AKT press release
AKITA Drilling Ltd. Announces Second Quarter Earnings and Cash Flow
TSX - Toronto Stock Exchange · Oil · Natural Gas · Potash · Hydrogen · Canada
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CALGARY, July 30, 2014/CNW/ - AKITA Drilling Ltd.'s net income for the three months ended June 30, 2014was $2,082,000($0.12per share) on revenue of $28,365,000compared to $2,757,000($0.15per share) on revenue of $28,170,000for the corresponding period in 2013. Funds flow from operations for the quarter ended June 30, 2014was $10,609,000compared to $9,121,000in the corresponding quarter in 2013.
Net income for the six months ended June 30, 2014was $12,231,000($0.68per share) on revenue of $82,708,000. Comparative figures for 2013 were net income of $15,252,000($0.85per share) on revenue of $89,085,000. Funds flow from operations for the January to June period in 2014 was $28,273,000compared to $29,106,000for the comparative period in 2013.
During 2013 and 2014, the Company entered into forward foreign exchange contracts in order to mitigate foreign exchange exposure for capital purchases made outside of Canada. In that regard, AKITA recorded an unrealized foreign exchange loss of $945,000during the second quarter of 2014 (YTD 2014 - $647,000) which was partially offset by a realized foreign exchange gain of $376,000during the second quarter of 2014 (YTD 2014 - $499,000). The Company did not have similar foreign exchange exposures during the comparative periods during 2013.
The increase in operating days in the second quarter of 2014 compared to the corresponding quarter in 2013 (i.e., 1,220 in 2014 compared to 1,017 in 2013) was attributable to additional pad rig activity as well as having several conventional rigs working during this period. Lower operating margins and higher depreciation expense along with the foreign currency hedge loss noted above resulted in lower net income in the second quarter of 2014 compared to the corresponding quarter in 2013.
The Company is continuing with its major capital projects that form the backbone of the largest capital program in AKITA's history. In addition to two new build pad rigs under construction, the Company is refitting a recently purchased pad rig, upgrading an existing pad rig to increase its drilling capabilities and is in the final stages of construction and commissioning of its first slant pad rig. Management anticipates that these additions and improvements to the fleet will result in meaningful increases to the earnings and cash flow potential for the Company.
While upcoming business conditions remain positive, the rate at which a number of major projects develop are dependent upon significant future events, especially as they relate to final investment decisions for the development of anticipated liquified natural gas (commonly referred to as "LNG") projects and increased capacity to transport crude oil and bitumen. Although both of these major opportunities dominate much of the Canadian energy related press, other significant prospects continue to develop at a reasonable rate. The Duvernayformation in Albertais an additional significant play that impacts AKITA. This play, which spans a large geographic area, requires heavy double and triple sized conventional rigs for much of the exploration phase and will ultimately require deeper capacity pad rigs to complete the development phase. AKITA's fleet is well positioned to meet all of the foregoing requirements.
Selected information from AKITA Drilling Ltd.'s Management's Discussion and Analysis from the Quarterly Report is as follows:
Basis of Analysis in this MD&A , Non-Standard and Additional GAAP Items
The Company reports its joint venture activities in the financial statements in accordance with International Financial Reporting Standards ("IFRS"), IFRS 11 "Joint Arrangements". In determining the classification of its joint arrangements, AKITA considers whether the joint arrangements are structured through separate vehicles, if the legal form of the separate vehicles confers upon the parties direct rights to assets and obligations for liabilities relating to the arrangements, whether the contractual terms between the parties confer upon them rights to assets and obligations for liabilities relating to the arrangements as well as if other facts and circumstances lead to rights to assets and obligations for liabilities being conferred upon the parties to the arrangement prior to concluding that AKITA's joint ventures are appropriately classified as joint ventures rather than joint operations. 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. None of AKITA's joint ventures are individually material in size when considered in the context of AKITA's overall 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 tool 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 indicate 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 tool 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 | | | | | | | | | 2014 | 2013 | Change | %
Change | | 2014 | 2013 | Change | %
Change | | Revenue per Interim Financial Statements_(1)_ | 28.4 | 28.2 | 0.2 | 1% | | 82.7 | 89.1 | (6.4) | (7%) | | Proportionate Share of Revenue from
Joint Ventures(2) | 16.6 | 11.0 | 5.6 | 51% | | 34.1 | 24.3 | 9.8 | 40% | | Adjusted Revenue(2) | 45.0 | 39.2 | 5.8 | 15% | | 116.8 | 113.4 | 3.4 | 3% | | | | | | | | | | | | | $ Millions | Three Months Ended June 30 | | Six Months Ended June 30 | | | | | | | | | 2014 | 2013 | Change | %
Change | | 2014 | 2013 | Change | %
Change | | Operating & Maintenance Expenses per
Interim Financial Statements_(1)_ | 18.7 | 18.6 | 0.1 | 1% | | 53.5 | 56.0 | (2.5) | (4%) | | Proportionate Share of Operating &
Maintenance Expenses from Joint Ventures(2) | 10.5 | 6.6 | 3.9 | 59% | | 21.3 | 14.3 | 7.0 | 49% | | Adjusted Operating & Maintenance Expenses(2) | 29.2 | 25.2 | 4.0 | 16% | | 74.8 | 70.3 | 4.5 | 6% | | | | | | | | | | | | | $ Millions | Three Months Ended June 30 | | Six Months Ended June 30 | | | | | | | | | 2014 | 2013 | Change | %
Change | | 2014 | 2013 | Change | %
Change | | Adjusted Revenue_(2)_ | 45.0 | 39.2 | 5.8 | 15% | | 116.8 | 113.4 | 3.4 | 3% | | Adjusted Operating & Maintenance Expenses(2) | 29.2 | 25.2 | 4.0 | 16% | | 74.8 | 70.3 | 4.5 | 6% | | Adjusted Operating Margin(1)(2)(3) | 15.8 | 14.0 | 1.8 | 13% | | 42.0 | 43.1 | (1.1) | (3%) | | | | | | | | | | | | | $ Dollars | Three Months Ended June 30 | | Six Months Ended June 30 | | | | | | | | | 2014 | 2013 | Change | %
Change | | 2014 | 2013 | Change | %
Change | | Adjusted Revenue per Operating Day_(2)_ | 36,843 | 38,520 | (1,677) | (4%) | | 35,059 | 35,883 | (824) | (2%) | | Adjusted Operating & Maintenance
Expensesper Operating Day(2) | 23,933 | 24,796 | (863) | (3%) | | 22,466 | 22,271 | 195 | 1% | | Adjusted Operating Margin per
Operating Day(2)(3) | 12,910 | 13,724 | (814) | (6%) | | 12,593 | 13,612 | (1,019) | (7%) |
| (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 –Higher Activity Levels partially Offset by Lower Day Rates
During the second quarter of 2014, adjusted revenue increased to $44,948,000from $39,175,000during the second quarter of 2013 as a result of increased rig activity for pad rigs and conventional doubles.
Although adjusted revenue for the three month period ended June 30, 2014increased, adjusted revenue per operating day decreased to $36,843during the second quarter of 2014 from $38,520in the comparative quarter of 2013 due to an increased proportion of the Company's revenue being generated by its conventional drilling rigs versus pad rigs as well as due to lower day rates for certain of AKITA's pad rigs. Pad 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 $29,198,000($23,933per operating day) during the second quarter of 2014 compared to $25,218,000($24,796per operating day) in the same period of the prior year. While conventional rigs figured more prominently in the drilling activities during the current quarter compared to the second quarter of 2013, the actual mix of rigs resulted in higher operating costs when taken on a "per operating day" basis.
The adjusted operating margin for the Company increased to $15,750,000($12,910per operating day) in the second quarter of 2014 from $13,957,000($13,724per operating day) during the corresponding quarter of 2013. Increased drilling activity was the major reason for the total adjusted operating margin increasing in the second quarter of 2014 compared to the corresponding period in 2013, while an increase in the proportion of conventional rigs compared to pad rigs as well as day rate reductions for specific pad rigs adversely affected the adjusted operating margin per operating day when comparing the same periods.
Year-to-Date Comparatives – Improvements in the Second Quarter partially Offset Weakness encountered in First Quarter
During the first six months of 2014, adjusted revenue increased to $116,815,000from $113,353,000during the first six months of 2013 as a result of strengthening market conditions for pad rigs and conventional double sized rigs, particularly in the second quarter of the year.
Although adjusted revenue for the year-to-date period ended June 30, 2014increased, adjusted revenue per operating day decreased to $35,059during the first six months of 2014 from $35,883in the comparative six month period of 2013 due to the same factors that affected second quarter adjusted revenue per operating day.
Adjusted operating and maintenance costs are tied to revenue and amounted to $74,858,000($22,466per operating day) during the first six months of 2014 compared to $70,354,000($22,271per operating day) in the same period of the prior year.
The adjusted operating margin for the Company decreased to $41,957,000in the first six months of 2014 from $42,999,000during the corresponding period of 2013. This reduction occurred in the first quarter of 2014 due to a reduction in standby revenue as well as the change in rig mix (i.e. there was a higher percentage of activity generated by conventional rigs during the first quarter of 2014 compared to the corresponding quarter in 2013). During the second quarter, this decline in adjusted operating margin was partially offset by stronger market conditions.
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, 2014, deferred revenue related to these activities totalled $76,000(June 30, 2013- $371,000).
| Depreciation and Amortization Expense |
| $ Millions | Three Months Ended June 30 | | Six Months Ended June 30 | | | | | | | | | 2014 | 2013 | Change | %
Change | | 2014 | 2013 | Change | %
Change | | Depreciation and
Amortization Expense | 7.3 | 5.5 | 1.8 | 33% | | 15.1 | 13.0 | 2.1 | 16% |
The depreciation and amortization expense reported in the second quarter of 2014 of $7,256,000was higher than the corresponding quarter of 2013 ($5,556,000)due to the increased cost base for AKITA's fleet as well as due to higher rig activity. In addition, during the second quarter, the most active rigs also had the highest cost base. AKITA depreciates its rig assets using a unit of production method.
Depreciation and amortization expense for the first six months of 2014 totalled $15,119,000compared to $13,023,000for the corresponding period in 2013. As with the depreciation and amortization expense for the second quarter, both the higher cost base for AKITA's rigs as well as increased drilling activity were the major factors in the depreciation increase. In the first six months of 2014, drilling rig depreciation accounted for 96% of total depreciation and amortization expense (2013 - 96%).
While AKITA conducts several 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 | | | | | | | | | 2014 | 2013 | Change | %
Change | | 2014 | 2013 | Change | %
Change | | Selling & Administrative Expense
per Interim Financial Statements | 4.8 | 4.6 | 0.2 | 4% | | 10.0 | 9.4 | 0.6 | 6% | | Proportionate Share of Selling &
Administrative Expense from Joint Ventures(1) | 0.3 | 0.1 | 0.2 | 200% | | 0.5 | 0.3 | 0.2 | 67% | | Adjusted Selling & Administrative Expense(1) | 5.1 | 4.7 | 0.4 | 8% | | 10.5 | 9.7 | 0.8 | 8% |
| (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 9.0% of adjusted revenue in the first six months of 2014 compared to 8.6% of adjusted revenue in the first six months of 2013. The increased selling and administration costs were due to a combination of personnel and non-personnel related costs including recording bad debt expense of $175,000as well as computer system upgrades. The single largest component was salaries and benefits, which accounted for 58% of these expenses (60% in 2013).
| Equity Income from Joint Ventures |
| $ Millions | Three Months Ended June 30 | | Six Months Ended June 30 | | | | | | | | | 2014 | 2013 | Change | %
Change | | 2014 | 2013 | Change | %
Change | | Proportionate Share of Revenue from
Joint Ventures(1) | 16.6 | 11.0 | 5.6 | 51% | | 34.1 | 24.3 | 9.8 | 40% | | Proportionate Share of Operating & Maintenance Expenses
from Joint Ventures(1) | 10.5 | 6.6 | 3.9 | 59% | | 21.3 | 14.3 | 7.0 | 49% | | Proportionate Share of Selling & Administrative Expense
from Joint Ventures(1) | 0.3 | 0.1 | 0.2 | 200% | | 0.5 | 0.3 | 0.2 | 67% | | Equity Income from Joint Ventures per Interim Financial
Statements | 5.8 | 4.3 | 1.5 | 35% | | 12.3 | 9.7 | 2.6 | 27% |
| (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.
| Other Income |
| $ Millions | Three Months Ended June 30 | | Six Months Ended June 30 | | | | | | | | | 2014 | 2013 | Change | %
Change | | 2014 | 2013 | Change | %
Change | | Interest Income | 0.0 | 0.0 | 0.0 | N/A | | 0.1 | 0.1 | 0.0 | N/A | | Interest Expense | 0.0 | 0.0 | 0.0 | N/A | | (0.1) | 0.0 | (0.1) | N/A | | Gain on Sale of Rigs and Other Assets | 0.1 | 0.0 | 0.1 | N/A | | 0.1 | 0.0 | 0.1 | N/A | | Net Other Gains (Losses) | (0.5) | 0.0 | (0.5) | N/A | | (0.1) | 0.0 | (0.1) | N/A | | Total Other Income | (0.4) | 0.0 | (0.4) | N/A | | 0.0 | 0.1 | (0.1) | N/A |
The Company invests any cash balances in excess of its ongoing operating requirements in bank guaranteed highly liquid investments. Interest income decreased to $98,000in the first six months of 2014 from $163,000in 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 the second quarter of 2014, the Company began to access its operating loan facility.
During the second quarter of 2014, the Company disposed of certain non-core assets resulting in a $117,000gain. The Company did not have any significant disposals during the first six months of 2013.
During 2013 and 2014, the Company entered into forward foreign exchange contracts in order to mitigate foreign exchange exposure for capital purchases made outside of Canada. In that regard, AKITA recorded an unrealized foreign exchange loss of $945,000during the second quarter of 2014 (YTD 2014 - $647,000), which was partially offset by a realized foreign exchange gain of $376,000during the second quarter of 2014 (YTD 2014 - $499,000). The Company did not have similar foreign exchange exposures during the comparative periods during 2013. In addition to foreign exchange gains and losses, the Company had other gains and losses of $27,000in the second quarter of 2014 (YTD 2014 - $56,000). All of the foregoing has been classified as "Net Other Losses" on the Interim Consolidated Statements of Net Income and Comprehensive Income.