			Nine Months Ended
Unaudited			September 30	September 30		September 30	September 30
$ Thousands			2012	2011		2012	2011
Revenue			$ 52,111	$ 54,874		$ 174,669	$ 143,969
Costs and expenses
	Operating and maintenance		36,255	35,814		115,782	94,017
	Depreciation and amortization		5,578	5,647		18,475	15,606
	Selling and administrative		4,577	4,168		14,597	12,669
Total costs and expenses			46,410	45,629		148,854	122,292
Revenue less costs and expenses			5,701	9,245		25,815	21,677
Other income (losses)
	Interest income		104	163		325	505
	Interest expense		(1)	(4)		(3)	(11)
	Gain on sale of joint venture interests in rigs and other assets		5	57		1,066	275
	Other gains and losses (net)		1	(8)		24	(21)
Total other income			109	208		1,412	748
Income before income taxes			5,810	9,453		27,227	22,425
Income taxes			1,479	2,527		6,900	6,050
Net income for the period attributable to shareholders			4,331	6,926		20,327	16,375
Other comprehensive income (loss)
Cumulative translation adjustment			-	-		-	(50)
Comprehensive income for the     period attributable to shareholders			$ 4,331	$ 6,926		$ 20,327	$ 16,325
Earnings per Class A and Class B Share
	Basic		$ 0.24	$ 0.38		$ 1.13	$ 0.90
	Diluted		$ 0.24	$ 0.38		$ 1.13	$ 0.90

AKITA Drilling Ltd. Interim Consolidated Statements of Cash Flow
			Three Months Ended			Nine Months Ended
Unaudited			September 30	September 30		September 30	September 30
Operating Activities
Net income			$ 4,331	$ 6,926		$ 20,327	$ 16,375
Non-cash items included in net income:
	Depreciation and amortization		5,578	5,647		18,475	15,606
	Deferred income taxes		721	181		1,272	(2,313)
	Expense for defined benefit pension plan		98	66		294	199
	Stock options charged to expense		77	62		225	184
	Gain on sale of joint venture interests in rigs and other assets		(5)	(57)		(1,066)	(275)
Funds flow from operations			10,800	12,825		39,527	29,776
Change in non-cash working capital:
	Accounts receivable		(15,278)	(19,497)		(721)	(12,051)
	Prepaid expenses and other		335	186		3	(386)
	Income tax recoverable		(505)	-		(505)	-
Accounts payable and accrued liabilities			9,178	6,924		9,590	6,080
	Deferred revenue		-	715		(146)	815
			(6,270)	(11,672)		8,221	(5,542)
			4,530	1,153		47,748	24,234
	Interest paid		(2)	(4)		(3)	(9)
	Income tax expense - current		758	2,346		5,628	8,363
	Income tax paid		(1,854)	(4,024)		(8,897)	(6,193)
Net Cash from operating activities			3,432	(529)		44,476	26,395
Investing Activities
Capital expenditures			(20,064)	(13,317)		(46,501)	(35,420)
Change in non-cash working capital related to capital			1,845	(1,460)		(6,014)	(5,693)
Change in cash restricted for loan guarantees			-	-		-	2,500
Change in term deposits			-	5,499		7,000	(2,991)
Proceeds on sale of joint venture interests in rigs and other assets			107	170		1,217	398
Net Cash used in investing activities			(18,112)	(9,108)		(44,298)	(41,206)
Financing Activities
Dividends paid			(1,257)	(1,264)		(3,781)	(3,802)
Proceeds received on exercise of stock options			18	-		18	-
Repurchase of share capital			(641)	(535)		(1,023)	(1,013)
Change in non-cash working capital			-	-		-	-
Net Cash used in financing activities			(1,880)	(1,799)		(4,786)	(4,815)
Effect of exchange rate changes on cash and cash equivalents			-	-		-	(50)
(Decrease) in Cash and Cash Equivalents			(16,560)	(11,436)		(4,608)	(19,676)
Cash and cash equivalents, beginning of period			30,180	29,724		18,228	37,964
Cash and Cash Equivalents, End of Period			$ 13,620	$ 18,288		$ 13,620	$ 18,288

 

SOURCE: AKITA Drilling Ltd.