AKT press release
AKITA Drilling Ltd. Announces Third Quarter Earnings and Cash Flow
TSX - Toronto Stock Exchange · Oil · Natural Gas · Potash · Hydrogen · Canada
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CALGARY, Oct. 30, 2014/CNW/ - AKITA Drilling Ltd.'s net income for the three months ended September 30, 2014was $3,854,000($0.21per share) on revenue of $36,556,000compared to $3,540,000($0.20per share) on revenue of $33,096,000for the corresponding period in 2013. Funds flow from operations for the quarter ended September 30, 2014was $10,942,000compared to $11,300,000in the corresponding quarter in 2013.
Net income for the nine months ended September 30, 2014was $16,085,000($0.90basic earnings per share / $0.89diluted earnings per share) on revenue of $119,263,000. Comparative figures for 2013 were net income of $18,793,000($1.05basic earnings per share / $1.04diluted earnings per share) on revenue of $122,181,000. Funds flow from operations for the January to September period in 2014 was $39,216,000compared to $40,406,000for the comparative period in 2013.
Rig activity increased during the third quarter of 2014 to 1,519 operating days or 45.0% utilization compared to 1,347 operating days or 38.6% utilization during the third quarter of 2013. This increase was attributable to improved market conditions for conventional double and triple sized rigs. By contrast, AKITA's pad rigs were less active than during the corresponding period in 2013.
During the quarter, the Company completed construction of and deployed its first slant pad drilling rig. Management anticipates that this rig will provide AKITA with access to new opportunities in heavy oil drilling. The Company expects to have three additional pad rigs in service prior to year-end: an ultra-deep new build, a new pad double rig purchased earlier this year that is being refitted for the Canadian market and an existing pad triple rig that is being upgraded.
Although the recent decline in crude oil prices has not had a material impact on rig activity management anticipates that a prolonged decline may slow demand for rigs targeting oil prospects. While crude oil drilling potential is influenced by the price of crude oil, natural gas drilling potential continues to be tied to the establishment of FIDs (final investment decisions) by selected operators to invest in major west coast development for LNG (liquified natural gas) projects. AKITA remains well positioned with its fleet of pad rigs to be a significant supplier for any related drilling opportunities.
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 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 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 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 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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended September 30 | Nine Months Ended September 30 | | | | | | | | | | | | | | | | | | | | | | | | | | $Millions | 2014 | 2013 | Change | % Change | 2014 | 2013 | Change | % Change | | | | | | Revenue per Interim Financial Statements (1) | 36.6 | 33.1 | 3.5 | 11% | 119.3 | 122.2 | (2.9) | (2%) | | | | | | Proportionate Share of Revenue from Joint Ventures (2) | 13.8 | 12.0 | 1.8 | 15% | 47.9 | 36.2 | 11.7 | 32% | | | | | | Adjusted Revenue (2) | 50.4 | 45.1 | 5.3 | 12% | 167.2 | 158.4 | 8.8 | 6% | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | Nine Months Ended September 30 | | | | | | | | | | | | | | | | | | $Millions | 2014 | 2013 | Change | % Change | 2014 | 2013 | Change | % Change | | Operating & Maintenance | 25.1 | 21.6 | 3.5 | 16% | 78.7 | 77.6 | 1.1 | 1% | | Expenses per Interim | | | | | | | | | | Financial Statements (1) | | | | | | | | | | Proportionate Share of | | | | | | | | | | Operating & Maintenance Expenses from Joint | 9.4 | 7.6 | 1.8 | 24% | 30.7 | 21.9 | 8.8 | 40% | | Ventures (2) | | | | | | | | | | Adjusted Operating & Maintenance Expenses (2) | 34.5 | 29.2 | 5.3 | 18% | 109.4 | 99.5 | 9.9 | 10% | | | | | | | | | | |
| | Three Months Ended September 30 | Nine Months Ended September 30 | | | | | | | | | | | | | | | | | | $Millions | 2014 | 2013 | Change | % Change | 2014 | 2013 | Change | % Change | | Adjusted Revenue (2) | 50.4 | 45.1 | 5.3 | 12% | 167.2 | 158.4 | 8.8 | 6% | | Adjusted Operating & Maintenance Expenses (2) | 34.5 | 29.2 | 5.3 | 18% | 109.4 | 99.5 | 9.9 | 10% | | Adjusted Operating Margin(1)(2)(3) | 15.9 | 15.9 | 0.0 | 0% | 57.8 | 58.9 | (1.1) | (2%) |
| | Three Months Ended September 30 | Nine Months Ended September 30 | | | | | | | | | | | | | | | | | | $Dollars | 2014 | 2013 | Change | % Change | 2014 | 2013 | Change | % Change | | Adjusted Revenue per Operating Day (2) | 33,139 | 33,460 | (321) | (1%) | 34,457 | 35,158 | (701) | (2%) | | Adjusted Operating & | | | | | | | | | | Maintenance Expenses | 22,708 | 21,678 | 1,030 | 5% | 22,542 | 22,094 | 448 | 2% | | per Operating Day (2) | | | | | | | | | | Adjusted Operating Margin per Operating Day (2)(3) | 10,431 | 11,782 | (1,351) | (11%) | 11,915 | 13,064 | (1,149) | (9%) |
| (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) | Proportionateshareof 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) | Adjustedoperating margin is the difference between adjusted revenue and adjusted operating & maintenance expenses. |
_Third__Quarter__Comparatives__– Lower Operating Margins Diminish the Impact of Increased Activity Levels_
During the third quarter of 2014, adjusted revenue increased to $50,338,000from $45,071,000during the third quarter of 2013 as a result of increased rig activity, particularly for AKITA's conventional doubles and triples.
Although adjusted revenue for the three month period ended September 30, 2014increased, adjusted revenue per operating day decreased to $33,139during the third quarter of 2014 from $33,460in the comparative quarter in 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 rigs, typically generate higher revenue on a "per day" basis.
Adjusted operating and maintenance costs are tied to revenue and amounted to $34,494,000($22,708per operating day) during the third quarter of 2014 compared to $29,200,000($21,678per 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 third 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 decreased to $15,844,000($10,431per operating day) in the third quarter of 2014 from $15,871,000($11,782per operating day) during the corresponding quarter of 2013. During the third quarter of 2014, a higher proportion of conventional rigs worked compared to the third quarter of 2013 when more pad rigs operated. This change in rig mix resulted in both lower overall average day rates and lower operating margins than during the corresponding period in 2013. Higher activity levels in the third quarter of 2014 compared to the corresponding period in 2013 were not sufficient to offset these changes.
_Year-to-Date__Comparatives__– Improvements in the Second and Third Quarters Partially Offset Weakness Encountered in First Quarter_
During the first nine months of 2014, adjusted revenue increased to $167,153,000from $158,424,000during the comparative nine month period of 2013 as a result of strengthening market conditions for conventional double and triple sized rigs. Pad rig activity had a number of program delays which were most pronounced during the third quarter.
Although adjusted revenue for the year-to-date period ended September 30, 2014increased, adjusted revenue per operating day decreased to $34,457during the first nine months of 2014 from $35,158in the comparative period in 2013 due to the same factors that affected third quarter adjusted revenue per operating day.
Adjusted operating and maintenance costs are tied to revenue and amounted to $109,352,000($22,542per operating day) during the first nine months of 2014 compared to $99,554,000($22,094per operating day) in the same period of the prior year.
The adjusted operating margin for the Company decreased to $57,801,000in the first nine months of 2014 from $58,870,000during the corresponding period of 2013. This reduction occurred during 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 and third quarters of 2014, 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 September 30, 2014, deferred revenue related to these activities totalled $364,000(September 30, 2013- $498,000).
Depreciation and Amortization Expense
| | Three Months Ended September 30 | Nine Months Ended September 30 | | | | | | | | $Millions | 2014 | 2013 | Change | % Change | 2014 | 2013 | Change | % Change | | Depreciation and Amortization Expense | 7.1 | 6.5 | 0.6 | 9% | 22.2 | 19.5 | 2.7 | 14% |
The increase in depreciation and amortization expense to $7,088,000during the third quarter of 2014 from $6,502,000during the corresponding quarter in 2013 was largely attributable to an increase in the average cost base for AKITA's rigs as well as an increase in drilling activity by AKITA's conventional rigs.
Depreciation and amortization expense for the first nine months of 2014 totalled $22,208,000compared to $19,524,000for the corresponding period in 2013. As with the depreciation and amortization expense for the third quarter, both an increase in drilling activity as well as a higher average cost base per rig resulted in depreciation and amortization expense being 14% higher in the first nine months of 2014 versus the comparative period in 2013. In the first nine months of 2014, drilling rig depreciation accounted for 96% of total depreciation and amortization expense (2013 - 96%).
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
| | Three Months Ended September 30 | Nine Months Ended September 30 | | | | | | | | $Millions | 2014 | 2013 | Change | % Change | 2014 | 2013 | Change | % Change | | Selling & Administrative | 4.0 | 4.3 | (0.3) | (7%) | 14.1 | 13.7 | 0.4 | 3% | | Expense per | | | | | | | | | | Interim Financial Statements | | | | | | | | | | | | | | | | | | | | Proportionate Share of Selling | | | | | | | | | | & Administrative Expense | 0.1 | 0.1 | 0.0 | N/A | 0.8 | 0.3 | 0.5 | 167% | | from Joint Ventures (1) | | | | | | | | | | Adjusted Selling & Administrative Expense (1) | 4.1 | 4.4 | (0.3) | (7%) | 14.9 | 14.0 | 0.9 | 6% |
| (1) | Proportionateshareof 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 8.8% of adjusted revenue in the first nine months of 2014 compared to 8.7% of adjusted revenue in the first nine months of 2013. The increased selling and administrative costs were due to a combination of personnel and non-personnel related costs including computer system upgrades. The single largest component was salaries and benefits, which accounted for 59% of these expenses in the first nine months of 2014 (62% in 2013).
Equity Income from Joint Ventures
| | Three Months Ended September 30 | Nine Months Ended September 30 | | | | | | | | $Millions | 2014 | 2013 | Change | % Change | 2014 | 2013 | Change | % Change | | Proportionate Share of Revenue from Joint Ventures (1) | 13.8 | 12.0 | 1.8 | 15% | 47.9 | 36.2 | 11.7 | 32% | | Proportionate Share of | | | | | | | | | | Operating & Maintenance Expenses from Joint | 9.4 | 7.6 | 1.8 | 24% | 30.7 | 21.9 | 8.8 | 40% | | Ventures (1) | | | | | | | | | | Proportionate Share of Selling | | | | | | | | | | & Administrative Expense | 0.1 | 0.1 | 0.0 | N/A | 0.8 | 0.3 | 0.5 | 167% | | from Joint Ventures (1) | | | | | | | | | | Equity Income from Joint
Ventures | 4.3 | 4.3 | 0.0 | 0% | 16.6 | 14.0 | 2.6 | 19% |
| (1) | Proportionateshareof 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 (Losses)
| | Three Months Ended September 30 | Nine Months Ended September 30 | | | | | | | | $Millions | 2014 | 2013 | Change | % Change | 2014 | 2013 | Change | % Change | | Total Other Income (Losses) | 0.6 | (0.0) | 0.6 | N/A | 0.6 | 0.1 | 0.5 | 500% |
The Company invests any cash balances in excess of its ongoing operating requirements in bank guaranteed highly liquid investments. Interest income decreased to $142,000in the first nine months of 2014 from $259,000in the corresponding period in 2013 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. In addition to interest income, the Company has recorded interest expense totalling $119,000during the first nine months of 2014 (first nine months of 2013 - $81,000), primarily as a result of standby charges for its lending facility.
During the third quarter of 2014, the Company disposed of an older underutilized pad rig. Additionally, throughout the current year, AKITA disposed of other non-core assets resulting in year-to-date gains totalling $499,000. AKITA disposed of several minor assets during the first nine months of 2013 resulting in $184,000in gains.
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 currency gain of $402,000during the third quarter of 2014 (YTD 2014 – unrealized foreign currency loss of $245,000). The balance reported as "Net Other Losses" on the Interim Consolidated Statements of Net Income and Comprehensive Income also includes realized foreign exchange gains (YTD 2014 - $472,000), unrealized losses on financial instruments (YTD 2014 - $155,000) and other gains (YTD 2014 - $46,000).
Income Tax Expense
| | Three Months Ended September 30 | Nine Months Ended September 30 | | | | | | | | $Millions | 2014 | 2013 | Change | % Change | 2014 | 2013 | Change | % Change | | Current Tax Expense | 0.9 | 0.4 | 0.5 | 125% | 5.1 | 5.0 | 0.1 | 2% | | Deferred Tax Expense | 0.4 | 1.0 | (0.6) | (60%) | 0.3 | 1.5 | (1.2) | (80%) | | Income Tax Expense | 1.3 | 1.4 | (0.1) | (7%) | 5.4 | 6.5 | (1.1) | (17%) |
Income tax expense decreased to $5,425,000in the first nine months of 2014 from $6,508,000in the corresponding period in 2013 due to lower pre-tax earnings. The completion of major capital projects affects the portion of income taxes that are deferred to future dates.