AKITA Drilling Ltd. increases funds flow during third quarter

CALGARY, Oct. 28, 2013 /CNW/ - AKITA Drilling Ltd.'s net income for the three months ended September 30, 2013 was $3,540,000 ($0.20 per share) on revenue of $32,945,000 compared to $4,331,000 ($0.24 per share) on revenue of $44,576,000 for the corresponding period in 2012.  Funds flow from operations for the quarter ended September 30, 2013 was $11,300,000 compared to $10,804,000 in the corresponding quarter in 2012.  Commencing in 2013, the Company is reporting its financial results pursuant to a new accounting standard under International Financial Reporting Standards ("IFRS"), IFRS 11, whereby assets, liabilities, revenues and expenses of joint ventures are required to be reported on an equity accounting basis.  This adoption, which had no effect on net income, has resulted in a reduction of revenue amounts that would have been reported if the Company were allowed to continue to report using the proportionate consolidation basis.

Net income for the nine months ended September 30, 2013 was $18,793,000 ($1.05 basic earnings per share/$1.04 diluted earnings per share) on revenue of $121,750,000.  Comparative figures for 2012 were net income of $20,327,000 ($1.13 per share) on revenue of $148,712,000.  Funds flow from operations for the January to September period in 2013 was $40,406,000 compared to $39,539,000 for the comparative period in 2012.

Rig activity declined during the third quarter of 2013 to 1,347 operating days or 38.6% utilization compared to 1,529 operating days or 43.7% utilization during the corresponding quarter in 2012.  This decline was attributable to weak market conditions for conventional double and triple sized rigs.  However, AKITA's pad rigs continue to achieve strong utilization.

During the third quarter, the Company completed the construction of and is currently operating its latest pad rig on a multi-year contract in the oil sands.  Additionally during the quarter, the Company entered into a multi-year contract to construct and operate a new ultra-deep pad rig for use in the Fort Liard Basin.  Construction on this latter rig has now commenced and is anticipated to be completed by mid-2014.

In addition to strong on-going pad drilling activity, the Company is currently receiving increased interest in its conventional drilling rigs.  During the fourth quarter, AKITA is anticipating operating six rigs that have been idle since the end of the first quarter and has bookings for four additional rigs in its fleet during the first quarter of 2014.

Selected information from AKITA Drilling Ltd.'s Management's Discussion and Analysis for the Quarterly Report is as follows:

Basis of Analysis in this MD&A , Non-Standard and Additional GAAP Items

Effective January 1, 2013, the Company adopted a new accounting standard under International Financial Reporting Standards ("IFRS"), IFRS 11 "Joint Arrangements", in relation to reporting its joint venture activities.  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.

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

Third Quarter Comparatives - Impact of Pad Rigs Drives Performance

During the third quarter of 2013, adjusted revenue decreased to $44,919,000 from $52,506,000 during the third quarter of 2012 as a result of weakening market conditions for conventional double and triple sized rigs which was partially offset by an increase in AKITA's pad drilling activity.

Adjusted revenue per operating day decreased to $33,347 during the third quarter of 2013 from $34,340 in the comparative quarter of 2012 due to an overall reduction in the number and type of ancillary services (such as rentals, third party and standby charges) provided during the quarter.

Adjusted operating and maintenance costs are tied to revenue and amounted to $29,200,000 ($21,678 per operating day) during the third quarter of 2013 compared to $36,649,000 ($23,969 per operating day) in the same period of the prior year.  While pad rigs dominated the drilling activities during the third quarter, the actual mix of pad rigs and the reduction in the number and type of ancillary services provided resulted in lower operating costs when taken on a "per operating day" basis.

The adjusted operating margin for the Company decreased to $15,719,000 in the third quarter of 2013 from $15,857,000 during the corresponding quarter of 2012.  This decrease amounted to 1% compared to a 14% reduction in adjusted revenue.  The weak correlation between changes in adjusted operating margin and adjusted revenue was largely the result of a higher proportion of AKITA's drilling activities being derived from pad rigs during the current quarter compared to the corresponding period in 2012, and was affected by the specific mix of rigs that participated in drilling activities as well as the number and type of ancillary services provided.  Pad rigs typically achieve higher activity levels, revenues per day and operating margins per day than conventional rigs.

Year-to-Date Comparatives - Effects of Conventional Rig Performance Offset by Impact of Pad Rigs

During the first nine months of 2013, adjusted revenue decreased to $157,992,000 from $175,691,000 during the first nine months of 2012 as a result of weakening market conditions for conventional double and triple sized rigs which was partially offset by an increase in AKITA's pad drilling activity.

Although adjusted revenue for the year-to-date period ended September 30, 2013 decreased from the comparative period in 2012, adjusted revenue per operating day increased to $35,062 during the first nine months of 2013 from $33,800 in the comparative nine month period of 2012 due to an increased proportion of the Company's revenue being generated by its pad drilling rigs and was also affected by the number and types of ancillary services provided.  Pad rigs, compared to conventional drilling rigs, typically generate higher revenues on a "per operating day" basis.

Adjusted operating and maintenance costs are tied to revenue and amounted to $99,553,000 ($22,093 per operating day) during the first nine months of 2013 compared to $116,803,000 ($22,471 per operating day) in the same period of the prior year.

The adjusted operating margin for the Company decreased to $58,439,000 in the first nine months of 2013 from $58,888,000 during the corresponding year-to-date period of 2012.  This reduction amounted to 1% compared to a 10% reduction in adjusted revenue.  The lower decline in adjusted operating margin compared to adjusted revenue was the result of a higher proportion of AKITA's drilling activities being derived from pad rigs during the first nine months of the year compared to the corresponding period in 2012.  Pad rigs typically achieve higher activity levels, revenues per day and operating margins per day than conventional rigs.

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, 2013, deferred revenue related to these activities totalled $498,000 (September 30, 2012 - $Nil).

Depreciation and Amortization Expense

The increase in depreciation and amortization expense to $6,502,000 during the third quarter of 2013 from $5,578,000 during the corresponding quarter in 2012 was largely attributable to an increase in the average cost base for AKITA's rigs which more than offset the decline in drilling activity.

Depreciation and amortization expense for the first nine months of 2013 totalled $19,524,000 compared to $18,475,000 for the corresponding period in 2012.  As with the depreciation and amortization expense for the third quarter, offsetting factors of a higher average cost base for AKITA's rigs and lower drilling activity in the current year-to-date period resulted in depreciation and amortization expense being 5% higher in the first nine months of 2013 versus the comparative period in 2012.  In the first nine months of 2013, drilling rig depreciation accounted for 96% of total depreciation and amortization expense (2012 - 97%).

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 8.7% of adjusted revenue in the first nine months of 2013 compared to 8.4% of adjusted revenue in the first nine months of 2012, largely as a result of decreased adjusted revenue in 2013.  The single largest component was salaries and benefits, which accounted for 62% of these expenses (60% in 2012).  31% of the year-to-date adjusted selling and administrative expenses during the current year were incurred during the third quarter (31% in the comparative periods in 2012).

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 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)

The Company invests any cash balances in excess of its ongoing operating requirements in bank guaranteed highly liquid investments.  Interest income decreased to $259,000 in the first nine months of 2013 from $308,000 in 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 2012, the Company disposed of its interests in its remaining two arctic drilling camps and other non-core assets resulting in a $1,066,000 gain.  While AKITA disposed of several minor assets resulting in $184,000 in gains, the Company did not dispose of any significant assets during the first nine months of 2013.

For 2013, amounts reported as "Other Net Losses" include unrealized amounts related to forward exchange contracts purchased to provide a hedge for foreign rig equipment commitments for a rig under construction as well as an unrealized cost related to loan guarantees that the Company has provided on behalf of certain joint venture partners.

Income Tax Expense

Income tax expense decreased to $6,476,000 in the first nine months of 2013 from $6,900,000 in the corresponding period in 2012 due to lower pre-tax earnings.  Recent capital additions have affected 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 decreased to $3,540,000 or $0.20 per Class A Non-Voting and Class B Common Share (basic and diluted) for the three month period ended September 30, 2013 from $4,331,000 or $0.24 per share (basic and diluted) in the comparative quarter of 2012.  Funds flow from operations increased to $11,300,000 in the third quarter of 2013 from $10,804,000 in the corresponding quarter in 2012.  Changes in quarterly net income and funds flow from operations that occurred in third quarter of 2013 compared to the corresponding quarter in 2012 were attributable to having lower drilling activity levels in the current quarter as well as higher depreciation and amortization costs, which were offset by higher operating margins per operating day versus the third quarter of 2012.

Net income decreased to $18,793,000 or $1.05 per Class A Non-Voting and Class B Common Share (basic) ($1.04 - diluted) for the first nine months of 2013 from $20,327,000 or $1.13 per share (basic and diluted) in the corresponding period of 2012.  Funds flow from operations increased to $40,406,000 in the first nine months of 2013 from $39,539,000 in the corresponding period in 2012.  As with third quarter results, comparability of net income and funds flows for these two periods were mostly affected by rig activity levels (lower in 2013 on a year-to-date basis), operating margins per operating day (higher in 2013 on a year-to-date basis) and depreciation (higher in 2013 on a year-to-date basis).

Fleet and Rig Utilization

At September 30, 2013 AKITA had 38 drilling rigs, including 10 that operated under joint ventures, (35.725 net to AKITA) compared to 38 rigs (35.025 net to AKITA) in the corresponding period of 2012.  Effective July, 1, 2013, the Company added one triple sized pad rig (0.85 net to AKITA) which commenced operations during the third quarter.  AKITA also decommissioned one of its wholly owned conventional double sized rigs during the third quarter of 2013.

Liquidity and Capital Resources

Cash used for capital expenditures totalled $27,892,000 during the first nine months of 2013 (2012 - $46,501,000).  The most significant expenditure in 2013 related to the ongoing construction of a new pad rig.  This rig commenced operations during the third quarter of 2013 under a multi-year contract.  Additional capital expenditures related to routine capital items.

At September 30, 2013, AKITA's Statement of Financial Position included working capital (current assets minus current liabilities) of $33,749,000 compared to working capital of $29,557,000 at September 30, 2012 and working capital of $31,214,000 at December 31, 2012.  Readers should also be aware of 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 break-up and decline thereafter as a result of increased drilling activity.  Non-cash working capital amounted to $11,545,000 at September 30, 2013 compared to $20,211,000 at December 31, 2012.

During the third quarter of 2013, the Company was awarded a contract to construct and operate an ultra deep capacity pad rig on a long-term basis.  The Company sourced approximately $16 Million of materials for this rig from non-Canadian suppliers.  In order to minimize the risk of currency translation adjustments, AKITA purchased forward currency contracts totalling $13 Million.  These contracts expire during the second quarter of 2014.

The Company had seven rigs under multi-year contracts at September 30, 2013.  Of these contracts, five are anticipated to expire in 2014, one in 2016 and one in 2018.

During 2011, the Company guaranteed bank loans made to joint venture partners totalling $2,700,000 for a period of four years.  During the third quarter of 2013, the Company guaranteed bank loans made to joint venture partners totalling $2,812,000 for a period of four years.  The Company has provided assignments of monies on deposit totalling $5,950,000 with respect to these loans.  These funds have been classified as "restricted cash" on the Statement of Financial Position.  The Company's security from its partners for these guarantees includes interests in specific rig assets.

Forward-Looking Statements

From time to time AKITA makes forward-looking statements.  These statements include but are not limited to comments with respect to AKITA's objectives and strategies, financial condition, results of operations, the outlook for the industry and risk management.

By their nature, these forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, and the risk that the predictions and other forward-looking statements will not be realized.  Readers of this News Release are cautioned not to place undue reliance on these statements as a number of important factors could cause actual future results to differ materially from the plans, objectives, estimates and intentions expressed in such forward-looking statements.

Forward-looking statements may be influenced by factors such as the level of exploration and development activity carried on by AKITA's customers; world crude oil prices and North American natural gas prices; weather; access to capital markets and government policies.  We caution that the foregoing list of factors is not exhaustive and that investors and others should carefully consider the foregoing factors as well as other uncertainties and events prior to making a decision to invest in AKITA.  Except as required by law, the Company does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by it or on its behalf.

Selected Financial Information for the Company is as follows:

SOURCE AKITA Drilling Ltd.