AKT press release
AKITA Drilling Ltd. Reports Higher Net Income and Funds Flow during Second Quarter of 2013
TSX - Toronto Stock Exchange · Oil · Natural Gas · Potash · Hydrogen · Canada
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CALGARY, July 30, 2013/CNW/ - AKITA Drilling Ltd.'s net income for the three months ended June 30, 2013was $2,757,000($0.15per share) on revenue of $28,044,000compared to $2,092,000($0.12per share) on revenue of $35,959,000for the corresponding period in 2012. Funds flow from operations for the quarter ended June 30, 2013was $9,121,000compared to $8,368,000in the corresponding quarter in 2012. Commencing in 2013, the Company is reporting its financial results pursuant to a new accounting standard under International Financial Reporting Standards ("IFRS"), IFRS 11, whereby assets, liabilities, revenues and expenses of joint ventures are required to be reported on an equity accounting basis. This adoption, which had no effect on net income, has resulted in a reduction of revenue amounts that would have been reported if the Company were allowed to continue to report using the proportionate consolidation basis.
Net income for the six months ended June 30, 2013was $15,252,000($0.85per share) on revenue of $88,805,000. Comparative figures for 2012 were net income of $15,996,000($0.89per share) on revenue of $104,136,000. Funds flow from operations for the January to June period in 2013 was $29,106,000compared to $28,734,000for the comparative period in 2012.
Weaker markets conditions, particularly for conventional drilling rigs, as well as wetter than normal weather in June, were the two main influences that resulted in AKITA Drilling achieving fewer operating days in the second quarter of 2013 than in the corresponding quarter of 2012 (i.e., 1,017 compared to 1,161 in 2012). However, the financial impact of this lower activity was more than offset by having stronger day rates due to the Company's high percentage of pad drilling rigs.
It appears that market conditions will be slower for the balance of the summer drilling season and perhaps the upcoming winter, especially for conventional drilling rigs. However, management does not anticipate any adverse impact to its pad rig activity as a result of a generally weaker set of market conditions. Further, during the third quarter, AKITA anticipates having a new pad rig commence operations on a multi-year project.
In the first quarter report issued earlier this year, management indicated that the Company was bidding on the construction of several new custom rigs to meet specialized long-term customer needs. While a number of these projects have been deferred or cancelled, subsequent to June 30, the Company entered into a multi-year contract to construct and operate a new ultra-deep pad rig for use in the Fort Liard basin. This rig, which should cost approximately twice the amount of a typical oil sands pad triple due to the amount of equipment included, is expected to be funded out of a combination of ongoing cash flow from operations and the Company's existing banking facility.
Selected information from AKITA Drilling Ltd.'s Management's Discussion and Analysis for the Quarterly Report is as follows:
Basis of Analysis in this MD&A , Non-Standard and Additional GAAP Items
Effective January 1, 2013, the Company adopted a new accounting standard under International Financial Reporting Standards ("IFRS"), IFRS 11 "Joint Arrangements", in relation to reporting its joint venture activities. Under IFRS 11, AKITA is required to report its joint venture assets, liabilities and financial activities using the equity method of accounting. However, for purposes of analysis in this MD&A, the proportionate share of assets, liabilities and financial activities is included as non-standard GAAP information ("Adjusted") where appropriate. 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.
Operating margin, revenue per operating day, operating and maintenance expense per operating day and operating margin per operating day are not recognized measures under IFRS. Management and certain investors may find operating margin data to be a useful measurement metric as it provides an indication of the profitability of the business prior to the influence of depreciation, overhead expenses, financing costs and income taxes. Management and certain investors may find "per operating day" measures for revenue and operating margin indicative of pricing strength while operating and maintenance expense per operating day demonstrates the degree of cost control and provides a proxy for specific inflation rates incurred by the Company. Readers should be cautioned that in addition to the foregoing, other factors, including the mix of rigs between conventional and pad and singles, doubles and triples can also impact these results. Readers should also be aware that AKITA includes standby revenue, construction revenue and construction costs in its determination of "per operating day" results.
Funds flow from operations is considered as an additional GAAP measure under IFRS. AKITA's method of determining funds flow from operations may differ from methods used by other companies and includes cash flow from operating activities before working capital changes. Management and certain investors may find funds flow from operations to be a useful measurement to evaluate the Company's operating results at year-end and within each year, since the seasonal nature of the business affects the comparability of non-cash working capital changes both between and within periods.
Revenue and Operating & Maintenance Expenses
| | | | | | | | | | | | $ Millions | Three Months Ended June 30 | | Six Months Ended June 30 | | | | | | | | | 2013 | 2012 | Change | % Change | | 2013 | 2012 | Change | % Change | | Revenue per Interim Financial Statements_(1)_ | 28.0 | 35.9 | (7.9) | (22%) | | 88.8 | 104.1 | (15.3) | (15%) | | Proportionate Share of Revenue from Joint Ventures(2) | 11.0 | 8.2 | 2.8 | 34% | | 24.3 | 19.1 | 5.2 | 27% | | Adjusted Revenue(2) | 39.0 | 44.1 | (5.1) | (12%) | | 113.1 | 123.2 | (10.1) | (8%) | | | | | | | | | | | | | $ Millions | Three Months Ended June 30 | | Six Months Ended June 30 | | | | | | | | | 2013 | 2012 | Change | % Change | | 2013 | 2012 | Change | % Change | | Operating & Maintenance Expenses per Interim Financial Statements_(1)_ | 18.6 | 25.6 | (7.0) | (27%) | | 56.1 | 68.3 | (12.2) | (18%) | | Proportionate Share of Operating & Maintenance Expenses from Joint Ventures(2) | 6.6 | 5.1 | 1.5 | 29% | | 14.3 | 11.9 | 2.4 | 20% | | Adjusted Operating & Maintenance Expenses(2) | 25.2 | 30.7 | (5.5) | (18%) | | 70.4 | 80.2 | (9.8) | (12%) | | | | | | | | | | | | | $ Millions | Three Months Ended June 30 | | Six Months Ended June 30 | | | | | | | | | 2013 | 2012 | Change | % Change | | 2013 | 2012 | Change | % Change | | Adjusted Revenue_(2)_ | 39.0 | 44.1 | (5.1) | (12%) | | 113.1 | 123.2 | (10.1) | (8%) | | Adjusted Operating & Maintenance Expenses(2) | 25.2 | 30.7 | (5.5) | (18%) | | 70.4 | 80.2 | (9.8) | (12%) | | Adjusted Operating Margin(1)(2)(3) | 13.8 | 13.4 | 0.4 | 3% | | 42.7 | 43.0 | (0.3) | (1%) | | | | | | | | | | | | | $ Dollars | Three Months Ended June 30 | | Six Months Ended June 30 | | | | | | | | | 2013 | 2012 | Change | % Change | | 2013 | 2012 | Change | % Change | | Adjusted Revenue per Operating Day_(2)_ | 38,348 | 37,984 | 364 | 1% | | 35,802 | 33,579 | 2,223 | 7% | | Adjusted Operating & Maintenance Expensesper Operating Day(2) | 24,779 | 26,443 | (1,664) | (6%) | | 22,286 | 21,859 | 427 | 2% | | Adjusted Operating Margin per Operating Day(2)(3) | 13,569 | 11,541 | 2,028 | 18% | | 13,516 | 11,720 | 1,796 | 15% |
| (1) | _Revenue, operating & maintenance expenses and adjusted operating margin include the Company's rig construction for third parties. AKITA does not disclose its operating margin on rig construction activity separately for competitive reasons._ | | (2) | _Proportionate share of revenue from joint ventures, adjusted revenue, proportionate share of operating & maintenance expenses from joint ventures, adjusted operating & maintenance expenses, adjusted operating margin, adjusted revenue per operating day, adjusted operating & maintenance expenses per operating day and adjusted operating margin per operating day are non-standard accounting measures. See commentary in "Basis of Analysis in this MD&A, Non-Standard and Additional GAAP Items"._ | | (3) | _Adjusted operating margin is the difference between adjusted revenue and adjusted operating & maintenance expenses._ | | | |
Second Quarter Comparatives - Impact of Pad Rigs Drives Performance
During the second quarter of 2013, adjusted revenue decreased to $39,049,000from $44,125,000during the second quarter of 2012 as a result of weakening market conditions for conventional double and triple sized rigs which was partially offset by an increase in AKITA's pad drilling activity.
Although adjusted revenue for the three month period ended June 30, 2013decreased, adjusted revenue per operating day increased to $38,348during the second quarter of 2013 from $37,984in the comparative quarter of 2012 due to an increased proportion of the Company's revenue being generated by its pad drilling rigs. These rigs, compared to conventional drilling rigs, typically generate higher revenue on a per day basis.
Adjusted operating and maintenance costs are tied to revenue and amounted to $25,218,000($24,779per operating day) during the second quarter of 2013 compared to $30,668,000($26,443per operating day) in the same period of the prior year. While pad rigs dominated the drilling activities during the current quarter, the actual mix of pad rigs resulted in lower operating costs when taken on a "per operating day" basis.
The operating margin for the Company increased to $13,831,000in the second quarter of 2013 from $13,457,000during the corresponding quarter of 2012. This increase amounted to 3% compared to a 12% reduction in adjusted revenue. The negative correlation between changes in operating margin and adjusted revenue was largely the result of a higher proportion of AKITA's drilling activities being derived from pad rigs during the current quarter compared to the corresponding period in 2012, as well as the specific mix of rigs that participated in drilling activities. Pad rigs typically achieve higher activity levels, revenues per day and operating margins per day than conventional rigs.
Year-to-Date Comparatives - Effects of Weaker Conventional Rig Performance Offset by Impact of Pad Rigs
During the first six months of 2013, adjusted revenue decreased to $113,073,000from $123,185,000during the first six months of 2012 as a result of weakening market conditions for conventional double and triple sized rigs which was partially offset by an increase in AKITA's pad drilling activity.
Although adjusted revenue for the year-to-date period ended June 30, 2013decreased, adjusted revenue per operating day increased to $35,802during the first six months of 2013 from $33,579in the comparative six month period of 2012 due to an increased proportion of the Company's revenue being generated by its pad drilling rigs. These rigs, compared to conventional drilling rigs, typically generate higher revenues on a "per operating day" basis.
Adjusted operating and maintenance costs are tied to revenue and amounted to $70,353,000($22,286per operating day) during the first six months of 2013 compared to $80,154,000($21,859per operating day) in the same period of the prior year.
The operating margin for the Company decreased to $42,720,000in the first six months of 2013 from $43,031,000during the corresponding year-to-date period of 2012. This reduction amounted to 1% compared to a 8% reduction in adjusted revenue. The lower decline in operating margin compared to adjusted revenue was the result of a higher proportion of AKITA's drilling activities being derived from pad rigs during the first six months of the year compared to the corresponding period in 2012. Pad rigs typically achieve higher activity levels, revenues per day and operating margins per day than conventional rigs.
Other Comments
From time to time, the Company requires customers to make pre-payments prior to the provision of drilling services. In addition, from time to time, the Company records cost recoveries related to capital enhancements for specific customer related projects. At June 30, 2013, deferred revenue related to these activities totalled $371,000(June 30, 2012- $Nil).
Depreciation Expense
| | | | | | | | | | | | $ Millions | Three Months Ended June 30 | | Six Months Ended June 30 | | | | | | | | | 2013 | 2012 | Change | % Change | | 2013 | 2012 | Change | % Change | | Depreciation and Amortization Expense | 5.5 | 5.6 | (0.1) | (2%) | | 13.0 | 12.9 | 0.1 | 1% | | | | | | | | | | | |
The depreciation and amortization expense reported in the second quarter of 2013 of $5,556,000was virtually the same as for the corresponding quarter of 2012 ($5,631,000). The impact of a decline in drilling activity on depreciation and amortization expense was largely offset by an increase in the average cost base for AKITA's rigs.
Depreciation and amortization expense for the first six months of 2013 totalled $13,023,000compared to $12,897,000for the corresponding period in 2012. As with the depreciation and amortization expense for the second quarter, offsetting factors of lower activity in the current year-to-date period and a higher average cost base for AKITA's rigs resulted in depreciation and amortization expense being within 1% of the 2012 total. In the first six months of 2013, drilling rig depreciation accounted for 96% of total depreciation and amortization expense (2012 - 97%).
While AKITA conducts many 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 the joint ventures themselves. Therefore, the joint ventures do not hold any property, plant, or equipment assets directly. Consequently, the depreciation balance reported above includes depreciation on assets involved in both wholly owned and joint ventured activities.
Selling and Administrative Expense
| | | | | | | | | | | | $ Millions | Three Months Ended June 30 | | Six Months Ended June 30 | | | | | | | | | 2013 | 2012 | Change | %Change | | 2013 | 2012 | Change | %Change | | Selling & Administrative Expense per Interim Financial Statements | 4.5 | 5.0 | (0.5) | (10%) | | 9.1 | 9.8 | (0.7) | (7%) | | Proportionate Share of Selling & Administrative Expense from Joint Ventures(1) | 0.1 | 0.1 | 0.0 | N/A | | 0.3 | 0.3 | 0.0 | N/A | | Adjusted Selling & Administrative Expense(1) | 4.6 | 5.1 | (0.5) | (10%) | | 9.4 | 10.1 | (0.7) | (7%) |
| | | | (1) | _Proportionate share of selling and administrative expense from joint ventures and adjusted selling and administrative expense are non-standard accounting measures. See commentary in "Basis of Analysis in this MD&A, Non-Standard and Additional GAAP Items"._ | | | |
Adjusted selling and administrative expenses were 8.3% of adjusted revenue in the first six months of 2013 compared to 8.1% of adjusted revenue in the first six months of 2012, largely as a result of decreased adjusted revenue in 2013. The single largest component was salaries and benefits, which accounted for 60% of these expenses (58% in 2012).
Other Income
| | | | | | | | | | | | $ Millions | Three Months Ended June 30 | | Six Months Ended June 30 | | | | | | | | | 2013 | 2012 | Change | % Change | | 2013 | 2012 | Change | % Change | | Interest Income | 0.0 | 0.1 | (0.1) | (100%) | | 0.1 | 0.2 | (0.1) | (50%) | | Gain (Loss) on Sale of Joint Venture Interests in Rigs and Other Assets | 0.0 | (0.1) | 0.1 | 100% | | 0.0 | 1.1 | (1.1) | (100%) | | Total Other Income | 0.0 | 0.0 | 0.0 | N/A | | 0.1 | 1.3 | (1.2) | (92%) | | | | | | | | | | | |
The Company invests any cash balances in excess of its ongoing operating requirements in bank guaranteed highly liquid investments. Interest income decreased to $163,000in the first six months of 2013 from $208,000in the corresponding period as a result of reduced cash and short term deposit balances. The Company has undertaken significant capital expenditures related to the construction of new rigs and the conversion of conventional rigs into pad rigs, thereby reducing AKITA's cash balances.
During 2012, the Company disposed of its interests in its remaining two arctic drilling camps and other non-core assets resulting in a $1,062,000gain. The Company did not have any significant disposals during the first six months of 2013.
Equity Income from Joint Ventures
| | | | | | | | | | | | $ Millions | Three Months Ended June 30 | | Six Months Ended June 30 | | | | | | | | | 2013 | 2012 | Change | %Change | | 2013 | 2012 | Change | %Change | | Proportionate Share of Revenue from Joint Ventures(1) | 11.0 | 8.2 | 2.8 | 34% | | 24.3 | 19.1 | 5.2 | 27% | | Proportionate Share of Operating & Maintenance Expenses from Joint Ventures(1) | 6.6 | 5.1 | 1.5 | 29% | | 14.3 | 11.9 | 2.4 | 20% | | Proportionate Share of Selling & Administrative Expense from Joint Ventures(1) | 0.1 | 0.1 | 0.0 | N/A | | 0.3 | 0.3 | 0.0 | N/A | | Equity Income from Joint Ventures | 4.3 | 3.0 | 1.3 | 43% | | 9.7 | 6.9 | 2.8 | 41% |
| (1) | _Proportionate share of revenue from joint ventures, proportionate share of operating & maintenance expenses from joint ventures and proportionate share of selling & administrative expense from joint ventures are non-standard accounting measures. See commentary in "Basis of Analysis in this MD&A, Non-Standard and Additional GAAP Items"._ | | | |
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 analyses of these activities are incorporated throughout the relevant sections of this MD&A. Joint venture activities are often located in some of the most prospective regions in Canada. Two thirds of AKITA's joint ventures utilize pad drilling rigs.
Income Tax Expense
| | | | | | | | | | | | $ Millions | Three Months Ended June 30 | | Six Months Ended June 30 | | | | | | | | | 2013 | 2012 | Change | % Change | | 2013 | 2012 | Change | % Change | | Current Tax Expense | 0.2 | 0.3 | (0.1) | (33%) | | 4.6 | 4.9 | (0.3) | (6%) | | Deferred Tax Expense | 0.7 | 0.4 | 0.3 | 75% | | 0.5 | 0.5 | 0.0 | N/A | | Income Tax Expense | 0.9 | 0.7 | 0.2 | 29% | | 5.1 | 5.4 | (0.3) | (6%) | | | | | | | | | | | |
Income tax expense decreased to $5,144,000in the first six months of 2013 from $5,422,000in the corresponding period in 2012 due to lower pre-tax earnings. Recent capital additions have affected the portion of income taxes that are deferred to future dates.
Net Income, Funds Flow and Net Cash From Operating Activities
| | | | | | | | | | | | $ Millions | Three Months Ended June 30 | | Six Months Ended June 30 | | | | | | | | | 2013 | 2012 | Change | % Change | | 2013 | 2012 | Change | % Change | | Net Income | 2.8 | 2.1 | 0.7 | 33% | | 15.3 | 16.0 | (0.7) | (4%) | | Funds Flow From Operations(1) | 9.1 | 8.4 | 0.7 | 8% | | 29.1 | 28.7 | 0.4 | 1% |
| (1) | _Funds flow from operations is an additional GAAP measure under IFRS. See commentary in "Basis of Analysis in this MD&A, Non-Standard and Additional GAAP Items"._ |
Net income attributable to shareholders increased to $2,757,000or $0.15per Class A Non-Voting and Class B Common Share (basic and diluted) for the three month period ended June 30, 2013from $2,092,000or $0.12per share (basic and diluted) in the comparative quarter of 2012. Funds flow from operations increased to $9,121,000in the second quarter of 2013 from $8,368,000in the corresponding quarter in 2012. Higher net income and funds flow from operations that occurred in second quarter of 2013 were directly attributable to higher operating margins per operating day versus the second quarter of 2012 and were partially offset by lower activity levels in the current quarter.