AKT press release
AKITA Drilling Ltd. releases year-end results
TSX - Toronto Stock Exchange · Oil · Natural Gas · Potash · Hydrogen · Canada
Canada NewsWire
CALGARY, March 7, 2018
CALGARY, March 7, 2018/CNW/ - AKITA Drilling Ltd.'s net loss for the year ended December 31, 2017was $39,177,000(net loss of $2.18per share (basic and diluted)) on revenue of $71,198,000compared to net income of $5,329,000or $0.30earnings per share (basic and diluted) on revenue of $61,061,000in 2016. 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). 2016 results included significant contract cancellation revenue of $28,250,000($20,609,000after tax). Net loss from routine operations in 2017 totalled $23,857,000(2016 - $15,280,000). Funds flow from operations for the current year was $6,607,000compared to $34,500,000($13,891,000net of contract cancellation revenue) in 2016, while net cash from operating activities for 2017 was $3,724,000compared to $11,892,000in 2016.
The Canadian drilling industry saw significant activity improvements in 2017 with utilization improving to an annual industry average of 30% from 17% in 2016. AKITA's utilization rose to 36% in 2017 from 14% in 2016. This improvement in activity was driven by higher prices for crude oil which steadily increased throughout 2017. The increase in activity was spread across several rig categories for the Company, with pad triples, pad doubles, conventional doubles and conventional singles all more than doubling their operating days in 2017 compared to 2016. Triple pad rigs were the most active category for the Company generating 65% of the Company's operating days. These rigs are primarily focussed in the SAGD/Heavy Oil segments of the Canadian market.
Despite the significant escalation in drilling activity in 2017 over 2016, there is still more supply than demand for rigs which is resulting in low pricing for drilling services. The Company's revenue per operating day decreased to $26,704in 2017 from $31,447in 2016. This 15% drop had a significant impact on the Company's earnings as well as funds flow from operations. The decrease in revenue per day for the Company was a result of a change in the mix of rigs that operated in the year. Without a significant shift in demand for rigs or a reduction in the Canadian rig fleet, AKITA does not anticipate any significant price increases in the near future.
On November 21, 2017, the Canadian Association of Oilwell Drilling Contractors ("CAODC") released its 2018 industry drilling forecast, estimating 32% average rig utilization up slightly from the 30% actual average rig utilization in 2017, and 6,138 wells in 2018, up from 6,031 in 2017. The 2018 forecast was based upon commodity price assumptions of US $52.50per barrel for crude oil and CAD $2.35per mcf for natural gas. Based on the CAODC forecast it would appear that 2018 will be very similar to 2017. Without improvements to the existing takeaway capacity in Canada, the Canadian market may see limited growth.
AKITA began looking for growth opportunities in other geographical markets in 2017 due to the low activity and low profit margins prevailing in the Canadian market. After evaluating several potential alternatives, the Company created a United Statessubsidiary to pursue opportunities in the most active basin in North America, the Permian Basin. In December of 2017 the Company moved a state of the art rig into Odessa Texasand began marketing the rig to operators in the area. This rig has subsequently been contracted to a major USAoperator. AKITA's expansion into the USApresents an exciting opportunity for the Company, with significant growth potential.
Selected information from AKITA Drilling Ltd.'s Management's Discussion and Analysis for the Annual Report is as follows:
Fleet and Utilization
Oil and gas contract drilling activity is cyclical and is affected by numerous factors, most importantly world crude oil prices and North American natural gas prices. Overall demand for AKITA's drilling services improved in 2017 compared to 2016.
Driving the increase in activity was the steady increase in oil prices through 2017, with the average West Texas Intermediate ("WTI") price increasing 18% in 2017 compared to 2016. Average Albertanatural gas prices also improved 6% in 2017 over 2016. Improved prices for both crude oil and natural gas led to increased capital spending by AKITA's customers, many of whom had scaled back their drilling programs in 2016.
At the same time both industry and AKITA utilization levels increased in 2017, the Western Canadian Sedimentary Basin ("WCSB") rig count continued to decline, dropping 6% in 2017 compared to 2016. The decrease in rig count contributed to the improvement in industry utilization; increased activity was the prime driver of the utilization increase. AKITA's drilling fleet of 27 rigs in Canadarepresented 4.5% of the total Canadian drilling fleet at December 31, 2017(December 31, 2016– 4.2%).
Utilization rates are a key statistic for the drilling industry since they directly affect total revenue and influence pricing. During 2017, AKITA achieved 3,659 operating days, which corresponds to an annual utilization rate of 36%, compared to 2016 utilization of 14% (1,583 days), and a 2017 industry average of 30%. Historically AKITA's utilization has been above industry standard due to the higher than average number of pad rigs in AKITA's fleet. Pad rigs typically have higher utilization than conventional rigs as pad drilling is a more efficient way to drill multiple wells without needing trucks to move.
In 2017, the Company built and deployed an AC heavy double pad rig that commenced operations in the third quarter of 2017. AKITA also decommissioned one conventional triple rig during the year.
| | | | | | 2017 Fleet Changes | | Gross | Net | | Number of rigs at December 31, 2016 | | 28 | 26.750 | | Construction of heavy double pad rig | | 1 | 1.000 | | Decommissioning of rig | | (1) | (1.000) | | Number of rigs at December 31, 2017 | | 28 | 26.750 |
Revenue per day
The decrease in revenue per day in 2017 was directly related to lower day rates in the industry. Despite the decrease in the WCSB rig count, there is still an oversupply of rigs compared to demand in Canadaand therefore rates remain very low. In contrast, activity levels in the United Stateshave reached a level where day rates are increasing. AKITA moved a high spec rig to the U.S. Permian Basin in the fourth quarter of 2017 to take advantage of high demand in that market.
Seasonality
The drilling industry in Canadais seasonal, with activity typically building in the fall and peaking during the winter months, at which time areas with muskeg conditions freeze sufficiently to allow the movement of rigs and other heavy equipment. The peak drilling season 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.
Revenue and Operating & Maintenance Expenses
| $Millions | | 2017 | 2016 | Change | % Change | | AKITA contract drilling revenue | | 71.2 | 61.0 | 10.2 | 17% | | AKITA operating & maintenance expenses | | 62.2 | 24.2 | 38.0 | 157% | | | | | | | | | $Dollars | | 2017 | 2016 | Change | % Change | | AKITA and Joint Ventures' revenue per operating day(1) | | 26,704 | 31,447 | (4,743) | (15%) | | AKITA and Joint Ventures' operating & maintenance expenses per operating day (1) | | 22,226 | 22,015 | 211 | 1% |
| (1) | AKITA and Joint Ventures' revenue per operating day and AKITA and Joint Ventures' operating & maintenance expenses per operating day are non-GAAP financial measures. See commentary in "Basis of Analysis in this MD&A, Non-GAAP and Additional GAAP Items". |
Revenue of $71,198,000in 2017 was 17% higher than 2016 revenue of $61,061,000, due to increased activity in 2017. Excluding the 2016 contract cancellation revenue of $28,250,000, revenue directly related to drilling activities increased 117% in 2017 compared to 2016 ($71,198,000in 2017 from $32,811,000in 2016). This increase in activity is also reflected in the 131% increase in operating days between the two years. Revenue per operating day including AKITA's share of revenue from its joint ventures was $26,704per day in 2017, down 15% from $31,447in 2016. The drop in revenue per day in 2017 corresponded to an increased number of lower margin rigs working in 2017 than in 2016 for AKITA. AKITA's share of revenue from its joint ventures was included in the per day amounts 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 increased to $62,156,000in 2017 from $24,169,000in 2016. On a per day basis, when including AKITA's portion of joint venture expense operating costs per day in 2017 remained consistent with the prior year, increasing only 1% in 2017 over 2016.
AKITA provided drilling services to 35 different customers in 2017 (2016 - 29 different customers), including two customers that each provided more than 10% of AKITA's revenue for the year (2016 – three customers).
Depreciation and Amortization Expense
| $Millions | | 2017 | 2016 | Change | % Change | | Depreciation and amortization expense | | 27.1 | 24.0 | 3.1 | 13% |
Drilling rigs are generally depreciated using the unit of production method. Depreciation is typically calculated for each rig's major components resulting in an average useful life of 3,600 operating days per rig, subject to annual minimum imputed activity levels. In certain instances where rigs are inactive for extended periods, the Company's depreciation rate is accelerated. Major rig upgrades are depreciated over the remaining useful life of the related component or to the date of the next major upgrade, whichever is sooner. Major rig inspection and overhaul expenditures are depreciated on a straight-line basis over three years.
The increase in depreciation and amortization expense to $27,126,000during 2017 from $23,959,000during 2016 was attributable to more operating days in 2017. On a per operating day basis, depreciation decreased to $7,414per operating day in 2017 from $9,153per operating day in 2016 as a result of fewer inactive rigs incurring depreciation relating to minimum imputed activity levels in 2017. Drilling rig depreciation accounted for 96% of total depreciation and amortization expense in 2017 (2016 – 96%).
Selling and Administrative Expenses
| $Millions | | 2017 | 2016 | Change | % Change | | Selling and administrative expenses | | 13.7 | 12.5 | 1.2 | 9% |
Selling and administrative expenses increased to $13,659,000in 2017 from $12,502,000in 2016. The increase in 2017 is related to higher business development costs as well as higher personnel costs.
Selling and administrative expenses equated to 19% of revenue in 2017, compared to 20.5% of revenue in 2016, as a result of the increase in revenue and the fixed nature of the majority of selling and administrative expenses.
The single largest component of selling and administrative expenses was salaries and benefits which accounted for 51% of these expenses in 2017 (2016 – 55%).
Asset Decommissioning and Impairment
| $Millions | | 2017 | 2016 | Change | % Change | | Asset impairment loss | | 16.0 | 0.0 | 16.0 | N/A | | Asset decomissioning loss | | 13.1 | 0.0 | 13.1 | N/A | | Asset decomissioning and inpairment loss | | 29.1 | 0.0 | 29.1 | N/A |
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. While the Company did not determine any internal indicators of impairment at December 31, 2017, it did determine one external indicator of impairment at that date: the lack of an increase in market rates in the drilling industry despite both increases to both drilling activity and oil prices over the prior year. The resulting lower drilling rates for longer forecast prompted the Company to perform an impairment analysis on its CGUs which include the following:
Hydraulic Singles; Heavy Singles; Tele-Doubles; Heavy Triples; A.C. Tele-Double Pad Rigs; A.C. Oil Sands Pad Rigs; D.C. Pad Rigs; and A.C. Deep Gas Pad Rigs.
As at December 31, 2017, the recoverable amounts of these CGUs were determined as the higher of fair value less cost of disposal and the value-in-use basis. Fair value less cost of disposal was determined through the use of appraisals prepared in December 2017by independent third party valuation experts. Value-in-use was calculated using the discounted cash flow for each CGU using the Company's 2018 budget and business plan as well as internal forecasts as the bases of the calculation of discounted cash flows. These tests indicated that certain of the Company's CGUs carrying amounts exceeded their recoverable amounts, resulting in impairment losses in 2017 of $16,000,000(2016 – nil).
The amounts in excess of the recoverable amounts for each of the Company's CGUs that were impaired at December 31, 2017were as follows:
| CGU | Impairment Amount | Basis for Recoverable Amount | | | | | | Hydraulic Singles | 2,500,000 | Fair value less costs to dispose | | Heavy Singles | 1,000,000 | Value in use | | Tele-Doubles | 3,500,000 | Fair value less costs to dispose | | AC Deep Gas Pad Rigs | 8,000,000 | Fair value less costs to dispose | | DC Pad Rigs | 1,000,000 | Fair value less costs to dispose | | Total | $ 16,000,000 | |
The assumptions used in the value-in-use impairment tests were based on the Company's board approved 2018 budget and business plan covering a three year period and applied an average growth rate ranging from 0% to 5% 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 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.
Asset impairment testing is subject to numerous assumptions, inherent risks and uncertainties, both general and specific, and the risk that the predictions will not be realized. As a result, the following sensitivity analysis has been performed to recognize that additional outcomes are possible:
Reduced future revenue assumptions by 10%; Increased inflation for cash outflows to 5%; and Increased the pre-tax discount rate from 13% to 16%.
As rigs are long lived assets, no sensitivity adjustment was made for the projected forecast period.
The sensitivity tests resulted in reductions to the various rig CGUs' values in use ranging from $680,000to $13,800,000. As the base case test represented management's best estimates, these sensitivity reductions were not included in the asset impairment loss reported.
In the fourth quarter of 2017 the Company performed a detailed review of its property, plant and equipment in light of a forecasted lower for longer demand for drilling rigs in the WCSB. The review resulted in a non-cash asset decommissioning expense of $13,123,000(2016 – nil) relating to older spare equipment with uncertain future value.
Equity Income from Joint Ventures
Equity income from joint ventures is comprised of the following.
| $Millions | | 2017 | 2016 | Change | % Change | | Proportionate share of revenue from joint ventures | | 26.5 | 17.0 | 9.5 | 56% | | Proportionate share of operating & maintenance expenses from joint ventures | | 19.2 | 10.7 | 8.5 | 79% | | Proportionate share of selling and administrative expenses from joint ventures | | 0.4 | 0.2 | 0.2 | 104% | | Equity income from joint ventures | | 6.9 | 6.1 | 0.8 | 14% |
The Company provides the same drilling services and utilizes the same management, financial and reporting controls for its joint venture activities as it does for its wholly-owned operations. The analyses of these activities are incorporated throughout the relevant sections of this MD&A relating to increased activity, revenue per day as well as operating expenses.
Other Income (Loss)
| $Millions | | 2017 | 2016 | Change | % Change | | Interest income | | 0.4 | 1.0 | (0.6) | (59%) | | Interest expense | | (0.2) | (0.2) | (0.0) | 23% | | Gain on sale of assets | | 0.2 | 0.1 | 0.1 | 122% | | Net other gains | | 0.3 | 0.1 | 0.2 | 103% | | Total other income (loss) | | 0.7 | 1.0 | (0.3) | 33% |
Interest income decreased to $439,000in 2017 from $965,000in 2016 due primarily to less interest accrued on the receivable related to the contract cancellation revenue as the Company continued to collect the outstanding receivable.
During 2017, the Company recorded interest expense of $168,000(2016 – $163,000) related to the future cost of the Company's unfunded defined benefit pension plan.
During 2017, the Company disposed of non-core assets resulting in a gain of $194,000(2016 – gain of $90,000).
In 2017, amounts reported as "Net Other Gains" of $232,000included $119,000in income from the sale of previously written off equipment. In 2016, "Net Other Gains" of $148,000related to various miscellaneous income.
Income Tax Expense (Recovery)
| $Millions, Except Income Tax Rate (%) | | 2017 | 2016 | Change | % Change | | Current tax recovery | | (3.0) | (2.3) | (0.7) | (30%) | | Deferred tax expense (recovery) | | (11.1) | 4.5 | (15.6) | (346%) | | Total income tax expense (recovery) | | (14.1) | 2.2 | (16.3) | (739%) | | Effective income tax rate | | 26.8% | 29.2% | | |
AKITA had an income tax recovery of $14,053,000in 2017 compared to a tax expense of $2,206,000in 2016. The change in current tax recovery resulted from a slightly higher loss for tax purposes in the year when comparing 2017 to 2016. The decrease in deferred tax is result of the asset impairment and decommissioning expense recorded in 2017 that reduced the Company's future tax liability.
Net Income (Loss), Funds Flow and Net Cash from Operating Activities
| $Millions | | 2017 | 2016 | Change | % Change | | Net Income (Loss) | | (39.2) | 5.3 | (44.5) | 839% | | Funds Flow from Operations(1) | | 6.6 | 34.5 | (27.9) | (81%) |
| | | | (1) | Funds flow from operations is an additional GAAP measure under IFRS. See commentary in "Basis of Analysis in this MD&A, Non-GAAP and Additional GAAP Items". |
During 2017, the Company recorded a net loss of $39,177,000(net loss of $2.18per Class A Non-Voting and Class B Common Share (basic and diluted)) compared to net income of $5,329,000(net income of $0.30per Class A Non-Voting and Class B Common Share (basic and diluted)) in 2016. The material difference in net income from 2017 and 2016 is largely attributable to the asset decommissioning and impairment expense in 2017 of $29,123,000and $28,500,000revenue from contract cancellation AKITA received in 2016. Funds flow from operations decreased to $6,607,000in 2017 from $34,500,000in 2016.
Both net income and funds flow from operations were impacted by the low revenue per operating day in 2017. With revenue per day down 15% in 2017 from already reduced rates in 2016 and operating costs per day up 1% over the same time frame, the Company saw record low operating profits despite the activity for the year.
Liquidity and Capital Resources
At December 31, 2017, AKITA had $15,528,000in working capital including $560,000in cash and no bank indebtedness, compared to a working capital of $34,907,000, including $14,250,000in cash at December 31, 2016. In 2017, AKITA generated $5,074,000cash from operating activities. Cash was also generated from joint venture distributions ($6,095,000), from reductions in cash balances restricted for loan guarantees ($1,444,000)and from proceeds on sales of assets ($221,000). During the same period, cash was used for capital expenditures ($20,569,000)(1)and payment of dividends ($6,100,000)(1). Accounts payable at year end included $9,401,000in accrued expenses, half of which related to routine operations while the other half related to one-time items such as the expense related to the changes in Saskatchewan PST as well as the cost to move a rig from Canadato the US.