AKT press release
AKITA Drilling Ltd. Releases Year-End Results
TSX - Toronto Stock Exchange · Oil · Natural Gas · Potash · Hydrogen · Canada
Canada NewsWire
CALGARY, March 5, 2019
CALGARY, March 5, 2019/CNW/ - AKITA Drilling Ltd.'s net loss for the year ended December 31, 2018was $15,939,000(net loss of $0.65per share (basic and diluted)) on revenue of $118,361,000compared to a net loss of $39,177,000or $2.18loss per share (basic and diluted) on revenue of $71,198,000in 2017. Included in the 2017 net loss is an asset decommissioning and impairment expense of $29,123,000(after tax effect of $15,320,000or $0.85per share). Funds flow from operations for the current year was $14,306,000compared to $6,607,000in 2017, while net cash from operating activities for 2018 was ($8,494,000)compared to $5,074,000in 2017.
On September 11, 2018, AKITA closed on its transformational acquisition of Xtreme Drilling Corp. ("Xtreme"), a TSX listed United States("US") based contract drilling company with a fleet of 13 high specification AC triple drilling rigs, operating throughout major resource plays of the US, plus spare equipment and real estate. With this acquisition, and the movement of three rigs from AKITA's Canadian fleet to the US in 2018 in addition to the rig deployed in Q4 of 2017, AKITA's fleet of rigs in the US has increased to 17 rigs. The Company is now well-balanced with 23 rigs in Canadaand 17 in the US.
In Canada, the Company's utilization for the year decreased to 33% in 2018 from 36% in 2017. Sentiment in the Canadian energy industry shifted from optimism in the first quarter of 2018 to pessimism in the fourth quarter of 2018. Regulated production cuts, pipeline access and political and regulatory uncertainty are all weighing heavily on the Canadian energy industry, which in turn is affecting drilling activity. There is still an oversupply of rigs in Canadaand day rates remain low, despite improving to $31,354per operating day in 2018 from $26,704in 2017. Without a significant shift in demand for rigs or a reduction in the overall Canadian rig fleet, AKITA does not anticipate any significant price increases or activity increases in Canadain the near future.
On November 22, 2018, the Canadian Association of Oilwell Drilling Contractors ("CAODC") released its 2019 industry drilling forecast, estimating 33% average rig utilization, up from the 29% actual average rig utilization in 2018, and estimating 6,962 wells in 2019, up from 6,911 in 2018. The 2018 forecast was based upon commodity price assumptions of US $58.75per barrel for crude oil and CAD $2.00per mcf for natural gas. Based on the CAODC forecast it would appear that 2019 will be very similar to 2018. Without improvements to the existing takeaway capacity in Canada, growth in the Canadian market may remain challenged. The Company's focus in 2019 will be on reducing costs in its Canadian operations.
AKITA's activity in the US, on a weighted average basis, calculated on the days that the rigs were owned by AKITA and physically in the US was 61% for 2018 and 79% for the three months ended December 31, 2018. In the US the Company is looking to 2019 with optimism. Demand for AKITA's US rigs remains strong as AKITA's culture of "best-in-class" operations permeates through its US division. At December 31, 2018, 15 of the Company's 17 US rigs were operating and strong utilization is expected to continue through 2019. Together with ongoing evaluation of opportunities to move additional Canadian rigs to the US, synergy realization related to the Xtreme acquisition and a modest capital program will be the focus of AKITA in the US.
Selected information from AKITA Drilling Ltd.'s Management's Discussion and Analysis for the Annual Report is as follows:
Financial Highlights
| | | | | | | For the years ended December 31, | | | | | | ($ thousands except per share amounts) | 2018 | 2017 | Change | % Change | | Revenue | 118,361 | 71,198 | 47,163 | 66% | | Operating expenses | 86,575 | 62,156 | 24,419 | 39% | | Operating margin(1) | 31,786 | 9,042 | 22,744 | 252% | | Margin %(1) | 27% | 13% | 14% | 108% | | | | | | | | Adjusted EBIDTA(1) | 16,447 | 3,187 | 13,260 | 416% | | Per Share | 0.67 | 0.18 | 0.49 | 272% | | | | | | | | Adjusted funds flow from operations(1) | 14,306 | 6,607 | 7,699 | 117% | | Per share | 0.58 | 0.37 | 0.21 | 57% | | | | | | | | Net loss | 15,939 | 39,177 | (23,238) | (59%) | | Per Share | 0.65 | 2.18 | (1.53) | (70%) | | | | | | | | Capital expenditures | 17,546 | 20,569 | (3,023) | (15%) | | Dividend declared | 9,784 | 6,100 | 3,684 | 60% | | Weighted average shares outstanding | 24,552 | 17,946 | 6,606 | 37% | | | | | | | | Total Assets | 403,641 | 207,497 | 196,144 | 95% |
| (1)See commentary in "Basis of Analysis in this MD&A and Non-GAAP Items". |
Operational Highlights
| | | | | | | For the years ended December 31, | 2018 | 2017 | Change | % Change | | Operating days(1) | | | | | | Canada | 2,800 | 3,659 | (859) | (23%) | | United States | 1,783 | - | 1,783 | N/A | | | | | | | | Revenue per operating day(1) | | | | | | Canada(2) | 31,354 | 26,704 | 4,650 | 17% | | United States | 29,932 | - | 29,932 | N/A | | | | | | | | Operating and maintenance per operating day(1) | | | | | | Canada(2) | 23,160 | 22,226 | 934 | 4% | | United States | 21,329 | - | 21,329 | N/A | | | | | | | | Utilization (1) | | | | | | Canada | 33% | 36% | (3%) | (8%) | | United States(3) | 61% | | 61% | N/A |
| (1)See commentary in "Basis of Analysis in this MD&A and Non-GAAP Items". | | (2)Includes AKITA's share of Joint Venture revenue and expenses. See commentary in "Basis of Analysis in this MD&A and Non-GAAP". | | (3)Utilization in the US is a weighted average for the year based on the number of days each rig was physically in the US and owned by the Company |
Introduction
AKITA is a premier Canadian oil and gas drilling contractor with operations in Canadaand the United States("US") with a fleet of 40 rigs. In 2018, AKITA began providing drilling services through two geographical segments: Canadaand the US. With a fleet of 23 rigs, AKITA's Canadian division conducts operations in Alberta, British Columbia, Saskatchewan, and from time to time, in the Yukonand the Northwest Territories, primarily with its wholly owned rigs and through its active joint ventures, the newly established AKITA Mistiyapew Aski Drilling Ltd. (owned 50% by AKITA), AKITA Equtak Drilling Ltd. (owned 50% by AKITA), and Akita Wood Buffalo Drilling Ltd. (owned 50% by AKITA), each of which has defined geographical boundaries. With a fleet of 17 rigs, AKITA's US division conducts operations in North Dakota, Colorado, Utah, Wyoming, Texas, New Mexico, Oklahomaand Ohio.
With a singular focus on the provision of drilling services, rigorous crew training, rig maintenance and safety processes and adherence to a leading quality assurance – quality control program, AKITA strives to ensure it is well positioned to meet the most demanding requirements of global operators who offer long-lasting resource based drilling programs. The Company has utilized this strategy to enhance its development of pad drilling rigs designed for both heavy oil and unconventional natural gas formations.
General Overview
The financial results for the Company for 2018, when compared to 2017, improved in almost all metrics. Revenue increased to $118,361,000from $71,198,000, net loss decreased to $15,939,000from $39,177,000and adjusted funds flow from operations1increased to $14,306,000from $6,607,000. During 2018, AKITA focused on geographical diversification to the US as the Canadian oil and gas market struggled to sustain the slow recovery that began in 2017.
AKITA began its geographical diversification in the first quarter of 2018 with one drilling rig working in the Permian Basin in New Mexicoand ended 2018 with 15 active rigs out of a total of 17 US-based drilling rigs. This growth was primarily the result of AKITA's acquisition of Xtreme Drilling Corp. ("Xtreme"), bolstered organically by the move of three additional Canadian rigs to the US over the course of 2018.
On September 11, 2018, AKITA closed its previously announced acquisition of Xtreme. The acquisition of Xtreme added 13 high-specification AC triple drilling rigs to the Company's US rig fleet as well as facilities, a skilled workforce and infrastructure throughout the US. The acquisition of Xtreme was funded with $122 millionin Class A Non-Voting shares and cash of $45 million.
Conditions in the US continued to improve through 2018 until the fourth quarter of 2018 when prices for crude oil declined significantly, which had a leveling effect on growth. In Canada, the growth was more subdued than in the US and the decrease in oil prices in the fourth quarter has had a more significant impact with many operators pausing or canceling capital spending. In 2018 three customers each provided more than 10% of AKITA's revenue for the year (2017 – two customers).
| _ | | 1See commentary in "Basis of Analysis in this MD&A and Non-GAAP Items". |
Results by Segment
Canada
| For the years ended December 31, | | | | | | $Thousands | 2018 | 2017 | Change | % Change | | Revenue(1) | 87,790 | 97,711 | (9,921) | (10%) | | Operating and maintenance(1) | 64,847 | 81,325 | (16,478) | (20%) | | Operating income | 22,943 | 16,386 | 6,557 | 40% | | Margin %(1) | 26% | 17% | 9% | 53% | | | | | | | | Operating days | 2,800 | 3,659 | (859) | (23%) | | | | | | | | Revenue per operating day(1)(2) | 31,354 | 26,704 | 4,650 | 17% | | Operating and maintenance per operating day(1)(2) | 23,160 | 22,226 | 934 | 4% | | | | | | | | Utilization | 33% | 36% | (3%) | (8%) | | | | | | | | Rig count | 23 | 27 | (4) | (15%) |
| (1)Includes AKITA's share of Joint Venture revenue and expenses. See commentary in "Basis of Analysis in this MD&A and Non-GAAP Items". | | | (2)See commentary in "Basis of Analysis in this MD&A and Non-GAAP Items". | |
Utilization rates are a key statistic for the drilling industry since they directly affect total revenue and influence pricing. During 2018, AKITA achieved 2,800 operating days in Canada, which corresponds to an annual utilization rate of 33%, compared to 2017 utilization of 36% (3,659 days), and a 2018 industry average of 29%. Historically, AKITA's utilization in Canadahas been above industry standard due to the higher than average number of pad drilling rigs in AKITA's fleet. Pad drilling rigs typically have higher utilization than conventional drilling rigs as pad drilling is a more efficient way to drill multiple wells without needing trucks to move.
Activity in Canada, for AKITA and the industry, decreased in 2018 from 2017 despite higher average WTI prices. Infrastructure constraints and uncertainty over the future of the Canadian market affected the capital spending of Canadian oil and gas companies.
Canadian revenue of $87,790,000in 2018 was 10% lower than 2017 revenue of $97,711,000, due to decreased activity in 2018. Through a greater percentage of higher specification rigs working, revenue per day increased in 2018 to $31,354per day from $26,704per day in 2017, a 17% increase. This increase in revenue per day resulted in a 40% increase in operating income from the Canadian operating segment. Included in the Canadian operating results is AKITA's share of revenue and costs from its joint ventures, as AKITA provides the same drilling services through its joint venture rigs as it does its wholly-owned rigs.
Operating and maintenance costs are tied to activity levels and decreased to $64,847,000in 2018 from $81,325,000in 2017 including AKITA's share of costs from its joint venture rigs. On a per day basis, 2018 remained consistent with the prior year, increasing only 4% in 2018 over 2017.
AKITA's Canadian segment provided drilling services to 29 different customers in 2018 (2017 - 35 different customers), including two customers that each provided more than 10% of AKITA's Canadian revenue for the year (2017 – two customers).
United States
| For the year ended December 31, | | | $ Thousands (CAD) | 2018 | | Revenue | 53,368 | | Operating and maintenance | 38,029 | | Operating income | 15,339 | | Margin % | 29% | | | | | Operating days | 1,783 | | | | | Revenue per operating day(1) | 29,932 | | Operating and maintenance per operating day(1)(2) | 21,329 | | | | | Utilization (2) | 61% | | | | | Rig count | 17 |
| (1)See commentary in "Basis of Analysis in this MD&A and Non-GAAP Items". | | (2)Utilization in the US is a weighted average for the year based on the number of days each rig was physically in the US and owned by the Company. |
AKITA moved one drilling rig from Canadato the Permian Basin in December of 2017, one in the first quarter of 2018 and two more in the third quarter of 2018. The Company added an additional thirteen rigs through its acquisition of Xtreme in September of 2018, to end the year with a fleet of seventeen rigs in the US.
Revenue in the US was $53,368,000for 2018 (2017 – n/a) equal to 45% of the Company's total revenue. This revenue includes the full year for AKITA's US based rigs prior to the acquisition of Xtreme, and revenue from September 12 to December 31, 2018generated by the acquired Xtreme assets. Total operating income, which is operating revenue less direct operating and maintenance costs, was $15,339,000for the year.
Since the acquisition of Xtreme in September of 2018, the Company has focused on integrating AKITA and Xtreme to maximize the efficiencies available to the larger, more diverse Company.
In the US, AKITA provided drilling services to 16 different customers in 2018 (2017 – n/a), including four customers that each provided more than 10% of AKITA's US revenue for the year (2017 – n/a).
Seasonality
The Canadian drilling industry is seasonal with activity typically building in the fall as the ground freezes and peaking during the winter months. Northern transportation routes become available once areas with muskeg conditions freeze to allow the movement of rigs and other heavy equipment. The peak Canadian drilling season typically 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 as frozen ground melts. The summer drilling season begins when road bans are lifted. Some areas are subject to environmental orders for specific well leases which can prevent drilling activity during certain periods when authorities prioritize wildlife or habitat protections. Such restrictions may affect activity levels and operating results.
While activity in the northern part of the US is subject to a degree of seasonality, North Dakota'sWillistonBasin, where AKITA operates, is less affected by spring break-up than are AKITA's operations in northern Canada. Other areas in the US where AKITA conducts drilling operations are infrequently subject to weather constraints, especially in the southern states, but may experience operational restrictions for other reasons.
While seasonality can affect all rig classes, pad drilling rigs are generally less susceptible to seasonality than conventional rigs.
Depreciation and Amortization Expense
| $Millions | 2018 | 2017 | Change | % Change | | Depreciation and amortization expense | 26.6 | 27.1 | (0.5) | (2%) |
The decrease in depreciation and amortization expense to $26,614,000during 2018 from $27,126,000during 2017 was attributable to the asset decommissioning and asset impairment expense of $29,123,000that was recorded in 2017. This expense decrease the Company's depreciable asset base. Drilling rig depreciation accounted for 97% of total depreciation and amortization expense in 2018 (2017 – 96%).
On January 1, 2018, AKITA changed its depreciation method to a straight-line calculation from a unit-of-production basis on drilling rig assets. The rationale for this change was to have rig depreciation more closely match the new lifecycle of rigs. Drilling technology is a critical component of modern drilling rigs, and drilling rigs' useful lives are reduced as new technologies are utilized for modern drilling programs. As a result, the passage of time plays a more significant role than operating days in determining a drilling rig's life. Accordingly, the straight-line depreciation method matches the new lifecycle more accurately than the unit-of-production depreciation method. The estimated effect of the change in depreciation method on the Company's financial statements for 2018 is not material.
While AKITA conducts some 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 by the joint ventures themselves. As the joint ventures do not hold any property, plant, or equipment assets directly, the Company's depreciation expense includes depreciation on assets involved in both wholly-owned and joint venture activities.
Selling and Administrative Expenses
| $Millions | 2018 | 2017 | Change | % Change | | Selling and administrative expenses | 22.6 | 13.7 | 8.9 | 65% |
Selling and administrative expenses increased to $22,611,000in 2018 from $13,659,000in 2017. The increase in 2018 is related to transaction costs of $2.4 millionfor the acquisition of Xtreme and the addition of the US-based selling and administrative costs to the Company's total cost.
Selling and administrative expenses equated to 19% of revenue in 2018, the same as in 2017. The single largest component of selling and administrative expenses was salaries and benefits which accounted for 33% of these expenses in 2018 (2017 – 51%).
Asset Decommissioning and Impairment
| $Millions | 2018 | 2017 | Change | % Change | | Asset impairment loss | - | 16.0 | (16.0) | (100%) | | Asset decommissioning loss | - | 13.1 | (13.1) | (100%) | | Asset decommissioning and impairment loss | - | 29.1 | (29.1) | (100%) |
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. At December 31, 2018, there were no internal indicators of impairment, however there were external indicators of impairment. The uncertainty around oil prices impacts the earnings potential of the Company's cash generating units ("CGU's") and at December 31, 2018, the book value of the Company's net assets was greater than its market capitalization; therefore, the Company tested its CGUs for impairment.
Upon completion of its asset impairment testing, the Company concluded that there was no asset impairment required at December 31, 2018(2017 - $16,000,000). The Company also concluded that there were no reversals of previous asset impairments required at December 31, 2018.
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 test at December 31, 2018, management determined value in use for each of its CGUs using estimated discounted cash flows, 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. At December 31, 2018, management determined recoverable amounts for its CGUs using a combination of value in use and fair value less costs to dispose. IFRS considers this approach to constitute a Level 3 hierarchy in its determination of value.
The assumptions used in the value-in-use impairment tests were based on the Company's Board approved 2019 budget and business plan covering a three year period and applied an average growth rate ranging from 2% to 9% over a 10 year period depending on the CGU being analyzed. In forecasting its projected cash flows the Company assumed that current market conditions will not persist into the future. The Company assumed a pre-tax discount rate of 13%, in order to calculate the present value of projected cash flows. Determination of this discount rate included analysis of the cost of debt and equity for the Company and the Canadian drilling industry incorporating a risk premium based on current market conditions. This valuation has a fair value hierarchy of Level 3.