AKITA Drilling Ltd.'s net loss for the three months ended March 31, 2017 was $4,975,000 (net loss of $0.28 per share basic and diluted) on revenue of $19,193,000, compared to net income of $18,173,000 (net income of $1.01 per share basic and diluted) on revenue of $41,991,000 ($13,741,000 from direct operations and $28,250,000 from contract cancelation fee) for the corresponding period in 2016. Funds flow from operations for the quarter ended March 31, 2017 was $1,824,000 compared to $25,368,000 in the corresponding quarter in 2016.
The first quarter of 2017 saw considerable increases in drilling activity across the western Canadian sedimentary basin when compared to the first quarter of 2016. As a result of increased West Texas Intermediate crude oil prices, operators have begun to expand their capital programs which in turn has led to significantly more opportunities for drilling companies than in the first quarter of 2016. However, this marked improvement in drilling activity over 2016 is still well below historical averages and there continues to be pricing pressure on drilling companies. This pricing pressure is likely to continue until some stability in crude oil prices is obtained. AKITA saw a 61% improvement in its operating days in the first quarter of 2017 when compared to the same period in 2016. To satisfy this demand, AKITA started up 12 rigs in the first quarter of 2017 that had previously been down for extended periods.
Selected information from AKITA Drilling Ltd.'s Management Discussion and Analysis from the Quarterly Report as follows:
Introduction and General Overview
Activity levels in the contract drilling industry are highly correlated to the market prices for both crude oil and natural gas. Average West Texas Intermediate crude oil prices increased 56% when comparing the first quarter of 2017 to the first quarter of 2016 and natural gas Alberta Energy Company (AECO) spot prices increased 21% over the same time period. This strengthening of commodity prices has had a correspondingly positive effect on drilling activity in the western Canadian sedimentary basin with industry utilization rates increasing.
This increase in utilization is a positive sign for the drilling industry and AKITA, however pricing pressure still remains severe as discussed further in this MD&A.
Readers of this MD&A should be aware that historically, the first quarter of the calendar year is the most active in the drilling industry, as operators take advantage of the frozen ground making the movement of heavy equipment easier. Lower activity levels that result from spring break-up and associated travel bans on public roads characterize the second quarter.
Generally, AKITA meets or exceeds industry average rig utilization rates as a result of positive customer relations, meaningful joint ventures with Aboriginal and First Nations partners, employee expertise, safety performance, drilling performance and the majority of the Company's rig fleet being invested in high demand pad rigs.
Revenue and Operating & Maintenance Expenses
During the first quarter of 2017, adjusted revenue increased to $25,339,000 from $19,412,000 in the first quarter of 2016, due solely to higher utilization of the Company's rig fleet. On a per operating day basis, adjusted revenue per operating day decreased to $26,367 in the first quarter of 2017 from $32,462 in the same period of 2016. This significant decline in revenue per day was a result of two factors, the first and most significant being the continuation of the bottom of the cycle spot rig pricing which was reached in mid 2016 and has continued throughout the first quarter of 2017. Secondly, a change in the mix of rigs working saw more single and double rigs working in the first quarter of 2017 compared to the same period of 2016. Single and double rigs do not earn as high a day rate as triple rigs.
Adjusted operating and maintenance expenses are tied to operating days and amounted to $21,743,000 ($22,625 per operating day) during the first quarter of 2017, compared to $12,297,000 ($20,564 per operating day) during the same period of the prior year. The increase in adjusted operating and maintenance expenses is primarily due to more operating days in the first quarter of 2017 compared to the first quarter of 2016. High rig start-up costs was the main factor behind the increase to adjusted operating and maintenance costs on a per operating day basis as 12 rigs started up during the first quarter of 2017 compared to only one rig starting up in the same period of 2016.
The adjusted operating margin for the Company decreased to $3,596,000 ($3,742 per operating day) in the first quarter of 2017 from $7,115,000 ($11,898 per operating day) during the corresponding quarter of 2016. The reduction in adjusted operating margin both as a whole and on a per operating day basis is directly related to lower adjusted revenue per operating day, down 19% in the first quarter of 2017 compared to the first quarter of 2016, while operating costs were up 10% over the same period for the reasons noted above.
Depreciation and Amortization Expense
Depreciation and amortization expense increased to $6,736,000 during the first quarter of 2017 from $6,275,000 during the corresponding period in 2016. AKITA depreciates its rig fleet on a unit of production basis and the increase in depreciation and amortization was directly correlated to the increase in overall drilling days offset slightly by rigs with lower cost basis working in the first quarter of 2017 compared to the first quarter of 2016. In the first quarter of 2017, drilling rig depreciation accounted for 97% of total depreciation expense (Q1 2016 - 96%).
While AKITA conducts some of its drilling operations via joint ventures, the drilling rigs used to conduct those activities are owned jointly by AKITA and its joint venture partners, and not by the joint ventures themselves. As the joint ventures do not hold any property, plant, or equipment assets directly, the Company's depreciation expense includes depreciation on assets involved in both wholly-owned and joint ventured activities.
Other Income (Losses)
Total other income (losses) is the aggregate of interest income, interest expense, gain (loss) on sale of assets and net other gains (losses) all of which are discussed below in detail.
Interest income decreased to $120,000 in the first quarter of 2017 from $248,000 in the same period of 2016, due to the decrease in the interest-bearing long-term receivable held related to a contract cancellation recorded in 2016.
In the first quarter of 2017, the Company incurred interest expense of $42,000 related to the future cost of the Company's defined benefit pension plan (Q1 2016-$40,000).
During the first quarter of 2017, the Company sold ancillary assets for proceeds of $80,000 that resulted in a gain of $76,000. During the corresponding quarter of 2016, assets were sold for $60,000 resulting in a loss of $27,000.
During the first quarter of 2016, $197,000 of net other losses related to the discount of the long-term receivable associated with the contract cancellation fee. During the first quarter of 2017, there was no such discount as all the receivable was reclassified to current assets.
Net Income, Funds Flow and Net Cash From Operating Activities
The Company incurred a net loss of $4,975,000 ($0.28 basic and diluted loss per share) for the first quarter of 2017, compared to net income of $18,173,000 ($1.01 basic and diluted earnings per share) in the first quarter of 2016. Funds flow from operations decreased to $1,824,000 in the first quarter of 2017, from $25,368,000 during the corresponding quarter in 2016. The net income in 2016 was directly attributable to the contract cancellation fee, while lower revenue per operating day and higher direct costs per operating day in 2017 contributed to the quarter over quarter decrease in profitability. Funds flow from operations was affected by the same factors as net income.
Liquidity and Capital Resources
Cash used for capital expenditures totalled $4,587,000 in the first quarter of 2017 (Q1 2016 - $373,000). Current year-to-date capital expenditures largely related to routine items while 33% related to construction of the Company's new AC double pad rig which is scheduled to be completed in mid-2017. The prior year's first quarter capital expenditures related to routine capital items.
At March 31, 2017, AKITA's Statement of Financial Position included working capital (current assets minus current liabilities) of $29,980,000 compared to working capital of $30,759,000 at March 31, 2016, and working capital of $34,907,000 at December 31, 2016. The seasonal nature of AKITA's business typically results in higher non-cash working capital balances at the end of the first quarter than at year-end due to the high seasonal activity levels encountered in the first quarter. Working capital at March 31, 2017 decreased compared to March 31, 2016 and December 31, 2016 due to the second payment of the receivable associated with the 2016 contract cancellation fee as well as higher payables balances related to increased activity, which was not offset by a corresponding increase in accounts receivable due to historically low day rates discussed above.
During the first quarter of 2017, the Company requested a reduction to its credit facility (currently undrawn) from $100 million to $50 million. The facility was reduced as part of the Company's continued cost cutting initiatives in order to reduce standby fees on the undrawn amounts. The changes to the credit facility also included elimination of certain covenants to allow for more flexibility in accessing the facility in the current low earnings environment.
SOURCE: AKITA Drilling Ltd.
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