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AKITA Drilling Ltd. Releases Year-End Results

Mar 5, 2019

CALGARY, March 5, 2019 /CNW/ - AKITA Drilling Ltd.'s net loss for the year ended December 31, 2018 was $15,939,000 (net loss of $0.65 per share (basic and diluted)) on revenue of $118,361,000 compared to a net loss of $39,177,000 or $2.18 loss per share (basic and diluted) on revenue of $71,198,000 in 2017.  Included in the 2017 net loss is an asset decommissioning and impairment expense of $29,123,000 (after tax effect of $15,320,000 or $0.85 per share). Funds flow from operations for the current year was $14,306,000 compared to $6,607,000 in 2017, while net cash from operating activities for 2018 was ($8,494,000) compared to $5,074,000 in 2017.

On September 11, 2018, AKITA closed on its transformational acquisition of Xtreme Drilling Corp. ("Xtreme"), a TSX listed United States ("US") based contract drilling company with a fleet of 13 high specification AC triple drilling rigs, operating throughout major resource plays of the US, plus spare equipment and real estate. With this acquisition, and the movement of three rigs from AKITA's Canadian fleet to the US in 2018 in addition to the rig deployed in Q4 of 2017, AKITA's fleet of rigs in the US has increased to 17 rigs. The Company is now well-balanced with 23 rigs in Canada and 17 in the US. 

In Canada, the Company's utilization for the year decreased to 33% in 2018 from 36% in 2017. Sentiment in the Canadian energy industry shifted from optimism in the first quarter of 2018 to pessimism in the fourth quarter of 2018. Regulated production cuts, pipeline access and political and regulatory uncertainty are all weighing heavily on the Canadian energy industry, which in turn is affecting drilling activity. There is still an oversupply of rigs in Canada and day rates remain low, despite improving to $31,354 per operating day in 2018 from $26,704 in 2017. Without a significant shift in demand for rigs or a reduction in the overall Canadian rig fleet, AKITA does not anticipate any significant price increases or activity increases in Canada in the near future.

On November 22, 2018, the Canadian Association of Oilwell Drilling Contractors ("CAODC") released its 2019 industry drilling forecast, estimating 33% average rig utilization, up from the 29% actual average rig utilization in 2018, and estimating 6,962 wells in 2019, up from 6,911 in 2018. The 2018 forecast was based upon commodity price assumptions of US $58.75 per barrel for crude oil and CAD $2.00 per mcf for natural gas. Based on the CAODC forecast it would appear that 2019 will be very similar to 2018. Without improvements to the existing takeaway capacity in Canada, growth in the Canadian market may remain challenged. The Company's focus in 2019 will be on reducing costs in its Canadian operations.

AKITA's activity in the US, on a weighted average basis, calculated on the days that the rigs were owned by AKITA and physically in the US was 61% for 2018 and 79% for the three months ended December 31, 2018. In the US the Company is looking to 2019 with optimism. Demand for AKITA's US rigs remains strong  as AKITA's culture of "best-in-class" operations permeates through its US division. At December 31, 2018, 15 of the Company's 17 US rigs were operating and strong utilization is expected to continue through 2019. Together with ongoing evaluation of opportunities to move additional Canadian rigs to the US, synergy realization related to the Xtreme acquisition and a modest capital program will be the focus of AKITA in the US.

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

Financial Highlights



For the years ended December 31,

($ thousands except per share amounts)

2018

2017

Change

 % Change

Revenue

118,361

71,198

47,163

66%

Operating expenses

86,575

62,156

24,419

39%

Operating margin(1)

31,786

9,042

22,744

252%

Margin %(1)

27%

13%

14%

108%






Adjusted EBIDTA(1)

16,447

3,187

13,260

416%

Per Share

0.67

0.18

0.49

272%






Adjusted funds flow from operations(1)

14,306

6,607

7,699

117%

Per share

0.58

0.37

0.21

57%






Net loss

15,939

39,177

(23,238)

(59%)

Per Share

0.65

2.18

(1.53)

(70%)






Capital expenditures

17,546

20,569

(3,023)

(15%)

Dividend declared

9,784

6,100

3,684

60%

Weighted average shares outstanding

24,552

17,946

6,606

37%






Total Assets

403,641

207,497

196,144

95%


(1)See commentary in "Basis of Analysis in this MD&A and Non-GAAP Items". 

 

Operational Highlights






For the years ended December 31,

2018

2017

Change 

% Change

Operating days(1)





Canada

2,800

3,659

(859)

(23%)

United States

1,783

-

1,783

N/A






Revenue per operating day(1)





Canada(2) 

31,354

26,704

4,650

17%

United States

29,932

-

29,932

N/A






Operating and maintenance per operating day(1)





Canada(2)

23,160

22,226

934

4%

United States

21,329

-

21,329

N/A






Utilization (1)





Canada

33%

36%

(3%)

(8%)

United States(3)

61%


61%

N/A


(1)See commentary in "Basis of Analysis in this MD&A and Non-GAAP Items". 

(2)Includes AKITA's share of Joint Venture revenue and expenses. See commentary in "Basis of Analysis in this MD&A and Non-GAAP". 

(3)Utilization in the US is a weighted average for the year based on the number of days each rig was physically in the US and owned by the Company

 

Introduction

AKITA is a premier Canadian oil and gas drilling contractor with operations in Canada and the United States ("US") with a fleet of 40 rigs.  In 2018, AKITA began providing drilling services through two geographical segments: Canada and the US. With a fleet of 23 rigs, AKITA's Canadian division conducts operations in Alberta, British Columbia, Saskatchewan, and from time to time, in the Yukon and the Northwest Territories, primarily with its wholly owned rigs and through its active joint ventures, the newly established AKITA Mistiyapew Aski Drilling Ltd. (owned 50% by AKITA), AKITA Equtak Drilling Ltd. (owned 50% by AKITA), and Akita Wood Buffalo Drilling Ltd. (owned 50% by AKITA), each of which has defined geographical boundaries.   With a fleet of 17 rigs, AKITA's US division conducts operations in North Dakota, Colorado, Utah, Wyoming, Texas, New Mexico, Oklahoma and Ohio.

With a singular focus on the provision of drilling services, rigorous crew training, rig maintenance and safety processes and adherence to a leading quality assurance – quality control program, AKITA strives to ensure it is well positioned to meet the most demanding requirements of global operators who offer long-lasting resource based drilling programs.  The Company has utilized this strategy to enhance its development of pad drilling rigs designed for both heavy oil and unconventional natural gas formations.

General Overview

The financial results for the Company for 2018, when compared to 2017, improved in almost all metrics. Revenue increased to $118,361,000 from $71,198,000, net loss decreased to $15,939,000 from $39,177,000 and adjusted funds flow from operations1 increased to $14,306,000 from $6,607,000. During 2018, AKITA focused on geographical diversification to the US as the Canadian oil and gas market struggled to sustain the slow recovery that began in 2017.

AKITA began its geographical diversification in the first quarter of 2018 with one drilling rig working in the Permian Basin in New Mexico and ended 2018 with 15 active rigs out of a total of 17 US-based drilling rigs. This growth was primarily the result of AKITA's acquisition of Xtreme Drilling Corp. ("Xtreme"), bolstered organically by the move of three additional Canadian rigs to the US over the course of 2018.

On September 11, 2018, AKITA closed its previously announced acquisition of Xtreme. The acquisition of Xtreme added 13 high-specification AC triple drilling rigs to the Company's US rig fleet as well as facilities, a skilled workforce and infrastructure throughout the US.  The acquisition of Xtreme was funded with $122 million in Class A Non-Voting shares and cash of $45 million.

Conditions in the US continued to improve through 2018 until the fourth quarter of 2018 when prices for crude oil declined significantly, which had a leveling effect on growth. In Canada, the growth was more subdued than in the US and the decrease in oil prices in the fourth quarter has had a more significant impact with many operators pausing or canceling capital spending. In 2018 three customers each provided more than 10% of AKITA's revenue for the year (2017 – two customers).

_________________________

1 See commentary in "Basis of Analysis in this MD&A and Non-GAAP Items".

 

Results by Segment

Canada

For the years ended December 31,


$Thousands

2018

2017

Change 

% Change

Revenue(1)

87,790

97,711

(9,921)

(10%)

Operating and maintenance(1) 

64,847

81,325

(16,478)

(20%)

Operating income

22,943

16,386

6,557

40%

Margin %(1)

26%

17%

9%

53%






Operating days

2,800

3,659

(859)

(23%)






Revenue per operating day(1)(2)

31,354

26,704

4,650

17%

Operating and maintenance per operating day(1)(2)

23,160

22,226

934

4%






Utilization

33%

36%

(3%)

(8%)






Rig count

23

27

(4)

(15%)


(1)Includes AKITA's share of Joint Venture revenue and expenses. See commentary in "Basis of Analysis in this MD&A and Non-GAAP Items". 


(2)See commentary in "Basis of Analysis in this MD&A and Non-GAAP Items". 


 

Utilization rates are a key statistic for the drilling industry since they directly affect total revenue and influence pricing.  During 2018, AKITA achieved 2,800 operating days in Canada, which corresponds to an annual utilization rate of 33%, compared to 2017 utilization of 36% (3,659 days), and a 2018 industry average of 29%. Historically, AKITA's utilization in Canada has been above industry standard due to the higher than average number of pad drilling rigs in AKITA's fleet. Pad drilling rigs typically have higher utilization than conventional drilling rigs as pad drilling is a more efficient way to drill multiple wells without needing trucks to move.

Activity in Canada, for AKITA and the industry, decreased in 2018 from 2017 despite higher average WTI prices. Infrastructure constraints and uncertainty over the future of the Canadian market affected the capital spending of Canadian oil and gas companies. 

Canadian revenue of $87,790,000 in 2018 was 10% lower than 2017 revenue of $97,711,000, due to decreased activity in 2018. Through a greater percentage of higher specification rigs working, revenue per day increased in 2018 to $31,354 per day from $26,704 per day in 2017, a 17% increase.  This increase in revenue per day resulted in a 40% increase in operating income from the Canadian operating segment. Included in the Canadian operating results is AKITA's share of revenue and costs from its joint ventures, as AKITA provides the same drilling services through its joint venture rigs as it does its wholly-owned rigs.

Operating and maintenance costs are tied to activity levels and decreased to $64,847,000 in 2018 from $81,325,000 in 2017 including AKITA's share of costs from its joint venture rigs. On a per day basis, 2018 remained consistent with the prior year, increasing only 4% in 2018 over 2017. 

AKITA's Canadian segment provided drilling services to 29 different customers in 2018 (2017 - 35 different customers), including two customers that each provided more than 10% of AKITA's Canadian revenue for the year (2017 – two customers).

United States

For the year ended December 31,


$ Thousands (CAD)

2018

Revenue

53,368

Operating and maintenance

38,029

Operating income

15,339

Margin %

29%



Operating days

1,783



Revenue per operating day(1)

29,932

Operating and maintenance per operating day(1)(2)

21,329



Utilization (2)

61%



Rig count

17


(1)See commentary in "Basis of Analysis in this MD&A and Non-GAAP Items". 

(2)Utilization in the US is a weighted average for the year based on the number of days each rig was physically in the US and owned by the Company.

 

AKITA moved one drilling rig from Canada to the Permian Basin in December of 2017, one in the first quarter of 2018 and two more in the third quarter of 2018. The Company added an additional thirteen rigs through its acquisition of Xtreme in September of 2018, to end the year with a fleet of seventeen rigs in the US.

Revenue in the US was $53,368,000 for 2018 (2017 – n/a) equal to 45% of the Company's total revenue. This revenue includes the full year for AKITA's US based rigs prior to the acquisition of Xtreme, and revenue from September 12 to December 31, 2018 generated by the acquired Xtreme assets. Total operating income, which is operating revenue less direct operating and maintenance costs, was $15,339,000 for the year.

Since the acquisition of Xtreme in September of 2018, the Company has focused on integrating AKITA and Xtreme to maximize the efficiencies available to the larger, more diverse Company.

In the US, AKITA provided drilling services to 16 different customers in 2018 (2017 – n/a), including four customers that each provided more than 10% of AKITA's US revenue for the year (2017 – n/a).

Seasonality

The Canadian drilling industry is seasonal with activity typically building in the fall as the ground freezes and peaking during the winter months. Northern transportation routes become available once areas with muskeg conditions freeze to allow the movement of rigs and other heavy equipment. The peak Canadian drilling season typically ends with "spring break-up" at which time drilling operations are curtailed due to seasonal road bans (temporary prohibitions on road use) and restricted access to agricultural land as frozen ground melts. The summer drilling season begins when road bans are lifted. Some areas are subject to environmental orders for specific well leases which can prevent drilling activity during certain periods when authorities prioritize wildlife or habitat protections.  Such restrictions may affect activity levels and operating results.

While activity in the northern part of the US is subject to a degree of seasonality, North Dakota's Williston Basin, where AKITA operates, is less affected by spring break-up than are AKITA's operations in northern Canada.  Other areas in the US where AKITA conducts drilling operations are infrequently subject to weather constraints, especially in the southern states, but may experience operational restrictions for other reasons. 

While seasonality can affect all rig classes, pad drilling rigs are generally less susceptible to seasonality than conventional rigs.

Depreciation and Amortization Expense

$Millions

2018

2017

Change

% Change

Depreciation and amortization expense

26.6

27.1

(0.5)

(2%)

 

The decrease in depreciation and amortization expense to $26,614,000 during 2018 from $27,126,000 during 2017 was attributable to the asset decommissioning and asset impairment expense of $29,123,000 that was recorded in 2017. This expense decrease the Company's depreciable asset base. Drilling rig depreciation accounted for 97% of total depreciation and amortization expense in 2018 (2017 – 96%).

On January 1, 2018, AKITA changed its depreciation method to a straight-line calculation from a unit-of-production basis on drilling rig assets. The rationale for this change was to have rig depreciation more closely match the new lifecycle of rigs. Drilling technology is a critical component of modern drilling rigs, and drilling rigs' useful lives are reduced as new technologies are utilized for modern drilling programs. As a result, the passage of time plays a more significant role than operating days in determining a drilling rig's life. Accordingly, the straight-line depreciation method matches the new lifecycle more accurately than the unit-of-production depreciation method.  The estimated effect of the change in depreciation method on the Company's financial statements for 2018 is not material. 

While AKITA conducts some 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 by the joint ventures themselves.  As the joint ventures do not hold any property, plant, or equipment assets directly, the Company's depreciation expense includes depreciation on assets involved in both wholly-owned and joint venture activities.

Selling and Administrative Expenses

$Millions

2018

2017

Change

% Change

Selling and administrative expenses  

22.6

13.7

8.9

65%

 

Selling and administrative expenses increased to $22,611,000 in 2018 from $13,659,000 in 2017.  The increase in 2018 is related to transaction costs of $2.4 million for the acquisition of Xtreme and the addition of the US-based selling and administrative costs to the Company's total cost.

Selling and administrative expenses equated to 19% of revenue in 2018, the same as in 2017. The single largest component of selling and administrative expenses was salaries and benefits which accounted for 33% of these expenses in 2018 (2017 – 51%). 

Asset Decommissioning and Impairment

$Millions

2018

2017

Change

% Change

Asset impairment loss

-

16.0

(16.0)

(100%)

Asset decommissioning loss

-

13.1

(13.1)

(100%)

Asset decommissioning and impairment loss

-

29.1

(29.1)

(100%)

 

International Accounting Standard 36, "Impairment of Assets", requires an entity to consider both internal and external factors when assessing whether there are indications of asset impairment at each reporting period.  At December 31, 2018, there were no internal indicators of impairment, however there were external indicators of impairment.  The uncertainty around oil prices impacts the earnings potential of the Company's cash generating units ("CGU's") and at December 31, 2018, the book value of the Company's net assets was greater than its market capitalization; therefore, the Company tested its CGUs for impairment.

Upon completion of its asset impairment testing, the Company concluded that there was no asset impairment required at December 31, 2018 (2017 - $16,000,000).  The Company also concluded that there were no reversals of previous asset impairments required at December 31, 2018.

The accuracy of asset impairment testing is affected by estimates and judgments in respect of the inputs and parameters that are used to determine recoverable amounts.  In performing its asset impairment test at December 31, 2018, management determined value in use for each of its CGUs using estimated discounted cash flows, which included estimates of future cash flows, expectations regarding cash flow variability, a determination of the discount rate and consideration of the recoverable amount and salvage value of each CGU.  At December 31, 2018, management determined recoverable amounts for its CGUs using a combination of value in use and fair value less costs to dispose.  IFRS considers this approach to constitute a Level 3 hierarchy in its determination of value.

The assumptions used in the value-in-use impairment tests were based on the Company's Board approved 2019 budget and business plan covering a three year period and applied an average growth rate ranging from 2% to 9% over a 10 year period depending on the CGU being analyzed. In forecasting its projected cash flows the Company assumed that current market conditions will not persist into the future.  The Company assumed a pre-tax discount rate of 13%, in order to calculate the present value of projected cash flows.  Determination of this discount rate included analysis of the cost of debt and equity for the Company and the Canadian drilling industry incorporating a risk premium based on current market conditions.  This valuation has a fair value hierarchy of Level 3.

Asset impairment testing is subject to numerous assumptions, inherent risks and uncertainties, both general and specific, and the risk that the predictions will not be realized.  As a result, the following sensitivity analysis has been performed to recognize that additional outcomes are possible:

  • Reduced future revenue assumptions by 5%;
  • Increased inflation for cash outflows to 5%; and
  • Increased the pre-tax discount rate from 13% to 15%.

As rigs are long lived assets, no sensitivity adjustment was made for the projected forecast period.

The sensitivity tests resulted in reductions to the CGUs' values-in-use ranging from $9 million to $32 million.  As the base case test represented management's best estimates, these sensitivity changes were not included in the recoverable amounts used in the 2018 asset impairment testing or the 2017 asset impairment loss reported.

Equity Income from Joint Ventures

Equity income from joint ventures is comprised of the following:

$Millions

2018

2017

Change

% Change

Proportionate share of revenue from joint ventures 

22.8

26.5

(3.7)

(14%)

Proportionate share of operating & maintenance expenses from joint ventures 

(16.3)

(19.2)

2.9

(15%)

Proportionate share of selling and administrative expenses from joint ventures 

(0.3)

(0.4)

0.1

25%

Equity income from joint ventures

6.2

6.9

(0.7)

(10%)

 

The Company provides the same drilling services and utilizes the same management, financial and reporting controls for its joint venture activities as it does for its wholly-owned operations.  The analyses of these activities are incorporated throughout the relevant sections of this MD&A relating to increased activity, revenue per day as well as operating expenses.

Other Income (Loss)

$Millions

2018

2017

Change

% Change

Interest income

0.1

0.4

(0.3)

(75%)

Interest expense

(2.1)

(0.2)

(1.9)

(950%)

Gain on sale of assets

0.6

0.2

0.4

200%

Net other gains

0.4

0.3

0.1

33%

Total other income (loss)

(1.0)

0.7

(1.7)

(243%)

 

Interest income decreased to $84,000 in 2018 from $439,000 in 2017 due primarily to less interest accrued on a long term receivable that was paid in early 2018.

During 2018, the Company recorded interest expense of $2,121,000 (2017 – $168,000). The increase is due to the increase in the Company's debt as a result of the acquisition, as well as the debt assumed as part of the transaction.

During 2018, the Company disposed of non-core assets resulting in a gain of $567,000 (2017 – gain of $194,000).  

In 2018, amounts reported as "Net Other Gains" of $453,000 included $227,000 in foreign exchange, the balance is made up of several amounts.

Income Tax Expense (Recovery)

$Millions, except income tax rate (%)

2018

2017

Change

% Change

Current tax recovery

0.1

(3.0)

3.1

(103%)

Deferred tax expense (recovery)

3.5

(11.1)

14.6

132%

Total income tax expense (recovery)

3.6

(14.1)

17.7

126%

Effective income tax rate

27.0%

26.8%



 

AKITA had an income tax expense of $3,651,000 in 2018 compared to a tax recovery of $14,053,000 in 2017. The current tax expense in 2018 relates to the true-up of the 2017 tax return to the provision. Deferred tax increased to an expense of $3,508,000 in 2018 compared to a recovery of $11,063,000 in 2017. This change is a result of intercompany asset sales between jurisdictions and unrecognized deferred tax assets in 2018 compared to the asset impairment and decommissioning expense recorded in 2017 that reduced the Company's future tax liability.

Net Loss, Adjusted Funds Flow and Net Cash From (Used in) Operating Activities

$Millions

2018

2017

Change

% Change

Net loss

(15.9)

(39.2)

23.3

(59%)

Net cash from operating activities

(8.5)

5.0

(13.5)

(270%)

Adjusted funds flow from operations(1)

14.3

6.6

7.7

117%


(1)See commentary in "Basis of Analysis in this MD&A and Non-GAAP Items". 

 

During 2018, the Company recorded a net loss of $15,939,000 (net loss of $0.65 per Class A Non-Voting and Class B Common share (basic and diluted)) compared to net loss of $39,177,000 (net loss of $2.18 per Class A Non-Voting and Class B Common share (basic and diluted)) in 2017. The material difference in net income from 2018 and 2017 is largely attributable to the asset decommissioning and impairment expense in 2017 of $29,123,000, and the deferred tax recovery of $11,063,000 in 2017.

Net cash from (used in) operating activities decreased in 2018 to negative $8,494,000 in 2018 from positive $5,074,000 in 2017 due primarily to changes in non-cash working capital.

Adjusted funds flow from operations2 increased to $14,306,000 in 2018 from $6,607,000 in 2017 due to an increase in operating days and revenue per day for the company as a whole. Increased US activity more than offset the decline in the Canadian market, resulting in an overall increase for the Company.   


___________________________

2 See commentary in "Basis of Analysis in this MD&A and Non-GAAP Items."

 

Liquidity and Capital Resources

At December 31, 2018, AKITA had $11,166,000 in working capital (working capital ratio of 1.31:1) including $1,503,000 in cash, compared to a working capital of $15,528,000 (working capital ratio of 2.02:1) and $560,000 cash for the previous year. In 2018, AKITA used $8,494,000 in cash for operating activities.  Positive cash was generated from joint venture distributions ($5,808,000), from reductions in cash balances restricted for loan guarantees ($1,525,000) and from proceeds on sales of assets ($640,000).  During the same period, cash was used for capital expenditures ($17,546,000)[3] and payment of dividends ($7,942,000)3. Accounts payable at year end included $19,020,000 in accrued expenses, three quarters of which related to routine operations while the other quarter related to one-time items.

The Company chooses to maintain a conservative Statement of Financial Position due to the cyclical nature of the industry. In conjunction with the closing of the Xtreme acquisition, the Company entered into a new operating loan facility with its principal banker totaling $125,000,000 that is available until 2022. The operating loan facility was syndicated in the fourth quarter of 2018 with the Company's principal banker as the agent on the syndication and three other national banks joining the group. The interest rate on the operating loan facility ranges from 50 to 200 basis points over prime interest rates depending on the funded debt to EBITDA1 ratio.  Security for this facility includes all present and after-acquired property of the Company and a first floating charge over all other present and after-acquired property of the Company including real property.

The credit facility includes two financial covenants:

1.

Funded Debt1 to EBITDA1 Ratio:


i.

for the Fiscal Quarter ending December 31, 2018, the Funded Debt1 to EBITDA1 Ratio shall not be more than 4.00:1.00;


ii.

for the Fiscal Quarter ending March 31, 2019, the Funded Debt1 to EBITDA1 Ratio shall not be more than 3.50:1.00; and


iii.

for the Fiscal Quarter ending June 30, 2019 and each Fiscal Quarter ending thereafter, the Funded Debt1 to EBITDA1 Ratio shall not be more than 3.00:1.00.

The Funded Debt1 to EBITDA1 Ratio is calculated quarterly on the last day of each Fiscal Quarter on a rolling four quarter basis; and

 

_____________________________

3 Readers should be aware that the use of cash in any given period for capital expenditures or payment of dividends does not necessarily coincide with the accounting treatment when reported on an accrual basis.

 

2.

EBITDA1 to Interest Expense Ratio: the Company shall not permit the EBITDA1 to Interest
Expense Ratio, calculated quarterly on the last day of each Fiscal Quarter on a rolling four
quarter basis, to fall below 3.00:1.00.




The facility also includes a borrowing base calculation as follows:


The sum of:




i.

75% of Eligible Accounts Receivable1; plus   


ii.

40% of the net book value of all Eligible Fixed Assets1; less


iii.

Priority Payables1 of the Loan Parties.

(1)

Readers should be aware that each of the EBITDA, interest expense, eligible accounts receivable and eligible fixed assets have specifically set out definitions in the loan facility agreement and are not necessarily defined by or consistent with either GAAP or determinations by other users for other purposes.

 

The new operating loan facility has been classified as long-term debt as the credit agreement has no required repayment obligations prior to the end of the loan facility term. The Company is in compliance with its operating loan facility covenants. At December 31, 2018, the Company had $69 million outstanding on its operating loan facility (2017 - nil).

In addition to the Company's operating loan facility, the Company also had $14 million in debt outstanding at December 31, 2018 that was assumed upon the acquisition of Xtreme.

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 further 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. 

Basis of Analysis in this MD&A and Non-GAAP Items

Revenue and operating and maintenance expenses in AKITA's Canadian operating segment include revenue and expenses from AKITA's wholly-owned rigs as well as its share of joint venture revenue and expenses.

$Thousands

2018

2017

Revenue from wholly-owned rigs in Canada

64,993

71,198

Revenue from joint venture rigs

22,797

26,513

Total revenue in Canada

87,790

97,711




Operating and maintenance expenses from wholly-owned rigs in Canada

48,547

62,156

Operating and maintenance expenses from joint venture rigs

16,300

19,167

Total operating and maintenance expenses in Canada

64,847

81,323

 

AKITA's revenue per operating day and AKITA's operating and maintenance expenses per operating day are not recognized GAAP measures under IFRS.  Management and certain investors may find "per operating day" measures for AKITA's revenue indicate pricing strength while AKITA's 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 drilling rigs that are utilized can also influence these results.

Adjusted earnings before Interest, Tax, Depreciation and Amortization ("Adjusted EBITDA") is not a recognized GAAP measure under IRFS and users of these financial statements should note that Adjusted EBITDA calculations may differ between AKITA and other companies. AKITA calculated Adjusted EBITDA as follows:

$Thousands

2018

2017

Net loss attributable to shareholders

(15,939)

(39,177)

Interest expense

2,121

168

Income tax

3,651

(14,053)

Depreciation and amortization

26,614

27,126

Asset impairment 

-

29,123

Adjusted EBITDA

16,447

3,187

 

Adjusted funds flow from operations is not a recognized GAAP measure under IRFS and users of these financial statements should note that AKITA's method of determining adjusted 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 adjusted 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.

$Thousands

2018

2017

Net Cash from (Used in ) Operating Activities

(8,494)

5,074

Income tax recoverable

(2,812)

(2,270)

Current income tax (recovery)

(143)

2,990

Interest paid

1,950

1

Post-employment benefits

90

142

Equity income from joint ventures

6,168

6,939

Change in non-cash working capital

17,547

(6,269)

Adjusted funds flow from operations

14,306

6,607


 

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 industry and risk management discussions.

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; global liquified natural gas (LNG) demand; weather; access to capital markets; and government policies.  We caution that the foregoing list of factors is not exhaustive and that while relying on forward-looking statements to make decisions with respect to AKITA, 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 where 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.





Statements of Financial Position











December 31,

December 31,

$ Thousands



2018

2017

ASSETS





Cash



$

1,503

$

560

Accounts receivable



42,733

27,024

Income taxes recoverable



531

3,076

Inventory



394

-

Prepaid expenses and other



2,446

89




47,607

30,749

Non-current Assets





Restricted cash



756

1,525

Other long-term assets



474

528

Investments in joint ventures



4,456

4,096

Property, plant and equipment



350,348

170,599

TOTAL ASSETS



$

403,641

$

207,497











LIABILITIES





Current Liabilities





Accounts payable and accrued liabilities



$

23,317

$

13,696

Deferred revenue



367

-

Dividends payable



3,367

1,525

Finance leases



559

-

Current portion of long-term debt



8,831

-




36,441

15,221

Non-current Liabilities





Financial instruments



-

9

Deferred income taxes



16,235

12,592

Deferred share units



417

388

Pension liability



4,712

4,832

Long term debt



74,108

-

Total Liabilities



131,913

33,042






SHAREHOLDERS' EQUITY





Class A and Class B shares



146,264

23,871

Contributed surplus



4,701

4,500

Accumulated other comprehensive income (loss)


86

(495)

Retained earnings



120,677

146,579

Total Equity



271,728

174,455

TOTAL LIABILITIES AND EQUITY



$

403,641

$

207,497

 

AKITA Drilling Ltd.




Statements of Net Loss and Comprehensive Loss








 Year Ended December 31 

$ Thousands except per share amounts


2018

2017









COSTS AND EXPENSES




Operating and maintenance


86,575

62,156

Depreciation and amortization


26,614

27,126

Asset write-down and impairment loss


-

29,123

Selling and administrative


22,611

13,659

Total Costs and Expenses


135,800

132,064





Revenue Less Costs and Expenses


(17,439)

(60,866)





EQUITY INCOME FROM JOINT VENTURES


6,168

6,939





OTHER INCOME (LOSS)




Interest income


84

439

Interest expense


(2,121)

(168)

Gain on sale of assets


567

194

Net other gains


453

232

Total Other Income (Loss)


(1,017)

697





Loss Before Income Taxes


(12,288)

(53,230)





Income tax expense (recovery)


3,651

(14,053)





NET LOSS FOR THE PERIOD ATTRIBUTABLE TO SHAREHOLDERS 


(15,939)

(39,177)





OTHER COMPREHENSIVE INCOME (LOSS)




Items that will not subsequently be reclassified to profit or loss



Remeasurement of pension liability and other


364

(129)

Items that may be subsequently reclassified to profit or loss




Foreign currency translation adjustment


217


Total Other Comprehensive Income (Loss)


581

(129)





COMPREHENSIVE LOSS FOR THE PERIOD ATTRIBUTABLE TO SHAREHOLDERS  


$

(15,358)

$

(39,306)









NET LOSS PER CLASS A AND CLASS B SHARE




Basic


$

(0.65)

$

(2.18)

Diluted


$

(0.65)

$

(2.18)

 

AKITA Drilling Ltd.



Statements of Cash Flows








 Year Ended December 31  

$ Thousands


2018

2017





Net loss


$

(15,939)

$

(39,177)

Non-cash items included in net income:




Depreciation and amortization


26,614

27,126

Asset decomissioning and impairment loss


-

29,123

Deferred income tax expense (recovery)


3,508

(11,063)

Defined benefit pension plan expense


469

443

Stock options and deferred share units expense


230

381

Gain on sale of assets


(567)

(194)

Unrealized gain on financial guarantee contracts


(9)

(32)

Change in non-cash working capital


(17,547)

6,269

Equity income from joint ventures


(6,168)

(6,939)

Post-employment benefits


(90)

(142)

Interest paid


(1,950)

(1)

Current income tax (recovery)  


143

(2,990)

Income tax recoverable


2,812

2,270

Net Cash From (Used In) Operating Activities


(8,494)

5,074





INVESTING ACTIVITIES




Net cash consideration for Xtreme shares


(43,928)

-

Capital expenditures 


(17,546)

(20,569)

Change in non-cash working capital


2,615

190

Distributions from investments in joint ventures


5,808

6,095

Change in restricted cash


1,525

1,444

Proceeds on sale of assets


640

221

Net Cash Used In Investing Activities


(50,886)

(12,619)





FINANCING ACTIVITIES




Change in debt


68,884

-

Dividends paid


(7,942)

(6,100)

Loan commitment fee 


(836)

(45)

Net Cash From (Used In) Financing Activities


60,106

(6,145)





Effect of Foreign Exchange on Cash


217

-





Increase (Decrease) in Cash


943

(13,690)

Cash, beginning of year


560

14,250





CASH, END OF YEAR


$

1,503

$

560


 

SOURCE AKITA Drilling Ltd.

For further information: Darcy Reynolds, Vice President, Finance and Chief Financial Officer, (403) 292-7530


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