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 March 31, 2017, was $4,975,000 (net loss of 28 cents per share basic and diluted) on revenue of $19,193,000, compared with net income of $18,173,000 (net income of $1.01 per share basic and diluted) on revenue of $41,991,000 ($13,741,000 from direct operations and $28.25-million from contract cancellation fee) for the corresponding period in 2016. Funds flow from operations for the quarter ended March 31, 2017, was $1,824,000, compared with $25,368,000 in the corresponding quarter in 2016.

The first quarter of 2017 saw considerable increases in drilling activity across the Western Canadian sedimentary basin when compared with the first quarter of 2016. As a result of increased West Texas Intermediate crude oil prices, operators have begun to expand their capital programs, which in turn has led to significantly more opportunities for drilling companies than in the first quarter of 2016. However, this marked improvement in drilling activity over 2016 is still well below historical averages and there continues to be pricing pressure on drilling companies. This pricing pressure is likely to continue until some stability in crude oil prices is obtained. Akita saw a 61-per-cent improvement in its operating days in the first quarter of 2017 when compared with the same period in 2016. To satisfy this demand, Akita started up 12 rigs in the first quarter of 2017 that had previously been down for extended periods.

Selected information from Akita's management discussion and analysis from the quarterly report

Introduction and general overview

Activity levels in the contract drilling industry are highly correlated to the market prices for both crude oil and natural gas. Average West Texas Intermediate crude oil prices increased 56 per cent when comparing the first quarter of 2017 with the first quarter of 2016 and natural gas Alberta Energy Company (AECO) spot prices increased 21 per cent over the same time period. This strengthening of commodity prices has had a correspondingly positive effect on drilling activity in the Western Canadian sedimentary basin with industry utilization rates increasing.

This increase in utilization is a positive sign for the drilling industry and Akita, however, pricing pressure still remains severe as discussed further in this MD&A.

Readers of the MD&A should be aware that historically, the first quarter of the calendar year is the most active in the drilling industry, as operators take advantage of the frozen ground making the movement of heavy equipment easier. Lower activity levels that result from spring breakup and associated travel bans on public roads characterize the second quarter.

Generally, Akita meets or exceeds industry average rig utilization rates as a result of positive customer relations, meaningful joint ventures with aboriginal and first nations partners, employee expertise, safety performance, drilling performance, and the majority of the company's rig fleet being invested in high-demand pad rigs.

The attached table summarizes first quarter utilization for Akita and industry for 2017 and 2016.

Utilization rates percentages         Akita         Industry (1) 

2017, January to March                  38%                 40%
2016, January to March                  21%                 21%

(1) Source: Canadian Association of Oilwell Drilling 
Contractors (CAODC).

During the first quarter of 2017 Akita's pad triple rigs, conventional singles and conventional doubles all had significant activity improvements over the same period of 2016.

Fleet and rig utilization

Akita had 28 drilling rigs at March 31, 2017, including eight that operated under joint ventures (26.750 net to Akita), compared with 31 rigs (27.725 net) at March 31, 2016. In the fourth quarter of 2016, two new rigs were added and five rigs were decommissioned. There were no changes to the company's rig fleet during the first quarter of 2017.

Revenue, and operating and maintenance expenses

During the first quarter of 2017, adjusted revenue increased to $25,339,000 from $19,412,000 in the first quarter of 2016, due solely to higher utilization of the company's rig fleet. On a per-operating-day basis, adjusted revenue per operating day decreased to $26,367 in the first quarter of 2017 from $32,462 in the same period of 2016. This significant decline in revenue per day was a result of two factors, the first and most significant being the continuation of the bottom of the cycle spot rig pricing which was reached in mid-2016 and has continued throughout the first quarter of 2017. Secondly, a change in the mix of rigs working saw more single and double rigs working in the first quarter of 2017, compared with the same period of 2016. Single and double rigs do not earn as high a day rate as triple rigs.

Adjusted operating and maintenance expenses are tied to operating days and amounted to $21,743,000 ($22,625 per operating day) during the first quarter of 2017, compared with $12,297,000 ($20,564 per operating day) during the same period of the prior year. The increase in adjusted operating and maintenance expenses is primarily due to more operating days in the first quarter of 2017, compared with the first quarter of 2016. High rig start-up costs were the main factor behind the increase to adjusted operating and maintenance costs on a per-operating-day basis as 12 rigs started up during the first quarter of 2017, compared with only one rig starting up in the same period of 2016.

The adjusted operating margin for the company decreased to $3,596,000 ($3,742 per operating day) in the first quarter of 2017 from $7,115,000 ($11,898 per operating day) during the corresponding quarter of 2016. The reduction in adjusted operating margin both as a whole and on a per-operating-day basis is directly related to lower adjusted revenue per operating day, down 19 per cent in the first quarter of 2017, compared with the first quarter of 2016, while operating costs were up 10 per cent over the same period for the reasons noted above.

Depreciation and amortization expense

Depreciation and amortization expense increased to $6,736,000 during the first quarter of 2017 from $6,275,000 during the corresponding period in 2016. Akita depreciates its rig fleet on a unit of production basis, and the increase in depreciation and amortization was directly correlated to the increase in overall drilling days, offset slightly by rigs with lower-cost basis working in the first quarter of 2017, compared with the first quarter of 2016. In the first quarter of 2017, drilling rig depreciation accounted for 97 per cent of total depreciation expense (Q1 2016, 96 per cent).

While Akita conducts some 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 by the joint ventures themselves. As the joint ventures do not hold any property, plant or equipment assets directly, the company's depreciation expense includes depreciation on assets involved in both wholly owned and joint-ventured activities.

Selling and administrative expense

Adjusted selling and administrative expenses were 16 per cent of adjusted revenue in the first quarter of 2017, compared with 21 per cent of adjusted revenue in the first quarter of 2016, largely as a result of increased adjusted revenue in 2017, and the fixed nature of most selling and administrative expenses. Salaries and benefits accounted for 43 per cent of these expenses (Q1 2016, 51 per cent).

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. The analyses of these activities are incorporated throughout the relevant sections of the MD&A.

Other income (losses)

Total other income (losses) is the aggregate of interest income, interest expense, gain (loss) on sale of assets and net other gains (losses), all of which are discussed in this news release in detail.

Interest income decreased to $120,000 in the first quarter of 2017 from $248,000 in the same period of 2016, due to the decrease in the interest-bearing, long-term receivable held related to a contract cancellation recorded in 2016.

In the first quarter of 2017, the company incurred interest expense of $42,000 related to the future cost of the company's defined benefit pension plan (Q1 2016, $40,000).

During the first quarter of 2017, the company sold ancillary assets for proceeds of $80,000, resulting in a gain of $76,000. During the corresponding quarter of 2016, assets were sold for $60,000, resulting in a loss of $27,000.

During the first quarter of 2016, $197,000 of net other losses related to the discount of the long-term receivable associated with the contract cancellation fee. During the first quarter of 2017, there was no such discount as all the receivable was reclassified to current assets.

Income tax expense

The company recorded a tax recovery of $2,046,000 in the first quarter of 2017, compared with an expense of $6,895,000 in the corresponding period in 2016, due to the loss incurred in the first quarter of 2017.

Net income, funds flow and net cash from operating activities

The company incurred a net loss of $4,975,000 (loss of 28 cents per share, basic and diluted) for the first quarter of 2017, compared with a net income of $18,173,000 (earnings of $1.01 per share, basic and diluted) in the first quarter of 2016. Funds flow from operations decreased to $1,824,000 in the first quarter of 2017, from $25,368,000 during the corresponding quarter in 2016. The net income in 2016 was directly attributable to the contract cancellation fee, while lower revenue per operating day and higher direct costs per operating day in 2017 contributed to the quarter-over-quarter decrease in profitability. Funds flow from operations was affected by the same factors as net income.

Liquidity and capital resources

Cash used for capital expenditures totalled $4,587,000 in the first quarter of 2017 (Q1 2016, $373,000). Current year-to-date capital expenditures largely related to routine items while 33 per cent related to construction of the company's new AC double pad rig which is scheduled to be completed in mid-2017. The prior-year first quarter capital expenditures related to routine capital items.

At March 31, 2017, Akita's statement of financial position included working capital (current assets minus current liabilities) of $29.98-million, compared with working capital of $30,759,000 at March 31, 2016, and working capital of $34,907,000 at Dec. 31, 2016. The seasonal nature of Akita's business typically results in higher non-cash working capital balances at the end of the first quarter than at year-end due to the high seasonal activity levels encountered in the first quarter. Working capital at March 31, 2017, decreased, compared with March 31, 2016, and Dec. 31, 2016, due to the second payment of the receivable associated with the 2016 contract cancellation fee as well as higher payables balances related to increased activity, which was not offset by a corresponding increase in accounts receivable due to historically low day rates discussed above.

During the first quarter of 2017, the company requested a reduction to its credit facility (currently undrawn) from $100-million to $50-million. The facility was reduced as part of the company's continued cost cutting initiatives in order to reduce standby fees on the undrawn amounts. The changes to the credit facility also included elimination of certain covenants to allow for more flexibility in accessing the facility in the current low earnings environment.

The financial covenants of the old facility were:

• Funded debt to EBITDA (earnings before interest, taxes, depreciation and amortization) shall not be greater than 3.00 to 1;
• EBITDA to interest expense shall not be less than 3.00 to 1;
• Tangible assets to funded debt shall not be less than 2.25 to 1.

The new credit facility has the following financial covenants:

• EBITDA to interest expense shall not be less than 2.00 to 1.

The borrowing base of the new facility is based on (1):

• 75 per cent of good accounts receivable;
• Plus 40 per cent of the aggregate book value of the consolidated eligible fixed assets.

(1) Readers should be aware that each of the EBITDA, interest expense, good accounts receivable and consolidated eligible fixed assets have specifically set out definitions in the loan facility agreement, and are not necessarily defined by or consistent with either GAAP (generally accepted accounting principles) or determinations by other users for other purposes.

Although the facility may be used to finance general corporate needs, 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 is 1.25 per cent over prime interest rates or 2.5 per cent over guaranteed notes, depending on the preference of the company. The company did not have any borrowings from this facility at March 31, 2017.

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 in order to meet growth opportunities.

The company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust its capital structure, the company may adjust the amount of dividends paid to shareholders, repurchase shares, 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.

The company did not have a normal course issuer bid in place during the first quarter of 2017 or 2016.

During the 10-year period since 2007, Akita has repurchased and cancelled 455,108 Class A non-voting shares through normal course issuer bids and issued 122,200 Class A non-voting shares upon exercise of stock options.

The company had two rigs under multiyear contracts at March 31, 2017. Of these contracts, one is scheduled 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 March 31, 2017, Akita provided $2,613,000 in deposits with its bank for those purposes (March 31, 2016, $5,317,000; Dec. 31, 2016, $2,969,000). 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 consolidated statements of financial position.

     INTERIM STATEMENTS OF NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) 
        (unaudited) (in thousands of dollars, except per-share amounts)

                                                       Three months ended March 31,
                                                               2017           2016

Revenue                                                 $    19,193     $   41,991
Costs and expenses
Operating and maintenance                                    17,735          9,154
Depreciation and amortization                                 6,736          6,275
Selling and administrative                                    3,978          3,963
Total costs and expenses                                     28,449         19,392
Revenue less costs and expenses                              (9,256)        22,599
Equity income from joint ventures                             2,062          2,455
Other income (loss)                              
Interest income                                                 120            248
Interest expense                                                (42)           (40)
Gain (loss) on sale of assets                                    76            (27)
Net other gains (losses)                                         19           (167)
Total other income (loss)                                       173             14
Income (loss) before income taxes                            (7,021)        25,068
Income taxes                                                 (2,046)         6,895
Net income (loss) and comprehensive 
income (loss) for the period attributable 
to shareholders                                         $    (4,975)    $   18,173
Earnings (loss) per Class A and Class B share                      
Basic                                                   $     (0.28)    $     1.01
Diluted                                                 $     (0.28)    $     1.01

We seek Safe Harbor.