AKT press release
AKITA Drilling Ltd. Announces Year-to-Date Earnings and Cash Flow
TSX - Toronto Stock Exchange · Oil · Natural Gas · Potash · Hydrogen · Canada
Canada NewsWire
CALGARY, July 27, 2018
CALGARY, July 27, 2018/CNW/ - AKITA Drilling Ltd.'s net loss for the three months ended June 30, 2018, was $2,959,000(net loss of $0.16per share basic & diluted) on revenue of $17,293,000compared to a net loss of $4,491,000(net loss of $0.25per share basic & diluted) on revenue of $17,986,000for the corresponding period of 2017. Funds flow from operations decreased to $1,638,000in the second quarter of 2018 from $3,254,000in the corresponding period of 2017.
AKITA incurred a net loss of $4,870,000for the six months ended June 30, 2018($0.27per share basic & diluted) on revenue of $44,382,000compared to a net loss of $9,466,000($0.53per share basic & diluted) on revenue of $37,179,000in the comparative period in 2017. Funds flow from operations for the January to June period of 2018 was $6,157,000compared to $5,078,000for the same period in 2017.
The second quarter of 2018 was less active for AKITA than the corresponding period of 2017 due to several of the Company's customers delaying rig reactivations as natural gas prices continue to fall and take away capacity for Canadian oil remains uncertain. In the United States, AKITA added a third rig to its US fleet at the end of the quarter, as demand in the US for quality equipment and operations continues to increase. AKITA's strong first quarter improved the year to date results in 2018 for both net income and funds flow when compared to the first half of 2017.
On June 4, 2018, AKITA and Xtreme Drilling Corp ("Xtreme") agreed to enter into a plan of arrangement to combine their respective businesses to create a leading intermediate North American land drilling contractor. Under the plan of arrangement, Xtreme shareholders will receive 0.3732394 of a Class A Non-Voting share of AKITA or $2.65in cash for each Xtreme share. An Xtreme shareholder may elect to receive AKITA Non-Voting Class A shares, cash or a combination of AKITA Non-Voting Class A shares and cash such that the aggregate consideration to be paid by AKITA will not exceed $45,000,000and will not exceed 22,235,458 Class A Non-Voting shares. The combined company will effectively double the market capitalization of each company on its own as well as double the drilling assets on a net book value basis. Both AKITA and Xtreme view this combination as highly complementary, the companies are like-sized, operate in different geographical segments for different customers and have a strong focus on safety and customer satisfaction. The transaction has received unanimous board approval from both companies and is subject to shareholder approval, as well as customary TSX, Court and regulatory approvals and other closing conditions, and is expected to be completed in the third quarter of 2018.
Selected information from AKITA Drilling Ltd.'s Management Discussion and Analysis from the Quarterly Report as follows:
Introduction and General Overview
Activity levels in the contract drilling industry are highly correlated to the market prices of crude oil and natural gas. The average West Texas Intermediate crude oil prices for the second quarter of 2018 increased 41% compared to the same period in 2017. However, the impact of higher oil prices was offset by two factors. The first is that average natural gas prices for the second quarter of 2018, per Alberta Energy Company ("AECO") spot prices, have decreased by 58% compared to the second quarter of 2017. The second is the uncertainty around the takeaway capacity of oil in the Canadian market which is causing Canadian producers to delay capital spending or shift spending to other opportunities. This delay in capital spending resulted in decreased activity for AKITA in Canadawhen comparing the second quarter of 2018 to the second quarter of 2017.
The impact of lower activity levels for AKITA in Canadawas offset somewhat by increased day rates in Canada, as well as higher utilization in the United States("US") for AKITA's US rigs.
Historically, the first quarter of the calendar year is the most active in the Canadian drilling industry. Lower activity levels that result from spring break-up and associated road bans on public roads typically characterize the second quarter. In the second quarter of 2018, breakup conditions persisted longer than average which also had an impact on activity levels.
Fleet and Rig Utilization
AKITA had 28 drilling rigs at June 30, 2018, including five that operated under joint ventures (26.75 net to AKITA), the same as at June 30, 2017. During the second quarter of 2018, a third rig was moved to the US leaving 25 rigs in Canada.
| | Three Months Ended June 30 | Six Months Ended June 30 | | | | | | | | | 2018 | 2017 | Change | % Change | 2018 | 2017 | Change | % Change | | Canada1 | | | | | | | | | | Operating days | 548 | 931 | (422) | (45%) | 1,681 | 1,892 | (211) | (11%) | | Utilization rate | 24% | 37% | 15 | (41%) | 37% | 37% | 0 | 0% | | United States2 | | | | | | | | | | Operating days | 136 | - | 136 | - | 177 | - | 177 | - | | Utilization rate | 50% | - | 50 | - | 39% | - | 39 | - |
| 1 | Canadian utilization was calculated based on 26 rigs for the first quarter of 2018 and 25 rigs for the second quarter of 2018. For 2017 utilization was based on 28 rigs. | | 2 | United States utilization was calculated based on 2 rigs in the first quarter of 2018 and 3 rigs in the second quarter of 2018. |
| Utilization Rates in Canada | Three Months Ended
June 30 | Six Months Ended
June 30 | | | | | AKITA | Industry(1) | AKITA | Industry(1) | | 2018 | 24% | 17% | 37% | 29% | | 2017 | 37% | 18% | 37% | 28% |
| (1) | Source: CAODC |
Generally, AKITA meets or exceeds industry average rig utilization rates as a result of positive customer relations, meaningful joint ventures with Aboriginal and First Nations partners, employee expertise, safety performance, drilling performance and because the majority of the Company's rig fleet are high-demand pad drilling rigs.
The decline in utilization in Canadafor AKITA was mainly attributable to more rigs shutting down over break-up in the second quarter of 2018 compared to the same period in 2017. In the US, AKITA's third rig was moved late in the second quarter which negatively impacted utilization as the rig did not operate. Excluding the third rig that was moving, US utilization was 75%.
Revenue and Operating & Maintenance Expenses
| | Three Months Ended June 30 | Six Months Ended June 30 | | | | | | | | $Millions | 2018 | 2017 | Change | % Change | 2018 | 2017 | Change | % Change | | Total drilling revenue | 17.3 | 18.0 | (0.7) | (4%) | 44.3 | 37.1 | 7.2 | 19% | | Operating & maintenance expenses | 12.1 | 14.6 | (2.5) | (17%) | 32.5 | 32.4 | 0.1 | 0% | | | | | | | | | | | | $Dollars | 2018 | 2017 | Change | % Change | 2018 | 2017 | Change | % Change | | AKITA and joint ventures' revenue per operating day(1) | 30,722 | 27,142 | 3,580 | 13% | 29,863 | 26,748 | 3,115 | 12% | | AKITA and joint ventures' operating & maintenance expenses per operating day(1) | 22,224 | 21,434 | 790 | 4% | 21,986 | 22,039 | (53) | (0%) | | AKITA and joint ventures' operating margin per operating day | 8,499 | 5,708 | 2,791 | 49% | 7,877 | 4,709 | 3,168 | 67% |
| (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 "Basis of Analysis in this MD&A, Non-GAAP and Additional GAAP Items". |
Second Quarter Comparatives
During the second quarter of 2018, revenue decreased slightly to $17,293,000from $17,986,000due to fewer operating days worked by the Company's drilling rigs. The impact of this decrease in activity was offset by higher day rates which increased revenue per day to $30,722from $27,142in the second quarter of 2017. Day rates in the Canadian market are continuing a slow recovery which began in the fourth quarter of 2017. Also contributing to the increase in revenue per day is the US where day rates are typically higher than in Canada.
Operating and maintenance expenses are directly related to operating days and amounted to $12,087,000($22,224per operating day for AKITA including joint ventures) during the second quarter of 2018, compared to $14,632,000($21,434per operating day for AKITA including joint ventures) during the same period of the prior year. The decrease in operating and maintenance expense is due to fewer operating days in the second quarter of 2018 compared to the second quarter of 2017.
Year-to-Date Comparatives
During the first six months of 2018, revenue increased to $44,382,000from $37,179,000during the first six months of 2017 as a result of higher revenue per day, which increased to $29,863in the first half of 2018 from $26,748in the same period of 2017. In addition, the increased revenue per operating day was impacted by the mix of rigs AKITA operated in the first quarter of 2018. Pad triple drilling rigs, which generally demand higher day rates than other conventional drilling rigs, achieved more operating days in the first quarter of 2018 compared to the same period of 2017.
Operating and maintenance costs are tied to operating days and amounted to $32,477,000($21,986per operating day) during the first six months of 2018 compared to $32,367,000($22,039per operating day) in the same period of the prior year. The decrease per operating day is a result of higher maintenance costs due to more rigs starting up in the first half of 2017 compared to the same period in 2018.
Depreciation and Amortization Expense
| | Three Months Ended June 30 | Six Months Ended June 30 | | | | | | | | $ Millions | 2018 | 2017 | Change | % Change | 2018 | 2017 | Change | % Change | | Depreciation and amortization expense | 5.5 | 7.7 | (2.2) | 29% | 11.4 | 14.5 | (3.1) | (21%) |
Depreciation and amortization expense decreased to $5,487,000during the second quarter of 2018 from $7,735,000during the corresponding period in 2017, primarily due to an asset write-down and asset impairment loss recorded in the fourth quarter of 2017, which reduced the Company's depreciable property by $29,123,000. This asset write-down and asset impairment loss also affected the depreciation and amortization expense for the first six months of 2018 which decreased to $11,413,000compared to $14,471,000for the corresponding period in 2017.
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 estimate effect of the change in depreciation method on the Company's interim financial statements for the first quarter of 2018 is not material. In the first six months of 2018, drilling rig depreciation accounted for 97% of total depreciation expense (2017 - 97%).
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
| | Three Months Ended June 30 | Six Months Ended June 30 | | | | | | | | $ Millions | 2018 | 2017 | Change | % Change | 2018 | 2017 | Change | % Change | | Selling and administrative expenses | 4.1 | 3.4 | 0.7 | 21% | 8.6 | 7.4 | 1.2 | 16% |
Selling and administrative expenses increased to $8,561,000for the first six months of 2018 from $7,387,000for the same period of 2017 due to costs relating to AKITA's US operations as well as costs associated with the proposed business combination with Xtreme Drilling (see the future outlook section of this MD&A for detail on the Xtreme Drilling transaction). Selling and administrative expenses were 19% of revenue in the first six months of 2018 compared to 20% of revenue in the first six months of 2017. The single largest component of selling and administrative expenses is salaries and benefits, which accounted for 46% of these expenses (2017 - 47%).
Equity Income from Joint Ventures
| | Three Months Ended June 30 | Six Months Ended June 30 | | | | | | | | $ Millions | 2018 | 2017 | Change | %Change | 2018 | 2017 | Change | %Change | | Proportionate share of revenue from joint ventures | 3.7 | 7.3 | (3.6) | (49%) | 11.1 | 13.4 | (2.3) | (17%) | | Proportionate share of operating & maintenance expenses from joint ventures | 3.1 | 5.3 | (2.2) | (42%) | 8.4 | 9.3 | (0.9) | (10%) | | Proportionate share of selling and administrative expenses from joint ventures | 0.1 | 0.1 | 0.0 | 0% | 0.2 | 0.2 | 0.0 | 0% | | Equity income from joint ventures per interim financial statements | 0.5 | 1.9 | (1.4) | (74%) | 2.5 | 3.9 | (1.4) | (35%) |
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 decrease in equity income from joint ventures in both the second quarter of 2018 and year to date 2018, when compared to the respective periods in 2017, is directly attributable to activity. In the second quarter of 2018 activity for AKITA's joint venture rigs dropped by 42% with 172 operating days in the second quarter of 2018, compared to 297 in the second quarter of 2017. The drop relates to a pause in capital spending by oilsands producers that are assessing their capital programs for the balance of the year and into 2019.
Other Income (Loss)
| | Three Months Ended June 30 | Six Months Ended June 30 | | | | | | | | $ Millions | 2018 | 2017 | Change | % Change | 2018 | 2017 | Change | % Change | | Total other income (loss) | 0.0 | 0.2 | (0.2) | (100%) | 0.1 | 0.3 | (0.2) | (67%) |
Total other income (loss) is the aggregate of interest income, interest expense, gain (loss) on sale of assets, and net other gains (losses) all of which are discussed below in detail.
Interest income decreased to $40,000in the first half of 2018 from $231,000in the same period of 2017. The decrease is related to the collection of the interest-bearing long-term receivable held related to contract cancellation revenue recorded in 2016. This long term receivable was collected over three years with the final payment received in the first quarter of 2018.
In the first half of 2018, the Company incurred interest expense of $85,000on the Company's line of credit (2017 – nil), and $84,000for the future cost of the Company's defined benefit pension plan (2017 - $84,000).
During the first half of 2018, the Company sold ancillary assets for proceeds of $23,000resulting in a gain of $23,000compared to the same period in 2017, when assets were sold for proceeds of $167,000that resulted in a gain of $140,000.
During the first half of 2018, net other gains of $171,000included $131,000of proceeds on the sale of previously written-off assets. In the first half of 2017, $39,000of net other gains was recorded made up of various balances.
Income Tax Expense
| | Three Months Ended June 30 | Six Months Ended June 30 | | | | | | | | $ Millions | 2018 | 2017 | Change | % Change | 2018 | 2017 | Change | % Change | | Current tax recovery | 0.0 | (1.0) | 1.0 | 100% | 0.0 | (3.0) | 3.0 | 100% | | Deferred tax recovery | (0.9) | (0.3) | (0.6) | (200%) | (0.6) | (0.3) | (0.3) | (100%) | | Income tax recovery | (0.9) | (1.3) | 0.4 | 31% | (0.6) | (3.3) | 2.7 | 82% |
Income tax recovery decreased to $573,000in the first six months of 2018 from $3,343,000in the corresponding period in 2017 mainly due a smaller loss for tax purposes recorded in the first half of 2018 compared to 2017. There was no current tax recovery recorded in 2018 as all potential loss carryback amounts have been utilized.
Net Loss, Funds Flow and Net Cash From Operating Activities
| | Three Months Ended June 30 | Six Months Ended June 30 | | | | | | | | $ Millions | 2018 | 2017 | Change | % Change | 2018 | 2017 | Change | % Change | | Net loss | (3.0) | (4.5) | 1.5 | 33% | (4.9) | (9.5) | 4.6 | 48% | | Funds flow from operations(1) | 1.6 | 3.3 | (1.7) | (52%) | 6.2 | 5.1 | 1.1 | 22% |
| | | | (1) | Funds flow from operations is an additional GAAP measure under IFRS. See "Basis of Analysis in this MD&A, Non-GAAP and Additional GAAP Items". |
During the three months ended June 30, 2018, the Company reported a net loss of $2,959,000or $0.16per Class A Non-Voting and Class B Common Share (basic and diluted) compared to a net loss of $4,491,000or $0.25per share (basic and diluted) in the comparative quarter of 2017. The reduction in the net loss between the second quarter of 2018 and the same second quarter of 2017 was caused by lower depreciation offset by lower equity income from joint ventures and lower income tax recovery.
Funds flow from operations decreased to $1,638,000during the second quarter of 2018 from $3,254,000in the corresponding quarter in 2017 due to decreased activity in 2018.
The Company incurred a net loss of $4,870,000or $0.27per Class A Non-Voting and Class B Common Share (basic and diluted) for the first six months of 2018 compared to a net loss of $9,466,000or $0.53per share (basic and diluted) in the corresponding period of 2017. Funds flow from operations increased to $6,157,000during the first six months of 2018 from $5,078,000in the corresponding period in 2017. The reduction in net loss and increase in funds flow from operations are both due to higher revenue in the first quarter of 2018 compared to the same period in 2017 which was the result of increased overall activity and higher day rates.
The following table reconciles funds flow and cash flow from operations:
| | Three Months Ended June 30 | Six Months Ended June 30 | | | | | | | | $ Millions | 2018 | 2017 | Change | %
Change | 2018 | 2017 | Change | %
Change | | Funds flow from operations(1) | 1.6 | 3.2 | (1.6) | (50%) | 6.2 | 5.1 | 1.1 | 22% | | Change in non-cash working capital | 8.8 | 3.1 | 5.7 | 184% | 9.2 | 8.6 | 0.6 | 7% | | Equity income from joint ventures | (0.5) | (1.9) | 1.4 | 72% | (2.6) | (3.9) | 1.3 | 33% | | Post-employment benefits | 0.0 | 0.0 | 0.0 | - | (0.1) | 0.0 | (0.1) | - | | Current income tax expense (recovery) | 0.0 | (1.0) | 1.0 | 100% | 0.0 | (3.0) | 3.0 | (100%) | | Net cash from operating activities | 9.9 | 3.4 | 6.5 | 191% | 12.7 | 6.8 | 5.9 | 87% |
| | | | (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". |
Liquidity and Capital Resources
Cash used for capital expenditures totalled $4,005,000in the first six months of 2018 and related to routine capital spending. In the first six months of 2017 capital expenditures were $12,202,000of which 42% was related to new build construction and the balance to routine items.
At June 30, 2018, AKITA's Statements of Financial Position included working capital (current assets minus current liabilities) of $16,219,000compared to $24,557,000at June 30, 2017, and $15,528,000at December 31, 2017. Readers should be aware of the seasonal nature of AKITA's Canadian operations 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 spring break-up. Non-cash working capital amounted to $9,117,000at June 30, 2018, compared to non-cash working capital of $14,968,000at December 31, 2017. Note that the non-cash working capital amount at December 31, 2017, included $10,641,000in accounts receivable related to contract cancellation compared to nil at June 30, 2018. Working capital at June 30, 2018decreased compared to June 30, 2017, due to lower working capital balances at December 31, 2017($15,528,000)compared to December 31, 2016($34,907,000).