AKITA Drilling Ltd. Announces 2012 Earnings and Record Funds Flow
CALGARY, March 5, 2013 /CNW/ - Net income for the year ended December 31, 2012 was $28,703,000 or $1.60 per share (basic and diluted) on revenue of $239,654,000. Comparative figures for 2011 were $23,353,000 or $1.29 per share (basic and diluted) on revenue of $199,934,000. Funds flow from operations for the current year was $59,412,000 as compared to $42,895,000 in 2011, while net cash from operating activities for 2012 was $55,605,000 as compared to $34,196,000 in 2011. AKITA achieved record revenue, funds flow from operations and net cash from operating activities in 2012.
AKITA's rig utilization rate has traditionally been higher than the industry average and 2012 was no exception. Although conventional rig activity was negatively affected by low natural gas prices and waning hydrocarbon liquids prices, pad rigs consistently achieved utilization that confirmed this category of assets as AKITA's most highly sought after rig class. To date, AKITA's heavy oil pad rigs have not been negatively affected by widening differentials in the price of Canadian heavy oil compared to other oil prices. The following table highlights AKITA's utilization rate for the past five years:
RIG UTILIZATION RATES (PERCENT)
|AKITA Pad Rigs||61.7||67.9||67.4||59.5||46.4|
The Company's focus on its pad rig strategy included five major rig projects during 2012. Three of these rigs were new, including two rigs under construction at year-end. In addition to the three new rigs, AKITA converted two of its conventional rigs into pad rigs.
One of the newly constructed rigs has been sold to an AKITA customer and will be used to drill potash prospects. AKITA is operating this rig for its customer on a multi-year basis.
AKITA's fleet includes 16 pad drilling rigs. The Company also operates 23 conventional rigs that span all depth ranges. All of the conventional rig classes made meaningful contributions to AKITA's positive financial results during 2012.
AKITA consistently maintains the financial resources to accomplish its capital spending plans. In addition to having $13,285,000 in cash at December 31, 2012, the Company has a long-term financing arrangement to provide up to $75,000,000 for capital expenditures and general corporate purposes. As such, the Company has great flexibility to expand its capital program, should appropriate opportunities arise.
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, and typically far better. In 2012, the Company's lost-time accident frequency was 0.12 accidents per 200,000 hours worked compared to an accident rate of 0.76 for the industry (preliminary estimate provided by the Canadian Association of Oilwell Drilling Contractors). This constituted the lowest rate of reportable incidents since AKITA's inception. The Company incorporates methods to eliminate or reduce hazards in the design of equipment as well as through the use of regularly updated standardized operating procedures. AKITA dedicates significant resources to ensure that employees receive extensive training to operate safely and efficiently.
On November 13, 2012, the Canadian Association of Oilwell Drilling Contractors ("CAODC") provided its industry drilling forecast for 2013 estimating the drilling of 10,409 wells, compared to 11,651 wells completed in 2012. The current year estimate was based upon commodity price assumptions of US $86 per barrel for crude oil and CAD $3.44 per mcf for natural gas. In addition to the number of wells drilled, horizontal and other more complex drilling applications affect the drilling days per well, thereby impacting the actual utilization rates for both AKITA and industry rigs. Although winter drilling activity to date appears to support the CAODC forecast, management remains cautious regarding post-break up drilling activity given commodity price levels, especially the continuing low prices for natural gas with no clear signal of improvement.
Despite a modest well forecast, management anticipates that select drilling opportunities will present themselves in the upcoming year. More particularly, many customers have indicated a strong preference for custom drilling solutions which are well suited to AKITA's strengths, especially its pad rig offerings. The Company may or may not be successful in capturing upcoming opportunities.
Selected information from AKITA's Management's Discussion and Analysis for 2012 is as follows:
Revenue and Operating & Maintenance Expenses
margin (2) (3)
operating day (3)
operating day (3)
Operating margin per
operating day (2)(3)
|(1)||Revenue, operating & maintenance expenses and 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)||Operating margin is the difference between revenue and operating & maintenance expenses.|
|(3)||Operating margin, revenue per operating day, operating & maintenance expenses per operating day and operating margin per operating day are non-standard accounting measures. See commentary regarding non-standard accounting measures.|
Revenue of $239,654,000 in 2012 was at record levels for AKITA and surpassed the previous year's revenue of $199,934,000. The Company's conventional rigs benefited from stronger market conditions for at least a portion of 2012: the first quarter for singles and doubles and mainly during the first two quarters for conventional triples. The market for pad rigs, unlike conventional rigs, was strong throughout the year and has increasingly become a focus for the Company. In addition to contract drilling revenue, during 2012, the Company earned revenue from the construction of a pad rig for a third party. During 2012, average revenue per operating day increased to $35,679 per day compared to $29,166 in the comparative year. While each of the aforementioned factors played a role in the increasing revenue per operating day measurement, AKITA's emphasis on pad drilling and construction revenue were the most significant.
Operating and maintenance costs are tied to activity levels and amounted to $159,458,000 or $23,739 per operating day during 2012 compared to $132,520,000 or $19,332 per operating day for the prior year. This increase in total operating and maintenance costs was the result of the change in rig mix including the change in the range of services provided, as well as costs related to earning construction revenue.
The Company's operating margin for 2012 was $80,196,000, up from $67,414,000 in 2011. The operating margin improvement was a combined result of improved profit margins on a "per operating day" basis as well as a contribution from construction activities. On a "per operating day" basis, AKITA's operating margin rose in 2012 to $11,940 from $9,834 in 2011.
In addition to revenue and operating and maintenance costs achieved from drilling activities, the Company earned $17,941,000 in rig construction revenue during 2012 including $6,633,000 during the fourth quarter. The Company does not disclose its construction costs or operating margin separately for this activity for competitive reasons.
AKITA provided drilling services to 40 different customers in 2012 (2011 - 40 different customers), including two customers that each provided more than 10% of AKITA's revenue for the year (2011 - two customers).
Depreciation and Amortization Expense
The increase in depreciation and amortization expense to $24,342,000 during 2012, from $20,933,000 during 2011 was mostly attributable to the higher average cost base for drilling rigs. Drilling rig depreciation accounted for 97% of total depreciation expense in 2012 (2011 - 96%).
Selling and Administrative Expenses
Selling and administrative expenses increased to $19,012,000 in 2012 from $16,117,000 in 2011. Selling and administrative expenses equated to 7.9% of total revenue in 2012, compared to 8.1% of total revenue in 2011, as a result of increased revenue. The Company has been expanding its overall support for its drilling services due to increased complexity of the wells that it drills as well as having a sophisticated client base with specialized service demands.
The single largest component of selling and administrative expenses was salaries and benefits which accounted for 60% of these expenses (64% in 2011).
Other Income (Expense)
Gain on sale of joint
venture interests in rigs
and other assets
The Company invests any cash balances in excess of its ongoing operating requirements in bank guaranteed highly liquid investments. Interest income decreased to $419,000 in 2012 from $638,000 in 2011 as a result of reduced cash and term deposit balances, as these assets were deployed to fund the Company's significant capital expenditure program.
The gain on sale of joint venture interests in rigs and other assets, which resulted from the disposition of certain non-core assets, totalled $1,082,000 in 2012 compared to $787,000 in the previous year. The Company does not anticipate this to be a significant continuing source of regular earnings in the future.
Income Tax Expense
Income tax expense increased to $9,641,000 in 2012 from $8,409,000 in 2011, due to higher pre-tax income which was partially offset by a reduction in the Canadian federal income tax rate. AKITA's significant capital expenditure program has resulted in a larger proportion of the Company's income tax expense being classified as deferred when compared to the previous year. In addition, during the fourth quarter, the Company received confirmation from the Canada Revenue Agency of its request to accelerate certain deductions that were previously deducted over longer time frames.
Net Income and Cash Flow
|(1): See commentary regarding additional GAAP measure|
Net income increased to $28,703,000 or $1.60 per Class A Non-Voting and Class B Common Share (basic and diluted) for 2012 from $23,353,000 or $1.29 per share (basic and diluted) in 2011. Funds flow from operations represented record levels for the Company, increasing to $59,412,000 in 2012 from $42,895,000 in 2011.
Net income improvements compared to 2011 were largely as a result of the following factors:
- Strong financial performance from the Company's conventional single and double rigs during the first quarter due to strong market conditions at that time for those rig classes;
- Strong financial performance from the Company's conventional triple rigs during the first two quarters of the year and to a lesser degree in the second half as select operators explored specific deeper shale formations to help determine potential future exploitation programs;
- Strong financial performance from the Company's pad rigs throughout the year; and
- Earnings derived from rig construction activity for sale to a third party. Upon construction completion, which occurred early in 2013, the Company began operating this rig on a multi-year basis.
In addition to the foregoing factors, funds flow from operations increased compared to the previous year as a result of a tax assessment received from the Canada Revenue Agency in response to the Company's request to accelerate certain deductions that were previously deducted over longer time frames.
Additional GAAP Measure
Funds flow from operations is considered an additional GAAP measure under IFRS. AKITA's method of determining funds flow from operations may differ from methods used by other companies and involves including operating 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. The following table reconciles funds flow from operations and cash flow from operations:
Change in non-
Income tax paid
(net of recoveries)
Cash Flow from
Fleet and Utilization
The following table summarizes rig changes that occurred in 2012:
|Number of rigs at December 31, 2011||38||35.075|
|Purchase of interest in rig from joint venture partner||0||0.100|
|Sale of interest in rig to joint venture partners||0||(0.150)|
|New rig completed during the year||1||0.850|
|Number of rigs at December 31, 2012||39||35.875|
Utilization rates are a key statistic for the drilling industry since they measure revenue volume and influence pricing. During 2012, AKITA achieved 6,717 operating days, which corresponded to a utilization rate of 48.3% compared to an industry average utilization rate of 41.6% during the same period. During the comparative year in 2011, AKITA achieved 6,857 operating days, representing 51.5% 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.
Drilling Fleet Summary at December 31, 2012
|Conventional Rigs||Pad Rigs|
From time to time, the Company enters into drilling contracts for extended terms. At December 31, 2012, AKITA had ten rigs with multi-year contracts that extend into 2013 or beyond. Of these contracts, five are anticipated to expire in 2013, three in 2014, one in 2016 and one in 2018.
Fourth Quarter Summary
During the fourth quarter of 2012, rig activity for the Company included 1,533 operating days compared to 1,715 operating days during the corresponding period in 2011. The decline in operating days compared to the corresponding quarter in 2011 was due to a drop in activity for AKITA's conventional doubles and was partially offset by an increase in pad rig operating days. While operating days were lower in the fourth quarter of 2012 compared to the corresponding period, revenue of $64,985,000 ($42,391 per operating day) exceeded fourth quarter 2011 revenue of $55,965,000 ($32,633 per operating day), both on an overall and a "per operating day" basis. The overall revenue and revenue per operating day increases were mainly due to three factors: a higher proportion of pad drilling activity compared to conventional drilling days, revenue generated from rig construction for a third party (no comparative activity occurred in 2011) and the receipt of a cancellation premium from an operator that was unable to meet a two-year contract commitment. Operating and maintenance costs, which are also tied to activity levels, increased during the fourth quarter of 2012 to $43,676,000 ($28,491 per operating day) from $38,503,000 ($22,451 per operating day) during the corresponding quarter of 2011. As a result of the foregoing, the operating margin during the fourth quarter of 2012 was $21,309,000 ($13,900 per operating day) compared to $17,462,000 ($10,182 per operating day) during the fourth quarter of 2011.
Net income increased to $8,376,000 or $0.47 per Class A Non-Voting and Class B Common Share (basic and diluted) for the fourth quarter of 2012 from $6,977,000 or $0.39 per share (basic and diluted) in the fourth quarter of 2011. Funds flow from operations increased to $19,886,000 in the fourth quarter of 2012 from $13,104,000 in the corresponding quarter in 2011. The higher net income that occurred in the fourth quarter of 2012 compared to the corresponding quarter in 2011 resulted from an increasing proportion of pad drilling compared to conventional drilling, rig construction activity for a third party and the receipt of a cancellation premium from an operator that was unable to meet a two-year contract commitment. In addition to the foregoing, funds flow from operations was also positively affected due to a tax ruling regarding the timing of deductions for certain purchases made by the Company.
Liquidity and Capital Resources
In years in which no new rigs are built under contract, and occasionally in years when new rigs are added to the fleet, the Company adheres to an internal capital expenditure discipline that typically restricts capital expenditures to less than 50% of funds flow from operations. The Company has determined that such a level is required to sustain the operations in a manner that maintains or enhances Company equipment standards. In 2012, AKITA's net capital expenditure program of $65,356,000 represented 110% of funds flow from operations, while in 2011, AKITA's net capital expenditure program of $54,509,000 represented 133% of funds flow from operations. In addition to routine capital expenditures, the Company added new rigs in each of 2012 and 2011 as these projects met appropriate hurdle rates to justify this higher level of capital expenditures.
At December 31, 2012, AKITA had $36,039,000 in working capital, including $13,285,000 in cash, compared to $44,265,000 in working capital, including $18,228,000 in cash and $9,500,000 in term deposits, for the previous year. In 2012, AKITA generated $55,605,000 from operating activities. Cash was also generated from redemption of term deposits ($9,500,000), from proceeds on sales of joint venture rigs and other assets ($3,984,000) and from proceeds on exercise of stock options ($18,000). During the same period, cash was used for capital expenditures ($65,356,000), payment of dividends ($5,038,000), repurchasing share capital ($1,091,000), and payment of a loan commitment fee ($140,000).
In 2011, the Company established an operating loan facility with its principal banker totalling $50,000,000, having an initial five year term. This facility was increased to $75,000,000 in the fourth quarter of 2012 and the term was also extended for an additional year. Although the facility has been provided in order to finance general corporate needs, capital expenditures and acquisitions, management intends to access this facility primarily to enable the Company to fund new rig construction requirements related to drilling contracts that it might be awarded. The interest rate on the facility varies based upon the actual amounts borrowed, but 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 accessed this facility during the first quarter of 2012 on an interim basis with the borrowed amount being repaid within that quarter.
Property, Plant and Equipment
AKITA's 2012 capital expenditure program was its largest in its history. The Company has been actively executing its strategy to increase market penetration in self-moving pad rigs. During the year, the Company completed the conversion of two conventional rigs into pad rigs, added one new pad rig and was continuing with the construction of a second new pad rig, anticipated to be completed in 2013.
Capital expenditures totalled $65,356,000 in 2012. The total cost of the rig construction projects described in the previous two paragraphs totalled $38,287,000 of this amount. Additional capital expenditures related to rig equipment for existing rigs ($10,085,000), certifications and overhauls having a life in excess of one year ($12,252,000), drill pipe and drill collars ($3,765,000) and other equipment ($967,000). Capital expenditures for 2011 totalled $54,509,000.
From time to time AKITA makes forward-looking statements. These statements include but are not limited to comments with respect to AKITA's objectives and strategies, financial condition, results of operations, the outlook for industry and risk management discussions.
By their nature, these forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, and therefore carry the risk that the predictions and other forward-looking statements will not be realized. Readers of this News Release are cautioned not to place undue reliance on these statements as a number of important factors could cause actual future results to differ materially from the plans, objectives, estimates and intentions expressed in such forward-looking statements.
Forward-looking statements may be influenced by factors such as the level of exploration and development activity carried on by AKITA's customers; world crude oil prices and North American natural gas prices; weather; access to capital markets and government policies. We caution that the foregoing list of factors is not exhaustive and that while relying on forward-looking statements to make decisions with respect to AKITA, investors and others should carefully consider the foregoing factors as well as other uncertainties and events prior to making a decision to invest in AKITA. Except where required by law, the Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by it or on its behalf.
Selected financial information for the Company is as follows:
|AKITA Drilling Ltd.|
|Consolidated Statements of Financial Position|
|December 31||December 31|
|Cash and cash equivalents||$ 13,285||$ 18,228|
|Prepaid expenses and other||216||413|
|Other long term assets||320||200|
|Property, plant and equipment||204,969||166,812|
|Total Assets||$ 292,994||$ 247,130|
|Accounts payable and accrued liabilities||$ 44,669||$ 27,550|
|Income taxes payable||-||3,269|
|Deferred income taxes||18,989||12,264|
|Class A and Class B shares||23,186||23,308|
|Total Liabilities and Equity||$ 292,994||$ 247,130|
|AKITA Drilling Ltd.|
|Consolidated Statements of Net Income and Comprehensive Income|
|Year Ended December 31|
|$ Thousands except per share amounts||2012||2011|
|Revenue||$ 239,654||$ 199,934|
|Costs and expenses|
|Operating and maintenance||159,458||132,520|
|Depreciation and amortization||24,342||20,933|
|Selling and administrative||19,012||16,117|
|Total costs and expenses||202,812||169,570|
|Revenue less costs and expenses||36,842||30,364|
|Other income (losses)|
|Gain on sale of joint venture interests in rigs and other assets||1,082||787|
|Other gains and losses (net)||5||(4)|
|Total other income||1,502||1,398|
|Income before income taxes||38,344||31,762|
|Net income for the year attributable to shareholders||28,703||23,353|
|Other comprehensive income (loss)|
|Cumulative translation adjustment||-||(50)|
|Comprehensive income for the year attributable to shareholders||$ 28,703||$ 23,303|
|Earnings per Class A and Class B Share|
|Basic||$ 1.60||$ 1.29|
|Diluted||$ 1.60||$ 1.29|
|AKITA Drilling Ltd.|
|Consolidated Statements of Cash Flows|
|Year Ended December 31|
|Net income||$ 28,703||$ 23,353|
|Non-cash items included in net income:|
|Depreciation and amortization||24,342||20,933|
|Deferred income taxes||6,725||(971)|
|Expense for defined benefit pension plan||422||121|
|Stock options charged to expense||302||246|
|Gain on sale of joint venture interests in rigs and other assets||(1,082)||(787)|
|Funds flow from operations||59,412||42,895|
|Change in non-cash working capital:|
|Prepaid expenses and other||197||(191)|
|Income tax recoverable||(4,487)||-|
|Accounts payable and accrued liabilities||19,537||3,212|
|Pension benefits paid||(15)||(15)|
|Income tax expense - current||2,916||9,380|
|Income tax paid||(6,185)||(6,196)|
|Net cash from operating activities||55,605||34,196|
|Change in non-cash working capital related to capital||(2,425)||5,524|
|Change in cash restricted for loan guarantees||-||(500)|
|Change in term deposits||9,500||500|
|Proceeds on sale of joint venture interests in rigs and other assets||3,984||1,487|
|Net cash used in investing activities||(54,297)||(47,498)|
|Proceeds received on exercise of stock options||18||-|
|Repurchase of share capital||(1,091)||(1,118)|
|Loan commitment fee paid||(140)||(200)|
|Change in non-cash working capital||-||-|
|Net cash used in financing activities||(6,251)||(6,384)|
|Effect of exchange rate changes on cash and cash equivalents||-||(50)|
|Decrease in cash and cash equivalents||(4,943)||(19,736)|
|Cash and cash equivalents, beginning of year||18,228||37,964|
|Cash and Cash Equivalents, End of Year||$ 13,285||$ 18,228|
SOURCE: AKITA Drilling Ltd.