Mr. Darcy Reynolds reports
AKITA DRILLING LTD. ANNOUNCES YEAR-TO-DATE EARNINGS AND CASH FLOW
Akita Drilling Ltd.'s net loss for the three months ended June 30, 2016, was $4,062,000 (net loss of 23 cents per share, basic and diluted) on revenue of $3,646,000, compared with a net loss of $1.62-million (net loss of nine cents per share, basic and diluted) on revenue of $22,536,000 for the corresponding period in 2015. Funds flow from operations for the quarter ended June 30, 2016, was $2,688,000 compared with $9,072,000 in the corresponding quarter in 2015.
Net income for the six months ended June 30, 2016, was $14,111,000 (79 cents per share) on revenue of $45,636,000, which included a contract cancellation fee. Comparative figures for the corresponding six-month period in 2015 were net income of $2,598,000 (14 cents per share, basic and diluted) and revenue of $69,251,000. Funds flow from operations for the January to June period in 2016 was $28,071,000 compared with $23,131,000 for the comparative period in 2015.
Crude oil and natural gas prices have recovered slightly over the first quarter of 2016 with West Texas Intermediate (WTI) closing at $48.33 (U.S.) at June 30, 2016, which is 31 per cent higher than in the first quarter of 2016. Oil and gas companies remain very cautious with capital spending resulting in limited opportunities for companies in the contract drilling segment. The Western Canadian active rig count for the six months ended June 30, 2016, has declined 49 per cent when compared with the same period of 2015. Akita's rig utilization for the six months ended June 30, 2016, declined 71 per cent with only 719 operating days versus 2,520 operating days in the same period of 2015. This significant decline in activity is the primary driver for Akita's net loss in the second quarter of 2016.
During these challenging times, management's focus has been to preserve Akita's strong financial position. Working capital at June 30, 2016, has increased to $31,373,000 from $16,002,000 at Dec. 31, 2015, and cash and cash equivalent balances have increased 140 per cent over the same time frame. Capital spending has been limited to routine capital and totalled $1.53-million for the six months ended June 30, 2016, compared with $11,874,000 for the six months ended June 30, 2015, which included significant rig construction costs.
Despite small improvements in crude oil and natural gas prices, management anticipates the balance of 2016 and into 2017 to remain very challenging for Akita and the contract drilling industry as a whole. Despite this challenge, management believes the company is in a strong position and is poised to pursue opportunities as they arise.
Selected information from Akita Drilling's management's discussion and analysis from the quarterly report is as follows:
Basis of analysis in the MD&A, and non-standard and additional generally accepted accounting principle items
The company reports its joint venture activities in the financial statements in accordance with international financial reporting standards, 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 for assets and obligations for liabilities being conferred upon the parties to the arrangement prior to concluding that Akita's joint ventures are properly 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 the MD&A, the proportionate share of assets, liabilities and financial activities is included as non-standard information, 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.
During the six months ended June 30, 2016, the company included a material contract cancellation fee in revenue. The effect of this fee has been excluded in the company's adjusted revenue and adjusted operating margin analysis.
Revenue and operating and maintenance expenses
Second quarter comparatives
During the second quarter of 2016, adjusted revenue decreased to $4,964,000 ($41,025 per day) compared with $30,205,000 ($34,130 per day) during the second quarter of 2015 as a result of weak market conditions, which affected all rig categories. The increase on a per-day basis was a result of the rig mix in the second quarter of 2016 as compared with the same period in 2015, in which rigs of a broader mix were operating as opposed to only triple-pad rigs in 2016.
Adjusted operating and maintenance costs are tied to operating days and amounted to $2,383,000 ($19,694 per operating day) during the second quarter of 2016 compared with $18.74-million ($21,175 per operating day) in the same period of the prior year. The decrease in operating and maintenance costs, on a total basis, resulted primarily from reduced drilling activity while on a per-day basis, and resulted from cost reductions implemented over the previous year.
The adjusted operating margin for the company decreased to $2,581,000 in the second quarter of 2016 from $11,465,000 during the corresponding quarter of 2015. The decreased adjusted operating margin is a direct result of decreased drilling activity as Akita's operating days declined 86 per cent in the second quarter of 2016 compared with the same period in 2015. On a per-day basis, adjusted operating margin increased to $21,331 in the second quarter of 2016 from $12,955 in the comparative period of 2015, primarily as a result of the rig mix operating.
Year-to-date comparatives
During the first six months of 2016, adjusted revenue decreased to $24,376,000 from $89,707,000 during the first six months of 2015 as a result of lower drilling activity. Adjusted revenue per operating day decreased to $33,903 during the first six months of 2016 from $35,598 in the comparative six-month period of 2015. This decrease is due to increased competition in the drilling industry as rigs compete for fewer jobs, which has driven day rates lower.
While overall adjusted revenue for the six months ended June 30, 2016, declined by 73 per cent compared with the corresponding period in 2015, unadjusted revenue per the interim financial statements decreased by only 34 per cent. Offsetting the reduction in adjusted revenue was contract cancellation revenue of $28.25-million (2015: nil) relating to a multiyear contract that was cancelled in January of 2016 for one of Akita's triple-pad rigs. Payment of the contract cancellation fee was divided into three payments, including the first which was received during the first quarter of 2016. The remaining amounts are included in current and long-term receivables on the company's statement of financial position.
Adjusted operating and maintenance costs are tied to operating days and amounted to $14.68-million ($20,417 per operating day) during the first six months of 2016 compared with $58,249,000 ($23,115 per operating day) in the same period of the prior year. The decrease on a per-day basis is a result of both rig mix and cost controls.
The adjusted operating margin for the company decreased to $9,696,000 in the first six months of 2016 from $31,458,000 during the corresponding period of 2015. On a per-day basis, adjusted operating margin increased to $13,485 for the six months ended June 30, 2016, from $12,483 in the corresponding period of 2015. This increase in margin per day is due to lower costs per day resulting from a change in the rig mix, as well as cost controls as noted above.
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 June 30, 2016, there was no deferred revenue related to these activities (June 30, 2015: $79,000).
Depreciation and amortization expense
Depreciation and amortization expense was 35 per cent lower in the second quarter of 2016 compared with the corresponding quarter of 2015. As Akita depreciates its rig fleet on a unit-of-production basis, the decrease in the depreciation and amortization expense is directly related to the 87-per-cent decrease in the number of operating days when comparing the second quarter of 2016 with the corresponding period of 2015. On a per-day basis, depreciation in the second quarter of 2016 ($44,496 per day) was significantly higher than the second quarter of 2015 ($9,351 per day) as rigs are subject to certain minimum annual depreciation (in addition to the unit-of-production basis for depreciation).
Depreciation and amortization expense for the first six months of 2016 totalled $11,659,000 compared with $17,344,000 for the corresponding period in 2015. As with the depreciation and amortization expense for the second quarter, lower rig activity levels were the driver behind the lower depreciation and amortization expense in 2016 to date. In the first six months of 2016, drilling rig depreciation accounted for 95 per cent of total depreciation and amortization expense (2015: 96 per cent).
While Akita conducts several of its drilling operations through 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 expenses
Adjusted selling and administrative expenses were 29 per cent of adjusted revenue in the first six months of 2016 compared with 10 per cent of adjusted revenue in the first six months of 2015. The increase in selling and administrative expenses when compared with adjusted revenue is a result of the fixed nature of the majority of the company's selling and administrative costs. The single largest component of selling and administrative expenses was salaries and benefits, which accounted for 57 per cent of these expenses (58 per cent in 2015).
Equity income from joint ventures
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. Two-thirds of Akita's joint ventures utilize pad drilling rigs.
Other income (loss)
Interest income increased to $493,000 in the first six months of 2016 from $68,000 in the corresponding period in 2015 primarily due to accrued interest ($394,000) on receivable balances related to the contract cancellation discussed previously. The balance of interest income is interest on cash and term deposit balances.
During the first six months of 2016, the company incurred interest expense of $80,000 related to the future cost of the company's defined benefit pension plan. During the corresponding six-month period in 2015, Akita incurred interest expense of $285,000 primarily as a result of the company's indebtedness, as well as the future cost of the defined benefit pension plan.
During the first six months of 2016, the company sold some ancillary assets for $125,000 that resulted in a gain of $30,000. During the first six months of 2015, the company disposed of certain non-core assets for $786,000 resulting in an $111,000 loss.
Net other gains (losses) of $110,000 for the six months ended June 30, 2016, relate primarily to the discount of the long-term receivable associated with the contract cancellation fee. Approximately 95 per cent of amounts recorded as net other gains (losses) during the first six months of 2015 related to foreign exchange that was associated with rig construction for Akita's newest triple-pad rig.
Income tax expense
Income tax expense increased to $5,426,000 in the first six months of 2016 from $2,777,000 in the corresponding period in 2015 mainly due to higher pretax earnings resulting from the contract cancellation fee. Deferred taxes for the six months ended June 30, 2016, were lower than the same period in 2015 as the effect of the 2015 Alberta corporate income tax increase affected the second quarter of 2015, thereby increasing the company's future tax liabilities.
Net income (loss), funds flow and net cash from operating activities
During the three months ended June 30, 2016, the company reported a net loss of $4,062,000 or 23 cents per Class A non-voting and Class B common share (basic and diluted) compared with a net loss of $1.62-million or nine cents per share (basic and diluted) in the comparative quarter of 2015. Two primary factors that contributed to the increased loss in 2016 were the 86-per-cent reduction in operating days during the second quarter of 2016 compared with the same period in 2015 and the increase in depreciation resulting from minimum depreciation days for non-operating rigs.
Funds flow from operations decreased to $2,688,000 during the second quarter of 2016 from $9,072,000 in the corresponding quarter in 2015. Funds flow from operations was negatively affected by weaker drilling activity in the second quarter of 2016 but was not affected by depreciation expense as this is a non-cash item.
Net income increased to $14,111,000 or 79 cents per Class A non-voting and Class B common shares (basic and diluted) for the first six months of 2016 from $2,598,000 or 14 cents per share (basic and diluted) in the corresponding period of 2015. Funds flow from operations increased to $28,071,000 during the first six months of 2016 from $23,131,000 in the corresponding period in 2015. The increase in both net income and funds flow for the six-month period ended June 30, 2016, was directly attributable to the contract cancellation fee recorded in the first quarter of 2016. The larger increase in net income than in funds flow in the first six months of 2016 compared with 2015 is a result of higher depreciation and future taxes in 2015, which are non-cash items that do not affect funds flow.
Fleet and rig utilization
At June 30, 2016, Akita had 31 drilling rigs, including nine that operated under joint ventures (28.225 net to Akita), compared with 36 rigs (32.725 net) in the corresponding period of 2015 (five rigs decommissioned). There were no changes to Akita's rig fleet during the first six months of 2016.
Liquidity and capital resources
Cash used for capital expenditures totalled $1.53-million in the first six months of 2016 (2015: $11,874,000). All of the capital spending in 2016 relates to routine items while nearly three quarters of the 2015 capital expenditures related to the completion of a triple-pad rig.
At June 30, 2016, Akita's statement of financial position included working capital (current assets minus current liabilities) of $31,373,000 compared with working capital of $7,414,000 at June 30, 2015, and working capital of $16,002,000 at Dec. 31, 2015. Readers should also be aware of the seasonal nature of Akita's business 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 breakup. Non-cash working capital amounted to $8.8-million at June 30, 2016, compared with a non-cash working capital of $6,637,000 at Dec. 31, 2015. Working capital at June 30, 2016, improved compared with June 30, 2015, as a result of cost controls over capital and operating expenses, as well as the first payment and receivables associated with the contract cancellation fee.
The company chooses to maintain a conservative statement of financial position due to the cyclical nature of the industry. In addition to its cash and term deposit balances, the company has an operating loan facility with its principal banker totalling $100-million that is available until 2020. Although the facility has been provided to finance general corporate needs, capital expenditures and acquisitions, management intends to access this facility primarily to enable the company to explore expansion opportunities or to finance new rig construction requirements related to drilling contracts that it might be awarded. The interest rate on the facility varies based upon the actual amounts borrowed, and ranges from 0.45 per cent to 1.45 per cent over prime interest rates or 1.45 per cent to 2.45 per cent over guaranteed notes, depending on the preference of the company. The company did not have any borrowings from this facility at June 30, 2016 (2015: $2.5-million).
The company's objectives when managing capital are:
- To safeguard the company's ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders;
- To augment existing resources to meet growth opportunities.
The company manages its capital structure and makes adjustments in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the company may adjust the amount of dividends paid to shareholders, repurchase or issue new shares, sell assets, or take on long-term debt. Since 1999, dividend rates have increased eight times with no decreases. The last dividend increase was declared on March 5, 2014.
During the 10-year period since 2006, Akita has repurchased 711,408 Class A non-voting shares through normal course issuer bids and has issued 122,200 Class A non-voting shares upon exercise of stock options.
The company had two rigs under multiyear contracts at June 30, 2016. Of these contracts, one is due to expire in 2017 and one in 2018.
From time to time, the company may provide guarantees for bank loans to joint venture partners in respect of sales of rig interests to joint venture partners. At June 30, 2016, Akita provided $4,792,000 in deposits with its bank for those purposes (June 30, 2015: $8,482,000 and Dec. 31, 2015: $5,978,000). Akita's security from its partners for these guarantees includes interests in specific rig assets. These balances have been classified as restricted cash on the interim statements of financial position.
INTERIM STATEMENTS OF NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
($ thousands)
Three months ended Six months ended
June 30, June 30,
2016 2015 2016 2015
Revenue $3,646 $22,536 $45,636 $69,251
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Costs and expenses
Operating and maintenance 1,464 13,858 10,618 45,102
Depreciation and amortization 5,384 8,276 11,659 17,344
Selling and administrative 3,037 3,726 6,999 8,437
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Total costs and expenses 9,885 25,860 29,276 70,883
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Revenue less costs and expenses (6,239) (3,324) 16,360 (1,632)
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Equity income from joint ventures 389 2,694 2,844 7,073
Other income (loss)
Interest income 245 37 493 68
Interest expense (40) (79) (80) (285)
Gain (loss) on sale of assets 57 79 30 (111)
Net other gains (losses) 57 33 (110) 262
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Total other income (loss) 319 70 333 (66)
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Income (loss) before income taxes (5,531) (560) 19,537 5,375
Income taxes (recovery) (1,469) 1,060 5,426 2,777
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Net income (loss) and comprehensive income (loss)
for the period attributable to shareholders (4,062) (1,620) 14,111 2,598
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Earnings (loss) per Class A and Class B share
Basic (0.23) (0.09) 0.79 0.14
Diluted (0.23) (0.09) 0.79 0.14
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We seek Safe Harbor.
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