CALGARY, March 3, 2016 /CNW/ - AKITA Drilling Ltd.'s net
loss for the year ended December 31,
2015 was $33,965,000 (net loss
of $1.89 per share (basic and
diluted)) on revenue of $112,488,000
compared to net income of $21,079,000
or $1.17 per share (basic and
diluted) on revenue of $165,274,000
in 2014. The 2015 results include an asset impairment expense
of $41,968,000 (after tax effect of
$30,748,000 or $1.71 per share) with respect to certain of its
rigs in addition to a net loss of $3,217,000 (net loss of $0.18 per share) as a result of routine
operations. Funds flow from operations for the current year
was $38,510,000 compared to
$56,195,000 in 2014, while net cash
from operating activities for 2015 was $41,507,000 compared to $40,622,000 in 2014.
The year 2015 was challenging for AKITA. Low commodity
prices for crude oil and natural gas were the fundamental factors
in AKITA generating the fewest operating days in the Company's 23
year history. In addition to low commodity prices, for the
first time in the history of AKITA, the Company recorded asset
impairment charges as previously noted. Furthermore, net loss
was adversely affected due to a 20% increase in corporate income
tax rates in Alberta.
AKITA's rig utilization exceeded industry average for the fifth
consecutive year despite the adversities AKITA faced in 2015.
AKITA relies on its key strengths to achieve this level of results:
the operation of quality equipment by highly skilled employees, a
commitment to customer satisfaction and the benefit of significant
exposure to pad drilling. The following table highlights
AKITA's utilization rates for the past five years:
RIG UTILIZATION
RATES(PERCENT)
|
|
|
|
2015
|
2014
|
2013
|
2012
|
2011
|
AKITA Pad
Rigs
|
47.2
|
64.8
|
71.9
|
61.7
|
67.9
|
AKITA Overall
Fleet
|
30.9
|
48.6
|
43.4
|
48.3
|
51.5
|
Industry
|
23.2
|
44.3
|
40.3
|
41.6
|
49.6
|
Despite weak market conditions, AKITA continued to enhance its
strong financial position throughout 2015, managing to eliminate
all of its $20 Million in bank
borrowings as well as building its cash position to over
$9 Million by year-end. At
December 31, 2015, the Company had
$16 Million in positive working
capital, no long-term debt and access to a $100 Million bank lending facility. This
financial capacity will go a long way to ensure the Company's
viability through this market weakness and it also leaves AKITA
well positioned to undertake opportunities that might arise.
AKITA continued to enhance its pad rig strategy in 2015, albeit
at a slower pace than during the previous year, when the Company
had a record capital expenditure program. During the second
quarter of 2015, AKITA completed construction and commenced
operations with Rig 41, a 6,000 metre capacity rig designed to be
competitive for deep gas pad applications. This rig, which
cost $24 Million to build, was the
most significant capital expenditure during 2015. By
year-end, 21 of the Company's fleet of 31 rigs were capable of pad
drilling.
AKITA maintains a commitment to safety that permeates all levels
of the organization. Since inception, AKITA's annual safety
performance has been better than industry averages. AKITA's
2015 total reportable accident frequency (often referred to as
"TRIF") was the best in the Company's history, showing a 16%
improvement over the Company's previous record. Field
employees complete extensive safety training and must meet current
industry certification standards. Managers, employees and
subcontractors are all required to understand and accept their
responsibility for maintaining a safe working environment.
On November 18, 2015, the Canadian
Association of Oilwell Drilling Contractors ("CAODC") released its
2016 industry drilling forecast estimating 22% average rig
utilization compared to 23.2% actual average rig utilization in
2015. The 2016 forecast was based upon commodity price
assumptions of US $45 per barrel for
crude oil and CAD $2.80 per mcf for
natural gas. Drilling activity for the year-to-date period in
2016, together with much lower than anticipated crude oil spot
prices, would suggest that anticipated drilling activity for the
year will be lower than the CAODC forecast.
Selected information from AKITA's Management's Discussion and
Analysis (MD&A) for the 2015 Annual Report is as follows:
Basis of Analysis for 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". 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 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 it does 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 tool, however, as it provides an indication
of the profitability of the business prior to the influence of
depreciation, asset impairment, overhead expenses, financing 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 as well as equity income from joint ventures adjusted for
income tax amounts paid during the period. 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
|
|
|
|
|
$Millions
|
2015
|
2014
|
Change
|
% Change
|
Revenue per Financial Statements
|
112.5
|
165.3
|
(52.8)
|
(32%)
|
Proportionate Share of Revenue from Joint Ventures
(1)
|
32.5
|
64.1
|
(31.6)
|
(49%)
|
Adjusted Revenue (1)
|
145.0
|
229.4
|
(84.4)
|
(37%)
|
|
|
|
|
|
$Millions
|
2015
|
2014
|
Change
|
% Change
|
Operating and Maintenance Expenses per Financial
Statements
|
74.0
|
112.6
|
(38.6)
|
(34%)
|
Proportionate Share of Operating and Maintenance
Expenses from Joint Ventures (1)
|
20.8
|
40.3
|
(19.5)
|
(48%)
|
Adjusted Operating and Maintenance Expenses
(1)
|
94.8
|
152.9
|
(58.1)
|
(38%)
|
|
|
|
|
|
$Millions
|
2015
|
2014
|
Change
|
% Change
|
Adjusted Revenue (1)
|
145.0
|
229.4
|
(84.4)
|
(37%)
|
Adjusted Operating and Maintenance Expenses
(1)
|
94.8
|
152.9
|
(58.1)
|
(38%)
|
Adjusted Operating Margin (1)
(2)
|
50.2
|
76.5
|
(26.3)
|
(34%)
|
|
|
|
|
|
$Dollars
|
2015
|
2014
|
Change
|
% Change
|
Adjusted Revenue per Operating Day
(1)
|
36,102
|
35,179
|
923
|
3%
|
Adjusted Operating and Maintenance Expenses per
Operating Day (1)
|
23,620
|
23,450
|
170
|
1%
|
Adjusted Operating Margin per Operating Day (1)
(2)
|
12,482
|
11,729
|
753
|
6%
|
(1)
|
Proportionate
share of revenue from joint ventures, adjusted revenue,
proportionate share of operating and maintenance expenses from
joint ventures, adjusted operating and maintenance expenses,
adjusted operating margin, adjusted revenue per operating day,
adjusted operating and maintenance expenses per operating day and
adjusted operating margin per operating day are non-standard
accounting measures.
|
(2)
|
Adjusted operating
margin is the difference between adjusted revenue and adjusted
operating and maintenance expenses.
|
Adjusted revenue of $144,951,000 in 2015 was 37% lower than the 2014
adjusted revenue of $229,364,000
primarily as a result of decreased rig activity. While all rig
categories were affected, on a proportionate basis the declines
were most pronounced for AKITA's conventional rigs. Although
adjusted revenue for 2015 decreased compared to the previous year,
adjusted revenue per operating day increased to $36,102 during 2015 from $35,179 during 2014 due to an increased
proportion of the Company's revenue being generated by its pad
drilling rigs versus conventional rigs. Pad rigs, compared to
conventional rigs, typically generate higher revenue on a "per day"
basis.
Adjusted operating and maintenance costs are tied to
activity levels and amounted to $94,834,000 or $23,620 per operating day during 2015 compared to
$152,891,000 or $23,450 per operating day for the prior year. The
reduction in operating and maintenance costs, when considered on a
totals basis, is directly related to the lower level of activity in
2015 compared to 2014. However, in 2015, the higher proportion of
drilling that was performed by AKITA's pad rigs resulted in a
slight increase in operating and maintenance costs per operating
day compared to the previous year.
The Company's adjusted operating margin for 2015 was
$50,117,000 ($12,482 per operating day), compared to
$76,473,000 ($11,729 per operating day) in 2014. Although the
overall operating margin decreased in 2015 compared to 2014 as a
result of lower drilling activity, AKITA's operating margin per
operating day increased as a result of a change in rig mix that
included a higher proportion of pad rigs working.
Revenue resulting from the supply of contracted services
is recorded by the percentage of completion method. Work in
progress on day work contracts is measured based upon the passage
of time in accordance with the terms of the contract. All drilling
revenue generated in 2015 and 2014 was generated under day work
contracts. No significant losses were anticipated at either of
these year-end dates and accordingly no provision for material
losses has been made.
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 December 31, 2015, AKITA
had no deferred revenue related to these activities (December 31, 2014 - $175,000).
AKITA provided drilling services to 27 different customers
in 2015 (2014 - 36 different customers), including three customers
that each provided more than 10% of AKITA's revenue for the year
(2014 – three customers).
Depreciation and Amortization Expense
|
|
|
|
|
$Millions
|
2015
|
2014
|
Change
|
% Change
|
Depreciation and Amortization
Expense
|
36.7
|
30.2
|
6.5
|
22%
|
Drilling rigs are generally depreciated using the unit of
production method. Depreciation is typically calculated for each
rig's major components resulting in an average useful life of 3,600
operating days per rig, subject to annual minimum imputed activity
levels. In certain instances where rigs are inactive for extended
periods, the Company's depreciation rate is accelerated. Major rig
renovations are depreciated over the remaining useful life of the
related component or to the date of the next major renovation,
whichever is sooner. Major rig inspection and overhaul expenditures
are depreciated on a straight-line basis over three
years.
The increase in depreciation and amortization expense to
$36,748,000 during 2015 from
$30,200,000 during 2014 was mostly
attributable to the higher average cost base for drilling rigs,
partially offset by lower drilling activity. Drilling rig
depreciation accounted for 97% of total depreciation and
amortization expense in 2015 (2014 – 96%).
Selling and Administrative Expenses
|
|
|
|
|
$Millions
|
2015
|
2014
|
Change
|
% Change
|
Selling and Administrative Expenses per Financial
Statements
|
15.1
|
18.1
|
(3.0)
|
(17%)
|
Proportionate Share of Selling and Administrative
Expenses from Joint Ventures (1)
|
0.4
|
0.8
|
(0.4)
|
(50%)
|
Adjusted Selling and Administrative Expenses
(1)
|
15.5
|
18.9
|
(3.4)
|
(18%)
|
(1)
|
Proportionate
share of selling and administrative expenses from joint ventures
and adjusted selling and administrative expenses are non-standard
accounting measures.
|
Adjusted selling and administrative expenses decreased to
$15,524,000 in 2015 from $18,929,000 in 2014. Adjusted selling and
administrative expenses equated to 10.7% of adjusted revenue in
2015, compared to 8.2% of adjusted revenue in 2014, as a result of
decreased adjusted revenue.
While cost reductions compared to 2014 occurred for both
personnel and non-personnel related activities, the single largest
component of adjusted selling and administrative expenses was
salaries and benefits which accounted for 57% of these expenses in
2015 (2014 – 61%).
Asset Impairment Loss
|
|
|
|
|
$Millions
|
2015
|
2014
|
Change
|
% Change
|
Asset Impairment Loss
|
42.0
|
-
|
42.0
|
N/A
|
International Accounting Standard 36, "Impairment of
Assets", requires an entity to consider both internal and external
factors when assessing whether there are indications of asset
impairment at each reporting period. While the Company did not
determine any internal indicators of impairment at December 31, 2014, it did determine two potential
external indicators of impairment at that date: a significant
decline in the price of crude oil; and the carrying amount of
AKITA's net assets exceeding the Company's market capitalization.
Both of these indicators continued to remain applicable throughout
2015. The price of crude oil declined throughout most of 2015,
resulting in further deterioration in the overall Canadian drilling
market, compared to 2014. In addition, management determined that,
as a result of this additional weakening of crude oil prices,
secondary opportunities to capture value for AKITA's drilling fleet
had also become more limited, especially during the last six months
of 2015.
The accuracy of asset impairment testing is affected by
estimates and judgments in respect of the inputs and parameters
that are used to determine recoverable amounts. In performing its
asset impairment tests during 2015 including at December 31, 2015, management determined value in
use for each of its cash generating units ("CGUs") using estimated
discounted cash flows ("DCFs"), which included estimates of future
cash flows, expectations regarding cash flow variability, a
determination of the discount rate and consideration of the
recoverable amount and salvage value of each CGU. IFRS considers
this approach to constitute a Level 3 hierarchy in its
determination of value.
AKITA recorded its first asset impairment loss in its history at
September 30, 2015. With respect to
the asset impairment loss recorded at that date, management used
its preliminary 2016 budget and business plan inputs as well as
subsequent internal forecasts as its primary bases for asset
impairment testing. Cash flows were determined for each of the
Company's five CGUs: conventional singles, conventional doubles,
conventional triples, pad doubles and pad triples. While these five
operating CGUs encompass 98% of the Company's property, plant and
equipment, consideration was also given to other corporate assets
in the Company's asset impairment tests.
Additional significant assumptions used in AKITA's asset
impairment tests at September 30,
2015 included potential annual revenue growth rates (0%),
potential inflation for cash outflows necessary to generate cash
inflows for CGUs (2%), the projected forecast period (up to 10
years per CGU), the discount rate taken based on the Company's
pre-tax determination of its weighted average cost of capital (8%)
and salvage value at the end of each CGU's useful life (20% of
original cost). The generation of cash flows was considered for the
Company's CGUs based on the existing condition of each CGU at
September 30, 2015.
During the fourth quarter of 2015, management determined that
the previous CGU classification did not adequately address the
competitive role of each rig within a rig category or between rig
categories given the current economic conditions.
Consequently, the Company established new CGU breakdowns that more
clearly categorize AKITA's rigs according to the functional, rather
than structural, nature of the Company's fleet. These "functional
CGUs" provide a closer substitutability that is sought within the
CGU definition and have resulted in more rig categories. The
Company now considers the CGUs for its rig fleet to be structured
as follows:
- Hydraulic Singles;
- Slant/Heavy Singles;
- Tele-Doubles;
- Heavy Triples;
- Light Capacity Pad Rigs;
- A.C. Tele-Double Pad Rigs;
- A.C. Oil Sands Pad Rigs;
- D.C. Pad Rigs;
- A.C. Deep Gas Pad Rigs; and
- A.C. Ultra-Deep Gas Pad Rigs.
Following its change in CGU classification noted above, and in
conjunction with continued market weakness, the Company recorded an
additional asset impairment loss at December
31, 2015. With respect to this second asset impairment
loss, management used its approved 2016 budget and business plan
inputs as well as subsequent internal forecasts as its primary
bases for asset impairment testing. Cash flows were determined for
each of the Company's ten revised CGUs as described above. While
these CGUs continue to encompass 98% of the Company's property,
plant and equipment, consideration was again given to other
corporate assets in the Company's asset impairment tests.
Additional significant assumptions used in AKITA's asset
impairment tests at December 31, 2015
remained consistent with the additional significant assumptions
used at September 30, 2015. The
generation of cash flows was considered for the Company's CGUs
based on the existing condition of each CGU at December 31, 2015.
As a result of performing its asset impairment tests, the
Company recorded an overall asset impairment of $8,200,000 with respect to certain of its
conventional rigs at September 30,
2015. This amount represented the difference between the
respective CGUs' recoverable amounts and their carrying
values. For assets within CGUs that were determined to be
impaired, 81% of the recoverable amounts were calculated based on
"value in use" with the balance based on "fair value less cost of
disposal". The Company did not record any asset impairment with
respect to AKITA's pad rigs at September 30,
2015.
As a result of performing its asset impairment tests at
December 31, 2015, the Company
recorded an additional asset impairment of $33,768,000 with respect to three of its
conventional rigs as well as nine of its pad rigs. Consistent
with the asset impairment loss reported at September 30, 2015, this amount represented the
difference between the respective CGUs' recoverable amounts and
their carrying values. At December 31,
2015, for assets within CGUs that were determined to be
impaired, 77% of the recoverable amounts were calculated based on
"value in use" with the balance based on "fair value less cost of
disposal".
The Company determined fair value less cost of disposal to be
based on external appraisals of select rig assets as of
September 30, 2015 and December 31, 2015.
Asset impairment testing is subject to numerous assumptions,
inherent risks and uncertainties, both general and specific, and
the risk that the predictions will not be realized. As a
result, the following sensitivity analysis has been performed to
recognize that additional outcomes are possible:
- Decreased future cash flows from the Company's preliminary
(September 30, 2015) or approved
(December 31, 2015) 2016 budget by
10%;
- Reduced future revenue assumptions by 2%:
- Increased inflation for cash outflows from 2% to 4%;
- Increased the pre-tax discount rate from 8% to 10%; and
- Reduced salvage values from 20% to 15%.
As rigs are long lived assets, no sensitivity adjustment was
made for the projected forecast period.
The sensitivity tests resulted in reductions to the various rig
CGUs' values in use ranging from $81,000 to
$11,546,000. As the base case test represented
management's best estimates, these sensitivity reductions were not
included in the asset impairment reported.
Equity Income from Joint Ventures
|
|
|
|
|
$Millions
|
2015
|
2014
|
Change
|
% Change
|
Proportionate Share of Revenue from Joint Ventures
(1)
|
32.5
|
64.1
|
(31.6)
|
(49%)
|
Proportionate Share of Operating and Maintenance
Expenses from Joint Ventures (1)
|
20.8
|
40.3
|
(19.5)
|
(48%)
|
Proportionate Share of Selling and Administrative
Expenses from Joint Ventures (1)
|
0.4
|
0.8
|
(0.4)
|
(50%)
|
Equity Income from Joint Ventures
|
11.3
|
23.0
|
(11.7)
|
(51%)
|
(1)
|
Proportionate share
of revenue from joint ventures, proportionate share of operating
and maintenance expenses from joint ventures and proportionate
share of selling and administrative expenses from joint ventures
are non-standard accounting measures.
|
The Company provides the same drilling services and utilizes the
same management, financial and reporting controls for its joint
venture activities as it does 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 (Loss)
|
|
|
|
|
$Millions
|
2015
|
2014
|
Change
|
% Change
|
Total Other Income (Loss)
|
(0.4)
|
0.8
|
(1.2)
|
(150%)
|
Interest income decreased to $130,000 in 2015 from $172,000 in 2014 as a result of reduced interest
rates. In addition, between 2011 and 2014, the Company had
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 over
time.
During 2015, the Company recorded interest expense of
$356,000 (2014 – $262,000) related to the future cost of the
Company's unfunded defined benefit pension plan as well as the cost
of financing the Company's indebtedness during the fourth quarter
of 2014 and the first six months of 2015.
During 2015, the Company disposed of selected non-core
assets resulting in a $657,000 loss.
AKITA disposed of several non-core assets in 2014, resulting in a
$536,000 gain.
In 2015, amounts reported as "Net Other Gains" of
$462,000 include foreign exchange
amounts related to forward exchange contracts purchased in 2014 to
provide a hedge for foreign rig equipment commitments made at that
time related to rig construction (gain of $267,000) and other items (gain of $195,000).
Other than the foreign currency hedge on major capital
expenditures noted above, readers should be aware that in 2015 the
Company conducted all of its operations in Canada, thereby reducing its exposure to
foreign currency fluctuations.
Income Tax Expense (Recovery)
|
|
|
|
|
$Millions, Except Income Tax Rate
(%)
|
2015
|
2014
|
Change
|
% Change
|
Current Tax (Recovery)
|
(2.7)
|
2.6
|
(5.3)
|
(203%)
|
Deferred Tax (Recovery)
|
(7.9)
|
4.4
|
(12.3)
|
(280%)
|
Total Income Tax Expense
(Recovery)
|
(10.6)
|
7.0
|
(17.6)
|
(251%)
|
Effective Income Tax Rate
|
23.7%
|
25.0%
|
|
|
AKITA had an income tax recovery of $10,579,000 in 2015 compared to a tax expense of
$7,042,000 in 2014 mainly due to
recording a pre-tax loss as a result of weaker operations and the
effect of recording asset impairment losses. In addition to the
effect of the pre-tax loss, during 2015, the Company recorded a
one-time deferred tax expense of $1,191,000 related to the corporate income tax
increase implemented by the Government of Alberta. Recent
capital additions have also affected the portion of income taxes
that are deferred to future dates.
Subsequent Event
A significant proportion of the Company's business is
conducted under contracts that range in duration from several
months to one or more years. On occasion, events occur that result
in either extensions to, or early terminations of, contracted
rigs. Subsequent to December 31,
2015, one of AKITA's major customers elected to early
terminate a multi-year contract that was scheduled to continue
until 2019. As a result of the early termination, AKITA is
scheduled to receive $29,542,000
(undiscounted) in cancellation fees.
Fleet and Utilization
The following table summarizes rig changes that occurred
in 2015:
Fleet Changes during 2015
|
|
|
|
Gross
|
Net
|
Number of rigs at December 31, 2014
|
35
|
31.725
|
|
|
|
Completion of construction of a deep pad
rig
|
1
|
1.000
|
|
|
|
Decommissioning of rigs
|
(5)
|
(4.500)
|
|
|
|
Number of rigs at December 31, 2015
|
31
|
28.225
|
Utilization rates are a key statistic for the
drilling industry since they measure revenue volume and influence
pricing. During 2015, AKITA achieved 3,941 operating days, which
corresponded to a utilization rate of 30.9% compared to an industry
average utilization rate of 23.2% during the same period.
During the comparative year in 2014, AKITA achieved 6,520 operating
days, representing 48.6% utilization. It should be noted that
AKITA calculates its utilization rates based only upon rigs
actively operating. Rigs that are moving or receiving standby
revenue do not contribute to AKITA's utilization
statistic.
The drilling industry is seasonal, with activity typically
building in the fall and peaking during the winter months, at which
time areas with muskeg conditions freeze sufficiently to allow the
movement of rigs and other heavy equipment. The peak drilling
season ends with "spring break-up", at which time drilling
operations are curtailed due to seasonal road bans (temporary
prohibitions on road use) and restricted access to agricultural
land. This seasonal pattern has been muted in 2015 and in
2016 to date, as a result of unusually weak oil and gas drilling
conditions.
In addition to traditional seasonal impacts, the business
of AKITA may be affected at various times in two important ways as
a result of warmer than normal temperatures. First, increases in
overall temperatures would have the effect of shortening the winter
drilling season. Another impact of warmer than normal
temperatures on AKITA is related to a reduced demand for natural
gas for heating. To the extent that warmer weather impacts
the demand for natural gas including the resultant lower natural
gas prices for many of AKITA's customers, AKITA's customers might
reduce natural gas drilling programs, which in turn, might reduce
the demand for AKITA's services.
A significant shift in drilling has occurred in recent
years with respect to the type of equipment preferred by AKITA's
customers. Specifically, there has been a shift away from
conventional rigs requiring trucks to relocate from well to well,
towards the use of pad rigs with self-moving systems which allow
the rig to move itself within a set of well locations (typically
referred to as a "pad"). Moreover, pad rigs typically drill
wells in "batches" whereby a series of surface holes are drilled,
followed by one or more series of intermediate holes and a final
series of main holes. This style of drilling, as opposed to
drilling each well from start to finish prior to moving, provides
significant efficiency gains when used in the appropriate
applications.
The following table demonstrates the range of drilling
capabilities for the Company's fleet:
Drilling Fleet Summary at December
31, 2015
|
|
|
|
Conventional Rigs
|
Pad Rigs
|
|
Number
of Rigs
|
Percentage
of Fleet
|
Number
of Rigs
|
Percentage
of Fleet
|
Singles
|
3
|
10%
|
0
|
0%
|
Doubles
|
4
|
13%
|
5
|
16%
|
Triples
|
4
|
13%
|
15
|
48%
|
Total
|
11
|
36%
|
20
|
64%
|
During 2015, AKITA commissioned one new pad triple rig and
decommissioned four conventional single rigs as well as one
conventional double rig.
From time to time, the Company enters into drilling
contracts for extended terms. At December
31, 2015, AKITA had three rigs with multi-year contracts
that extend beyond one year. Of these contracts, one is
anticipated to expire in 2016 and a second in 2018. The third
contract was cancelled in January, 2016, as described in this
document under the heading "Subsequent Event"
Liquidity and Capital Resources
At December 31, 2015, AKITA
had $16,002,000 in working capital
including $9,369,000 in cash and no
bank indebtedness, compared to a working capital deficiency of
$5,028,000, including $2,012,000 in cash and $20,000,000 of bank indebtedness at December 31, 2014. In 2015, AKITA generated
$41,507,000 from operating
activities. Cash was also generated from joint venture
distributions ($13,537,000), from
reductions in cash balances restricted for loan guarantees
($3,403,000) and from proceeds on
sales of assets ($1,093,000).
During the same period, cash was used for capital expenditures
($26,082,000), the repayment of the
loan operating facility ($20,000,000)
and payment of dividends ($6,101,000).
The Company chooses to maintain a conservative Statement of
Financial Position due to the cyclical nature of the
industry. In addition to its cash balances, the Company has
an operating loan facility with its principal banker totalling
$100,000,000 that is available until
2020. The interest rate on the facility varies based upon the
actual amounts borrowed and ranges from 0.45% to 1.45% over prime
interest rates or 1.45% to 2.45% over guaranteed notes, depending
on the preference of the Company. The Company did not have
any borrowings from this facility at December 31, 2015 (December 31, 2014 – borrowings of $20,000,000).
As part of the loan facility agreement, the Company must adhere
to the following financial covenants:
- Funded debt to EBITDA shall not be greater than 3.00 to 1;
- EBITDA to interest expense shall not be less than 3.00 to 1;
and
- Tangible assets to funded debt shall not be less than 2.25 to
1.
Readers should be aware that each of funded debt, EBITDA,
interest expense and tangible assets have specifically set out
definitions in the loan facility agreement and are not necessarily
defined by or consistent with either GAAP or determinations by
other users for other purposes.
Property, Plant and Equipment
Capital expenditures totalled $17,960,000 in 2015. The most significant
expenditure related to the completion of construction of an AC deep
gas pad rig.
The cost incurred during 2015 for the aforementioned rig
construction project was $9,727,000. Additional capital expenditures
related to certifications and overhauls having a life in excess of
one year ($3,878,000), rig equipment
for existing rigs ($2,544,000), drill
pipe and drill collars ($1,490,000)
and other equipment ($321,000).
Capital expenditures for 2014 totalled $103,949,000.
During 2015, the Company sold ancillary assets for $1,093,000 that resulted in a loss of
$657,000. During 2014, AKITA
disposed of one of its underutilized pad rigs. Proceeds from
sales of underutilized and non-core assets totalled $8,315,000 in 2014 and resulted in a gain of
$536,000.
Commitments
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 December 31, 2015, AKITA provided $5,978,000 in deposits with its bank for those
purposes (December 31, 2014 -
$9,381,000). These funds have
been classified as "restricted cash" on the Consolidated Statements
of Financial Position.
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 industry and risk management
discussions.
By their nature, these forward-looking statements involve
numerous assumptions, inherent risks and uncertainties, both
general and specific, and therefore carry 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; global liquified natural gas (LNG) demand;
weather; access to capital markets; and government policies.
We caution that the foregoing list of factors is not exhaustive and
that while relying on forward-looking statements to make decisions
with respect to AKITA, 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
where required by law, the Company does not undertake to update any
forward-looking statement, 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:
AKITA Drilling
Ltd.
|
|
|
|
Consolidated
Statements of Financial Position
|
|
|
|
|
|
|
|
|
December
31
|
December
31
|
$
Thousands
|
|
2015
|
2014
|
Current
Assets
|
|
|
|
|
Cash
|
|
$
|
9,369
|
$
|
2,012
|
|
Accounts
receivable
|
|
14,310
|
39,981
|
|
Income taxes
recoverable
|
|
3,279
|
3,011
|
|
Prepaid expenses and
other
|
|
75
|
257
|
|
|
|
27,033
|
45,261
|
Non-current
Assets
|
|
|
|
Restricted
cash
|
|
5,978
|
9,381
|
Other long-term
assets
|
|
917
|
1,025
|
Investments in joint
ventures
|
|
3,941
|
6,214
|
Property, plant and
equipment
|
|
216,647
|
279,045
|
Total
Assets
|
|
$
|
254,516
|
$
|
340,926
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
Current
Liabilities
|
|
|
|
|
Operating loan
facility
|
|
$
|
-
|
$
|
20,000
|
|
Accounts payable and
accrued liabilities
|
|
9,506
|
28,589
|
|
Deferred
revenue
|
|
-
|
175
|
|
Dividends
payable
|
|
1,525
|
1,525
|
|
|
|
11,031
|
50,289
|
Non-current
Liabilities
|
|
|
|
Financial
instruments
|
|
117
|
226
|
Deferred income
taxes
|
|
19,203
|
27,053
|
Deferred share
units
|
|
171
|
91
|
Pension
liability
|
|
3,794
|
3,426
|
Total
Liabilities
|
|
34,316
|
81,085
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
Class A and Class B
shares
|
|
23,871
|
23,871
|
Contributed
surplus
|
|
3,946
|
3,557
|
Accumulated other
comprehensive income (loss)
|
|
(244)
|
(280)
|
Retained
earnings
|
|
192,627
|
232,693
|
Total
Equity
|
|
220,200
|
259,841
|
Total Liabilities and
Equity
|
|
$
|
254,516
|
$
|
340,926
|
AKITA Drilling
Ltd.
|
|
|
|
Consolidated
Statements of Net Income (Loss) and
|
|
|
Comprehensive
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
$ Thousands except
per share amounts
|
|
2015
|
2014
|
Revenue
|
|
$
|
112,488
|
$
|
165,274
|
|
|
|
|
|
Costs and
expenses
|
|
|
|
Operating and
maintenance
|
|
74,031
|
112,590
|
Depreciation and
amortization
|
|
36,748
|
30,200
|
Asset impairment
loss
|
|
41,968
|
-
|
Selling and
administrative
|
|
15,128
|
18,136
|
Total costs and
expenses
|
|
167,875
|
160,926
|
|
|
|
|
|
Revenue less costs
and expenses
|
|
(55,387)
|
4,348
|
|
|
|
|
|
Equity income from
joint ventures
|
|
11,264
|
22,996
|
|
|
|
|
|
Other income
(loss)
|
|
|
|
Interest
income
|
|
130
|
172
|
Interest
expense
|
|
(356)
|
(262)
|
Gain (loss) on sale
of assets
|
|
(657)
|
536
|
Net other
gains
|
|
462
|
331
|
Total other income
(loss)
|
|
(421)
|
777
|
|
|
|
|
|
Income (loss) before
income taxes
|
|
(44,544)
|
28,121
|
|
|
|
|
|
Income taxes
(recovery)
|
|
(10,579)
|
7,042
|
|
|
|
|
|
Net income (loss) for
the year attributable to shareholders
|
|
(33,965)
|
21,079
|
|
|
|
|
|
Other comprehensive
income (loss)
|
|
36
|
(368)
|
|
|
|
|
|
Comprehensive
income (loss) for the year attributable to
shareholders
|
$
|
(33,929)
|
$
|
20,711
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
per Class A and Class B Share
|
|
|
|
|
Basic
|
|
$
|
(1.89)
|
$
|
1.17
|
|
Diluted
|
|
$
|
(1.89)
|
$
|
1.17
|
AKITA Drilling
Ltd.
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Changes in Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
Thousands
|
|
|
Attributable to
the Shareholders of the Company
|
|
|
Class
A
|
Class
B
|
Class A
and
|
|
Other
|
|
|
|
|
Non-Voting
|
Common
|
Class
B
|
Contributed
|
Comprehensive
|
Retained
|
Total
|
|
|
Shares
|
Shares
|
Shares
|
Surplus
|
Income
(Loss)
|
Earnings
|
Equity
|
Balance at
December 31, 2013
|
|
$
|
22,542
|
$
|
1,366
|
$
|
23,908
|
$
|
3,185
|
$
|
88
|
$
|
218,107
|
$
|
245,288
|
Net income for the
year
|
|
-
|
-
|
-
|
-
|
-
|
21,079
|
21,079
|
Remeasurement of
pension liability
|
|
-
|
-
|
-
|
-
|
(368)
|
-
|
(368)
|
Shares
repurchased
|
|
(37)
|
-
|
(37)
|
-
|
-
|
(390)
|
(427)
|
Stock options charged
to expense
|
|
-
|
-
|
-
|
372
|
-
|
-
|
372
|
Dividends
|
|
-
|
-
|
-
|
-
|
-
|
(6,103)
|
(6,103)
|
Balance at
December 31, 2014
|
|
$
|
22,505
|
$
|
1,366
|
$
|
23,871
|
$
|
3,557
|
$
|
(280)
|
$
|
232,693
|
$
|
259,841
|
Net loss for the
year
|
|
-
|
-
|
-
|
-
|
-
|
(33,965)
|
(33,965)
|
Remeasurement of
pension liability
|
|
-
|
-
|
-
|
-
|
36
|
-
|
36
|
Stock options charged
to expense
|
|
-
|
-
|
-
|
389
|
-
|
-
|
389
|
Dividends
|
|
-
|
-
|
-
|
-
|
-
|
(6,101)
|
(6,101)
|
Balance at
December 31, 2015
|
|
$
|
22,505
|
$
|
1,366
|
$
|
23,871
|
$
|
3,946
|
$
|
(244)
|
$
|
192,627
|
$
|
220,200
|
AKITA Drilling
Ltd.
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
$
Thousands
|
|
2015
|
2014
|
Operating
Activities
|
|
|
|
Net income
(loss)
|
|
$
|
(33,965)
|
$
|
21,079
|
Non-cash items
included in net income:
|
|
|
|
|
Depreciation and
amortization
|
|
36,748
|
30,200
|
|
Asset impairment
loss
|
|
41,968
|
-
|
|
Deferred income taxes
(recovery)
|
|
(7,863)
|
4,315
|
|
Defined benefit
pension plan expense
|
|
492
|
392
|
|
Stock options and
deferred share units expense
|
|
509
|
463
|
|
Gain (loss) on sale
of assets
|
|
657
|
(536)
|
|
Unrealized foreign
currency loss
|
|
73
|
162
|
|
Unrealized loss on
financial guarantee contracts
|
|
(109)
|
120
|
Funds flow from
operations
|
|
38,510
|
56,195
|
Change in non-cash
working capital
|
|
14,591
|
7,990
|
Equity income from
joint ventures
|
|
(11,264)
|
(22,996)
|
Post employment
benefits
|
|
(115)
|
(15)
|
Interest
paid
|
|
(215)
|
(130)
|
Income tax expense
(recovery) - current
|
|
(2,717)
|
2,602
|
Income tax paid
(recoverable)
|
|
2,717
|
(3,024)
|
Net cash from
operating activities
|
|
41,507
|
40,622
|
|
|
|
|
|
Investing
Activities
|
|
|
|
Capital
expenditures
|
|
(17,960)
|
(103,949)
|
Change in non-cash
working capital
|
|
(8,122)
|
1,087
|
Distributions from
investments in joint ventures
|
|
13,537
|
26,874
|
Change in cash
restricted for loan guarantees
|
|
3,403
|
(3,431)
|
Change in term
deposits
|
|
-
|
5,000
|
Proceeds on sale of
assets
|
|
1,093
|
8,316
|
Net cash used in
investing activities
|
|
(8,049)
|
(66,103)
|
|
|
|
|
|
Financing
Activities
|
|
|
|
Change in operating
loan facility
|
|
(20,000)
|
20,000
|
Dividends
paid
|
|
(6,101)
|
(6,015)
|
Repurchase of share
capital
|
|
-
|
(390)
|
Loan commitment fee
paid
|
|
-
|
(100)
|
Net cash from (used
in) financing activities
|
|
(26,101)
|
13,495
|
|
|
|
|
|
Increase (decrease)
in cash
|
|
7,357
|
(11,986)
|
Cash, beginning of
year
|
|
2,012
|
13,998
|
|
|
|
|
|
Cash, End of
Year
|
|
$
|
9,369
|
$
|
2,012
|
SOURCE AKITA Drilling Ltd.