CALGARY, March 5, 2019 /CNW/ - AKITA Drilling Ltd.'s net
loss for the year ended December 31,
2018 was $15,939,000 (net loss
of $0.65 per share (basic and
diluted)) on revenue of $118,361,000
compared to a net loss of $39,177,000
or $2.18 loss per share (basic and
diluted) on revenue of $71,198,000 in
2017. Included in the 2017 net loss is an asset
decommissioning and impairment expense of $29,123,000 (after tax effect of $15,320,000 or $0.85 per share). Funds flow from operations for
the current year was $14,306,000
compared to $6,607,000 in 2017, while
net cash from operating activities for 2018 was ($8,494,000) compared to $5,074,000 in 2017.
On September 11, 2018, AKITA
closed on its transformational acquisition of Xtreme Drilling Corp.
("Xtreme"), a TSX listed United
States ("US") based contract drilling company with a fleet
of 13 high specification AC triple drilling rigs, operating
throughout major resource plays of the US, plus spare equipment and
real estate. With this acquisition, and the movement of three rigs
from AKITA's Canadian fleet to the US in 2018 in addition to the
rig deployed in Q4 of 2017, AKITA's fleet of rigs in the US has
increased to 17 rigs. The Company is now well-balanced with 23 rigs
in Canada and 17 in the
US.
In Canada, the Company's
utilization for the year decreased to 33% in 2018 from 36% in 2017.
Sentiment in the Canadian energy industry shifted from optimism in
the first quarter of 2018 to pessimism in the fourth quarter of
2018. Regulated production cuts, pipeline access and political and
regulatory uncertainty are all weighing heavily on the Canadian
energy industry, which in turn is affecting drilling activity.
There is still an oversupply of rigs in Canada and day rates remain low, despite
improving to $31,354 per operating
day in 2018 from $26,704 in 2017.
Without a significant shift in demand for rigs or a reduction in
the overall Canadian rig fleet, AKITA does not anticipate any
significant price increases or activity increases in Canada in the near future.
On November 22, 2018, the Canadian
Association of Oilwell Drilling Contractors ("CAODC") released its
2019 industry drilling forecast, estimating 33% average rig
utilization, up from the 29% actual average rig utilization in
2018, and estimating 6,962 wells in 2019, up from 6,911 in 2018.
The 2018 forecast was based upon commodity price assumptions of US
$58.75 per barrel for crude oil and
CAD $2.00 per mcf for natural gas.
Based on the CAODC forecast it would appear that 2019 will be very
similar to 2018. Without improvements to the existing takeaway
capacity in Canada, growth in the
Canadian market may remain challenged. The Company's focus in 2019
will be on reducing costs in its Canadian operations.
AKITA's activity in the US, on a weighted average basis,
calculated on the days that the rigs were owned by AKITA and
physically in the US was 61% for 2018 and 79% for the three months
ended December 31, 2018. In the US
the Company is looking to 2019 with optimism. Demand for AKITA's US
rigs remains strong as AKITA's culture of "best-in-class"
operations permeates through its US division. At December 31, 2018, 15 of the Company's 17 US rigs
were operating and strong utilization is expected to continue
through 2019. Together with ongoing evaluation of opportunities to
move additional Canadian rigs to the US, synergy realization
related to the Xtreme acquisition and a modest capital program will
be the focus of AKITA in the US.
Selected information from AKITA Drilling Ltd.'s Management's
Discussion and Analysis for the Annual Report is as
follows:
Financial Highlights
|
For the years
ended December 31,
|
($ thousands except
per share amounts)
|
2018
|
2017
|
Change
|
%
Change
|
Revenue
|
118,361
|
71,198
|
47,163
|
66%
|
Operating
expenses
|
86,575
|
62,156
|
24,419
|
39%
|
Operating
margin(1)
|
31,786
|
9,042
|
22,744
|
252%
|
Margin
%(1)
|
27%
|
13%
|
14%
|
108%
|
|
|
|
|
|
Adjusted
EBIDTA(1)
|
16,447
|
3,187
|
13,260
|
416%
|
Per Share
|
0.67
|
0.18
|
0.49
|
272%
|
|
|
|
|
|
Adjusted funds flow
from operations(1)
|
14,306
|
6,607
|
7,699
|
117%
|
Per share
|
0.58
|
0.37
|
0.21
|
57%
|
|
|
|
|
|
Net loss
|
15,939
|
39,177
|
(23,238)
|
(59%)
|
Per Share
|
0.65
|
2.18
|
(1.53)
|
(70%)
|
|
|
|
|
|
Capital
expenditures
|
17,546
|
20,569
|
(3,023)
|
(15%)
|
Dividend
declared
|
9,784
|
6,100
|
3,684
|
60%
|
Weighted average
shares outstanding
|
24,552
|
17,946
|
6,606
|
37%
|
|
|
|
|
|
Total
Assets
|
403,641
|
207,497
|
196,144
|
95%
|
(1)See
commentary in "Basis of Analysis in this MD&A and Non-GAAP
Items".
|
Operational Highlights
|
|
|
|
|
For the years
ended December 31,
|
2018
|
2017
|
Change
|
% Change
|
Operating
days(1)
|
|
|
|
|
Canada
|
2,800
|
3,659
|
(859)
|
(23%)
|
United
States
|
1,783
|
-
|
1,783
|
N/A
|
|
|
|
|
|
Revenue per operating
day(1)
|
|
|
|
|
Canada(2)
|
31,354
|
26,704
|
4,650
|
17%
|
United
States
|
29,932
|
-
|
29,932
|
N/A
|
|
|
|
|
|
Operating and
maintenance per operating day(1)
|
|
|
|
|
Canada(2)
|
23,160
|
22,226
|
934
|
4%
|
United
States
|
21,329
|
-
|
21,329
|
N/A
|
|
|
|
|
|
Utilization
(1)
|
|
|
|
|
Canada
|
33%
|
36%
|
(3%)
|
(8%)
|
United
States(3)
|
61%
|
|
61%
|
N/A
|
(1)See
commentary in "Basis of Analysis in this MD&A and Non-GAAP
Items".
|
(2)Includes AKITA's share of Joint Venture
revenue and expenses. See commentary in "Basis of Analysis in this
MD&A and Non-GAAP".
|
(3)Utilization in the US is a weighted
average for the year based on the number of days each rig was
physically in the US and owned by the Company
|
Introduction
AKITA is a premier Canadian oil and gas drilling contractor with
operations in Canada and
the United States ("US") with a
fleet of 40 rigs. In 2018, AKITA began providing drilling
services through two geographical segments: Canada and the US. With a fleet of 23 rigs,
AKITA's Canadian division conducts operations in Alberta, British
Columbia, Saskatchewan, and
from time to time, in the Yukon
and the Northwest Territories,
primarily with its wholly owned rigs and through its active joint
ventures, the newly established AKITA Mistiyapew Aski Drilling Ltd.
(owned 50% by AKITA), AKITA Equtak Drilling Ltd. (owned 50% by
AKITA), and Akita Wood Buffalo Drilling Ltd. (owned 50% by AKITA),
each of which has defined geographical boundaries. With
a fleet of 17 rigs, AKITA's US division conducts operations in
North Dakota, Colorado, Utah, Wyoming, Texas, New
Mexico, Oklahoma and
Ohio.
With a singular focus on the provision of drilling services,
rigorous crew training, rig maintenance and safety processes and
adherence to a leading quality assurance – quality control program,
AKITA strives to ensure it is well positioned to meet the most
demanding requirements of global operators who offer long-lasting
resource based drilling programs. The Company has utilized
this strategy to enhance its development of pad drilling rigs
designed for both heavy oil and unconventional natural gas
formations.
General Overview
The financial results for the Company for 2018, when compared to
2017, improved in almost all metrics. Revenue increased to
$118,361,000 from $71,198,000, net loss decreased to $15,939,000 from $39,177,000 and adjusted funds flow from
operations1 increased to $14,306,000 from $6,607,000. During 2018, AKITA focused on
geographical diversification to the US as the Canadian oil and gas
market struggled to sustain the slow recovery that began in
2017.
AKITA began its geographical diversification in the first
quarter of 2018 with one drilling rig working in the Permian Basin
in New Mexico and ended 2018 with
15 active rigs out of a total of 17 US-based drilling rigs. This
growth was primarily the result of AKITA's acquisition of Xtreme
Drilling Corp. ("Xtreme"), bolstered organically by the move of
three additional Canadian rigs to the US over the course of
2018.
On September 11, 2018, AKITA
closed its previously announced acquisition of Xtreme. The
acquisition of Xtreme added 13 high-specification AC triple
drilling rigs to the Company's US rig fleet as well as facilities,
a skilled workforce and infrastructure throughout the US. The
acquisition of Xtreme was funded with $122
million in Class A Non-Voting shares and cash of
$45 million.
Conditions in the US continued to improve through 2018 until the
fourth quarter of 2018 when prices for crude oil declined
significantly, which had a leveling effect on growth. In
Canada, the growth was more
subdued than in the US and the decrease in oil prices in the fourth
quarter has had a more significant impact with many operators
pausing or canceling capital spending. In 2018 three customers each
provided more than 10% of AKITA's revenue for the year (2017 – two
customers).
_________________________
|
1 See
commentary in "Basis of Analysis in this MD&A and Non-GAAP
Items".
|
Results by Segment
Canada
For the years
ended December 31,
|
|
$Thousands
|
2018
|
2017
|
Change
|
% Change
|
Revenue(1)
|
87,790
|
97,711
|
(9,921)
|
(10%)
|
Operating and
maintenance(1)
|
64,847
|
81,325
|
(16,478)
|
(20%)
|
Operating
income
|
22,943
|
16,386
|
6,557
|
40%
|
Margin
%(1)
|
26%
|
17%
|
9%
|
53%
|
|
|
|
|
|
Operating
days
|
2,800
|
3,659
|
(859)
|
(23%)
|
|
|
|
|
|
Revenue per operating
day(1)(2)
|
31,354
|
26,704
|
4,650
|
17%
|
Operating and
maintenance per operating day(1)(2)
|
23,160
|
22,226
|
934
|
4%
|
|
|
|
|
|
Utilization
|
33%
|
36%
|
(3%)
|
(8%)
|
|
|
|
|
|
Rig count
|
23
|
27
|
(4)
|
(15%)
|
(1)Includes AKITA's share of Joint Venture
revenue and expenses. See commentary in "Basis of Analysis in this
MD&A and Non-GAAP Items".
|
|
(2)See
commentary in "Basis of Analysis in this MD&A and Non-GAAP
Items".
|
|
Utilization rates are a key statistic for the drilling industry
since they directly affect total revenue and influence
pricing. During 2018, AKITA achieved 2,800 operating days in
Canada, which corresponds to an
annual utilization rate of 33%, compared to 2017 utilization of 36%
(3,659 days), and a 2018 industry average of 29%. Historically,
AKITA's utilization in Canada has
been above industry standard due to the higher than average number
of pad drilling rigs in AKITA's fleet. Pad drilling rigs typically
have higher utilization than conventional drilling rigs as pad
drilling is a more efficient way to drill multiple wells without
needing trucks to move.
Activity in Canada, for AKITA
and the industry, decreased in 2018 from 2017 despite higher
average WTI prices. Infrastructure constraints and uncertainty over
the future of the Canadian market affected the capital spending of
Canadian oil and gas companies.
Canadian revenue of $87,790,000 in
2018 was 10% lower than 2017 revenue of $97,711,000, due to decreased activity in 2018.
Through a greater percentage of higher specification rigs working,
revenue per day increased in 2018 to $31,354 per day from $26,704 per day in 2017, a 17% increase.
This increase in revenue per day resulted in a 40% increase in
operating income from the Canadian operating segment. Included in
the Canadian operating results is AKITA's share of revenue and
costs from its joint ventures, as AKITA provides the same drilling
services through its joint venture rigs as it does its wholly-owned
rigs.
Operating and maintenance costs are tied to activity levels and
decreased to $64,847,000 in 2018 from
$81,325,000 in 2017 including AKITA's
share of costs from its joint venture rigs. On a per day basis,
2018 remained consistent with the prior year, increasing only 4% in
2018 over 2017.
AKITA's Canadian segment provided drilling services to 29
different customers in 2018 (2017 - 35 different customers),
including two customers that each provided more than 10% of AKITA's
Canadian revenue for the year (2017 – two customers).
United States
For the year ended
December 31,
|
|
$ Thousands
(CAD)
|
2018
|
Revenue
|
53,368
|
Operating and
maintenance
|
38,029
|
Operating
income
|
15,339
|
Margin %
|
29%
|
|
|
Operating
days
|
1,783
|
|
|
Revenue per operating
day(1)
|
29,932
|
Operating and
maintenance per operating day(1)(2)
|
21,329
|
|
|
Utilization
(2)
|
61%
|
|
|
Rig count
|
17
|
(1)See
commentary in "Basis of Analysis in this MD&A and Non-GAAP
Items".
|
(2)Utilization in the US is a weighted
average for the year based on the number of days each rig was
physically in the US and owned by the Company.
|
AKITA moved one drilling rig from Canada to the Permian Basin in December of
2017, one in the first quarter of 2018 and two more in the third
quarter of 2018. The Company added an additional thirteen rigs
through its acquisition of Xtreme in September of 2018, to end the
year with a fleet of seventeen rigs in the US.
Revenue in the US was $53,368,000
for 2018 (2017 – n/a) equal to 45% of the Company's total revenue.
This revenue includes the full year for AKITA's US based rigs prior
to the acquisition of Xtreme, and revenue from September 12 to December 31, 2018 generated by
the acquired Xtreme assets. Total operating income, which is
operating revenue less direct operating and maintenance costs, was
$15,339,000 for the year.
Since the acquisition of Xtreme in September of 2018, the
Company has focused on integrating AKITA and Xtreme to maximize the
efficiencies available to the larger, more diverse Company.
In the US, AKITA provided drilling services to 16 different
customers in 2018 (2017 – n/a), including four customers that each
provided more than 10% of AKITA's US revenue for the year (2017 –
n/a).
Seasonality
The Canadian drilling industry is seasonal with activity
typically building in the fall as the ground freezes and peaking
during the winter months. Northern transportation routes become
available once areas with muskeg conditions freeze to allow the
movement of rigs and other heavy equipment. The peak Canadian
drilling season typically 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 as frozen ground melts. The summer drilling
season begins when road bans are lifted. Some areas are subject to
environmental orders for specific well leases which can prevent
drilling activity during certain periods when authorities
prioritize wildlife or habitat protections. Such restrictions
may affect activity levels and operating results.
While activity in the northern part of the US is subject to a
degree of seasonality, North
Dakota's Williston Basin,
where AKITA operates, is less affected by spring break-up than are
AKITA's operations in northern Canada. Other areas in the US
where AKITA conducts drilling operations are infrequently subject
to weather constraints, especially in the southern states, but may
experience operational restrictions for other reasons.
While seasonality can affect all rig classes, pad drilling rigs
are generally less susceptible to seasonality than conventional
rigs.
Depreciation and Amortization Expense
$Millions
|
2018
|
2017
|
Change
|
% Change
|
Depreciation and
amortization expense
|
26.6
|
27.1
|
(0.5)
|
(2%)
|
The decrease in depreciation and amortization expense to
$26,614,000 during 2018 from
$27,126,000 during 2017 was
attributable to the asset decommissioning and asset impairment
expense of $29,123,000 that was
recorded in 2017. This expense decrease the Company's depreciable
asset base. Drilling rig depreciation accounted for 97% of total
depreciation and amortization expense in 2018 (2017 – 96%).
On January 1, 2018, AKITA changed
its depreciation method to a straight-line calculation from a
unit-of-production basis on drilling rig assets. The rationale for
this change was to have rig depreciation more closely match the new
lifecycle of rigs. Drilling technology is a critical component of
modern drilling rigs, and drilling rigs' useful lives are reduced
as new technologies are utilized for modern drilling programs. As a
result, the passage of time plays a more significant role than
operating days in determining a drilling rig's life. Accordingly,
the straight-line depreciation method matches the new lifecycle
more accurately than the unit-of-production depreciation
method. The estimated effect of the change in depreciation
method on the Company's financial statements for 2018 is not
material.
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 venture activities.
Selling and Administrative Expenses
$Millions
|
2018
|
2017
|
Change
|
% Change
|
Selling and
administrative expenses
|
22.6
|
13.7
|
8.9
|
65%
|
Selling and administrative expenses increased to $22,611,000 in 2018 from $13,659,000 in 2017. The increase in 2018
is related to transaction costs of $2.4
million for the acquisition of Xtreme and the addition of
the US-based selling and administrative costs to the Company's
total cost.
Selling and administrative expenses equated to 19% of revenue in
2018, the same as in 2017. The single largest component of selling
and administrative expenses was salaries and benefits which
accounted for 33% of these expenses in 2018 (2017 – 51%).
Asset Decommissioning and Impairment
$Millions
|
2018
|
2017
|
Change
|
% Change
|
Asset impairment
loss
|
-
|
16.0
|
(16.0)
|
(100%)
|
Asset decommissioning
loss
|
-
|
13.1
|
(13.1)
|
(100%)
|
Asset decommissioning
and impairment loss
|
-
|
29.1
|
(29.1)
|
(100%)
|
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. At December 31,
2018, there were no internal indicators of impairment,
however there were external indicators of impairment. The
uncertainty around oil prices impacts the earnings potential of the
Company's cash generating units ("CGU's") and at December 31, 2018, the book value of the
Company's net assets was greater than its market capitalization;
therefore, the Company tested its CGUs for impairment.
Upon completion of its asset impairment testing, the Company
concluded that there was no asset impairment required at
December 31, 2018 (2017 -
$16,000,000). The Company also
concluded that there were no reversals of previous asset
impairments required at December 31,
2018.
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 test at December 31,
2018, management determined value in use for each of its
CGUs using estimated discounted cash flows, 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. At
December 31, 2018, management
determined recoverable amounts for its CGUs using a combination of
value in use and fair value less costs to dispose. IFRS
considers this approach to constitute a Level 3 hierarchy in its
determination of value.
The assumptions used in the value-in-use impairment tests were
based on the Company's Board approved 2019 budget and business plan
covering a three year period and applied an average growth rate
ranging from 2% to 9% over a 10 year period depending on the CGU
being analyzed. In forecasting its projected cash flows the Company
assumed that current market conditions will not persist into the
future. The Company assumed a pre-tax discount rate of 13%,
in order to calculate the present value of projected cash
flows. Determination of this discount rate included analysis
of the cost of debt and equity for the Company and the Canadian
drilling industry incorporating a risk premium based on current
market conditions. This valuation has a fair value hierarchy
of Level 3.
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:
- Reduced future revenue assumptions by 5%;
- Increased inflation for cash outflows to 5%; and
- Increased the pre-tax discount rate from 13% 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 CGUs'
values-in-use ranging from $9 million
to $32 million. As the base
case test represented management's best estimates, these
sensitivity changes were not included in the recoverable amounts
used in the 2018 asset impairment testing or the 2017 asset
impairment loss reported.
Equity Income from Joint Ventures
Equity income from joint ventures is comprised of the
following:
$Millions
|
2018
|
2017
|
Change
|
% Change
|
Proportionate share
of revenue from joint ventures
|
22.8
|
26.5
|
(3.7)
|
(14%)
|
Proportionate share
of operating & maintenance expenses from joint
ventures
|
(16.3)
|
(19.2)
|
2.9
|
(15%)
|
Proportionate share
of selling and administrative expenses from joint
ventures
|
(0.3)
|
(0.4)
|
0.1
|
25%
|
Equity income from
joint ventures
|
6.2
|
6.9
|
(0.7)
|
(10%)
|
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 relating to
increased activity, revenue per day as well as operating
expenses.
Other Income (Loss)
$Millions
|
2018
|
2017
|
Change
|
% Change
|
Interest
income
|
0.1
|
0.4
|
(0.3)
|
(75%)
|
Interest
expense
|
(2.1)
|
(0.2)
|
(1.9)
|
(950%)
|
Gain on sale of
assets
|
0.6
|
0.2
|
0.4
|
200%
|
Net other
gains
|
0.4
|
0.3
|
0.1
|
33%
|
Total other income
(loss)
|
(1.0)
|
0.7
|
(1.7)
|
(243%)
|
Interest income decreased to $84,000 in 2018 from $439,000 in 2017 due primarily to less interest
accrued on a long term receivable that was paid in early 2018.
During 2018, the Company recorded interest expense of
$2,121,000 (2017 – $168,000). The increase is due to the increase in
the Company's debt as a result of the acquisition, as well as the
debt assumed as part of the transaction.
During 2018, the Company disposed of non-core assets resulting
in a gain of $567,000 (2017 – gain of
$194,000).
In 2018, amounts reported as "Net Other Gains" of $453,000 included $227,000 in foreign exchange, the balance is made
up of several amounts.
Income Tax Expense (Recovery)
$Millions, except
income tax rate (%)
|
2018
|
2017
|
Change
|
% Change
|
Current tax
recovery
|
0.1
|
(3.0)
|
3.1
|
(103%)
|
Deferred tax expense
(recovery)
|
3.5
|
(11.1)
|
14.6
|
132%
|
Total income tax
expense (recovery)
|
3.6
|
(14.1)
|
17.7
|
126%
|
Effective income tax
rate
|
27.0%
|
26.8%
|
|
|
AKITA had an income tax expense of $3,651,000 in 2018 compared to a tax recovery of
$14,053,000 in 2017. The current tax
expense in 2018 relates to the true-up of the 2017 tax return to
the provision. Deferred tax increased to an expense of $3,508,000 in 2018 compared to a recovery of
$11,063,000 in 2017. This change is a
result of intercompany asset sales between jurisdictions and
unrecognized deferred tax assets in 2018 compared to the asset
impairment and decommissioning expense recorded in 2017 that
reduced the Company's future tax liability.
Net Loss, Adjusted Funds Flow and Net Cash From (Used in)
Operating Activities
$Millions
|
2018
|
2017
|
Change
|
% Change
|
Net loss
|
(15.9)
|
(39.2)
|
23.3
|
(59%)
|
Net cash from
operating activities
|
(8.5)
|
5.0
|
(13.5)
|
(270%)
|
Adjusted funds flow
from operations(1)
|
14.3
|
6.6
|
7.7
|
117%
|
(1)See
commentary in "Basis of Analysis in this MD&A and Non-GAAP
Items".
|
During 2018, the Company recorded a net loss of $15,939,000 (net loss of $0.65 per Class A Non-Voting and Class B Common
share (basic and diluted)) compared to net loss of $39,177,000 (net loss of $2.18 per Class A Non-Voting and Class B Common
share (basic and diluted)) in 2017. The material difference in net
income from 2018 and 2017 is largely attributable to the asset
decommissioning and impairment expense in 2017 of $29,123,000, and the deferred tax recovery of
$11,063,000 in 2017.
Net cash from (used in) operating activities decreased in 2018
to negative $8,494,000 in 2018 from
positive $5,074,000 in 2017 due
primarily to changes in non-cash working capital.
Adjusted funds flow from
operations2 increased to $14,306,000 in 2018 from $6,607,000 in 2017 due to an increase in
operating days and revenue per day for the company as a whole.
Increased US activity more than offset the decline in the Canadian
market, resulting in an overall increase for the
Company.
___________________________
|
2 See
commentary in "Basis of Analysis in this MD&A and Non-GAAP
Items."
|
Liquidity and Capital Resources
At December 31, 2018, AKITA had
$11,166,000 in working capital
(working capital ratio of 1.31:1) including $1,503,000 in cash, compared to a working capital
of $15,528,000 (working capital ratio
of 2.02:1) and $560,000 cash for the
previous year. In 2018, AKITA used $8,494,000 in cash for operating
activities. Positive cash was generated from joint venture
distributions ($5,808,000), from
reductions in cash balances restricted for loan guarantees
($1,525,000) and from proceeds on
sales of assets ($640,000).
During the same period, cash was used for capital expenditures
($17,546,000)[3] and payment of
dividends ($7,942,000)3.
Accounts payable at year end included $19,020,000 in accrued expenses, three quarters
of which related to routine operations while the other quarter
related to one-time items.
The Company chooses to maintain a conservative Statement of
Financial Position due to the cyclical nature of the industry. In
conjunction with the closing of the Xtreme acquisition, the Company
entered into a new operating loan facility with its principal
banker totaling $125,000,000 that is
available until 2022. The operating loan facility was syndicated in
the fourth quarter of 2018 with the Company's principal banker as
the agent on the syndication and three other national banks joining
the group. The interest rate on the operating loan facility ranges
from 50 to 200 basis points over prime interest rates depending on
the funded debt to EBITDA1 ratio. Security for
this facility includes all present and after-acquired property of
the Company and a first floating charge over all other present and
after-acquired property of the Company including real property.
The credit facility includes two financial covenants:
1.
|
Funded
Debt1 to EBITDA1 Ratio:
|
|
i.
|
for the Fiscal
Quarter ending December 31, 2018, the Funded
Debt1 to EBITDA1 Ratio shall not be more
than 4.00:1.00;
|
|
ii.
|
for the Fiscal
Quarter ending March 31, 2019, the Funded Debt1 to
EBITDA1 Ratio shall not be more than 3.50:1.00;
and
|
|
iii.
|
for the Fiscal
Quarter ending June 30, 2019 and each Fiscal Quarter ending
thereafter, the Funded Debt1 to EBITDA1
Ratio shall not be more than 3.00:1.00.
|
The Funded
Debt1 to EBITDA1 Ratio is calculated
quarterly on the last day of each Fiscal Quarter on a rolling four
quarter basis; and
|
_____________________________
|
3 Readers
should be aware that the use of cash in any given period for
capital expenditures or payment of dividends does not necessarily
coincide with the accounting treatment when reported on an accrual
basis.
|
2.
|
EBITDA1 to Interest Expense Ratio:
the Company shall not permit the EBITDA1 to Interest
Expense Ratio, calculated quarterly on the last day of each Fiscal
Quarter on a rolling four
quarter basis, to fall below 3.00:1.00.
|
|
|
|
The facility also
includes a borrowing base calculation as follows:
|
|
The sum
of:
|
|
|
|
i.
|
75% of Eligible
Accounts Receivable1; plus
|
|
ii.
|
40% of the net book
value of all Eligible Fixed Assets1; less
|
|
iii.
|
Priority
Payables1 of the Loan Parties.
|
(1)
|
Readers should be
aware that each of the EBITDA, interest expense, eligible accounts
receivable and eligible fixed 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.
|
The new operating loan facility has been classified as long-term
debt as the credit agreement has no required repayment obligations
prior to the end of the loan facility term. The Company is in
compliance with its operating loan facility covenants. At
December 31, 2018, the Company had
$69 million outstanding on its
operating loan facility (2017 - nil).
In addition to the Company's operating loan facility, the
Company also had $14 million in debt
outstanding at December 31, 2018 that
was assumed upon the acquisition of Xtreme.
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; and
- to augment existing resources in order to meet further 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. In order 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.
Basis of Analysis in this MD&A and Non-GAAP Items
Revenue and operating and maintenance expenses in AKITA's
Canadian operating segment include revenue and expenses from
AKITA's wholly-owned rigs as well as its share of joint venture
revenue and expenses.
$Thousands
|
2018
|
2017
|
Revenue from
wholly-owned rigs in Canada
|
64,993
|
71,198
|
Revenue from joint
venture rigs
|
22,797
|
26,513
|
Total revenue in
Canada
|
87,790
|
97,711
|
|
|
|
Operating and
maintenance expenses from wholly-owned rigs in Canada
|
48,547
|
62,156
|
Operating and
maintenance expenses from joint venture rigs
|
16,300
|
19,167
|
Total operating and
maintenance expenses in Canada
|
64,847
|
81,323
|
AKITA's revenue per operating day and AKITA's operating and
maintenance expenses per operating day are not recognized GAAP
measures under IFRS. Management and certain investors may
find "per operating day" measures for AKITA's revenue indicate
pricing strength while AKITA's operating and maintenance expenses
per operating day demonstrates a 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 drilling rigs that
are utilized can also influence these results.
Adjusted earnings before Interest, Tax, Depreciation and
Amortization ("Adjusted EBITDA") is not a recognized GAAP measure
under IRFS and users of these financial statements should note that
Adjusted EBITDA calculations may differ between AKITA and other
companies. AKITA calculated Adjusted EBITDA as follows:
$Thousands
|
2018
|
2017
|
Net loss attributable
to shareholders
|
(15,939)
|
(39,177)
|
Interest
expense
|
2,121
|
168
|
Income tax
|
3,651
|
(14,053)
|
Depreciation and
amortization
|
26,614
|
27,126
|
Asset
impairment
|
-
|
29,123
|
Adjusted
EBITDA
|
16,447
|
3,187
|
Adjusted funds flow from operations is not a recognized GAAP
measure under IRFS and users of these financial statements should
note that AKITA's method of determining adjusted funds flow from
operations may differ from methods used by other companies and
includes cash flow from operating activities before working capital
changes, equity income from joint ventures, and income tax amounts
paid or recovered during the period. Management and certain
investors may find adjusted 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.
$Thousands
|
2018
|
2017
|
Net Cash from (Used
in ) Operating Activities
|
(8,494)
|
5,074
|
Income tax
recoverable
|
(2,812)
|
(2,270)
|
Current income tax
(recovery)
|
(143)
|
2,990
|
Interest
paid
|
1,950
|
1
|
Post-employment
benefits
|
90
|
142
|
Equity income from
joint ventures
|
6,168
|
6,939
|
Change in non-cash
working capital
|
17,547
|
(6,269)
|
Adjusted funds flow
from operations
|
14,306
|
6,607
|
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 MD&A 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.
|
|
|
|
|
Statements of
Financial Position
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
December
31,
|
$
Thousands
|
|
|
2018
|
2017
|
ASSETS
|
|
|
|
|
Cash
|
|
|
$
|
1,503
|
$
|
560
|
Accounts
receivable
|
|
|
42,733
|
27,024
|
Income taxes
recoverable
|
|
|
531
|
3,076
|
Inventory
|
|
|
394
|
-
|
Prepaid expenses and
other
|
|
|
2,446
|
89
|
|
|
|
47,607
|
30,749
|
Non-current
Assets
|
|
|
|
|
Restricted
cash
|
|
|
756
|
1,525
|
Other long-term
assets
|
|
|
474
|
528
|
Investments in joint
ventures
|
|
|
4,456
|
4,096
|
Property, plant and
equipment
|
|
|
350,348
|
170,599
|
TOTAL
ASSETS
|
|
|
$
|
403,641
|
$
|
207,497
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
Accounts payable and
accrued liabilities
|
|
|
$
|
23,317
|
$
|
13,696
|
Deferred
revenue
|
|
|
367
|
-
|
Dividends
payable
|
|
|
3,367
|
1,525
|
Finance
leases
|
|
|
559
|
-
|
Current portion of
long-term debt
|
|
|
8,831
|
-
|
|
|
|
36,441
|
15,221
|
Non-current
Liabilities
|
|
|
|
|
Financial
instruments
|
|
|
-
|
9
|
Deferred income
taxes
|
|
|
16,235
|
12,592
|
Deferred share
units
|
|
|
417
|
388
|
Pension
liability
|
|
|
4,712
|
4,832
|
Long term
debt
|
|
|
74,108
|
-
|
Total
Liabilities
|
|
|
131,913
|
33,042
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
Class A and Class B
shares
|
|
|
146,264
|
23,871
|
Contributed
surplus
|
|
|
4,701
|
4,500
|
Accumulated other
comprehensive income (loss)
|
|
86
|
(495)
|
Retained
earnings
|
|
|
120,677
|
146,579
|
Total
Equity
|
|
|
271,728
|
174,455
|
TOTAL LIABILITIES
AND EQUITY
|
|
|
$
|
403,641
|
$
|
207,497
|
AKITA Drilling
Ltd.
|
|
|
|
Statements of Net
Loss and Comprehensive Loss
|
|
|
|
|
|
|
|
Year Ended
December 31
|
$ Thousands except
per share amounts
|
|
2018
|
2017
|
|
|
|
|
|
|
|
|
COSTS AND
EXPENSES
|
|
|
|
Operating and
maintenance
|
|
86,575
|
62,156
|
Depreciation and
amortization
|
|
26,614
|
27,126
|
Asset write-down and
impairment loss
|
|
-
|
29,123
|
Selling and
administrative
|
|
22,611
|
13,659
|
Total Costs and
Expenses
|
|
135,800
|
132,064
|
|
|
|
|
Revenue Less Costs
and Expenses
|
|
(17,439)
|
(60,866)
|
|
|
|
|
EQUITY INCOME FROM
JOINT VENTURES
|
|
6,168
|
6,939
|
|
|
|
|
OTHER INCOME
(LOSS)
|
|
|
|
Interest
income
|
|
84
|
439
|
Interest
expense
|
|
(2,121)
|
(168)
|
Gain on sale of
assets
|
|
567
|
194
|
Net other
gains
|
|
453
|
232
|
Total Other Income
(Loss)
|
|
(1,017)
|
697
|
|
|
|
|
Loss Before Income
Taxes
|
|
(12,288)
|
(53,230)
|
|
|
|
|
Income tax expense
(recovery)
|
|
3,651
|
(14,053)
|
|
|
|
|
NET LOSS FOR THE
PERIOD ATTRIBUTABLE TO SHAREHOLDERS
|
|
(15,939)
|
(39,177)
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
Items that will
not subsequently be reclassified to profit or loss
|
|
|
Remeasurement of
pension liability and other
|
|
364
|
(129)
|
Items that may be
subsequently reclassified to profit or loss
|
|
|
|
Foreign currency
translation adjustment
|
|
217
|
|
Total Other
Comprehensive Income (Loss)
|
|
581
|
(129)
|
|
|
|
|
COMPREHENSIVE LOSS
FOR THE PERIOD ATTRIBUTABLE TO
SHAREHOLDERS
|
|
$
|
(15,358)
|
$
|
(39,306)
|
|
|
|
|
|
|
|
|
NET LOSS PER CLASS
A AND CLASS B SHARE
|
|
|
|
Basic
|
|
$
|
(0.65)
|
$
|
(2.18)
|
Diluted
|
|
$
|
(0.65)
|
$
|
(2.18)
|
AKITA Drilling
Ltd.
|
|
|
Statements of Cash
Flows
|
|
|
|
|
|
|
|
Year Ended
December 31
|
$
Thousands
|
|
2018
|
2017
|
|
|
|
|
Net loss
|
|
$
|
(15,939)
|
$
|
(39,177)
|
Non-cash items
included in net income:
|
|
|
|
Depreciation and
amortization
|
|
26,614
|
27,126
|
Asset decomissioning
and impairment loss
|
|
-
|
29,123
|
Deferred income tax
expense (recovery)
|
|
3,508
|
(11,063)
|
Defined benefit
pension plan expense
|
|
469
|
443
|
Stock options and
deferred share units expense
|
|
230
|
381
|
Gain on sale of
assets
|
|
(567)
|
(194)
|
Unrealized gain on
financial guarantee contracts
|
|
(9)
|
(32)
|
Change in non-cash
working capital
|
|
(17,547)
|
6,269
|
Equity income from
joint ventures
|
|
(6,168)
|
(6,939)
|
Post-employment
benefits
|
|
(90)
|
(142)
|
Interest
paid
|
|
(1,950)
|
(1)
|
Current income tax
(recovery)
|
|
143
|
(2,990)
|
Income tax
recoverable
|
|
2,812
|
2,270
|
Net Cash From
(Used In) Operating Activities
|
|
(8,494)
|
5,074
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
Net cash
consideration for Xtreme shares
|
|
(43,928)
|
-
|
Capital
expenditures
|
|
(17,546)
|
(20,569)
|
Change in non-cash
working capital
|
|
2,615
|
190
|
Distributions from
investments in joint ventures
|
|
5,808
|
6,095
|
Change in restricted
cash
|
|
1,525
|
1,444
|
Proceeds on sale of
assets
|
|
640
|
221
|
Net Cash Used In
Investing Activities
|
|
(50,886)
|
(12,619)
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
Change in
debt
|
|
68,884
|
-
|
Dividends
paid
|
|
(7,942)
|
(6,100)
|
Loan commitment
fee
|
|
(836)
|
(45)
|
Net Cash From
(Used In) Financing Activities
|
|
60,106
|
(6,145)
|
|
|
|
|
Effect of Foreign
Exchange on Cash
|
|
217
|
-
|
|
|
|
|
Increase
(Decrease) in Cash
|
|
943
|
(13,690)
|
Cash, beginning of
year
|
|
560
|
14,250
|
|
|
|
|
CASH, END OF
YEAR
|
|
$
|
1,503
|
$
|
560
|
SOURCE AKITA Drilling Ltd.