AKT press release
AKITA Drilling Ltd. Announces 212% Increase in Annual Earnings and 31% Increase in Annual Funds Flow
TSX - Toronto Stock Exchange · Oil · Natural Gas · Potash · Hydrogen · Canada
CALGARY, March 13, 2012 /CNW/ - Net income for the year ended December 31, 2011 was $23,353,000 or $1.29 per share (basic and diluted) on revenue of $199,934,000. Comparative figures for 2010 were $7,470,000 or $0.41 per share (basic and diluted) on revenue of $145,138,000. Funds flow from operations for the current year was $42,880,000 as compared to $32,798,000 in 2010, while net cash from operating activities for 2011 was $34,196,000 as compared to $31,858,000 in 2010.
AKITA's rig utilization has traditionally been ahead of industry and 2011 was no exception. While conventional rig activity, notably for deep capacity rigs, was negatively affected by low natural gas prices, pad rigs consistently achieved utilization that reinforced them as AKITA's most highly sought after rig class. The following table highlights AKITA's utilization rate for the past five years:
| RIG UTILIZATION RATES_(PERCENT)_ | | | | | | | | 2011 | 2010 | 2009 | 2008 | 2007 | | AKITA Pad Rigs | 67.9 | 67.4 | 59.5 | 46.4 | 58.5 | | AKITA Fleet | 51.5 | 37.8 | 31.1 | 42.2 | 40.9 | | Industry | 49.6 | 40.7 | 24.6 | 41.7 | 37.0 |
In 2010, AKITA converted three conventional rigs into pad rigs, upgraded the capacity of an existing pad rig and commenced the construction of a new pad rig. This activity was followed in 2011 with the conversion of three additional conventional rigs into pad rigs and the completion of the pad rig which was started in 2010. At year-end, the Company had one additional conventional rig undergoing conversion into a pad rig.
AKITA is well positioned with the financial resources to accomplish its capital spending plans without having to strain its balance sheet or impair its commitment to excellence. In addition to having $18,228,000 in cash and $9,500,000 in term deposits at December 31, 2011, the Company has also established a long-term financing arrangement to provide up to $50,000,000 for capital and general corporate purposes.
AKITA is strongly committed to the ongoing safety of its employees. Since inception, AKITA's annual safety performance has been better than industry averages. In 2011, the Company had a lost-time accident frequency of 0.24 accidents per 200,000 hours worked compared to an accident rate of 0.93 for the industry (preliminary estimate provided by the Canadian Association of Oilwell Drilling Contractors). 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. All managers, employees and subcontractors are required to understand and accept their responsibility for maintaining a safe working environment. Regularly scheduled safety meetings and an ongoing commitment to training, both on-the-job and through related courses, form the basic cornerstones of this understanding.
On November 8, 2011, the Canadian Association of Oilwell Drilling Contractors provided its industry drilling forecast for 2012 estimating the drilling of 12,672 wells, compared to 16,148 wells completed in 2011. The current year estimate was based upon commodity price assumptions of US $88 per barrel for crude oil and Cdn $4.00 per mcf for natural gas. Although winter drilling activity to date has been strong and appears to support this forecast, management remains cautious regarding post-break up drilling activity given the continuing natural gas price weakness and no clear signal of improvement.
Selected financial information for the Company is as follows:
| | | | | | | | | | | AKITA Drilling Ltd. | | | | | | | | | | Consolidated Statements of Financial Position | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31 | December 31 | January 1 | | | | | (000's of Canadian Dollars) | | 2011 | 2010 | 2010 | | | | | | | | | | Restated(1) | Restated(1) | | | | | Assets | | | | | | | | | | Current Assets | | | | | | | | | | Cash and cash equivalents | | $ | 18,228 | $ | 37,964 | $ | 34,142 | | | Term deposits | | | 9,500 | | 10,000 | | 18,000 | | | Accounts receivable | | | 48,351 | | 33,339 | | 28,523 | | | Income taxes recoverable | | | - | | - | | 330 | | | Prepaid expenses and other | | | 413 | | 222 | | 421 | | | | | | | 76,492 | | 81,525 | | 81,416 | | Non-current Assets | | | | | | | | | | Restricted cash | | | 3,000 | | 2,500 | | 5,000 | | | Other long term assets | | | 200 | | - | | - | | | Investment property | | | 626 | | - | | - | | | Property, plant and equipment | | | 166,812 | | 134,562 | | 121,346 | | | Total Assets | | $ | 247,130 | $ | 218,587 | | $ 207,762 | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | Current Liabilities | | | | | | | | | | Accounts payable and accrued liabilities | | $ | 27,550 | $ | 18,830 | $ | 10,123 | | | Deferred revenue | | | 146 | | - | | 197 | | | Dividends payable | | | 1,262 | | 1,269 | | 1,277 | | | Income taxes payable | | | 3,269 | | 85 | | - | | | | | | | 32,227 | | 20,184 | | 11,597 | | Non-current Liabilities | | | | | | | | | | Deferred income taxes | | | 12,264 | | 13,235 | | 12,679 | | | Pension liability | | | 1,535 | | 1,429 | | 1,363 | | | Total Liabilities | | | 46,026 | | 34,848 | | 25,639 | | | | | | | | | | | | | Shareholders' Equity | | | | | | | | | | Class A and Class B shares | | | 23,308 | | 23,447 | | 23,376 | | | Contributed surplus | | | 2,758 | | 2,512 | | 2,271 | | | Accumulated other comprehensive income | | | - | | 50 | | - | | | Retained earnings | | | 175,038 | | 157,730 | | 156,476 | | | Total Equity | | | 201,104 | | 183,739 | | 182,123 | | | Total Liabilities and Equity | | $ | 247,130 | $ | 218,587 | $ | 207,762 | |
| (1) | Comparative financial information for 2010 has been restated for IFRS |
| | | | | | | | | AKITA Drilling Ltd. | | | | | | | | Consolidated Statements of Net Income and Comprehensive Income | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended | | | | | | | | December 31 | | | | | (000's of Canadian Dollars except per share amounts) | | 2011 | 2010 | | | | | | | | | Restated(1) | | | | Revenue | | $ | 199,934 | $ | 145,138 | | | | | | | | | | | | Operating and maintenance | | | 132,520 | | 96,919 | | | Depreciation | | | 20,933 | | 24,540 | | | Selling and administrative | | | 16,117 | | 13,625 | | Total costs and expenses | | | 169,570 | | 135,084 | | | | | | | | | | | Revenue less costs and expenses | | | 30,364 | | 10,054 | | | | | | | | | | | Other income (losses) | | | | | | | | | Interest income | | | 638 | | 798 | | | Interest expense | | | (23) | | (25) | | | Gain on sale of joint venture interests in rigs and other assets | | | 787 | | 75 | | | Other gains and losses (net) | | | (4) | | 30 | | Total other income | | | 1,398 | | 878 | | | | | | | | | | | Income before income taxes | | | 31,762 | | 10,932 | | | | | | | | | | | Income taxes | | | 8,409 | | 3,462 | | | | | | | | | | | Net income for the year attributable to shareholders | | | 23,353 | | 7,470 | | | | | | | | | | | Other comprehensive income | | | | | | | | Foreign currency translation adjustment | | | (50) | | 50 | | | | | | | | | | | Comprehensive income for the year attributable to shareholders | $ | 23,303 | $ | 7,520 | | | | | | | | | | | | | | | | | | | | Net Income per Class A and Class B Share | | | | | | | | | Basic | | $ | 1.29 | $ | 0.41 | | | Diluted | | $ | 1.29 | $ | 0.41 | | | | | | | | | | (1)Comparative financial information for 2010 has been restated for IFRS | | | | | | |
| | | | | | | | AKITA Drilling Ltd. | | | | | | | Consolidated Statements of Cash Flow | | | | | | | | | | | | | | | | | | | | | | | | Year Ended | | | | | | | December 31 | | | | (000's of Canadian Dollars) | | 2011 | 2010 | | | | | | | | Restated(1) | | | Operating Activities | | | | | | | Net income | $ | 23,353 | $ | 7,470 | | | Non-cash items included in net income | | | | | | | | Depreciation | | 20,933 | | 24,540 | | | Deferred income taxes | | (971) | | 556 | | | Expense for defined benefit pension plan | | 106 | | 66 | | | Stock options charged to expense | | 246 | | 241 | | | Gain on sale of joint venture interests in rigs and other assets | | (787) | | (75) | | | | | 42,880 | | 32,798 | | Change in non-cash working capital | | | | | | | | Accounts receivable | | (15,012) | | (4,816) | | | Prepaid expenses and other | | (191) | | 529 | | | Accounts payable and accrued liabilities | | 3,212 | | 3,160 | | | Deferred revenue | | 146 | | (197) | | | | | 31,035 | | 31,474 | | Interest paid | | (23) | | (25) | | | Income tax expense - non cash | | 9,380 | | 2,906 | | | Income tax paid | | (6,196) | | (2,497) | | | Net cash from operating activities | | 34,196 | | 31,858 | | | | | | | | | | Investing Activities | | | | | | | Capital expenditures | | (48,985) | | (32,654) | | | Change in cash restricted for loan guarantees | | (500) | | 2,500 | | | Redemption (investment) of term deposits | | 500 | | 8,000 | | | Proceeds on sale of joint venture interests in rigs and other assets | | 1,487 | | 213 | | | Net cash used in investing activities | | (47,498) | | (21,941) | | | | | | | | | | Financing Activities | | | | | | | Dividends paid | | (5,066) | | (5,079) | | | Proceeds received on exercise of stock options | | - | | 280 | | | Repurchase of share capital | | (1,118) | | (1,346) | | | Loan commitment fee paid | | (200) | | - | | | Net cash used in financing activities | | (6,384) | | (6,145) | | | Effect of exchange rate changes on cash and cash equivalents | | (50) | | 50 | | | | | | | | | | Increase (decrease) in cash and cash equivalents | | (19,736) | | 3,822 | | | Cash and cash equivalents, beginning of year | | 37,964 | | 34,142 | | | | | | | | | | Cash and CashEquivalents, End of Year | $ | 18,228 | $ | 37,964 | | | | | | | | | | (1)Comparative financial information for 2010 has been restated for IFRS | | | | | |
Selected information from AKITA's Management's Discussion and Analysis for the Quarterly Report is as follows:
Revenue and Operating & Maintenance Expenses
| | | | | | | $Million | 2011 | 2010 | Change | % Change | | Revenue | 199.9 | 145.1 | 54.8 | 38% | | Operating & Maintenance Expenses | 132.5 | 96.9 | 35.6 | 37% | | Operating margin (Note) | 67.4 | 48.2 | 19.2 | 40% |
_Note: Operating margin is the difference between revenue and operating & maintenance expenses _
| | | | | | | $Dollars | 2011 | 2010 | Change | % Change | | Revenue per operating day | 29,158 | 26,962 | 2,196 | 8% | | Operating & Maintenance Expenses per operating day | 19,326 | 18,005 | 1,321 | 7% | | Operating margin (Note)per operating day | 9,832 | 8,957 | 875 | 10% |
_Note: Operating margin is the difference between revenue and operating & maintenance expenses_
_The changeover from GAAP to IFRS did not directly affect the Company's recognition of revenue. 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._
Revenue increased to $199,934,000 in 2011 from $145,138,000 in 2010. Stronger market conditions resulted in the Company achieving 6,857 operating days of rig activity compared to 5,383 operating days in 2010. This stronger market also had a positive impact on day rates, as average revenue per day increased to $29,158 per day compared to $26,962 in the comparative year. Revenue improvements were broadly based: conventional drilling activity improved as a result of increasing demand for AKITA's rigs while pad drilling demand improvements were largely a result of having an increasing number of rigs to service this aspect of the market.
Operating and maintenance costs are tied to activity levels and amounted to $132,520,000 or $19,326 per operating day during 2011 compared to $96,919,000 or $18,005 per operating day for the prior year. This increase in total operating and maintenance costs was the result of increased drilling activity coupled with the change in rig mix including the change in the range of services provided.
The Company's operating margin for 2011 was $67,414,000, up from $48,219,000 in 2010. The operating margin improvement was a combined result of higher rig utilization and improved profit margins on a "per operating day" basis; both improvements due to stronger market conditions in 2011 as compared to 2010. On a "per operating day" basis, AKITA's operating margin rose in 2011 to $9,832 from $8,957 in 2010.
AKITA provided drilling services to 40 different customers in 2011 (42 different customers - 2010), including two customers that each provided more than 10% of AKITA's revenue for the year (2010 - four customers).
Depreciation Expense
| | | | | | | $Million | 2011 | 2010 | Change | % Change | | Depreciation Expense | 20.9 | 24.5 | (3.6) | (15%) |
_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 the asset-by-asset basis 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 expected 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. AKITA depreciates its drilling rigs using the unit of production method.
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 began applying salvage values equal to 20% of the original cost of each rig.
The major factors that impacted 2011 and 2010 depreciation were as follows: the one-time change to useful lives of rigs and related salvage values described previously (effect was to reduce 2011 depreciation by $6,867,000; 2010 - no change), ongoing rig activity levels, ongoing changes in rig mix 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 $4,645,000 for 2011 (2010 - $3,945,000). 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 $20,933,000 during 2011, from $24,540,000 during 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 compared to the previous year. Drilling rig depreciation accounted for 96% of total depreciation expense in 2011 (2010 - 96%).
Selling and Administrative Expenses
| | | | | | | $Million | 2011 | 2010 | Change | % Change | | Selling & Administrative expenses | 16.1 | 13.6 | 2.5 | 18% |
_The changeover from GAAP to IFRS did not affect the Company's recognition of selling and administrative expenses per se. However, selling and administrative expenses increased $240,000 in 2011 ($173,000 in 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 increased to $16,117,000 in 2011 from $13,625,000 in 2010. Selling and administrative expenses equated to 8.1% of total revenue in 2011, compared to 9.4% of total revenue in 2010, in part due to the increase in rig activity and related revenue.
The single largest component of selling and administrative expenses was salaries and benefits which accounted for 64% of these expenses (60% in 2010).
Other Income (Expense)
| | | | | | | $Million | 2011 | 2010 | Change | % Change | | Interest Income | 0.6 | 0.8 | (0.2) | (25%) | | Gain on sale of joint venture interests in rigs and other assets | 0.8 | 0.1 | 0.7 | 700% | | Other Income | 1.4 | 0.9 | 0.5 | 56% |
_The changeover from GAAP to IFRS did not affect the Company's recognition of other income._
The Company invests any cash balances in excess of its ongoing operating requirements in bank guaranteed highly liquid investments. Interest income, decreased to $638,000 in 2011, compared to $798,000 in 2010 as a result of reduced cash and term deposit balances, as these assets were more actively 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 $787,000 in 2011 compared to $75,000 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
| | | | | | | $Million | 2011 | 2010 | Change | % Change | | Current Tax | 9.4 | 2.9 | 6.5 | 224% | | Deferred Tax | (1.0) | 0.6 | (1.6) | (267%) | | Total Income Tax Expense | 8.4 | 3.5 | 4.9 | 140% |
_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 deferred income tax expense has increased vis-à-vis the balance that would have been recorded under Canadian GAAP._
Income tax expense increased to $8,409,000 in 2011 from $3,462,000 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.
During 2011, the Company repatriated the Arctic Wolf. This repatriation was treated as a sale at fair value for US tax purposes, thereby creating a taxable event. The effect was to increase current tax expense and current income taxes payable by $2,432,000 and to decrease deferred tax expense and deferred income taxes payable by $2,263,000. This transaction was carried out to reduce the income taxes payable for income earned from the rig's future operations, since the Canadian income tax rate is substantially lower than the US income tax rate.
Net Income and Cash Flow
| | | | | | | $Million | 2011 | 2010 | Change | % Change | | Net Income | 23.4 | 7.5 | 15.9 | 212% | | Funds Flow from Operations(Note) | 42.9 | 32.8 | 10.1 | 31% | | Change in non-cash working capital | (11.9) | (1.3) | (10.6) | 815% | | Non-cash income tax expense | 9.4 | 2.9 | 6.5 | 224% | | Income tax paid | (6.2) | (2.5) | (3.7) | 148% | | Net cash from operating activities | 34.2 | 31.9 | 2.3 | 7% |