AKITA Drilling Ltd. Announces First Quarter Earnings and Cash Flow

CALGARY, April 30, 2014 /CNW/ - AKITA Drilling Ltd.'s net earnings for the three months ended March 31, 2014 were $10,150,000 ($0.57 per share basic; $0.56 per share diluted) on revenue of $54,342,000 compared to $12,495,000 ($0.70 per share basic and diluted) on revenue of $60,761,000 for the corresponding period in 2013.  Funds flow from operations for the quarter ended March 31, 2014 was $17,665,000 compared to $19,985,000 in the corresponding quarter in 2013.

AKITA achieved a similar number of operating days in the first quarter of 2014 (2,112 days) compared to the corresponding quarter in 2013 (2,142 days).  However, the revenue mix between pad rigs and conventional rigs as well as the absence of construction and standby revenue in the current quarter resulted in weaker financial performance when compared to the first quarter of 2013.

The Company continues to maintain a strong financial position with significant flexibility to capitalize on opportunities.  At March 31, 2014, AKITA had working capital of $34,926,000 as well as a $100,000,000 unused loan facility.

The Company is optimistic about its future prospects.  To that end, AKITA remains on schedule and budget to complete both its new ultra-deep pad rig and its slant rig that were each announced in 2013.  During the first quarter of 2014, AKITA announced construction of an additional new pad rig for use in Western Canada.  Additionally, the Company is refitting a recently purchased pad rig that will become operational later this year.  AKITA's management is confident that these rig additions will complement the existing rigs in AKITA's fleet as it strives to maintain a leading role in the Western Canadian resource based drilling plays.

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".  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.

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.

Revenue and Operating & Maintenance Expenses

         
$Million        
Three Months Ended March 31 2014 2013 Change % Change
Revenue per Interim Financial Statements(1) 54.3 60.8 (6.5) (11%)
Proportionate Share of Revenue from Joint Ventures(2) 17.5 13.3 4.2 32%
Adjusted Revenue(2) 71.8 74.1 (2.3) (3%)
         
$Million        
Three Months Ended March 31 2014 2013 Change % Change
Operating & Maintenance Expenses per Interim Financial Statements(1) 34.8 37.4 (2.6) (7%)
Proportionate Share of Operating & Maintenance Expenses  from Joint Ventures(2) 10.9 7.7 3.2 41%
Adjusted Operating & Maintenance Expenses (2) 45.7 45.1 0.6 1%
         
         
$Million        
Three Months Ended March 31 2014 2013 Change % Change
Adjusted Revenue(2) 71.8 74.0 (2.2) (3%)
Adjusted Operating & Maintenance Expenses(2) 45.7 45.1 0.6 1%
Adjusted Operating Margin(1)(2)(3) 26.1 28.9 (2.8) (10%)
         
$Dollars        
Three Months Ended March 31 2014 2013 Change % Change
Adjusted Revenue per Operating Day(2) 34,028 34,558 (530) (2%)
Adjusted Operating & Maintenance Expenses per Operating Day(2) 21,619 21,072 547 3%
Adjusted Operating Margin per Operating Day(2)(3) 12,409 13,486 (1,078) (8%)

(1) Revenue, operating & maintenance expenses and adjusted 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) Proportionate share of revenue from joint ventures, adjusted revenue, proportionate share of operating & maintenance expenses from joint ventures, adjusted operating & maintenance expenses, adjusted operating margin, adjusted revenue per operating day, adjusted operating & maintenance expenses per operating day and adjusted operating margin per operating day are non-standard accounting measures.  See commentary in "Basis of Analysis in this MD&A, Non-Standard and Additional GAAP Items".
(3) Adjusted operating margin is the difference between adjusted revenue and adjusted operating & maintenance expenses.

During the first quarter of 2014, adjusted revenue decreased to $71,867,000 from $74,024,000 during the first quarter of 2013.  This reduction was the result of four primary factors:

  • the Company had no construction revenue in the first quarter of 2014 whereas AKITA earned revenue from the construction of a rig sold to one of its current customers in the corresponding quarter in 2013;
  • during the first quarter of 2014, AKITA did not have any standby revenue unlike during the corresponding period in 2013;
  • pad drilling rig activity was 6% lower in the first quarter of 2014 than during the corresponding quarter in 2013; and
  • the higher drilling activity for conventional rigs (primarily triples) in the first quarter of 2014 did not produce the same revenue as would have been earned by pad drilling rigs.

In addition to the decline in adjusted revenue for the quarter, adjusted revenue per operating day decreased to $34,028 during the first quarter of 2014 from $34,558 in the first quarter of 2013.  The same factors that influenced the decline in overall revenue affected the revenue per day calculations.

Adjusted operating and maintenance costs are tied to revenue and amounted to $45,660,000 ($21,619 per operating day) during the first quarter of 2014 compared to $45,136,000 ($21,072 per operating day) in the same period of the prior year.

The adjusted operating margin for the Company decreased to $26,207,000 in the first quarter of 2014 from $28,888,000 during the corresponding quarter of 2013.  This reduction amounted to an 10% decline.  The reduction in standby revenue as well as the change in rig mix (i.e. a higher percentage of activity was produced by conventional rigs rather than pad rigs) had an adverse impact on overall operating margins during the first quarter of 2014.

From time to time, the Company requires customers to make pre-payments prior to the provision of drilling services.  At March 31, 2014, these prepayments totalled $169,000 (March 31, 2013 - $482,000).

Depreciation and Amortization Expense

                 
$Million                
Three Months Ended March 31   2014   2013   Change   % Change
Depreciation and Amortization Expense   7.9   7.5   0.4   5%

The depreciation and amortization expense increase to $7,863,000 during the first quarter of 2014 from $7,467,000 in the corresponding period in 2013 was largely attributable to an increase in the average cost base for AKITA's most active rigs. In the first quarter of 2014, drilling rig depreciation accounted for 96% of total depreciation expense (Q1, 2013 - 97%).

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

         
$Million        
Three Months Ended March 31 2014 2013 Change % Change
Selling & Administrative Expense per Interim Financial Statements 5.2 4.7 0.5 11%
Proportionate Share of Selling & Administrative Expense from Joint Ventures(1) 0.2 0.1 0.1 100%
Adjusted Selling & Administrative Expense(1) 5.4 4.8 0.6 13%

(1) Proportionate share of selling and administrative expense from joint ventures and adjusted selling and administrative expense are non-standard accounting measures.  See commentary in "Basis of Analysis in this MD&A, Non-Standard and Additional GAAP Items".

Adjusted selling and administrative expenses were 7.5% of adjusted revenue in the first quarter of 2014 compared to 6.5% of adjusted revenue in the first quarter of 2013, largely as a result of decreased adjusted revenue in 2013.  The other major factor related to salaries and benefits, which accounted for 59% of these expenses (58% in Q1, 2013).

Other Income

         
$Million        
Three Months Ended March 31 2014 2013 Change % Change
Interest Income 0.1 0.1 (0.0) N/A
Net Other Gains 0.4 0.0 0.4 N/A
Total Other Income 0.5 0.1 0.4 400%

The Company invests any cash balances in excess of its ongoing operating requirements in bank guaranteed highly liquid investments.  Interest income decreased to $64,000 in the first three months of 2014 from $88,000 in the corresponding period of 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.

Interest expense of $34,000 (2013 - $27,000) has been accrued primarily to reflect the related future cost of the Company's unfunded defined benefit pension plan.

In 2014, amounts reported as "Net Other Gains" of $449,000 included $298,000 with respect to unrealized gains related to forward exchange contracts purchased to provide a hedge for foreign rig equipment commitments for a rig under construction.

Equity Income from Joint Ventures

                 
$Million                
Three Months Ended March 31   2014   2013   Change   % Change
Proportionate Share of Revenue from Joint Ventures(1)   17.5   13.3   4.2   32%
Proportionate Share of Operating & Maintenance Expenses  from Joint Ventures(1)   10.9   7.7   3.2   42%
Proportionate Share of Selling & Administrative Expense from Joint Ventures(1)   0.2   0.1   0.1   100%
Equity Income from Joint Ventures   6.4   5.5   0.9   16%

(1) Proportionate share of revenue from joint ventures, proportionate share of operating & maintenance expenses from joint ventures and proportionate share of selling & administrative expense from joint ventures are non-standard accounting measures.  See commentary in "Basis of Analysis in this MD&A, Non-Standard and Additional GAAP Items".

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.

Income Tax Expense

                 
$Million                
Three Months Ended March 31   2014   2013   Change   % Change
Current Tax Expense   3.5   4.3   (0.8)   (18%)
Deferred Tax Expense   (0.2)   (0.1)   (0.1)   (100%)
Total Income Tax Expense   3.3   4.2   (0.9)   (22%)

Total income tax expense decreased to $3,276,000 in the first quarter of 2014 from $4,208,000 in the corresponding period in 2013 due to lower pre-tax earnings.

Net Income, Funds Flow and Net Cash From Operating Activities

                 
$Million                
Three Months Ended March 31   2014   2013   Change   % Change
Net Income   10.2   12.5   (2.3)   (18%)
Funds Flow From Operations(1)   17.7   20.0   (2.3)   (12%)

(1) Funds flow from operations is an additional GAAP measure under IFRS.  See commentary in "Basis of Analysis in this MD&A, Non-Standard and Additional GAAP Items".

Net income attributable to shareholders decreased to $10,150,000 or $0.57 per Class A Non-Voting and Class B Common Share (basic)($0.56 - diluted) for the first quarter of 2014 from $12,495,000 or $0.70 per share (basic and diluted) in the first quarter of 2013.  Funds flow from operations decreased to $17,665,000 in the first quarter of 2014 from $19,985,000 in the corresponding quarter in 2013.  Lower net income and funds flow from operations that occurred in 2014 were directly attributable to reductions in operating margins as well as increased depreciation and selling and administrative expenses.

Fleet and Rig Utilization

AKITA had 38 drilling rigs, including ten that operated under joint ventures, (34.725 net to AKITA) at the end of the first quarter of 2014 compared to 39 rigs (35.875 net) in the corresponding period of 2013.

                 
Three Months Ended March 31   2014   2013   Change   % Change
Operating Days   2,112   2,142   (30)   (1%)
Utilization Rate   60.2%   61.0%   (0.8)   (1%)

The Company had one conventional rig included in the above fleet statistics that was undergoing a conversion into a slant-capable rig at March 31, 2014.  AKITA also had two new pad rigs under construction and was refitting a recently purchased pad rig at that date.

Liquidity and Capital Resources

Cash used for capital expenditures totalled $18,064,000 in the first quarter of 2014 (2013 - $6,044,000).  The most significant expenditure related to ongoing construction of a new ultra-deep multi-year contracted pad rig which is anticipated to be completed in the second half of 2014.  In addition to this ultra-deep pad rig, the Company had two additional ongoing major capital projects during the first quarter of 2014.  AKITA is continuing to convert a conventional rig into a slant capable pad drilling rig.  In addition the Company purchased a pad rig during the quarter.  This addition is currently undergoing selected refits to allow it to operate in the cold weather climate in Canada.

At March 31, 2014, AKITA's balance sheet included working capital (current assets minus current liabilities) of $34,926,000 compared to working capital of $41,892,000 at March 31, 2013 and working capital of $40,645,000 at December 31, 2013.  The seasonal nature of AKITA's business typically results in higher non-cash working capital balances at the end of the first quarter than at year-end due to the high seasonal activity levels encountered in the first quarter.  Non-cash working capital amounted to $29,283,000 at March 31, 2014 compared to $26,647,000 at December 31, 2013.

During the three month period ended March 31, 2014, the Company purchased 27,600 Class A Non-Voting Shares at an average purchase 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 quarter of 2013.

During 2013, the Company was awarded a contract to construct and operate an ultra-deep capacity pad rig on a long-term basis.  During the first quarter of 2014, the Company commenced construction on 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, the Company purchased forward currency contracts totalling $18 Million, of which $16 Million remained outstanding at March 31, 2014.  These contracts expire between the second quarter of 2014 and the first quarter of 2015.

The Company had nine rigs under multi-year contracts at March 31, 2014.  Of these contracts, four are anticipated to expire in 2014, two in 2015, one in 2016, one in 2018 and one in 2019.

During 2011, the Company guaranteed bank loans made to joint venture partners totalling $2,700,000 for a period of four years.  During 2013, the Company guaranteed bank loans made to joint venture partners totalling $2,812,000 for a period of four years.  The Company has provided assignments of monies on deposit totalling $5,950,000 with respect to these guarantees.  AKITA's security from its partners for these guarantees includes interests in specific rig assets.  The $5,950,000 in deposits has been classified as restricted cash on the Statement of Financial Position and is in addition to the $5,643,000 in cash held at March 31, 2014.

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:

           
AKITA Drilling Ltd.        
Interim Consolidated Statements of Financial Position
           
           
Unaudited      March 31   March 31   December 31
$ Thousands     2014   2013   2013
Assets              
Current Assets              
  Cash and cash equivalents    $ 5,643  $ 8,430  $ 13,998
  Term deposits     -   -   5,000
  Accounts receivable     49,000   52,495   42,342
  Prepaid expenses and other     1,539   939   365
        56,182   61,864   61,705
Non-current Assets              
Restricted cash     5,950   3,000   5,950
Other long term assets     994   905   1,017
Investment in joint ventures     13,754   7,115   10,092
Property, plant and equipment     223,208   203,562   212,984
Total Assets    $ 300,088  $ 276,446  $ 291,748
                 
                 
Liabilities              
Current Liabilities              
  Accounts payable and accrued liabilities    $ 17,487  $ 17,073  $ 18,865
  Deferred revenue     169   482   334
  Dividends payable     1,526   1,439   1,439
  Income taxes payable     2,074   978   422
        21,256   19,972   21,060
Non-current Liabilities              
Deferred revenue     -   36   -
Financial instruments     91   -   106
Deferred income taxes     22,538   18,760   22,738
Pension liability     2,650   2,436   2,556
Total Liabilities     46,535   41,204   46,460
                 
Shareholders' Equity              
Class A and Class B shares     23,871   23,611   23,908
Contributed surplus     3,253   3,126   3,185
Accumulated other comprehensive income     88   (21)   88
Retained earnings     226,341   208,526   218,107
Total Equity     253,553   235,242   245,288
Total Liabilities and Equity    $ 300,088  $ 276,446  $ 291,748

 

       
AKITA Drilling Ltd.      
Interim Consolidated Statements of Net Income and Comprehensive Income
         
         
Unaudited        Three Months Ended March 31   
$ Thousands except per share amounts      2014    2013
             
Revenue    $ 54,342  $ 60,761
             
Costs and expenses          
  Operating and maintenance       34,790   37,444
  Depreciation and amortization       7,863   7,467
  Selling and administrative       5,224   4,659
Total costs and expenses     47,877   49,570
             
Revenue less costs and expenses     6,465   11,191
             
Equity income from joint ventures     6,481   5,428
             
Other income (losses)          
  Interest income       64   88
  Interest expense       (34)   (27)
  Gain on sale of assets       1   9
  Net other gains        449   14
Total other income      480   84
             
Income before income taxes     13,426   16,703
             
Income taxes     3,276   4,208
             
Net income for the period attributable to shareholders      10,150   12,495
  Other comprehensive income            
             
Comprehensive income for the period attributable to shareholders  $ 10,150  $ 12,495
             
             
Earnings per Class A and Class B Share          
 Basic       $ 0.57  $ 0.70
 Diluted        $ 0.56  $ 0.70

 


         
AKITA Drilling Ltd.      
Interim Consolidated Statements of Cash Flows  
         
Unaudited      Three Months Ended March 31   
$ Thousands     2014   2013
             
Operating Activities          
Net income and comprehensive income    $ 10,150  $ 12,495
Non-cash items included in net income and comprehensive income:          
  Depreciation and amortization     7,863   7,467
  Deferred income taxes     (200)   (126)
  Expense for defined benefit pension plan     98   92
  Stock options charged to expense     68   66
  Gain on sale of assets     (1)   (9)
  Unrealized foreign currency gain     (298)   -
  Unrealized gain on financial guarantee contracts     (15)   -
Funds flow from operations     17,665   19,985
Change in non-cash working capital:          
  Accounts receivable     (6,658)   7,509
  Prepaid expenses and other     (876)   (780)
  Income taxes recoverable     -   4,487
  Accounts payable and accrued liabilities     (5)   (20,814)
  Deferred revenue     (165)   387
        9,961   10,774
Equity income from joint ventures     (6,481)   (5,428)
Change in long term deferred revenue     -   36
Pension benefits paid     (4)   (4)
Interest paid     (1)   -
Income taxes expense - current     3,476   4,334
Income taxes paid      (1,824)   (3,356)
Net cash from operating activities     5,127   6,356
             
Investing Activities          
Capital expenditures      (18,064)   (6,044)
Change in non-cash working capital related to capital     (1,372)   (5,018)
Net distributions from investment in joint ventures     2,819   3,138
Change in term deposits     5,000   -
Proceeds on sale of joint venture interests in rigs and other assets     1   9
Net cash used in investing activities     (11,616)   (7,915)
             
Financing Activities          
Dividends paid     (1,439)   (1,439)
Proceeds received on exercise of stock options     -   425
Repurchase of share capital     (427)   -
Net cash used in financing activities     (1,866)   (1,014)
             
Decrease in cash and cash equivalents     (8,355)   (2,573)
Cash and cash equivalents, beginning of period     13,998   11,003
             
Cash and Cash Equivalents, End of Period    $ 5,643  $ 8,430

 

SOURCE AKITA Drilling Ltd.

For further information:

Murray Roth
Vice President, Finance and Chief Financial Officer
(403) 292-7950
murray.roth@akita-drilling.com