Mr. Murray Roth reports
AKITA DRILLING LTD. ANNOUNCES THIRD QUARTER EARNINGS AND CASH FLOW
Akita Drilling Ltd.'s net income for the three months ended Sept. 30, 2014, was $3,854,000 (21 cents per share) on revenue of $36,556,000 compared with $3.54-million (20 cents per share) on revenue of $33,096,000 for the corresponding period in 2013. Funds flow from operations for the quarter ended Sept. 30, 2014, was $10,942,000 compared with $11.3-million in the corresponding quarter in 2013.
Net income for the nine months ended Sept. 30, 2014, was $16,085,000 (90-cent basic earnings per share/89-cent diluted earnings per share) on revenue of $119,263,000. Comparative figures for 2013 were net income of $18,793,000 ($1.05 basic earnings per share/$1.04 diluted earnings per share) on revenue of $122,181,000. Funds flow from operations for the January to September period in 2014 was $39,216,000 compared with $40,406,000 for the comparative period in 2013.
Rig activity increased during the third quarter of 2014 to 1,519 operating days, or 45.0-per-cent utilization, compared with 1,347 operating days, or 38.6-per-cent 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 ultradeep 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.
Third quarter comparatives -- lower operating margins diminish the impact of increased activity levels
During the third quarter of 2014, adjusted revenue increased to $50,338,000 from $45,071,000 during 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 Sept. 30, 2014, increased, adjusted revenue per operating day decreased to $33,139 during the third quarter of 2014 from $33,460 in 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 with 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 ($22,708 per operating day) during the third quarter of 2014 compared with $29.2-million ($21,678 per 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 with 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 ($10,431 per operating day) in the third quarter of 2014 from $15,871,000 ($11,782 per operating day) during the corresponding quarter of 2013. During the third quarter of 2014, a higher proportion of conventional rigs worked compared with 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 with 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 $167,153,000 from $158,424,000 during 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 Sept. 30, 2014, increased, adjusted revenue per operating day decreased to $34,457 during the first nine months of 2014 from $35,158 in 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 ($22,542 per operating day) during the first nine months of 2014 compared with $99,554,000 ($22,094 per operating day) in the same period of the prior year.
The adjusted operating margin for the company decreased to $57,801,000 in the first nine months of 2014 from $58.87-million during 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 (there was a higher percentage of activity generated by conventional rigs during the first quarter of 2014 compared with 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 prepayments 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 Sept. 30, 2014, deferred revenue related to these activities totalled $364,000 (Sept. 30, 2013 -- $498,000).
Depreciation and amortization expense
The increase in depreciation and amortization expense to $7,088,000 during the third quarter of 2014 from $6,502,000 during 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 $22,208,000 compared with $19,524,000 for 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 per cent 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 per cent of total depreciation and amortization expense (2013 -- 96 per cent).
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
Adjusted selling and administrative expenses were 8.8 per cent of adjusted revenue in the first nine months of 2014 compared with 8.7 per cent 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 per cent of these expenses in the first nine months of 2014 (62 per cent in 2013).
Other income (losses)
The company invests any cash balances in excess of its continuing operating requirements in bank-guaranteed highly liquid investments. Interest income decreased to $142,000 in the first nine months of 2014 from $259,000 in 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 $119,000 during 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 $184,000 in 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 $402,000 during the third quarter of 2014 (year-to-date 2014 -- unrealized foreign currency loss of $245,000). Net other losses also include realized foreign exchange gains (year-to-date 2014 -- $472,000), unrealized losses on financial instruments (year-to-date 2014 -- $155,000) and other gains (year-to-date 2014 -- $46,000).
Income tax expense
Income tax expense decreased to $5,425,000 in the first nine months of 2014 from $6,508,000 in the corresponding period in 2013 due to lower pretax earnings. The completion of major capital projects affects the portion of income taxes that are deferred to future dates.
Net income, funds flow and net cash from operating activities
Net income attributable to shareholders increased to $3,854,000, or 21 cents per Class A non-voting and Class B common share (basic and diluted), for the three-month period ended Sept. 30, 2014, from $3.54-million, or 20 cents per share (basic and diluted), in the comparative quarter of 2013. Funds flow from operations decreased to $10,942,000 in the third quarter of 2014 from $11.3-million in the corresponding quarter in 2013. Changes in quarterly net income that occurred in the third quarter of 2014 compared with the corresponding quarter in 2013 were attributable to higher activity levels in the current year, as well as gains from asset sales and currency exchange rates, which were partially offset by lower margins and higher depreciation charges. Funds flow from operations was not affected by the aforementioned gains from asset sales and currency movements or depreciation expense as these are all non-cash items.
Net income decreased to $16,085,000, or 90 cents per Class A non-voting and Class B common share (basic) (89 cents, diluted) for the first nine months of 2014 from $18,793,000, or $1.05 per share (basic) ($1.04, diluted) in the corresponding period of 2013. Funds flow from operations decreased to $39,216,000 in the first nine months of 2014 from $40,406,000 in the corresponding period in 2013. Comparability of net income and funds flows for these two periods were mostly affected by rig activity levels (higher in 2014 on a year-to-date basis), operating margins per operating day (lower in 2014 on a year-to-date basis) and depreciation (higher in 2014 on a year-to-date basis).
Fleet and rig utilization
At Sept. 30, 2014, Akita had 36 drilling rigs, including 10 that operated under joint ventures (32.725 net to Akita) compared with 38 rigs (35.725 net to Akita) in the corresponding period of 2013. At Sept. 30, 2014, the company had three additional rigs under construction (three net to Akita). During the third quarter of 2014, the company disposed of one of its underutilized pad rigs.
Liquidity and capital resources
Cash used for capital expenditures totalled $71,285,000 during the first nine months of 2014 (2013 -- $27,892,000). The most significant expenditures related to the following projects:
- Continuing construction of a new ultradeep pad rig (scheduled to commence its multiyear contract in the fourth quarter of 2014);
- Completion of the conversion of a conventional rig into the company's first slant pad rig (this rig commenced operations during the third quarter of 2014);
- Purchasing and refitting of a new pad rig to enable it to operate in Canada (completion of the refit is scheduled for the fourth quarter of 2014 at which time the rig will operate under a one-year initial contract);
- Upgrading a pad triple to make it more suitable for drilling natural gas targets in the Duvernay or Montney formations (the rig is scheduled to commence operations during the fourth quarter of 2014);
- Continued construction of a pad rig announced in the first quarter of 2014 (the rig is anticipated to meet demand for proposed liquified natural gas-related drilling projects and is scheduled to be completed in the first half of 2015).
At Sept. 30, 2014, Akita's statement of financial position included working capital (current assets minus current liabilities) of $11,061,000 compared with working capital of $33,749,000 at Sept. 30, 2013, and working capital of $40,645,000 at Dec. 31, 2013. Readers should be aware of the significant capital expenditure program undertaken by the company as well as the seasonal nature of Akita's business and its impact 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 breakup and decline thereafter as a result of increased drilling activity. Non-cash working capital amounted to $8,127,000 at Sept. 30, 2014, compared with $26,647,000 at Dec. 31, 2013.
During the nine-month period ended Sept. 30, 2014, the company purchased 27,600 Class A non-voting shares at an average price of $15.49 pursuant to a normal course issuer bid. The company did not purchase any shares pursuant to a normal course issuer bid during the first nine months of 2013.
During 2013, the company was awarded a contract to construct and operate an ultradeep capacity pad rig under a multiyear contract. During the first quarter of 2014, the company commenced construction of a second pad rig. Akita sourced approximately $26-million of materials for these rigs from non-Canadian suppliers. In order to minimize the risk of currency translation adjustments, Akita purchased forward currency contracts totalling $18-million, of which $4.25-million was outstanding at Sept. 30, 2014. These contracts expire during the fourth quarter of 2014 and the first quarter of 2015.
The company had six rigs under multiyear contracts at Sept. 30, 2014. Of these contracts, two are anticipated to expire in 2014, one in 2015, one in 2016, one in 2018 and one in 2019.
From time to time, the company may provide guarantees for bank loans to joint venture partners in respect of sales to joint venture interests. At Sept. 30, 2014, Akita provided $9,381,000 in deposits with the bank for those guarantees. These funds have been classified as restricted cash.
INTERIM CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share)
Three months ended Sept. 30, Nine months ended Sept. 30,
2014 2013 2014 2013
Revenue $ 36,556 $ 33,096 $119,263 $122,181
Costs and expenses
Operating and maintenance 25,141 21,589 78,676 77,638
Depreciation and amortization 7,088 6,502 22,208 19,524
Selling and administrative 4,043 4,314 14,097 13,753
Total costs and expenses 36,272 32,405 114,981 110,915
Revenue less costs and expenses 284 691 4,282 11,266
Equity income from joint ventures 4,270 4,234 16,588 13,948
Other income (losses)
Interest income 43 96 142 259
Interest expense (42) (27) (119) (81)
Gain on sale of assets 381 183 499 184
Net other gains (losses) 210 (273) 118 (275)
Total other income (losses) 592 (21) 640 87
Income before income taxes 5,146 4,904 21,510 25,301
Income taxes 1,292 1,364 5,425 6,508
Net income and comprehensive income for
the period attributable to shareholders 3,854 3,540 16,085 18,793
Earnings per Class A and Class B share
Basic 0.21 0.20 0.90 1.05
Diluted 0.21 0.20 0.89 1.04We seek Safe Harbor.
© 2024 Canjex Publishing Ltd. All rights reserved.