AKT press release
AKITA Drilling Ltd. Announces 2012 Third Quarter Earnings and Funds Flow
TSX - Toronto Stock Exchange · Oil · Natural Gas · Potash · Hydrogen · Canada
CALGARY, Oct. 28, 2011 /CNW/ - _Commencing with the first quarterly report earlier this year, all financial information is reported for the Company in accordance with IFRS including for comparative periods except where noted._
AKITA Drilling Ltd.'s net income for the three months ended September 30, 2011 was $6,926,000 ($0.38 per share) on revenue of $54,874,000 compared to $2,215,000 ($0.12 per share) on revenue of $34,042,000 for the corresponding period in 2010. Funds flow from operations for the quarter ended September 30, 2011 was $12,825,000 compared to $8,476,000 in the corresponding quarter in 2010.
Net income for the nine months ended September 30, 2011 was $16,375,000 ($0.90 per share) on revenue of $143,969,000. Comparative figures for 2010 were net income of $2,614,000 ($0.14 per share) on revenue of $103,295,000. Funds flow from operations for the January to September period in 2011 was $29,776,000 which included a one-time tax charge of $2,432,000, related to the second quarter repatriation of the Company's rigs from Alaska into Canada. Funds flow from operations for the January to September comparative period was $21,240,000.
Rig activity increased significantly during the summer after a long and, in many cases, late break-up with third quarter utilization rates matching their highest level in over a decade for a third quarter. Operating statistics for the first nine months of 2011 and 2010 are as follows:
| | Number of Drilling Rigs | Operating Days | | | | | Gross | Net | Third Quarter | Year to Date | | | | Canadian Operations | 2011 | 37 | 34.075 | 2,140 | 5,142 | | 2010 | 37 | 34.225 | 1,387 | 3,938 | | | U.S. Operations | 2011 | 0 | 0.0 | 0 | 0 | | 2010 | 2 | 1.0 | 0 | 23 | | | Total | 2011 | 37 | 34.075 | 2,140 | 5,142 | | 2010 | 39 | 35.225 | 1,387 | 3,961 | |
AKITA's capital program is on track to be the largest since 2001. The Company continues to execute its strategy to increase market penetration in self-moving pad rigs. Thus far in 2011, AKITA has converted two rigs from conventional into pad configurations and has built one new pad rig. The Company also has two further rigs that are undergoing conversion into pad rigs for this winter. Once these additional two projects are complete, AKITA will have 15 pad rigs in its fleet.
The future outlook beyond the traditional strong winter drilling season includes significant uncertainty following break-up that will depend on, among other things, the price of crude oil, the ability for AKITA's customers to access financing and overall confidence levels in the economy. AKITA is well positioned with financial and other resources to adapt to market conditions as they present themselves.
We are pleased to announce that Mr. Harish Mohan joined our Board of Directors on August 1, 2011. Mr. Mohan brings a strong oil and gas drilling background and has held senior financial and management positions with a diversified, Canadian based, international group of companies.
Selected information from AKITA's Management's Discussion and Analysis for the Quarterly Report is as follows:
| Revenue and Operating and Maintenance Expenses |
| | | | | | | | | | | | $ Million | Three Months Ended September 30 | | Nine Months Ended September 30 | | | | | | | | | 2011 | 2010 | Change | %Change | | 2011 | 2010 | Change | %Change | | Revenue | 54.9 | 34.0 | 20.9 | 61% | | 144.0 | 103.3 | 40.7 | 39% | | Operating & Maintenance Expenses | 35.8 | 21.6 | 14.2 | 66% | | 94.0 | 70.9 | 23.1 | 33% |
| | | | | | | | | | | | $ Dollars | ThreeMonths Ended September 30 | | Nine Months Ended September 30 | | | | | | | | | 2011 | 2010 | Change | %Change | | 2011 | 2010 | Change | %Change | | Revenue per operating day | 25,642 | 24,544 | 1,098 | 4% | | 27,999 | 26,078 | 1,921 | 7% | | Operating & Maintenance Expenses per operating day | 16,736 | 15,590 | 1,146 | 7% | | 18,284 | 17,896 | 388 | 2% | | Operating margin(1) per operating day | 8,907 | 8,953 | (46) | (1%) | | 9,715 | 8,182 | 1,533 | 19% |
(1)Note: Operating margin is the difference between revenue and operating & maintenance expenses
_The changeover from GAAP to IFRS did not affect the Company's recognition of revenue per se. It did, however, affect the balances reported for operating and maintenance expenses. Certain expenditures that were previously recorded as maintenance expenses under GAAP are now recorded as property, plant and equipment under IFRS. This reduced the balance otherwise reported as operating and maintenance expenses under IFRS._
_Upon adoption of IFRS, revenue for goods and services provided by the Company to its customers on a cost recovery basis is presented in the Company's income statement on a gross basis. These amounts were reported on a net basis under Canadian GAAP. This change has resulted in offsetting increases to Revenue, Operating and Maintenance and Selling and Administrative expenses._
As a result of stronger market conditions, during the third quarter of 2011, overall revenue increased to $54,874,000 compared to $34,042,000 during the corresponding period in 2010. On a "per operating day" basis, third quarter revenue increased to $25,642 in 2011 compared to $24,544 per day in 2010. Much of the increase in revenue for the quarter was due to increased activity levels for AKITA's conventional rigs. Additionally, AKITA has continued to expand the pad rig component of its fleet, and the demand for these rigs has continued to be strong. As most of AKITA's pad rigs are working under longer duration contract, rates associated with those rigs were largely unchanged.
Operating and maintenance costs are tied to activity levels and amounted to $35,814,000 or $16,736 per operating day during the third quarter of 2011, compared to $21,624,000 or $15,590 per operating day for 2010. The overall balance recorded in operating and maintenance expense increased both as a result of increased activity levels and increased daily costs. "Per day" operating and maintenance costs rose based upon the overall mix of rigs that worked as well as general oilfield inflation, especially as it relates to the cost of drilling services as opposed to drilling supplies. Further, during the comparative period, three of AKITA's rigs were earning revenue on a standby basis and therefore had no associated operating and maintenance costs. During the current year, these rigs were all in active operation.
The Company's "per-day" operating margin for the third quarter of 2011 was $8,907 compared to a "per-day" operating margin of $8,953 during the corresponding quarter in 2010. AKITA's conventional rigs were busier in the third quarter of 2011 compared to the corresponding quarter in 2010. Typically, these rigs garner lower margins than the pad rigs, and were a significant factor in the quarterly margin reduction experience in the current quarter.
Overall revenue increased to $143,969,000 during the first nine months of 2011 from $103,295,000 during the first nine months of 2010 due to the stronger market conditions. The influence of pad rigs was greater in the year-to-date results compared to the third quarter results, since this type of drilling was affected less by seasonality factors. This improvement in revenue reverses the previous four year trend of consecutive "year-over-year" declines in revenue experienced in the January to September periods.
In addition to an increase in total revenue for the nine months ended September 30, revenue per operating day increased to $27,999 during the first nine months of 2011 from $26,078 in the corresponding period of 2010. As with the increase in overall revenue, revenue per day increased predominantly due to strength in the conventional drilling market. Improvements in day rates for pad rigs were a secondary factor.
Operating and maintenance costs amounted to $94,017,000 or $18,284 per operating day during the first nine months of 2011 compared to $70,886,000 or $17,896 per operating day in the corresponding period of the prior year. Although the daily cost of operating all rigs rose during the first nine months of 2011 compared to the corresponding period in 2010, this increase was offset to a large extent by having a higher percentage of conventional rigs operating in the current year-to-date period, as conventional rigs generally require smaller crew complements than are used in either deep or pad drilling applications.
On a nine month basis, the Company's "per-day" operating margin was $9,715 during 2011, compared to a "per-day" operating margin of $8,192 during the corresponding period in 2010. The daily cost of operating all rigs rose during the third quarter of 2011 compared to the corresponding period in 2010 but was more than offset by higher revenue rates due to improved market conditions.
From time to time, the Company requires customers to make pre-payments prior to the provision of drilling services. At September 30, 2011, these prepayments totalled $815,000 (September 30, 2010 - $985,000).
| Depreciation Expense |
| | | | | | | | | | | | $ Million | Three Months Ended September 30 | | Nine Months Ended September 30 | | | | | | | | | 2011 | 2010 | Change | % Change | | 2011 | 2010 | Change | % Change | | Depreciation Expense | 5.6 | 6.0 | (0.4) | (7%) | | 15.6 | 18.9 | (3.3) | (17%) |
_The changeover from GAAP to IFRS affected the balances reported and methods used in determining depreciation expense. Certain expenditures that were previously recorded as maintenance expenses under GAAP are now recorded as property, plant and equipment under IFRS. This had the impact of increasing the balance otherwise reported as depreciation expense under IFRS. Depreciation is also measured on a more detailed component-by-component basis under IFRS rather than using an asset-by-asset basis used under GAAP. This change in approach has resulted in some differences that, depending on the actual assets being depreciated, had the effect of either increasing or decreasing the actual depreciation balance reported. In general, the more detailed component-by-component depreciation approach is not considered to produce changes that are material in amount especially when considered over extended periods._
During 2011, the Company analyzed historical use patterns for its fleet and consequently changed its estimate of the useful lives of its rigs. Previously, most of the Company's rig components were depreciated over an average of 2,000 operating days per rig, while selected rigs had components that were being depreciated over an average of 3,600 operating days. Effective January 1, 2011, the Company began depreciating all of its rigs over an average useful life of 3,600 operating days per rig.
Concurrent with the change in estimate for useful lives of rigs, the Company reassessed and changed its estimates for salvage values for its rigs. Previously, salvage values were set between $50,000 and $300,000 per rig. Effective January 1, 2011, the Company is applying salvage values equal to 20% of the original cost of each rig.
The major factors that have had an impact on 2011 and 2010 depreciation are as follows: the one-time change to useful lives of rigs and related salvage values described previously (impact was to reduce depreciation recorded in the first nine months of 2011 by $3,255,000 including $383,000 in the third quarter; 2010 - no impact), ongoing rig activity levels, ongoing changes in rig mix actually working, and the recording of certain expenditures as assets under IFRS, necessitating depreciation for costs recorded as expense under previous GAAP. This final change resulted in an increased depreciation expense of $3,417,000 for the nine months ended September 30, 2011 (nine months ended September 30, 2010 - $2,747,000) including $1,044,000 for the third quarter of 2011 (third quarter of 2010 - $1,015,000). Since depreciation is based upon usage, it is impracticable to determine the impact of these changes in estimates for future periods until they occur.
The decrease in depreciation expense to $5,647,000 during the three months ended September 30, 2011 from $6,030,000 in the corresponding period in 2010 was mostly attributable to the change in estimated useful lives for the rig fleet. Higher rig activity and a mix of rigs working having a higher average cost base offset much of the impact of the above noted change in estimated useful lives for the rig fleet in the third quarter of 2011 compared to the corresponding period in the comparative period. In the three months ended September 30, 2011, drilling rig depreciation accounted for 96% of total depreciation expense (three months ended September 30, 2010 - 96%).
A comparison of year-to-date depreciation revealed an analogous pattern as described regarding third quarter of 2011 compared to the corresponding period in 2010. On a nine-month basis drilling rig depreciation accounted for 96% of total depreciation expense (first three quarters of 2010 - 96%).
| Selling and Administrative Expense |
| | | | | | | | | | | | $ Million | ThreeMonths Ended September 30 | | Nine Months Ended September 30 | | | | | | | | | 2011 | 2010 | Change | %Change | | 2011 | 2010 | Change | %Change | | Selling & Administrative Expense | 4.2 | 3.4 | 0.8 | 24% | | 12.7 | 10.3 | 2.4 | 23% |
_The changeover from GAAP to IFRS did not affect the Company's recognition of selling and administrative expense per se. However, selling and administrative expense increased $85,000 in the current quarter ($53,000 in the corresponding quarter of 2010) and $171,000 on a year-to-date basis in 2011 ($121,000 in the corresponding nine month period of 2010) as a result of the Company's change in revenue presentation as described in this MD&A under the section "Revenue and Operating & Maintenance Expenses"._
Selling and administrative expenses were 7.6% of total revenue in the first nine months of 2011 compared to 9.9% of total revenue in the comparative period of 2010, largely as a result of increased revenue in 2011. The single largest component was salaries and benefits, which accounted for 60% of these expenses (56% in 2010).
| Income Tax Expense |
| | | | | | | | | | | | $ Million | Three Months Ended September 30 | | Nine Months Ended September 30 | | | | | | | | | 2011 | 2010 | Change | % Change | | 2011 | 2010 | Change | % Change | | Current Tax Expense | 2.3 | 0.9 | 1.4 | 156% | | 8.3 | 1.7 | 6.6 | 388% | | Deferred Tax Expense | 0.2 | 0.1 | 0.1 | 100% | | (2.2) | (0.4) | (1.8) | 450% | | Total Income Tax Expense | 2.5 | 1.0 | 1.5 | 150% | | 6.1 | 1.3 | 4.8 | 369% |
_The changeover from GAAP to IFRS did not affect methods used in determining income tax expense. However, predominantly as a result of changes in balances reported for income before income taxes due to decreased operating and maintenance expense and increased depreciation expense, the amount reported as future income tax expense has increased._
Income tax expense increased to $6,050,000 in the first nine months of 2011 from $1,281,000 in the corresponding period in 2010, due to higher pre-tax income as well as one-time costs to repatriate one of the Company's rigs (hereinafter referred to as the "Arctic Wolf") from Alaska to Canada.
| Net Income and Funds Flow |
| | | | | | | | | | | | $ Million | Three Months Ended September 30 | | Nine Months Ended September 30 | | | | | | | | | 2011 | 2010 | Change | % Change | | 2011 | 2010 | Change | % Change | | Net Income | 6.9 | 2.2 | 4.7 | 214% | | 16.4 | 2.6 | 13.8 | 531% | | Funds Flow From Operations(Note) | 12.8 | 8.5 | 4.3 | 51% | | 29.8 | 21.2 | 8.6 | 41% |
Note:See commentary regarding non standard accounting measure
_The changeover from GAAP to IFRS affected the reporting of both net income and funds flow from operations. This was primarily due to a decrease in operating and maintenance expenses that was partially offset by an increase in depreciation expense._
Net income increased to $6,926,000 or $0.38 per Class A Non-Voting and Class B Common Share (basic and diluted) for the third quarter of 2011 from $2,215,000 or $0.12 per share (basic and diluted) in the third quarter of 2010. Funds flow from operations increased to $12,825,000 in the third quarter of 2011 from $8,476,000 in the corresponding quarter in 2010. The higher income and funds flow that occurred in the third quarter of 2011 compared to the corresponding period in 2010 was directly attributable to increased demand for AKITA's drilling services.
Net income increased to $16,375,000 or $0.90 per Class A Non-Voting and Class B Common Share (basic and diluted) for the first nine months of 2011 from $2,614,000 or $0.14 per share (basic and diluted) in the corresponding period of 2010. Funds flow from operations increased to $29,776,000 in the first nine months of 2011 from $21,240,000 in the corresponding period in 2010. Higher income and funds flow from operations that occurred in 2011 were directly attributable to higher activity levels and increased operating margins per day versus the corresponding period of 2010.
| Fleet and Rig Utilization |
AKITA had 37 drilling rigs, including seven that operated under joint ventures, (34.075 net to AKITA) at the end of the third quarter of 2011 compared to 39 rigs (35.225 net) in the corresponding period of 2010. Since last year, the Company retired two rigs and swapped its 50% interest in an additional rig for 100% of one of the two rigs swapped. As well, the Company completed construction of one new rig which is owned 85% by AKITA.
In the third quarter of 2011, AKITA achieved 2,140 operating days, which corresponded to a utilization rate of 62.9% for the period. In the third quarter of 2010, the Company achieved 1,387 operating days, representing 38.7% utilization. On a year-to-date basis during 2011, AKITA achieved 5,142 operating days, representing a utilization rate of 51.9%. During the comparative period in 2010, the Company achieved 3,961 operating days, representing 37.2% utilization. It should be noted that AKITA calculates utilization rates based upon rigs actively operating. From time to time, AKITA has rigs receiving standby revenue. Those rigs are not considered as contributing to the utilization statistic in AKITA's calculations.
During the first quarter of 2011, AKITA completed the Arctic Wolf retrofit. This rig is currently working under a multi-year contract. During the second quarter, the Company completed the construction and commenced a multi-year contract for a new pad rig. Although the Company did not complete any additional rigs during the third quarter, it is continuing the construction of a pad rig which is scheduled for completion during the fourth quarter. In addition, AKITA has commenced the conversion of one of its conventional large triple rigs into a pad rig. This work is scheduled for completion near year-end. Both of these rigs will be working under multi-year contracts once construction is complete.
| Liquidity and Capital Resources |
_The changeover from GAAP to IFRS affected the balances reported and methods used in determining property, plant and equipment. On January 1, 2010, the Company recorded an IFRS 1 exemption to report selected assets at fair value for deemed costs. This exemption resulted in a reduction of carrying values of $32,578,000 at that date. Certain expenditures that were previously recorded as maintenance expenses under GAAP are now recorded as property, plant and equipment under IFRS. Depreciation is also measured on a more detailed component-by-component basis under IFRS rather than using an asset-by-asset basis used under GAAP. This change in approach resulted in some differences that, depending on the actual assets being depreciated, had the effect of either increasing or decreasing the carrying values for property, plant and equipment. In general, the more detailed component-by-component depreciation approach is not considered to produce changes that are material in amount especially when considered over extended periods._
_The changeover from GAAP to IFRS did not affect the balances reported for working capital items for the Company._