AKITA Drilling Ltd. Announces Year-to-Date Earnings and Cash Flow

CALGARY, July 28, 2015 /CNW/ - AKITA Drilling Ltd.'s net loss for the three months ended June 30, 2015 was $1,620,000 (net loss of $0.09 per share) on revenue of $22,536,000, compared to net income of $2,082,000 (net income of $0.12 per share) on revenue of $28,365,000 for the corresponding period in 2014.  The second quarter results for 2015 included a one-time deferred income tax charge of $1,191,000 ($0.07 per share) as a result of a future provincial corporate income tax rate increase in Alberta in addition to a net loss of $429,000 as a result of routine operations.  Funds flow from operations for the quarter ended June 30, 2015 was $9,072,000 compared to $10,609,000 in the corresponding quarter in 2014.

Net income for the six months ended June 30, 2015 was $2,598,000 ($0.14 per share) on revenue of $69,251,000 and included the one-time deferred tax charge of $1,191,000 noted above.  Comparative figures for the corresponding six month period in 2014 were net income of $12,231,000 ($0.68 per share) and revenue of $82,708,000.  Funds flow from operations for the January to June period in 2015 was $23,131,000 compared to $28,273,000 for the comparative period in 2014.

Continuing weak commodity prices for crude oil and natural gas had a significant negative effect on AKITA's activity levels both during the second quarter of 2015 and on a year-to-date basis.  AKITA achieved 885 operating days during the second quarter of 2015 (2,520 operating days on a year-to-date basis) compared to 1,220 days during the second quarter of 2014 (3,333 operating days for January to June, 2014).  This reduction in operating days was most pronounced for conventional rigs, which accounted for 88% of the overall decline.

Weakened demand for drilling rigs had a negative effect on drilling rig rates, which affected the financial results for each of AKITA's rig categories.  From an earnings perspective, however, the effect of weakened rates was mitigated to an extent by a change in rig classes worked.  This change in rig classes resulted in a higher proportion of AKITA's pad rigs working.  Pad rigs achieve higher revenue rates than conventional rigs.

During the second quarter of 2015, the Company deployed its newly completed pad triple rig for work in the Alberta foothills. 

The Company anticipates that most of its remaining 2015 capital expenditures will be directed towards routine items.

As a result of the uncertainty around the timing and extent of any recovery in the industry, the Company remains focused on maintaining the strength of its already high quality balance sheet.  At June 30, 2015, borrowings by the Company had declined to $2,500,000 from $20,000,000 at December 31, 2014.  In addition, the Company had a cash balance of $4,725,000 at June 30, 2015, generating a positive "net cash" position.

Weak market conditions are likely to persist for the balance of 2015 and potentially beyond.  Nevertheless, the Company is well positioned financially, and has a significant asset base that includes a broad range of drilling equipment, including 21 pad rigs that are focused on some of the most active regions of the current market.  AKITA has a significant base of well-trained personnel to meet our customers' requirements, both in the existing market and when drilling conditions improve.

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

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

The Company reports its joint venture activities in the financial statements in accordance with International Financial Reporting Standards ("IFRS"), IFRS 11 "Joint Arrangements".  In determining the classification of its joint arrangements, AKITA considers whether the joint arrangements are structured through separate vehicles, if the legal form of the separate vehicles confers upon the parties direct rights to assets and obligations for liabilities relating to the arrangements, whether the contractual terms between the parties confer upon them rights to assets and obligations for liabilities relating to the arrangements as well as if other facts and circumstances lead to rights to assets and obligations for liabilities being conferred upon the parties to the arrangement prior to concluding that AKITA's joint ventures are appropriately classified as joint ventures rather than joint operations.  Under IFRS 11, AKITA is required to report its joint venture assets, liabilities and financial activities using the equity method of accounting.  However, for purposes of analysis in this MD&A, the proportionate share of assets, liabilities and financial activities is included as non-standard Generally Accepted Accounting Principles ("GAAP") information ("Adjusted") where appropriate.  The Company provides the same drilling services and utilizes the same management, financial and reporting controls for its joint venture activities as are in place for its wholly owned operations.  None of AKITA's joint ventures are individually material in size when considered in the context of AKITA's overall operations.

Operating margin, revenue per operating day, operating and maintenance expense per operating day and operating margin per operating day are not recognized measures under IFRS.  Management finds and certain investors may find operating margin data to be a useful measurement tool 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 finds 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 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 rigs between conventional and pad and singles, doubles and triples can also influence these results.  Readers should also be aware that AKITA includes standby revenue 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 finds and certain investors may find funds flow from operations to be a useful measurement tool 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. 

Second Quarter Comparatives

During the second quarter of 2015, adjusted revenue decreased to $30,205,000 compared to $44,948,000 during the second quarter of 2014 as a result of weak market conditions, particularly for conventional rigs, but also to a lesser extent for pad rigs.  Continuing low commodity prices for crude oil and natural gas were primary reasons for this market weakness.

In addition to a decline in overall adjusted revenue for the three month period ended June 30, 2015, adjusted revenue per operating day decreased to $34,130 during the second quarter of 2015 from $36,843 in the comparative quarter of 2014 due to lower day rates for most of AKITA's rigs, which was partially offset by having a higher percentage of pad rigs working.  Pad rigs, compared to conventional drilling rigs, typically generate higher revenue on a per day basis.

Adjusted operating and maintenance costs are tied to revenue and amounted to $18,740,000 ($21,175 per operating day) during the second quarter of 2015 compared to $29,198,000 ($23,933 per operating day) in the same period of the prior year.  The decreases in operating and maintenance costs, both on a total and "per day" basis, resulted primarily from reduced drilling activity and secondarily from cost reductions.

The adjusted operating margin for the Company decreased to $11,465,000 in the second quarter of 2015 from $15,750,000 during the corresponding quarter of 2014.  Lower activity due to weaker market conditions was the primary reason for the decline in operating margin.  Although the overall operating margin decreased during the second quarter of 2015 as compared to the corresponding period in 2014, AKITA's adjusted operating margin per operating day increased slightly to $12,955 from $12,910 in the comparative period during 2014, as a result of a change in rig mix which included a higher proportion of pad rigs working. 

Year-to-Date Comparatives

During the first six months of 2015, adjusted revenue decreased to $89,707,000 from $116,815,000 during the first six months of 2014 as a result of lower drilling activity.  88% of this decline in activity is attributable to AKITA's conventional rigs.

Although adjusted revenue for the year-to-date period ended June 30, 2015 decreased, adjusted revenue per operating day increased to $35,598 during the first six months of 2015 from $35,059 in the comparative six month period of 2014 due to the same factors that affected second quarter adjusted revenue per operating day.

Adjusted operating and maintenance costs are tied to revenue and amounted to $58,249,000 ($23,115 per operating day) during the first six months of 2015 compared to $74,858,000 ($22,466 per operating day) in the same period of the prior year. 

The adjusted operating margin for the Company decreased to $31,458,000 in the first six months of 2015 from $41,957,000 during the corresponding period of 2014.  The reduction in operating margin was related to weaker market conditions.  The higher percentage of pad drilling that occurred in the first six months of 2015 compared to the first six months of 2014 helped offset the "per operating day" decline in operating margin.

Other Comments

From time to time, the Company requires customers to make pre-payments prior to the provision of drilling services.  In addition, from time to time, the Company records cost recoveries related to capital enhancements for specific customer related projects.  At June 30, 2015, deferred revenue related to these activities totalled $79,000 (June 30, 2014 - $76,000).

The depreciation and amortization expense reported in the second quarter of 2015 of $8,276,000 was higher than the corresponding quarter of 2014 ($7,256,000).  AKITA depreciates its rig fleet on a unit of production basis and while overall drilling days declined during the second quarter of 2015 compared to the corresponding quarter in 2014, the most active rigs in the second quarter of 2015 were also the rigs with the highest cost bases.

Depreciation and amortization expense for the first six months of 2015 totalled $17,344,000 compared to $15,119,000 for the corresponding period in 2014.  As with the depreciation and amortization expense for the second quarter, the higher cost base for AKITA's active rigs more than offset the lower rig activity levels.  In the first six months of 2015, drilling rig depreciation accounted for 96% of total depreciation and amortization expense (2014 - 96%). 

While AKITA conducts several 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.

Adjusted selling and administrative expenses were 9.6% of adjusted revenue in the first six months of 2015 compared to 9.0% of adjusted revenue in the first six months of 2014 as a result of achieving lower adjusted revenue in 2015.  The Company has been able to reduce overall selling and administrative costs, particularly in the second quarter as a result of implementing various management controls.  The single largest component of selling and administrative expenses was salaries and benefits, which accounted for 58% of these expenses (58% in 2014). 

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.

Interest income decreased to $68,000 in the first six months of 2015 from $98,000 in the corresponding period in 2014 primarily 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 the first six months of 2015, the Company recorded interest expense of $285,000 as a result of the Company's indebtedness as well as to accrue the related future cost of the Company's unfunded defined benefit pension plan.  During the corresponding six month period in 2014, AKITA recorded interest expense of $77,000 primarily to reflect the related future cost of the Company's defined benefit pension plan.  The Company reduced its operating loan facility balance during the second quarter of 2015 from $19,814,000 to $2,500,000 at June 30, 2015.

During the first six months of 2015, the Company sold some ancillary assets for $786,000 that resulted in a loss of $111,000.  During the first six months of 2014, the Company disposed of certain non-core assets resulting in a $118,000 gain.

Approximately 95% of amounts recorded as "Net Other Gains" during the first six months of 2015 related to foreign exchange, that was associated with rig construction for AKITA's new pad triple which was deployed during the second quarter of 2015.  The comparative period in 2014 included $148,000 in exchange losses related to rig construction partially offset by $56,000 for non-exchange related losses.

Income tax expense decreased to $2,777,000 in the first six months of 2015 from $4,133,000 in the corresponding period in 2014 mainly due to lower pre-tax earnings.  In addition to the effect of lower pre-tax earnings, during the second quarter of 2015, the Company recorded a one-time deferred tax expense of $1,191,000 related to a corporate income tax increase announced by the Province of Alberta.  Recent capital additions have affected the portion of income taxes that are deferred to future dates.

During the three months ended June 30, 2015, the Company reported a net loss of $1,620,000 or $0.09 per Class A Non-Voting and Class B Common Share (basic and diluted) compared to net income of $2,082,000 or $0.12 per share (basic and diluted) in the comparative quarter of 2014.  The second quarter results for 2015 included a one-time deferred income tax charge of $1,191,000 as a result of a provincial corporate income tax rate increase for Alberta in addition to a net loss of $429,000 as a result of routine operations.  The second quarter of 2015 net loss compared to the net income reported in the second quarter of 2014 was also attributable to reductions in drilling activity, reduced day rates, as well as increased depreciation expense.  Funds flow from operations decreased to $9,072,000 during the second quarter of 2015 from $10,609,000 in the corresponding quarter in 2014.  Funds flow from operations was negatively affected by weaker drilling activity in the second quarter of 2015 but was not affected by depreciation expense or future income tax expense as these items are non-cash items.

Net income decreased to $2,598,000 or $0.14 per Class A Non-Voting and Class B Common Share (basic and diluted) for the first six months of 2015 from $12,231,000 or $0.68 per share (basic and diluted) in the corresponding period of 2014.  Funds flow from operations decreased to $23,131,000 during the first six months of 2015 from $28,273,000 in the corresponding period in 2014.  Lower net income in 2015 was directly attributable to reductions in drilling activity coupled with reduced day rates, as well as higher depreciation expense and a corporate income tax rate increase in Alberta.  Funds flow from operations was negatively affected by weaker drilling activity and lower day rates but was not affected by depreciation or income tax rate changes as these are both non-cash items.  As a consequence, while net income for the first six months of 2015 decreased 79% compared to the corresponding period in 2014, the decline in funds flow when comparing the same periods was only 18%.

Fleet and Rig Utilization  

At June 30, 2015 AKITA had 36 drilling rigs, including nine that operated under joint ventures (32.725 net to AKITA), compared to 37 rigs (33.725 net) in the corresponding period of 2014.  During the second quarter of 2015, the Company completed construction of and commenced operations with a new pad drilling rig. 

Liquidity and Capital Resources  

Cash used for capital expenditures totalled $11,874,000 in the first six months of 2015 (2014 - $42,973,000).  Nearly three quarters of current year capital expenditures relate to the completion of a new pad rig that was deployed during the second quarter.  Other capital expenditures related to routine items.

At June 30, 2015, AKITA's Statement of Financial Position included working capital (current assets minus current liabilities) of $7,414,000 compared to working capital of $14,483,000 at June 30, 2014 and a working capital deficiency of $5,028,000 at December 31, 2014.  Readers should also be aware of the seasonal nature of AKITA's business and its effect on non-cash working capital balances.  Typically, non-cash working capital balances reach annual maximum levels at the end of the first quarter or during the second quarter as a result of break-up.  Non-cash working capital amounted to $2,689,000 at June 30, 2015 compared to a non-cash working capital deficiency of $7,040,000 at December 31, 2014.  During the first six months of 2015, AKITA undertook a much reduced capital expenditure program compared to the comparative period in 2014, contributing to working capital and non-cash working capital during the current year.

The Company did not have a normal course issuer bid in place during the first six months of 2015.  During the first six months of 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.

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.  As at June 30, 2015 (the most recent measurement date), AKITA's actual rate was 0.05 to 1;
• EBITDA to interest expense shall not be less than 3.00 to 1.  As at June 30, 2015, AKITA's actual rate was 106.44 to 1; and
• Tangible assets to funded debt shall not be less than 2.25 to 1.  As at June 30, 2015 AKITA's actual rate was 116.14 to 1.

Readers should be aware that the terms "funded debt", "EBITDA", "interest expense" and tangible assets have been specifically defined 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 Company had four rigs under multi-year contracts at June 30, 2015.  Of these contracts, two are anticipated to expire in 2016, one in 2018 and one in 2019.

From time to time, the Company may provide guarantees for bank loans to joint venture partners in respect of sales of joint venture interests.  At June 30, 2015, AKITA provided $8,482,000 in deposits as security with the bank for those purposes (June 30, 2014 and December 31, 2014 - $9,381,000).  These deposits have been recorded as "Restricted Cash" on AKITA's Interim 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 the industry and risk management.

By their nature, these forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, and the risk that the predictions and other forward-looking statements will not be realized.  Readers of this News Release are cautioned not to place undue reliance on these statements as a number of important factors could cause actual future results to differ materially from the plans, objectives, estimates and intentions expressed in such forward-looking statements.

Forward-looking statements may be influenced by factors such as the level of exploration and development activity carried on by AKITA's customers; world crude oil prices and North American natural gas prices; weather; access to capital markets and government policies.  We caution that the foregoing list of factors is not exhaustive and that investors and others should carefully consider the foregoing factors as well as other uncertainties and events prior to making a decision to invest in AKITA.  Except as required by law, the Company does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by it or on its behalf.

Selected financial information for the Company is as follows:

 

 

 

 

 

SOURCE AKITA Drilling Ltd.