AKITA Drilling Ltd. Announces Third Quarter Earnings and Cash Flow

CALGARY, Oct. 30, 2014 /CNW/ -  AKITA Drilling Ltd.'s net income for the three months ended September 30, 2014 was $3,854,000 ($0.21 per share) on revenue of $36,556,000 compared to $3,540,000 ($0.20 per share) on revenue of $33,096,000 for the corresponding period in 2013.  Funds flow from operations for the quarter ended September 30, 2014 was $10,942,000 compared to $11,300,000 in the corresponding quarter in 2013.

Net income for the nine months ended September 30, 2014 was $16,085,000 ($0.90 basic earnings per share / $0.89 diluted earnings per share) on revenue of $119,263,000.  Comparative figures for 2013 were net income of $18,793,000 ($1.05 basic earnings per share / $1.04 diluted earnings per share) on revenue of $122,181,000.  Funds flow from operations for the January to September period in 2014 was $39,216,000 compared to $40,406,000 for the comparative period in 2013.

Rig activity increased during the third quarter of 2014 to 1,519 operating days or 45.0% utilization compared to 1,347 operating days or 38.6% utilization during the third quarter of 2013.  This increase was attributable to improved market conditions for conventional double and triple sized rigs.  By contrast, AKITA's pad rigs were less active than during the corresponding period in 2013.

During the quarter, the Company completed construction of and deployed its first slant pad drilling rig.  Management anticipates that this rig will provide AKITA with access to new opportunities in heavy oil drilling.  The Company expects to have three additional pad rigs in service prior to year-end: an ultra-deep new build, a new pad double rig purchased earlier this year that is being refitted for the Canadian market and an existing pad triple rig that is being upgraded.

Although the recent decline in crude oil prices has not had a material impact on rig activity management anticipates that a prolonged decline may slow demand for rigs targeting oil prospects.  While crude oil drilling potential is influenced by the price of crude oil, natural gas drilling potential continues to be tied to the establishment of FIDs (final investment decisions) by selected operators to invest in major west coast development for LNG (liquified natural gas) projects.  AKITA remains well positioned with its fleet of pad rigs to be a significant supplier for any related drilling opportunities.

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 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 metric 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 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.

 

 

 

 

 

 

Third Quarter Comparatives – Lower Operating Margins Diminish the Impact of Increased Activity Levels

During the third quarter of 2014, adjusted revenue increased to $50,338,000 from $45,071,000 during the third quarter of 2013 as a result of increased rig activity, particularly for AKITA's conventional doubles and triples.

Although adjusted revenue for the three month period ended September 30, 2014 increased, adjusted revenue per operating day decreased to $33,139 during the third quarter of 2014 from $33,460 in the comparative quarter in 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 rigs, typically generate higher revenue on a "per day" basis.

Adjusted operating and maintenance costs are tied to revenue and amounted to $34,494,000 ($22,708 per operating day) during the third quarter of 2014 compared to $29,200,000 ($21,678 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 third 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 decreased to $15,844,000 ($10,431 per operating day) in the third quarter of 2014 from $15,871,000 ($11,782 per operating day) during the corresponding quarter of 2013.  During the third quarter of 2014, a higher proportion of conventional rigs worked compared to the third quarter of 2013 when more pad rigs operated.  This change in rig mix resulted in both lower overall average day rates and lower operating margins than during the corresponding period in 2013.  Higher activity levels in the third quarter of 2014 compared to the corresponding period in 2013 were not sufficient to offset these changes.

Year-to-Date Comparatives – Improvements in the Second and Third Quarters Partially Offset Weakness Encountered in First Quarter

During the first nine months of 2014, adjusted revenue increased to $167,153,000 from $158,424,000 during the comparative nine month period of 2013 as a result of strengthening market conditions for conventional double and triple sized rigs.  Pad rig activity had a number of program delays which were most pronounced during the third quarter.

Although adjusted revenue for the year-to-date period ended September 30, 2014 increased, adjusted revenue per operating day decreased to $34,457 during the first nine months of 2014 from $35,158 in the comparative period in 2013 due to the same factors that affected third quarter adjusted revenue per operating day.

Adjusted operating and maintenance costs are tied to revenue and amounted to $109,352,000 ($22,542 per operating day) during the first nine months of 2014 compared to $99,554,000 ($22,094 per operating day) in the same period of the prior year.

The adjusted operating margin for the Company decreased to $57,801,000 in the first nine months of 2014 from $58,870,000 during the corresponding period of 2013.  This reduction occurred during 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 and third quarters of 2014, 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 September 30, 2014, deferred revenue related to these activities totalled $364,000 (September 30, 2013 - $498,000).

Depreciation and Amortization Expense

   

The increase in depreciation and amortization expense to $7,088,000 during the third quarter of 2014 from $6,502,000 during the corresponding quarter in 2013 was largely attributable to an increase in the average cost base for AKITA's rigs as well as an increase in drilling activity by AKITA's conventional rigs.

Depreciation and amortization expense for the first nine months of 2014 totalled $22,208,000 compared to $19,524,000 for the corresponding period in 2013.  As with the depreciation and amortization expense for the third quarter, both an increase in drilling activity as well as a higher average cost base per rig resulted in depreciation and amortization expense being 14% higher in the first nine months of 2014 versus the comparative period in 2013. In the first nine months of 2014, drilling rig depreciation accounted for 96% of total depreciation and amortization expense (2013 - 96%).

While AKITA conducts many 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.

Selling and Administrative Expense

       

 

Adjusted selling and administrative expenses were 8.8% of adjusted revenue in the first nine months of 2014 compared to 8.7% of adjusted revenue in the first nine months of 2013.  The increased selling and administrative costs were due to a combination of personnel and non-personnel related costs including computer system upgrades. The single largest component was salaries and benefits, which accounted for 59% of these expenses in the first nine months of 2014 (62% in 2013).

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. 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.

Other Income (Losses)

      

The Company invests any cash balances in excess of its ongoing operating requirements in bank guaranteed highly liquid investments. Interest income decreased to $142,000 in the first nine months of 2014 from $259,000 in the corresponding period in 2013 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. In addition to interest income, the Company has recorded interest expense totalling $119,000 during the first nine months of 2014 (first nine months of 2013 - $81,000), primarily as a result of standby charges for its lending facility.

During the third quarter of 2014, the Company disposed of an older underutilized pad rig. Additionally, throughout the current year, AKITA disposed of other non-core assets resulting in year-to-date gains totalling $499,000. AKITA disposed of several minor assets during the first nine months of 2013 resulting in $184,000 in gains.

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 currency gain of $402,000 during the third quarter of 2014 (YTD 2014 – unrealized foreign currency loss of $245,000).   The balance reported as "Net Other Losses" on the Interim Consolidated Statements of Net Income and Comprehensive Income also includes realized foreign exchange gains (YTD 2014 - $472,000), unrealized losses on financial instruments (YTD 2014 - $155,000) and other gains (YTD 2014 - $46,000).

Income Tax Expense

 

Income tax expense decreased to $5,425,000 in the first nine months of 2014 from $6,508,000 in the corresponding period in 2013 due to lower pre-tax earnings. The completion of major capital projects affects the portion of income taxes that are deferred to future dates.

Net Income, Funds Flow and Net Cash From Operating Activities

         

 

Net income attributable to shareholders increased to $3,854,000 or $0.21 per Class A Non-Voting and Class B Common Share (basic and diluted) for the three month period ended September 30, 2014 from $3,540,000 or $0.20 per share (basic and diluted) in the comparative quarter of 2013.  Funds flow from operations decreased to $10,942,000 in the third quarter of 2014 from $11,300,000 in the corresponding quarter in 2013. Changes in quarterly net income that occurred in the third quarter of 2014 compared to the corresponding quarter in 2013 were attributable to higher activity levels in the current year as well as gains from asset sales and currency exchange rates which were partially offset by lower margins and higher depreciation charges.  Funds flow from operations was not affected by the aforementioned gains from asset sales and currency movements or depreciation expense as these are all non-cash items.

Net income decreased to $16,085,000 or $0.90 per Class A Non-Voting and Class B Common Share (basic) ($0.89 - diluted) for the first nine months of 2014 from $18,793,000 or $1.05 per share (basic) ($1.04 - diluted) in the corresponding period of 2013. Funds flow from operations decreased to $39,216,000 in the first nine months of 2014 from $40,406,000 in the corresponding period in 2013.  Comparability of net income and funds flows for these two periods were mostly affected by rig activity levels (higher in 2014 on a year-to-date basis), operating margins per operating day (lower in 2014 on a year-to-date basis) and depreciation (higher in 2014 on a year-to-date basis).

Fleet and Rig Utilization

At September 30, 2014, AKITA had 36 drilling rigs, including 10 that operated under joint ventures, (32.725 net to AKITA) compared to 38 rigs (35.725 net to AKITA) in the corresponding period of 2013. At September 30, 2014, the Company had three additional rigs under construction (3 net to AKITA). During the third quarter of 2014, the Company disposed of one of its underutilized pad rigs.

     

Liquidity and Capital Resources

Cash used for capital expenditures totalled $71,285,000 during the first nine months of 2014 (2013 - $27,892,000). The most significant expenditures related to the following projects:

• ongoing construction of a new ultra-deep pad rig (scheduled to commence its multi-year contract in the fourth quarter of 2014);
• completion of the conversion of a conventional rig into the Company's first slant pad rig (this rig commenced operations during the third quarter of 2014);
• purchasing and refitting of a new pad rig to enable it to operate in Canada (completion of the refit is scheduled for the fourth quarter of 2014 at which time the rig will operate under a one-year initial contract);
• upgrading a pad triple to make it more suitable for drilling natural gas targets in the Duvernay or Montney formations (the rig is scheduled to commence operations during the fourth quarter of 2014); and
• continued construction of a pad rig announced in the first quarter of 2014 (the rig is anticipated to meet demand for proposed liquified natural gas ("LNG") related drilling projects and is scheduled to be completed in the first half of 2015).

At September 30, 2014, AKITA's Statement of Financial Position included working capital (current assets minus current liabilities) of $11,061,000 compared to working capital of $33,749,000 at September 30, 2013 and working capital of $40,645,000 at December 31, 2013. Readers should be aware of the significant capital expenditure program undertaken by the Company as well as 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 as a result of increased drilling activity. Non-cash working capital amounted to $8,127,000 at September 30, 2014 compared to $26,647,000 at December 31, 2013.

During the nine month period ended September 30, 2014, the Company purchased 27,600 Class A Non-Voting Shares at an average price of $15.49 pursuant to a normal course issuer bid. The Company did not purchase any shares pursuant to a normal course issuer bid during the first nine 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 construction of a second pad rig. AKITA sourced approximately $26 Million of materials for these rigs from non-Canadian suppliers. In order to minimize the risk of currency translation adjustments, AKITA purchased forward currency contracts totalling $18 Million, of which $4.25 Million was outstanding at September 30, 2014. These contracts expire during the fourth quarter of 2014 and the first quarter of 2015.

The Company had six rigs under multi-year contracts at September 30, 2014. Of these contracts, two are anticipated to expire in 2014, one 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 to joint venture interests. At September 30, 2014, AKITA provided $9,381,000 in deposits with the bank for those guarantees.  These funds have been classified as "restricted cash" on the Statement 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.