AKITA Drilling Ltd. Announces Second Quarter Earnings and Cash Flow

CALGARY, July 30, 2014 /CNW/ - AKITA Drilling Ltd.'s net income for the three months ended June 30, 2014 was $2,082,000 ($0.12 per share) on revenue of $28,365,000 compared to $2,757,000 ($0.15 per share) on revenue of $28,170,000 for the corresponding period in 2013.  Funds flow from operations for the quarter ended June 30, 2014 was $10,609,000 compared to $9,121,000 in the corresponding quarter in 2013.

Net income for the six months ended June 30, 2014 was $12,231,000 ($0.68 per share) on revenue of $82,708,000.  Comparative figures for 2013 were net income of $15,252,000 ($0.85 per share) on revenue of $89,085,000.  Funds flow from operations for the January to June period in 2014 was $28,273,000 compared to $29,106,000 for the comparative period in 2013.

During 2013 and 2014, the Company entered into forward foreign exchange contracts in order to mitigate foreign exchange exposure for capital purchases made outside of Canada.  In that regard, AKITA recorded an unrealized foreign exchange loss of $945,000 during the second quarter of 2014 (YTD 2014 - $647,000) which was partially offset by a realized foreign exchange gain of $376,000 during the second quarter of 2014 (YTD 2014 - $499,000).  The Company did not have similar foreign exchange exposures during the comparative periods during 2013.

The increase in operating days in the second quarter of 2014 compared to the corresponding quarter in 2013 (i.e., 1,220 in 2014 compared to 1,017 in 2013) was attributable to additional pad rig activity as well as having several conventional rigs working during this period.  Lower operating margins and higher depreciation expense along with the foreign currency hedge loss noted above resulted in lower net income in the second quarter of 2014 compared to the corresponding quarter in 2013.

The Company is continuing with its major capital projects that form the backbone of the largest capital program in AKITA's history.  In addition to two new build pad rigs under construction, the Company is refitting a recently purchased pad rig, upgrading an existing pad rig to increase its drilling capabilities and is in the final stages of construction and commissioning of its first slant pad rig.  Management anticipates that these additions and improvements to the fleet will result in meaningful increases to the earnings and cash flow potential for the Company.

While upcoming business conditions remain positive, the rate at which a number of major projects develop are dependent upon significant future events, especially as they relate to final investment decisions for the development of anticipated liquified natural gas (commonly referred to as "LNG") projects and increased capacity to transport crude oil and bitumen.  Although both of these major opportunities dominate much of the Canadian energy related press, other significant prospects continue to develop at a reasonable rate.  The Duvernay formation in Alberta is an additional significant play that impacts AKITA.  This play, which spans a large geographic area, requires heavy double and triple sized conventional rigs for much of the exploration phase and will ultimately require deeper capacity pad rigs to complete the development phase.  AKITA's fleet is well positioned to meet all of the foregoing requirements. 

Selected information from AKITA Drilling Ltd.'s Management's Discussion and Analysis from the Quarterly Report is 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 to assets and obligations for liabilities being conferred upon the parties to the arrangement prior to concluding that AKITA's joint ventures are appropriately 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 GAAP 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.

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 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 expense per operating day demonstrates the 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 between conventional and pad and singles, doubles and triples can also impact these results.  Readers should also be aware that AKITA includes standby revenue, construction revenue and construction costs in its determination of "per operating day" results.

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 includes cash flow from operating activities before working capital changes.  Management and certain investors may find funds flow from operations to be a useful measurement tool 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. 

 

Second Quarter Comparatives –Higher Activity Levels partially Offset by Lower Day Rates

During the second quarter of 2014, adjusted revenue increased to $44,948,000 from $39,175,000 during the second quarter of 2013 as a result of increased rig activity for pad rigs and conventional doubles.

Although adjusted revenue for the three month period ended June 30, 2014 increased, adjusted revenue per operating day decreased to $36,843 during the second quarter of 2014 from $38,520 in the comparative quarter of 2013 due to an increased proportion of the Company's revenue being generated by its conventional drilling rigs versus pad rigs as well as due to lower day rates for certain of AKITA's pad rigs.  Pad rigs, compared to conventional drilling rigs, typically generate higher revenue on a per day basis.

Adjusted operating and maintenance costs are tied to revenue and amounted to $29,198,000 ($23,933 per operating day) during the second quarter of 2014 compared to $25,218,000 ($24,796 per operating day) in the same period of the prior year.  While conventional rigs figured more prominently in the drilling activities during the current quarter compared to the second quarter of 2013, the actual mix of rigs resulted in higher operating costs when taken on a "per operating day" basis.

The adjusted operating margin for the Company increased to $15,750,000 ($12,910 per operating day) in the second quarter of 2014 from $13,957,000 ($13,724 per operating day) during the corresponding quarter of 2013.  Increased drilling activity was the major reason for the total adjusted operating margin increasing in the second quarter of 2014 compared to the corresponding period in 2013, while an increase in the proportion of conventional rigs compared to pad rigs as well as day rate reductions for specific pad rigs adversely affected the adjusted operating margin per operating day when comparing the same periods.

Year-to-Date Comparatives – Improvements in the Second Quarter partially Offset Weakness encountered in First Quarter

During the first six months of 2014, adjusted revenue increased to $116,815,000 from $113,353,000 during the first six months of 2013 as a result of strengthening market conditions for pad rigs and conventional double sized rigs, particularly in the second quarter of the year.

Although adjusted revenue for the year-to-date period ended June 30, 2014 increased, adjusted revenue per operating day decreased to $35,059 during the first six months of 2014 from $35,883 in the comparative six month period of 2013 due to the same factors that affected second quarter adjusted revenue per operating day.

Adjusted operating and maintenance costs are tied to revenue and amounted to $74,858,000 ($22,466 per operating day) during the first six months of 2014 compared to $70,354,000 ($22,271 per operating day) in the same period of the prior year. 

The adjusted operating margin for the Company decreased to $41,957,000 in the first six months of 2014 from $42,999,000 during the corresponding period of 2013.  This reduction occurred in the first quarter of 2014 due to a reduction in standby revenue as well as the change in rig mix (i.e. there was a higher percentage of activity generated by conventional rigs during the first quarter of 2014 compared to the corresponding quarter in 2013).  During the second quarter, this decline in adjusted operating margin was partially offset by stronger market conditions.

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, 2014, deferred revenue related to these activities totalled $76,000 (June 30, 2013 - $371,000).

                                                                                                     

 

The depreciation and amortization expense reported in the second quarter of 2014 of $7,256,000 was higher than the corresponding quarter of 2013 ($5,556,000) due to the increased cost base for AKITA's fleet as well as due to higher rig activity.  In addition, during the second quarter, the most active rigs also had the highest cost base.  AKITA depreciates its rig assets using a unit of production method.

Depreciation and amortization expense for the first six months of 2014 totalled $15,119,000 compared to $13,023,000 for the corresponding period in 2013.  As with the depreciation and amortization expense for the second quarter, both the higher cost base for AKITA's rigs as well as increased drilling activity were the major factors in the depreciation increase.  In the first six months of 2014, drilling rig depreciation accounted for 96% of total depreciation and amortization expense (2013 - 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.

Adjusted selling and administrative expenses were 9.0% of adjusted revenue in the first six months of 2014 compared to 8.6% of adjusted revenue in the first six months of 2013.  The increased selling and administration costs were due to a combination of personnel and non-personnel related costs including recording bad debt expense of $175,000 as well as computer system upgrades.  The single largest component was salaries and benefits, which accounted for 58% of these expenses (60% in 2013). 

 

 

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.  Joint venture activities are often located in some of the most prospective regions in Canada.  Two thirds of AKITA's joint ventures utilize pad drilling rigs.

 

 

The Company invests any cash balances in excess of its ongoing operating requirements in bank guaranteed highly liquid investments.  Interest income decreased to $98,000 in the first six months of 2014 from $163,000 in the corresponding period as a result of reduced cash and short term deposit balances.  The Company has undertaken significant capital expenditures related to the construction of new rigs and the conversion of conventional rigs into pad rigs, thereby reducing AKITA's cash balances.   During the second quarter of 2014, the Company began to access its operating loan facility. 

During the second quarter of 2014, the Company disposed of certain non-core assets resulting in a $117,000 gain.  The Company did not have any significant disposals during the first six months of 2013.

During 2013 and 2014, the Company entered into forward foreign exchange contracts in order to mitigate foreign exchange exposure for capital purchases made outside of Canada.  In that regard, AKITA recorded an unrealized foreign exchange loss of $945,000 during the second quarter of 2014 (YTD 2014 - $647,000), which was partially offset by a realized foreign exchange gain of $376,000 during the second quarter of 2014 (YTD 2014 - $499,000).  The Company did not have similar foreign exchange exposures during the comparative periods during 2013.  In addition to foreign exchange gains and losses, the Company had other gains and losses of $27,000 in the second quarter of 2014 (YTD 2014 - $56,000).  All of the foregoing has been classified as "Net Other Losses" on the Interim Consolidated Statements of Net Income and Comprehensive Income.

 

 

Income tax expense decreased to $4,133,000 in the first six months of 2014 from $5,144,000 in the corresponding period in 2013 due to lower pre-tax earnings.  Recent capital additions have affected the portion of income taxes that are deferred to future dates.

 

 

Net income attributable to shareholders decreased to $2,082,000 or $0.12 per Class A Non-Voting and Class B Common Share (basic and diluted) for the three month period ended June 30, 2014 from $2,757,000 or $0.15 per share (basic and diluted) in the comparative quarter of 2013.  Funds flow from operations increased to $10,609,000 in the second quarter of 2014 from $9,121,000 in the corresponding quarter in 2013.  Lower net income that occurred in second quarter of 2014 compared to the second quarter of 2013 was directly attributable to increased depreciation expense as well as lower operating margins per operating day versus the second quarter of 2013 and was partially offset by higher activity levels in the current quarter.  The increase in funds flow from operations during the second quarter of 2014 compared to the corresponding quarter of 2013 was directly attributable to higher activity levels in the current year and was partially offset by lower operating margins per operating day.  Funds flow from operations is not affected by depreciation expense as depreciation is a non-cash item.

Net income decreased to $12,231,000 or $0.68 per Class A Non-Voting and Class B Common Share (basic and diluted) for the first six months of 2014 from $15,252,000 or $0.85 per share (basic and diluted) in the corresponding period of 2013.  Funds flow from operations decreased to $28,273,000 in the first six months of 2014 from $29,106,000 in the corresponding period in 2013.  Over three quarters of the decline in year-to-date net income compared to 2013 and the entire decline in funds flow from operations occurred during the first quarter of 2014.  These reductions were directly attributable to reductions in operating margins as well as increased depreciation and selling and administrative expenses.

Fleet and Rig Utilization

At June 30, 2014 AKITA had 37 drilling rigs, including nine that operated under joint ventures, (33.725 net to AKITA) compared to 38 rigs (34.875 net) in the corresponding period of 2013.  During the second quarter of 2014, the Company decommissioned one of its wholly owned triple sized conventional rigs. 

 

 

The Company had one conventional rig included in the above fleet statistics that was undergoing a conversion into a slant capable rig at June 30, 2014.  AKITA also had two new pad rigs under construction and was refitting a recently purchased pad rig at June 30, 2014.  Upon completion of AKITA's current construction program the Company will have 40 rigs in its fleet.

Liquidity and Capital Resources

Cash used for capital expenditures totalled $42,973,000 in the first six months of 2014 (2013 - $15,137,000).  The most significant expenditure related to ongoing construction of a new ultra-deep multi-year contracted pad rig which is anticipated to be completed by the end of the third quarter of 2014.  The Company had three additional ongoing major projects during the first six months of 2014.  First, AKITA is converting a conventional rig into a slant capable pad drilling rig.  This rig is in the final stages of construction and commissioning and will be operating later in the third quarter of 2014.  In addition, the Company purchased a pad rig which is currently undergoing selected refits to allow it to operate in Canada's cold weather climate.  Management anticipates that this rig will be operational by the fourth quarter of 2014.  In the first quarter of 2014, AKITA announced construction of a new pad rig to meet anticipated demand related to obtaining feedstock for proposed liquified natural gas (commonly referred to as "LNG") projects.  This rig is anticipated to be operational in the first half of 2015.

At June 30, 2014, AKITA's Statement of Financial Position included working capital (current assets minus current liabilities) of $14,483,000 compared to working capital of $38,337,000 at June 30, 2013 and working capital of $40,645,000 at December 31, 2013.  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 spring break-up.  Non-cash working capital amounted to $9,493,000 at June 30, 2014 compared to $26,647,000 at December 31, 2013.  During 2014, AKITA's significant capital program has resulted in lower levels of working capital than during the comparative periods in 2013.

During the six month period ended June 30, 2014, the Company purchased 27,600 Class A Non-Voting Shares at an average price of $15.49 pursuant to its normal course issuer bid.  The Company did not purchase any shares pursuant to a normal course issuer bid during the first six months of 2013.

During 2013, the Company was awarded a contract to construct and operate an ultra-deep capacity pad rig under a multi-year contract.  During the first quarter of 2014, the Company commenced the construction of a second pad rig.  AKITA sourced approximately $26 Million for these rigs from non-Canadian suppliers.  In order to minimize the risk of currency translation adjustments, the Company purchased forward currency contracts totalling $18 Million, of which $7.5 Million remain outstanding at June 30, 2014.  These contracts expire between the third quarter of 2014 and the first quarter of 2015.

The Company had eight rigs under multi-year contracts at June 30, 2014.  Of these contracts, three are anticipated to expire later this year, two in 2015, one in 2016, one in 2018 and one in 2019.

From time to time, the Company may provide guarantees for bank loans to joint venture partners in respect of sales of joint venture interests.  At June 30, 2014, AKITA provided $9,381,000 in deposits as security with the bank for those guarantees.  These deposits have been recorded as "Restricted Cash" on AKITA's Interim Consolidated 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 News Release 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.