AKITA Drilling Ltd. releases year-end results
CALGARY, March 3, 2016 /CNW/ - AKITA Drilling Ltd.'s net loss for the year ended December 31, 2015 was $33,965,000 (net loss of $1.89 per share (basic and diluted)) on revenue of $112,488,000 compared to net income of $21,079,000 or $1.17 per share (basic and diluted) on revenue of $165,274,000 in 2014. The 2015 results include an asset impairment expense of $41,968,000 (after tax effect of $30,748,000 or $1.71 per share) with respect to certain of its rigs in addition to a net loss of $3,217,000 (net loss of $0.18 per share) as a result of routine operations. Funds flow from operations for the current year was $38,510,000 compared to $56,195,000 in 2014, while net cash from operating activities for 2015 was $41,507,000 compared to $40,622,000 in 2014.
The year 2015 was challenging for AKITA. Low commodity prices for crude oil and natural gas were the fundamental factors in AKITA generating the fewest operating days in the Company's 23 year history. In addition to low commodity prices, for the first time in the history of AKITA, the Company recorded asset impairment charges as previously noted. Furthermore, net loss was adversely affected due to a 20% increase in corporate income tax rates in Alberta.
AKITA's rig utilization exceeded industry average for the fifth consecutive year despite the adversities AKITA faced in 2015. AKITA relies on its key strengths to achieve this level of results: the operation of quality equipment by highly skilled employees, a commitment to customer satisfaction and the benefit of significant exposure to pad drilling. The following table highlights AKITA's utilization rates for the past five years:
RIG UTILIZATION RATES(PERCENT) |
|||||
2015 |
2014 |
2013 |
2012 |
2011 |
|
AKITA Pad Rigs |
47.2 |
64.8 |
71.9 |
61.7 |
67.9 |
AKITA Overall Fleet |
30.9 |
48.6 |
43.4 |
48.3 |
51.5 |
Industry |
23.2 |
44.3 |
40.3 |
41.6 |
49.6 |
Despite weak market conditions, AKITA continued to enhance its strong financial position throughout 2015, managing to eliminate all of its $20 Million in bank borrowings as well as building its cash position to over $9 Million by year-end. At December 31, 2015, the Company had $16 Million in positive working capital, no long-term debt and access to a $100 Million bank lending facility. This financial capacity will go a long way to ensure the Company's viability through this market weakness and it also leaves AKITA well positioned to undertake opportunities that might arise.
AKITA continued to enhance its pad rig strategy in 2015, albeit at a slower pace than during the previous year, when the Company had a record capital expenditure program. During the second quarter of 2015, AKITA completed construction and commenced operations with Rig 41, a 6,000 metre capacity rig designed to be competitive for deep gas pad applications. This rig, which cost $24 Million to build, was the most significant capital expenditure during 2015. By year-end, 21 of the Company's fleet of 31 rigs were capable of pad drilling.
AKITA maintains a commitment to safety that permeates all levels of the organization. Since inception, AKITA's annual safety performance has been better than industry averages. AKITA's 2015 total reportable accident frequency (often referred to as "TRIF") was the best in the Company's history, showing a 16% improvement over the Company's previous record. Field employees complete extensive safety training and must meet current industry certification standards. Managers, employees and subcontractors are all required to understand and accept their responsibility for maintaining a safe working environment.
On November 18, 2015, the Canadian Association of Oilwell Drilling Contractors ("CAODC") released its 2016 industry drilling forecast estimating 22% average rig utilization compared to 23.2% actual average rig utilization in 2015. The 2016 forecast was based upon commodity price assumptions of US $45 per barrel for crude oil and CAD $2.80 per mcf for natural gas. Drilling activity for the year-to-date period in 2016, together with much lower than anticipated crude oil spot prices, would suggest that anticipated drilling activity for the year will be lower than the CAODC forecast.
Selected information from AKITA's Management's Discussion and Analysis (MD&A) for the 2015 Annual Report is as follows:
Basis of Analysis for 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 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 it does 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, however, as it provides an indication of the profitability of the business prior to the influence of depreciation, asset impairment, overhead expenses, financing 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 as well as equity income from joint ventures adjusted for income tax amounts paid during the period. 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
$Millions |
2015 |
2014 |
Change |
% Change |
Revenue per Financial Statements |
112.5 |
165.3 |
(52.8) |
(32%) |
Proportionate Share of Revenue from Joint Ventures (1) |
32.5 |
64.1 |
(31.6) |
(49%) |
Adjusted Revenue (1) |
145.0 |
229.4 |
(84.4) |
(37%) |
$Millions |
2015 |
2014 |
Change |
% Change |
Operating and Maintenance Expenses per Financial Statements |
74.0 |
112.6 |
(38.6) |
(34%) |
Proportionate Share of Operating and Maintenance Expenses from Joint Ventures (1) |
20.8 |
40.3 |
(19.5) |
(48%) |
Adjusted Operating and Maintenance Expenses (1) |
94.8 |
152.9 |
(58.1) |
(38%) |
$Millions |
2015 |
2014 |
Change |
% Change |
Adjusted Revenue (1) |
145.0 |
229.4 |
(84.4) |
(37%) |
Adjusted Operating and Maintenance Expenses (1) |
94.8 |
152.9 |
(58.1) |
(38%) |
Adjusted Operating Margin (1) (2) |
50.2 |
76.5 |
(26.3) |
(34%) |
$Dollars |
2015 |
2014 |
Change |
% Change |
Adjusted Revenue per Operating Day (1) |
36,102 |
35,179 |
923 |
3% |
Adjusted Operating and Maintenance Expenses per Operating Day (1) |
23,620 |
23,450 |
170 |
1% |
Adjusted Operating Margin per Operating Day (1) (2) |
12,482 |
11,729 |
753 |
6% |
(1) |
Proportionate share of revenue from joint ventures, adjusted revenue, proportionate share of operating and maintenance expenses from joint ventures, adjusted operating and maintenance expenses, adjusted operating margin, adjusted revenue per operating day, adjusted operating and maintenance expenses per operating day and adjusted operating margin per operating day are non-standard accounting measures. |
(2) |
Adjusted operating margin is the difference between adjusted revenue and adjusted operating and maintenance expenses. |
Adjusted revenue of $144,951,000 in 2015 was 37% lower than the 2014 adjusted revenue of $229,364,000 primarily as a result of decreased rig activity. While all rig categories were affected, on a proportionate basis the declines were most pronounced for AKITA's conventional rigs. Although adjusted revenue for 2015 decreased compared to the previous year, adjusted revenue per operating day increased to $36,102 during 2015 from $35,179 during 2014 due to an increased proportion of the Company's revenue being generated by its pad drilling rigs versus conventional rigs. Pad rigs, compared to conventional rigs, typically generate higher revenue on a "per day" basis.
Adjusted operating and maintenance costs are tied to activity levels and amounted to $94,834,000 or $23,620 per operating day during 2015 compared to $152,891,000 or $23,450 per operating day for the prior year. The reduction in operating and maintenance costs, when considered on a totals basis, is directly related to the lower level of activity in 2015 compared to 2014. However, in 2015, the higher proportion of drilling that was performed by AKITA's pad rigs resulted in a slight increase in operating and maintenance costs per operating day compared to the previous year.
The Company's adjusted operating margin for 2015 was $50,117,000 ($12,482 per operating day), compared to $76,473,000 ($11,729 per operating day) in 2014. Although the overall operating margin decreased in 2015 compared to 2014 as a result of lower drilling activity, AKITA's operating margin per operating day increased as a result of a change in rig mix that included a higher proportion of pad rigs working.
Revenue resulting from the supply of contracted services is recorded by the percentage of completion method. Work in progress on day work contracts is measured based upon the passage of time in accordance with the terms of the contract. All drilling revenue generated in 2015 and 2014 was generated under day work contracts. No significant losses were anticipated at either of these year-end dates and accordingly no provision for material losses has been made.
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 December 31, 2015, AKITA had no deferred revenue related to these activities (December 31, 2014 - $175,000).
AKITA provided drilling services to 27 different customers in 2015 (2014 - 36 different customers), including three customers that each provided more than 10% of AKITA's revenue for the year (2014 – three customers).
Depreciation and Amortization Expense
$Millions |
2015 |
2014 |
Change |
% Change |
Depreciation and Amortization Expense |
36.7 |
30.2 |
6.5 |
22% |
Drilling rigs are generally depreciated using the unit of production method. Depreciation is typically calculated for each rig's major components resulting in an average useful life of 3,600 operating days per rig, subject to annual minimum imputed activity levels. In certain instances where rigs are inactive for extended periods, the Company's depreciation rate is accelerated. Major rig renovations are depreciated over the remaining useful life of the related component or to the date of the next major renovation, whichever is sooner. Major rig inspection and overhaul expenditures are depreciated on a straight-line basis over three years.
The increase in depreciation and amortization expense to $36,748,000 during 2015 from $30,200,000 during 2014 was mostly attributable to the higher average cost base for drilling rigs, partially offset by lower drilling activity. Drilling rig depreciation accounted for 97% of total depreciation and amortization expense in 2015 (2014 – 96%).
Selling and Administrative Expenses
$Millions |
2015 |
2014 |
Change |
% Change |
Selling and Administrative Expenses per Financial Statements |
15.1 |
18.1 |
(3.0) |
(17%) |
Proportionate Share of Selling and Administrative Expenses from Joint Ventures (1) |
0.4 |
0.8 |
(0.4) |
(50%) |
Adjusted Selling and Administrative Expenses (1) |
15.5 |
18.9 |
(3.4) |
(18%) |
(1) |
Proportionate share of selling and administrative expenses from joint ventures and adjusted selling and administrative expenses are non-standard accounting measures. |
Adjusted selling and administrative expenses decreased to $15,524,000 in 2015 from $18,929,000 in 2014. Adjusted selling and administrative expenses equated to 10.7% of adjusted revenue in 2015, compared to 8.2% of adjusted revenue in 2014, as a result of decreased adjusted revenue.
While cost reductions compared to 2014 occurred for both personnel and non-personnel related activities, the single largest component of adjusted selling and administrative expenses was salaries and benefits which accounted for 57% of these expenses in 2015 (2014 – 61%).
Asset Impairment Loss
$Millions |
2015 |
2014 |
Change |
% Change |
Asset Impairment Loss |
42.0 |
- |
42.0 |
N/A |
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. While the Company did not determine any internal indicators of impairment at December 31, 2014, it did determine two potential external indicators of impairment at that date: a significant decline in the price of crude oil; and the carrying amount of AKITA's net assets exceeding the Company's market capitalization. Both of these indicators continued to remain applicable throughout 2015. The price of crude oil declined throughout most of 2015, resulting in further deterioration in the overall Canadian drilling market, compared to 2014. In addition, management determined that, as a result of this additional weakening of crude oil prices, secondary opportunities to capture value for AKITA's drilling fleet had also become more limited, especially during the last six months of 2015.
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 tests during 2015 including at December 31, 2015, management determined value in use for each of its cash generating units ("CGUs") using estimated discounted cash flows ("DCFs"), 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. IFRS considers this approach to constitute a Level 3 hierarchy in its determination of value.
AKITA recorded its first asset impairment loss in its history at September 30, 2015. With respect to the asset impairment loss recorded at that date, management used its preliminary 2016 budget and business plan inputs as well as subsequent internal forecasts as its primary bases for asset impairment testing. Cash flows were determined for each of the Company's five CGUs: conventional singles, conventional doubles, conventional triples, pad doubles and pad triples. While these five operating CGUs encompass 98% of the Company's property, plant and equipment, consideration was also given to other corporate assets in the Company's asset impairment tests.
Additional significant assumptions used in AKITA's asset impairment tests at September 30, 2015 included potential annual revenue growth rates (0%), potential inflation for cash outflows necessary to generate cash inflows for CGUs (2%), the projected forecast period (up to 10 years per CGU), the discount rate taken based on the Company's pre-tax determination of its weighted average cost of capital (8%) and salvage value at the end of each CGU's useful life (20% of original cost). The generation of cash flows was considered for the Company's CGUs based on the existing condition of each CGU at September 30, 2015.
During the fourth quarter of 2015, management determined that the previous CGU classification did not adequately address the competitive role of each rig within a rig category or between rig categories given the current economic conditions. Consequently, the Company established new CGU breakdowns that more clearly categorize AKITA's rigs according to the functional, rather than structural, nature of the Company's fleet. These "functional CGUs" provide a closer substitutability that is sought within the CGU definition and have resulted in more rig categories. The Company now considers the CGUs for its rig fleet to be structured as follows:
- Hydraulic Singles;
- Slant/Heavy Singles;
- Tele-Doubles;
- Heavy Triples;
- Light Capacity Pad Rigs;
- A.C. Tele-Double Pad Rigs;
- A.C. Oil Sands Pad Rigs;
- D.C. Pad Rigs;
- A.C. Deep Gas Pad Rigs; and
- A.C. Ultra-Deep Gas Pad Rigs.
Following its change in CGU classification noted above, and in conjunction with continued market weakness, the Company recorded an additional asset impairment loss at December 31, 2015. With respect to this second asset impairment loss, management used its approved 2016 budget and business plan inputs as well as subsequent internal forecasts as its primary bases for asset impairment testing. Cash flows were determined for each of the Company's ten revised CGUs as described above. While these CGUs continue to encompass 98% of the Company's property, plant and equipment, consideration was again given to other corporate assets in the Company's asset impairment tests.
Additional significant assumptions used in AKITA's asset impairment tests at December 31, 2015 remained consistent with the additional significant assumptions used at September 30, 2015. The generation of cash flows was considered for the Company's CGUs based on the existing condition of each CGU at December 31, 2015.
As a result of performing its asset impairment tests, the Company recorded an overall asset impairment of $8,200,000 with respect to certain of its conventional rigs at September 30, 2015. This amount represented the difference between the respective CGUs' recoverable amounts and their carrying values. For assets within CGUs that were determined to be impaired, 81% of the recoverable amounts were calculated based on "value in use" with the balance based on "fair value less cost of disposal". The Company did not record any asset impairment with respect to AKITA's pad rigs at September 30, 2015.
As a result of performing its asset impairment tests at December 31, 2015, the Company recorded an additional asset impairment of $33,768,000 with respect to three of its conventional rigs as well as nine of its pad rigs. Consistent with the asset impairment loss reported at September 30, 2015, this amount represented the difference between the respective CGUs' recoverable amounts and their carrying values. At December 31, 2015, for assets within CGUs that were determined to be impaired, 77% of the recoverable amounts were calculated based on "value in use" with the balance based on "fair value less cost of disposal".
The Company determined fair value less cost of disposal to be based on external appraisals of select rig assets as of September 30, 2015 and December 31, 2015.
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:
- Decreased future cash flows from the Company's preliminary (September 30, 2015) or approved (December 31, 2015) 2016 budget by 10%;
- Reduced future revenue assumptions by 2%:
- Increased inflation for cash outflows from 2% to 4%;
- Increased the pre-tax discount rate from 8% to 10%; and
- Reduced salvage values from 20% 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 various rig CGUs' values in use ranging from $81,000 to $11,546,000. As the base case test represented management's best estimates, these sensitivity reductions were not included in the asset impairment reported.
Equity Income from Joint Ventures
$Millions |
2015 |
2014 |
Change |
% Change |
Proportionate Share of Revenue from Joint Ventures (1) |
32.5 |
64.1 |
(31.6) |
(49%) |
Proportionate Share of Operating and Maintenance Expenses from Joint Ventures (1) |
20.8 |
40.3 |
(19.5) |
(48%) |
Proportionate Share of Selling and Administrative Expenses from Joint Ventures (1) |
0.4 |
0.8 |
(0.4) |
(50%) |
Equity Income from Joint Ventures |
11.3 |
23.0 |
(11.7) |
(51%) |
(1) |
Proportionate share of revenue from joint ventures, proportionate share of operating and maintenance expenses from joint ventures and proportionate share of selling and administrative expenses from joint ventures are non-standard accounting measures. |
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. 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 (Loss)
$Millions |
2015 |
2014 |
Change |
% Change |
Total Other Income (Loss) |
(0.4) |
0.8 |
(1.2) |
(150%) |
Interest income decreased to $130,000 in 2015 from $172,000 in 2014 as a result of reduced interest rates. In addition, between 2011 and 2014, the Company had 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 over time.
During 2015, the Company recorded interest expense of $356,000 (2014 – $262,000) related to the future cost of the Company's unfunded defined benefit pension plan as well as the cost of financing the Company's indebtedness during the fourth quarter of 2014 and the first six months of 2015.
During 2015, the Company disposed of selected non-core assets resulting in a $657,000 loss. AKITA disposed of several non-core assets in 2014, resulting in a $536,000 gain.
In 2015, amounts reported as "Net Other Gains" of $462,000 include foreign exchange amounts related to forward exchange contracts purchased in 2014 to provide a hedge for foreign rig equipment commitments made at that time related to rig construction (gain of $267,000) and other items (gain of $195,000).
Other than the foreign currency hedge on major capital expenditures noted above, readers should be aware that in 2015 the Company conducted all of its operations in Canada, thereby reducing its exposure to foreign currency fluctuations.
Income Tax Expense (Recovery)
$Millions, Except Income Tax Rate (%) |
2015 |
2014 |
Change |
% Change |
Current Tax (Recovery) |
(2.7) |
2.6 |
(5.3) |
(203%) |
Deferred Tax (Recovery) |
(7.9) |
4.4 |
(12.3) |
(280%) |
Total Income Tax Expense |
(10.6) |
7.0 |
(17.6) |
(251%) |
Effective Income Tax Rate |
23.7% |
25.0% |
AKITA had an income tax recovery of $10,579,000 in 2015 compared to a tax expense of $7,042,000 in 2014 mainly due to recording a pre-tax loss as a result of weaker operations and the effect of recording asset impairment losses. In addition to the effect of the pre-tax loss, during 2015, the Company recorded a one-time deferred tax expense of $1,191,000 related to the corporate income tax increase implemented by the Government of Alberta. Recent capital additions have also affected the portion of income taxes that are deferred to future dates.
Subsequent Event
A significant proportion of the Company's business is conducted under contracts that range in duration from several months to one or more years. On occasion, events occur that result in either extensions to, or early terminations of, contracted rigs. Subsequent to December 31, 2015, one of AKITA's major customers elected to early terminate a multi-year contract that was scheduled to continue until 2019. As a result of the early termination, AKITA is scheduled to receive $29,542,000 (undiscounted) in cancellation fees.
Fleet and Utilization
The following table summarizes rig changes that occurred in 2015:
Fleet Changes during 2015
Gross |
Net |
|
Number of rigs at December 31, 2014 |
35 |
31.725 |
Completion of construction of a deep pad rig |
1 |
1.000 |
Decommissioning of rigs |
(5) |
(4.500) |
Number of rigs at December 31, 2015 |
31 |
28.225 |
Utilization rates are a key statistic for the drilling industry since they measure revenue volume and influence pricing. During 2015, AKITA achieved 3,941 operating days, which corresponded to a utilization rate of 30.9% compared to an industry average utilization rate of 23.2% during the same period. During the comparative year in 2014, AKITA achieved 6,520 operating days, representing 48.6% utilization. It should be noted that AKITA calculates its utilization rates based only upon rigs actively operating. Rigs that are moving or receiving standby revenue do not contribute to AKITA's utilization statistic.
The drilling industry is seasonal, with activity typically building in the fall and peaking during the winter months, at which time areas with muskeg conditions freeze sufficiently to allow the movement of rigs and other heavy equipment. The peak drilling season 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. This seasonal pattern has been muted in 2015 and in 2016 to date, as a result of unusually weak oil and gas drilling conditions.
In addition to traditional seasonal impacts, the business of AKITA may be affected at various times in two important ways as a result of warmer than normal temperatures. First, increases in overall temperatures would have the effect of shortening the winter drilling season. Another impact of warmer than normal temperatures on AKITA is related to a reduced demand for natural gas for heating. To the extent that warmer weather impacts the demand for natural gas including the resultant lower natural gas prices for many of AKITA's customers, AKITA's customers might reduce natural gas drilling programs, which in turn, might reduce the demand for AKITA's services.
A significant shift in drilling has occurred in recent years with respect to the type of equipment preferred by AKITA's customers. Specifically, there has been a shift away from conventional rigs requiring trucks to relocate from well to well, towards the use of pad rigs with self-moving systems which allow the rig to move itself within a set of well locations (typically referred to as a "pad"). Moreover, pad rigs typically drill wells in "batches" whereby a series of surface holes are drilled, followed by one or more series of intermediate holes and a final series of main holes. This style of drilling, as opposed to drilling each well from start to finish prior to moving, provides significant efficiency gains when used in the appropriate applications.
The following table demonstrates the range of drilling capabilities for the Company's fleet:
Drilling Fleet Summary at December 31, 2015
Conventional Rigs |
Pad Rigs |
|||
Number |
Percentage |
Number |
Percentage |
|
Singles |
3 |
10% |
0 |
0% |
Doubles |
4 |
13% |
5 |
16% |
Triples |
4 |
13% |
15 |
48% |
Total |
11 |
36% |
20 |
64% |
During 2015, AKITA commissioned one new pad triple rig and decommissioned four conventional single rigs as well as one conventional double rig.
From time to time, the Company enters into drilling contracts for extended terms. At December 31, 2015, AKITA had three rigs with multi-year contracts that extend beyond one year. Of these contracts, one is anticipated to expire in 2016 and a second in 2018. The third contract was cancelled in January, 2016, as described in this document under the heading "Subsequent Event"
Liquidity and Capital Resources
At December 31, 2015, AKITA had $16,002,000 in working capital including $9,369,000 in cash and no bank indebtedness, compared to a working capital deficiency of $5,028,000, including $2,012,000 in cash and $20,000,000 of bank indebtedness at December 31, 2014. In 2015, AKITA generated $41,507,000 from operating activities. Cash was also generated from joint venture distributions ($13,537,000), from reductions in cash balances restricted for loan guarantees ($3,403,000) and from proceeds on sales of assets ($1,093,000). During the same period, cash was used for capital expenditures ($26,082,000), the repayment of the loan operating facility ($20,000,000) and payment of dividends ($6,101,000).
The Company chooses to maintain a conservative Statement of Financial Position due to the cyclical nature of the industry. In addition to its cash balances, the Company has an operating loan facility with its principal banker totalling $100,000,000 that is available until 2020. The interest rate on the facility varies based upon the actual amounts borrowed and ranges from 0.45% to 1.45% over prime interest rates or 1.45% to 2.45% over guaranteed notes, depending on the preference of the Company. The Company did not have any borrowings from this facility at December 31, 2015 (December 31, 2014 – borrowings of $20,000,000).
As part of the loan facility agreement, the Company must adhere to the following financial covenants:
- Funded debt to EBITDA shall not be greater than 3.00 to 1;
- EBITDA to interest expense shall not be less than 3.00 to 1; and
- Tangible assets to funded debt shall not be less than 2.25 to 1.
Readers should be aware that each of funded debt, EBITDA, interest expense and tangible 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.
Property, Plant and Equipment
Capital expenditures totalled $17,960,000 in 2015. The most significant expenditure related to the completion of construction of an AC deep gas pad rig.
The cost incurred during 2015 for the aforementioned rig construction project was $9,727,000. Additional capital expenditures related to certifications and overhauls having a life in excess of one year ($3,878,000), rig equipment for existing rigs ($2,544,000), drill pipe and drill collars ($1,490,000) and other equipment ($321,000). Capital expenditures for 2014 totalled $103,949,000.
During 2015, the Company sold ancillary assets for $1,093,000 that resulted in a loss of $657,000. During 2014, AKITA disposed of one of its underutilized pad rigs. Proceeds from sales of underutilized and non-core assets totalled $8,315,000 in 2014 and resulted in a gain of $536,000.
Commitments
From time to time, the Company may provide guarantees for bank loans to joint venture partners in respect of sales of rig interests to joint venture partners. At December 31, 2015, AKITA provided $5,978,000 in deposits with its bank for those purposes (December 31, 2014 - $9,381,000). These funds have been classified as "restricted cash" on the 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 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 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; 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. |
||||||
Consolidated Statements of Financial Position |
||||||
December 31 |
December 31 |
|||||
$ Thousands |
2015 |
2014 |
||||
Current Assets |
||||||
Cash |
$ |
9,369 |
$ |
2,012 |
||
Accounts receivable |
14,310 |
39,981 |
||||
Income taxes recoverable |
3,279 |
3,011 |
||||
Prepaid expenses and other |
75 |
257 |
||||
27,033 |
45,261 |
|||||
Non-current Assets |
||||||
Restricted cash |
5,978 |
9,381 |
||||
Other long-term assets |
917 |
1,025 |
||||
Investments in joint ventures |
3,941 |
6,214 |
||||
Property, plant and equipment |
216,647 |
279,045 |
||||
Total Assets |
$ |
254,516 |
$ |
340,926 |
||
Liabilities |
||||||
Current Liabilities |
||||||
Operating loan facility |
$ |
- |
$ |
20,000 |
||
Accounts payable and accrued liabilities |
9,506 |
28,589 |
||||
Deferred revenue |
- |
175 |
||||
Dividends payable |
1,525 |
1,525 |
||||
11,031 |
50,289 |
|||||
Non-current Liabilities |
||||||
Financial instruments |
117 |
226 |
||||
Deferred income taxes |
19,203 |
27,053 |
||||
Deferred share units |
171 |
91 |
||||
Pension liability |
3,794 |
3,426 |
||||
Total Liabilities |
34,316 |
81,085 |
||||
Shareholders' Equity |
||||||
Class A and Class B shares |
23,871 |
23,871 |
||||
Contributed surplus |
3,946 |
3,557 |
||||
Accumulated other comprehensive income (loss) |
(244) |
(280) |
||||
Retained earnings |
192,627 |
232,693 |
||||
Total Equity |
220,200 |
259,841 |
||||
Total Liabilities and Equity |
$ |
254,516 |
$ |
340,926 |
AKITA Drilling Ltd. |
||||||
Consolidated Statements of Net Income (Loss) and |
||||||
Comprehensive Income (Loss) |
||||||
Year Ended December 31 |
||||||
$ Thousands except per share amounts |
2015 |
2014 |
||||
Revenue |
$ |
112,488 |
$ |
165,274 |
||
Costs and expenses |
||||||
Operating and maintenance |
74,031 |
112,590 |
||||
Depreciation and amortization |
36,748 |
30,200 |
||||
Asset impairment loss |
41,968 |
- |
||||
Selling and administrative |
15,128 |
18,136 |
||||
Total costs and expenses |
167,875 |
160,926 |
||||
Revenue less costs and expenses |
(55,387) |
4,348 |
||||
Equity income from joint ventures |
11,264 |
22,996 |
||||
Other income (loss) |
||||||
Interest income |
130 |
172 |
||||
Interest expense |
(356) |
(262) |
||||
Gain (loss) on sale of assets |
(657) |
536 |
||||
Net other gains |
462 |
331 |
||||
Total other income (loss) |
(421) |
777 |
||||
Income (loss) before income taxes |
(44,544) |
28,121 |
||||
Income taxes (recovery) |
(10,579) |
7,042 |
||||
Net income (loss) for the year attributable to shareholders |
(33,965) |
21,079 |
||||
Other comprehensive income (loss) |
36 |
(368) |
||||
Comprehensive income (loss) for the year attributable to shareholders |
$ |
(33,929) |
$ |
20,711 |
||
Net income (loss) per Class A and Class B Share |
||||||
Basic |
$ |
(1.89) |
$ |
1.17 |
||
Diluted |
$ |
(1.89) |
$ |
1.17 |
AKITA Drilling Ltd. |
||||||||||||||||
Consolidated Statements of Changes in Shareholders' Equity |
||||||||||||||||
$ Thousands |
Attributable to the Shareholders of the Company |
|||||||||||||||
Class A |
Class B |
Class A and |
Other |
|||||||||||||
Non-Voting |
Common |
Class B |
Contributed |
Comprehensive |
Retained |
Total |
||||||||||
Shares |
Shares |
Shares |
Surplus |
Income (Loss) |
Earnings |
Equity |
||||||||||
Balance at December 31, 2013 |
$ |
22,542 |
$ |
1,366 |
$ |
23,908 |
$ |
3,185 |
$ |
88 |
$ |
218,107 |
$ |
245,288 |
||
Net income for the year |
- |
- |
- |
- |
- |
21,079 |
21,079 |
|||||||||
Remeasurement of pension liability |
- |
- |
- |
- |
(368) |
- |
(368) |
|||||||||
Shares repurchased |
(37) |
- |
(37) |
- |
- |
(390) |
(427) |
|||||||||
Stock options charged to expense |
- |
- |
- |
372 |
- |
- |
372 |
|||||||||
Dividends |
- |
- |
- |
- |
- |
(6,103) |
(6,103) |
|||||||||
Balance at December 31, 2014 |
$ |
22,505 |
$ |
1,366 |
$ |
23,871 |
$ |
3,557 |
$ |
(280) |
$ |
232,693 |
$ |
259,841 |
||
Net loss for the year |
- |
- |
- |
- |
- |
(33,965) |
(33,965) |
|||||||||
Remeasurement of pension liability |
- |
- |
- |
- |
36 |
- |
36 |
|||||||||
Stock options charged to expense |
- |
- |
- |
389 |
- |
- |
389 |
|||||||||
Dividends |
- |
- |
- |
- |
- |
(6,101) |
(6,101) |
|||||||||
Balance at December 31, 2015 |
$ |
22,505 |
$ |
1,366 |
$ |
23,871 |
$ |
3,946 |
$ |
(244) |
$ |
192,627 |
$ |
220,200 |
AKITA Drilling Ltd. |
||||||
Consolidated Statements of Cash Flows |
||||||
Year Ended December 31 |
||||||
$ Thousands |
2015 |
2014 |
||||
Operating Activities |
||||||
Net income (loss) |
$ |
(33,965) |
$ |
21,079 |
||
Non-cash items included in net income: |
||||||
Depreciation and amortization |
36,748 |
30,200 |
||||
Asset impairment loss |
41,968 |
- |
||||
Deferred income taxes (recovery) |
(7,863) |
4,315 |
||||
Defined benefit pension plan expense |
492 |
392 |
||||
Stock options and deferred share units expense |
509 |
463 |
||||
Gain (loss) on sale of assets |
657 |
(536) |
||||
Unrealized foreign currency loss |
73 |
162 |
||||
Unrealized loss on financial guarantee contracts |
(109) |
120 |
||||
Funds flow from operations |
38,510 |
56,195 |
||||
Change in non-cash working capital |
14,591 |
7,990 |
||||
Equity income from joint ventures |
(11,264) |
(22,996) |
||||
Post employment benefits |
(115) |
(15) |
||||
Interest paid |
(215) |
(130) |
||||
Income tax expense (recovery) - current |
(2,717) |
2,602 |
||||
Income tax paid (recoverable) |
2,717 |
(3,024) |
||||
Net cash from operating activities |
41,507 |
40,622 |
||||
Investing Activities |
||||||
Capital expenditures |
(17,960) |
(103,949) |
||||
Change in non-cash working capital |
(8,122) |
1,087 |
||||
Distributions from investments in joint ventures |
13,537 |
26,874 |
||||
Change in cash restricted for loan guarantees |
3,403 |
(3,431) |
||||
Change in term deposits |
- |
5,000 |
||||
Proceeds on sale of assets |
1,093 |
8,316 |
||||
Net cash used in investing activities |
(8,049) |
(66,103) |
||||
Financing Activities |
||||||
Change in operating loan facility |
(20,000) |
20,000 |
||||
Dividends paid |
(6,101) |
(6,015) |
||||
Repurchase of share capital |
- |
(390) |
||||
Loan commitment fee paid |
- |
(100) |
||||
Net cash from (used in) financing activities |
(26,101) |
13,495 |
||||
Increase (decrease) in cash |
7,357 |
(11,986) |
||||
Cash, beginning of year |
2,012 |
13,998 |
||||
Cash, End of Year |
$ |
9,369 |
$ |
2,012 |
SOURCE AKITA Drilling Ltd.
Murray Roth, Vice President, Finance and Chief Financial Officer, (403) 292-7950
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