CALGARY, March 4, 2015 /CNW/ - Net income for the
year ended December 31, 2014 was
$21,079,000 or $1.17 per share (basic and diluted) on revenue of
$165,274,000. Comparative
figures for 2013 were net income of $26,515,000 or $1.48 per share - basic ($1.47 - diluted) on revenue of $168,111,000. Funds flow from operations
for the current year was $56,195,000
as compared to $57,619,000 in 2013,
while net cash from operating activities for 2014 was $40,622,000 as compared to $39,554,000 in 2013.
The 2014 decline in net income compared to the previous year
resulted from both lower operating margins and higher depreciation
costs. By contrast, the funds flow decline for 2014 occurred
primarily as a result of lower operating margins and was much less
significant than the reduction in net income.
For the fourth consecutive year, AKITA's rig utilization
exceeded industry average. 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 significant emphasis on pad drilling. The
following table highlights AKITA's utilization rates for the past
five years:
RIG UTILIZATION
RATES (PERCENT)
|
|
|
|
2014
|
|
2013
|
|
2012
|
|
2011
|
|
2010
|
AKITA Pad
Rigs
|
|
|
64.8
|
|
71.9
|
|
61.7
|
|
67.9
|
|
67.4
|
AKITA Overall
Fleet
|
|
|
48.6
|
|
43.4
|
|
48.3
|
|
51.5
|
|
37.8
|
Industry
|
|
|
44.3
|
|
40.3
|
|
41.6
|
|
49.6
|
|
40.7
|
AKITA has focused significant resources in the development of
its pad rig strategy over the past 14 years. At December 31, 2014, AKITA's fleet included 20 pad
drilling rigs (57% of the fleet), up from 18 pad rigs at the end of
2013 (47% of the fleet) and 3 pad rigs (8% of the fleet) one decade
ago. Additionally, pad rigs were responsible for generating
70% of the Company's 2014 adjusted revenue.
Capital expenditures during 2014 totalled $103,949,000 and were directed towards increasing
the breadth and quality of AKITA's pad rig offerings. This
represented record spending for the Company resulting in the
addition of two new pad rigs and upgrading two existing rigs to
better serve the industry. The Company also had an additional
new pad rig under construction at December
31, 2014. Each of these rigs was designed to meet
market demand for anticipated liquified natural gas ("LNG") related
drilling or to drill for heavy oil. The four completed rigs
have been actively drilling on their anticipated projects.
As a result of record capital expenditures in 2014, AKITA's
December 31, 2014 Statement of
Financial Position included $20,000,000 in bank indebtedness (representing
20% usage of a $100,000,000 lending
facility), partially offset by $2,012,000 in cash. This level of borrowing
is manageable for the Company in the context of debt covenant
coverage, anticipated repayment time and additional financial
flexibility available to the Company.
AKITA is strongly committed to the safety of its employees as
well as third parties at its worksites and continually achieves one
of the safest working records in the Canadian drilling
industry. Of note, the 2014 total reportable accident
frequency (often referred to as "TRIF") was the best in the history
of the Company. Management has taken measures to ensure that
the Company's comprehensive safety plan is fully endorsed through
specific actions and commitment at every worksite.
On January 22, 2015, the Canadian
Association of Oilfield Drilling Contractors released its revised
2015 industry drilling forecast estimating 26% average rig
utilization compared to 44.3% actual average rig utilization in
2014. The 2015 forecast was based upon commodity price
assumptions of US $55 per barrel for
crude oil and CAD $3.00 per mcf for
natural gas. The revised industry forecast projecting a 41%
decline in utilization is indicative of the anticipated impact on
the industry from the significant drop in crude oil prices that
began in the second half of 2014. This forecast replaced a
previous forecast issued two months earlier that predicted a 10%
decline in industry activity. While AKITA will not be immune
to reduced activity, the Company is positioned for this downturn by
having prudent financial management, skilled and experienced
personnel throughout the organization and a high performance rig
fleet that emphasizes pad drilling and participates in the two most
significant resource developments in Western Canada – heavy oil and shale gas,
including LNG focused plays. AKITA has demonstrated its
ability to compete effectively in weaker markets and expects to
continue to do so.
Selected information from AKITA Drilling Ltd.'s Management's
Discussion and Analysis for the Annual Report is as follows:
Basis of Analysis in this 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". In
determining the classification of its joint arrangements, AKITA
considers whether the joint arrangements are structured through
separate vehicles, if the legal form of the separate vehicles
confers upon the parties direct rights to assets and obligations
for liabilities relating to the arrangements, whether the
contractual terms between the parties confer upon them rights to
assets and obligations for liabilities relating to the arrangements
as well as if other facts and circumstances lead to rights for
assets and obligations for liabilities being conferred upon the
parties to the arrangement prior to concluding that AKITA's joint
ventures are appropriately classified as joint ventures rather than
joint operations. 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 are in place 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 as it provides an indication of the profitability
of the business prior to the influence of depreciation, 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 and Maintenance Expenses
|
|
|
|
|
|
|
|
|
$Millions
|
|
2014
|
|
2013
|
|
Change
|
|
% Change
|
Revenue per Financial
Statements (1)
|
|
165.3
|
|
168.1
|
|
(2.8)
|
|
(2%)
|
Proportionate Share
of Revenue from Joint Ventures (2)
|
|
64.1
|
|
48.8
|
|
15.3
|
|
31%
|
Adjusted Revenue
(2)
|
|
229.4
|
|
216.9
|
|
12.5
|
|
6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$Millions
|
|
2014
|
|
2013
|
|
Change
|
|
% Change
|
Operating and
Maintenance Expenses per Financial Statements
(1)
|
|
112.6
|
|
106.3
|
|
6.3
|
|
6%
|
Proportionate Share
of Operating and Maintenance Expenses from Joint Ventures
(2)
|
|
40.3
|
|
29.5
|
|
10.8
|
|
37%
|
Adjusted Operating
and Maintenance Expenses (2)
|
|
152.9
|
|
135.8
|
|
17.1
|
|
13%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$Millions
|
|
2014
|
|
2013
|
|
Change
|
|
% Change
|
Adjusted Revenue
(2)
|
|
229.4
|
|
216.9
|
|
12.5
|
|
6%
|
Adjusted Operating
and Maintenance Expenses (2)
|
|
152.9
|
|
135.8
|
|
17.1
|
|
13%
|
Adjusted Operating
Margin (1) (2) (3)
|
|
76.5
|
|
81.1
|
|
(4.6)
|
|
(6%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$Dollars
|
|
2014
|
|
2013
|
|
Change
|
|
% Change
|
Adjusted Revenue per
Operating Day (2)
|
|
35,179
|
|
35,724
|
|
(545)
|
|
(2%)
|
Adjusted Operating
and Maintenance Expenses per Operating Day
(2)
|
|
23,450
|
|
22,366
|
|
1,084
|
|
5%
|
Adjusted Operating
Margin per Operating Day (2) (3)
|
|
11,729
|
|
13,358
|
|
(1,629)
|
|
12%
|
(1)
|
Revenue, operating
and maintenance expenses and adjusted operating margin include the
Company's rig construction for third parties.
AKITA does not disclose its operating margin on rig construction
activity separately for competitive reasons. The Company did not
have
any construction revenue in 2014.
|
(2)
|
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. See commentary in "Basis of Analysis in this
MD&A, Non-Standard and Additional GAAP Items".
|
(3)
|
Adjusted operating
margin is the difference between adjusted revenue and adjusted
operating and maintenance expenses.
|
Adjusted revenue of $229,364,000
in 2014 was 6% higher than the 2013 adjusted revenue of
$216,952,000 largely as a result of
achieving more operating days during 2014, especially for the
Company's conventional triple and double sized rigs and to a lesser
extent for AKITA's pad doubles. This increase in demand for
those specific rig categories was partially offset by weaker demand
for the Company's conventional singles and pad triples during
2014. During 2014, average adjusted revenue per operating day
decreased to $35,179 per day compared
to $35,724 in 2013 due to a shift in
rig mix away from higher revenue generating pad triples as well as
increased competition. Pad rigs typically obtain higher day
rates than conventional rigs.
Adjusted operating and maintenance costs are tied to activity
levels and amounted to $152,891,000
or $23,450 per operating day during
2014 compared to $135,827,000 or
$22,366 per operating day for the
prior year. Increased activity levels, higher costs for
services and a change in rig mix resulted in higher operating and
maintenance costs in 2014 compared to 2013 when considered on both
an annual as well as a "per operating day" basis.
The Company's adjusted operating margin for 2014 was
$76,473,000 ($11,729 per operating day), down from
$81,125,000 ($13,358 per operating day) in 2013. Despite
AKITA's rigs being more active in 2014 compared to 2013, the change
in rig mix, increased competition and higher costs for services all
contributed to reduced operating margin results, both on a "total
amount" as well as "per day" basis.
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 2014 and 2013 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, 2014,
deferred revenue related to these activities totalled $175,000 (December 31,
2013 - $334,000).
AKITA provided drilling services to 36 different customers in
2014 (2013 - 21 different customers).
Depreciation and Amortization Expense
|
|
|
|
|
|
|
|
|
$Millions
|
|
2014
|
|
2013
|
|
Change
|
|
% Change
|
Depreciation and
Amortization Expense
|
|
30.2
|
|
26.8
|
|
3.4
|
|
13%
|
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
$30,200,000 during 2014 from
$26,825,000 during 2013 was mostly
attributable to the higher average cost base for drilling rigs
combined with increased drilling activity. Drilling rig
depreciation accounted for 96% of total depreciation and
amortization expense in 2014 (2013 – 96%).
Selling and Administrative Expense
|
|
|
|
|
|
|
|
|
$Millions
|
|
2014
|
|
2013
|
|
Change
|
|
% Change
|
Selling and
Administrative Expenses per Financial Statements
|
|
18.1
|
|
18.2
|
|
(0.1)
|
|
(1%)
|
Proportionate Share
of Selling and Administrative
Expenses from Joint Ventures (1)
|
|
0.8
|
|
0.5
|
|
0.3
|
|
60%
|
Adjusted Selling and
Administrative Expenses (1)
|
|
18.9
|
|
18.7
|
|
0.2
|
|
1%
|
(1)
|
Proportionate
share of selling and administrative expenses from joint ventures
and adjusted selling and administrative expenses are non-
standard accounting measures. See commentary in "Basis of
Analysis in this MD&A, Non-standard and Additional GAAP
Items".
|
Adjusted selling and administrative expenses increased to
$18,929,000 in 2014 from $18,768,000 in 2013. Adjusted selling and
administrative expenses equated to 8.2% of total adjusted revenue
in 2014, compared to 8.6% of total adjusted revenue in 2013, as a
result of increased adjusted revenue.
The single largest component of adjusted selling and
administrative expenses was salaries and benefits which accounted
for 61% of these expenses in 2014 (60% in 2013).
Equity Income from Joint Ventures
|
|
|
|
|
|
|
|
|
$Millions
|
|
2014
|
|
2013
|
|
Change
|
|
% Change
|
Proportionate Share
of Revenue from Joint Ventures (1)
|
|
64.1
|
|
48.8
|
|
15.3
|
|
31%
|
Proportionate Share
of Operating and Maintenance Expenses from Joint Ventures
(1)
|
|
40.3
|
|
29.5
|
|
10.8
|
|
37%
|
Proportionate Share
of Selling and Administrative Expenses from Joint Ventures
(1)
|
|
0.8
|
|
0.5
|
|
0.3
|
|
60%
|
Equity Income from
Joint Ventures
|
|
23.0
|
|
18.8
|
|
4.2
|
|
22%
|
(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. See commentary
in "Basis of Analysis
in this MD&A, Non-standard and Additional GAAP
Items".
|
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
|
|
|
|
|
|
|
|
|
|
|
$Millions
|
|
|
|
2014
|
|
2013
|
|
Change
|
|
% Change
|
Total Other
Income
|
|
|
|
0.8
|
|
0.7
|
|
0.1
|
|
14%
|
The Company invests any cash balances in excess of its ongoing
operating requirements in bank guaranteed highly liquid
investments. Interest income decreased to $172,000 in 2014 from $345,000 in 2013 as a result of reduced cash and
elimination of 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, utilizing term deposits and thereby reducing cash
balances over time.
During 2014, interest expense of $262,000 (2013 – $108,000) 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.
During 2014, the Company disposed of selected non-core assets
resulting in a $536,000 gain.
AKITA disposed of several minor assets in 2013, resulting in a
$106,000 gain.
In 2014, amounts reported as "Net Other Gains" of $331,000 include foreign exchange amounts related
to forward exchange contracts purchased to provide a hedge for
foreign rig equipment commitments related to rig construction (gain
of $371,000), an unrealized cost
related to loan guarantees that the Company has provided on behalf
of certain joint venture partners (cost of $120,000) and other (gain of $80,000).
Other than the foreign currency hedge on major capital
expenditures noted above, readers should be aware that in 2014 the
Company conducted all of its operations in Canada, thereby reducing its exposure to
foreign currency fluctuations.
Income Tax Expense
|
|
|
|
|
|
|
|
|
|
$Millions, Except
Income Tax Rate (%)
|
|
|
2014
|
|
2013
|
|
Change
|
|
% Change
|
Current
Tax
|
|
|
2.6
|
|
5.4
|
|
(2.8)
|
|
(52%)
|
Deferred
Tax
|
|
|
4.4
|
|
3.8
|
|
0.6
|
|
16%
|
Total Income Tax
Expense
|
|
|
7.0
|
|
9.2
|
|
(2.2)
|
|
(24%)
|
Effective Income Tax
Rate
|
|
|
25.0%
|
|
25.7%
|
|
|
|
|
Income tax expense decreased to $7,042,000 in 2014 from $9,167,000 in 2013, due to lower pre-tax income
as well as a decrease in the Canadian federal income tax rate as a
result of a change in provincial allocations of revenue and
expenses. AKITA's proportion of income taxes that are
deferred to future years has increased as a result of record
capital expenditures in 2014.
Net Income, Funds Flow and Net Cash from Operating
Activities
|
|
|
|
|
|
|
|
|
|
$Million
|
|
|
2014
|
|
2013
|
|
Change
|
|
% Change
|
Net Income
|
|
|
21.1
|
|
26.5
|
|
(5.4)
|
|
(20%)
|
Funds Flow from
Operations(1)
|
|
|
56.2
|
|
57.6
|
|
(1.4)
|
|
(2%)
|
(1)
|
Funds flow from
operations is an additional GAAP measure under IFRS. See
commentary in "Basis of Analysis in this MD&A, Non-Standard and
Additional GAAP Items".
|
Net income attributable to shareholders decreased to
$21,079,000 or $1.17 (basic and diluted) per Class A Non-Voting
and Class B Common Share for 2014 from $26,515,000 or $1.48 per share (basic) ($1.47 - diluted) in 2013. Funds flow from
operations decreased to $56,195,000
in 2014 from $57,619,000 in 2013.
The net income decline in 2014 compared to 2013 was attributable
to lower operating margins (as a result of a change in the classes
of rigs worked, increased competition and higher service costs)
combined with higher depreciation expense (due to a higher average
cost base for drilling rigs as well as higher drilling
activity).
While net income dropped 20% in 2014 compared to the previous
year, funds flow from operations declined by 2% primarily as a
result of lower operating margins.
Fleet and Rig Utilization
The following table summarizes rig changes that occurred in
2014:
Fleet Changes during 2014
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Net
|
Number of rigs at
December 31, 2013
|
|
|
|
38
|
|
|
34.725
|
|
|
|
|
|
|
|
|
New rig purchased and
subsequently upgraded to Canadian standards
|
|
|
|
1
|
|
|
1.000
|
|
|
|
|
|
|
|
|
Completion of
construction on ultra-deep pad rig
|
|
|
|
1
|
|
|
1.000
|
|
|
|
|
|
|
|
|
Decommissioning of
four rigs during the year
|
|
|
|
(4)
|
|
|
(4.000)
|
|
|
|
|
|
|
|
|
Sale of existing pad
rig
|
|
|
|
(1)
|
|
|
(1.000)
|
Number of rigs at
December 31, 2014
|
|
|
|
35
|
|
|
31.725
|
Utilization rates are a key statistic for the drilling industry
since they measure revenue volume and influence pricing.
During 2014, AKITA achieved 6,520 operating days, which
corresponded to a utilization rate of 48.6% compared to an industry
average utilization rate of 44.3% during the same period.
During the comparative year in 2013, AKITA achieved 6,073 operating
days, representing 43.4% 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.
During 2014, AKITA commissioned one new pad double rig and one
new pad triple rig. In addition, the Company converted a
conventional double rig into a slant pad single rig. During
2014, AKITA decommissioned two conventional single rigs as well as
one conventional double rig and one conventional triple rig.
The Company also sold one pad triple rig into a market in which the
Company does not compete.
Property, Plant and Equipment
Capital expenditures totalled $103,949,000 in 2014, a record level of capital
spending for the Company. The most significant expenditures
related to the following projects:
- Completion of a new ultra-deep pad triple which commenced its
multi-year contract during the fourth quarter of 2014;
- Completion of the conversion of a conventional double into the
Company's first slant pad single (this rig commenced operations
during the third quarter of 2014);
- Purchasing and refitting of a new pad double to enable it to
operate in Canada (completion of
the refit occurred in the fourth quarter of 2014 with the rig
currently operating under a one-year initial contract);
- Upgrading of a pad triple to make it more suitable for drilling
heavy oil targets in the Duvernay
or Montney formations (this rig
recommenced operations during the fourth quarter of 2014); and
- Commencing construction of a pad triple announced in the first
quarter of 2014 (the rig is anticipated to meet demand for proposed
liquified natural gas ("LNG") related drilling projects and is
scheduled to be completed in the first half of 2015).
The cost incurred during 2014 for the five aforementioned rig
construction projects was $81,667,000. Additional capital
expenditures related to certifications and overhauls having a life
in excess of one year ($12,573,000),
rig equipment for existing rigs ($5,846,000) drill pipe and drill collars
($3,459,000) and other equipment
($404,000). Capital
expenditures for 2013 totalled $35,113,000.
During the third quarter of 2014, the Company disposed of one of
its underutilized pad rigs. Proceeds from sales of
underutilized and non-core assets totalled $8,315,000 in 2014 (2013 - $443,000).
Asset Impairment Testing
International Accounting Standard 36 Impairment of Assets ("IAS
36") sets out requirements for reporting impairment which cover a
range of assets (and groups of assets, termed "cash generating
units" or CGUs). The impairment test utilized by the Company
compares each CGU's carrying amount with its recoverable
amount. The recoverable amounts are defined as the higher of
the amounts calculated under the fair value less cost of disposal,
and the value in use.
IAS 36 requires an entity to consider both internal and external
factors when assessing whether there are indicators of
impairment. While the Company did not determine any internal
indicators of impairment at December 31,
2014, it did recognize the significant decline in the price
of crude oil as a potential external indicator of impairment.
Since year-end, this decline in commodity prices has affected
drilling activity and expectations for ongoing drilling activity as
discussed later in this MD&A under "Future Outlook and
Strategy". Further, the carrying amount of AKITA's net assets
exceeded its market capitalization at December 31, 2014. The Company did not note
any additional events that occurred after December 31, 2014 that would provide additional
indications of impairment as at December 31,
2014.
The accuracy of impairment testing is affected by the extent and
subjectivity of estimates and judgments in respect of the inputs
and parameters that are used to determine the recoverable
amounts. In performing its impairment tests at December 31, 2014 management determined value in
use for its 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 inherent price of each CGU.
IFRS considers this approach to constitute a Level 3 hierarchy in
its determination of value.
Management used its Budget and Business Plan, as approved on
November 14, 2014 by its Board of
Directors and subsequently adjusted for weaker market conditions,
as its primary basis for its impairment testing at December 31, 2014. Cash flows were
determined for each of the Company's six operating CGUs:
conventional singles, conventional doubles, conventional triples,
pad singles, pad doubles and pad triples. While these six
operating CGUs encompass 98% of the Company's property, plant and
equipment, consideration was also given to other corporate assets
in the Company's impairment tests.
Additional significant assumptions used in AKITA's impairment
tests at December 31, 2014 included
potential annual revenue growth rates (taken as 0%), potential
inflation for cash outflows necessary to generate cash inflows for
CGUs (taken as 2%), the projected forecast period (taken as 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
(calculated as 8%) and salvage value at the end of each CGU's
useful life (determined as 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 December 31, 2014.
The Company also performed the following sensitivity tests
relative to its impairment testing:
- Decreased future cash flows from its approved budgets as
subsequently adjusted for weaker market conditions by 10%;
- Changed annual revenue growth assumption from 0% to -2% per
year;
- Increased inflation for cash outflows from 2% to 4% per
year;
- Increased 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 CGUs' values
in use ranging between $9,710,000 and
$28,666,000. In all instances the adjusted CGU values
in use exceeded the carrying values reported in the financial
statements at December 31,
2014. No adjustments to carrying amounts were made as a
result of this asset impairment testing process.
Liquidity and Capital Resources
At December 31, 2014, AKITA had
$5,028,000 in working capital
deficiency, including $2,012,000 in
cash and $20,000,000 of bank
indebtedness, compared to $40,645,000
in working capital, including $13,998,000 in cash and no bank indebtedness, for
the previous year. In 2014, AKITA generated $40,622,000 from operating activities. Cash
was also generated from joint venture distributions ($26,874,000), from drawing on the Company's
credit facility ($20,000,000), from
proceeds on sales of assets ($8,316,000) and from redemptions of term
deposits ($5,000,000). During
the same period, cash was used for capital expenditures
($102,862,000), payment of dividends
($6,015,000), increasing restricted
cash balances used for loan guarantees ($3,431,000) repurchasing Class A Non-Voting
Shares ($390,000), and payment of a
loan commitment fee ($100,000).
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
2019. Although the facility has been provided in order to
finance general corporate needs, capital expenditures and
acquisitions, management intends to access this facility primarily
to enable the Company to fund new rig construction requirements
related to drilling contracts that it might be awarded. The
interest rate on the facility varies based upon the actual amounts
borrowed and ranges from 0.45% to 1.45% over guaranteed notes,
depending on the preference of the Company. The Company had
borrowings of $20,000,000 from this
facility at December 31, 2014.
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. As at December 31, 2014 (the
most recent measurement date), AKITA's actual rate was 0.34 to
1;
- EBITDA to interest expense shall not be less than 3.00 to
1. As at December 31, 2014.
AKITA's actual rate was 224 to 1; and
- Tangible assets to funded debt shall not be less than 2.25 to
1. As at December 31, 2014,
AKITA's actual rate was 16.05 to 1.
Readers should be aware that the terms: "funded debt", "EBITDA",
"interest expense" and "tangible assets" have been specifically
defined in the loan facility agreement and are not necessarily
defined by or consistent with either GAAP or determinations by
other users for other purposes.
From time to time, the Company makes major purchases from
non-Canadian suppliers in connection with its capital
expenditures. AKITA purchases forward currency contracts in
order to minimize the risk of currency translation adjustments
associated with these purchases. At December 31, 2014, the Company had $1.3 Million in forward currency contracts
related to capital expenditures which were executed in January,
2015.
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, 2014, AKITA provided $9,381,000 in deposits with its bank for those
purposes (December 31, 2013 -
$5,950,000). These funds have
been classified as "restricted cash" on the Consolidated Statements
of Financial Position.
From time to time, the Company enters into drilling contracts
for extended terms. At December 31,
2014, AKITA had four rigs with multi-year contracts that
extend beyond one year. Of these contracts, two are
anticipated to expire in 2016, one in 2018 and one in 2019.
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; 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
|
|
|
|
|
2014
|
|
|
|
2013
|
Assets
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
$
|
2,012
|
|
|
$
|
13,998
|
|
Term
deposits
|
|
|
|
|
-
|
|
|
|
5,000
|
|
Accounts
receivable
|
|
|
|
|
39,981
|
|
|
|
42,342
|
|
Income taxes
recoverable
|
|
|
|
|
3,011
|
|
|
|
-
|
|
Prepaid expenses and
other
|
|
|
|
|
257
|
|
|
|
365
|
|
|
|
|
|
|
45,261
|
|
|
|
61,705
|
Non-current
Assets
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
|
|
9,381
|
|
|
|
5,950
|
Other long term
assets
|
|
|
|
|
1,025
|
|
|
|
1,017
|
Investments in joint
ventures
|
|
|
|
|
6,214
|
|
|
|
10,092
|
Property, plant and
equipment
|
|
|
|
|
279,045
|
|
|
|
212,984
|
Total
Assets
|
|
|
|
$
|
340,926
|
|
|
$
|
291,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Operating Loan
Facility
|
|
|
|
$
|
20,000
|
|
|
$
|
-
|
|
Accounts payable and
accrued liabilities
|
|
|
|
|
28,589
|
|
|
|
18,865
|
|
Deferred
revenue
|
|
|
|
|
175
|
|
|
|
334
|
|
Dividends
payable
|
|
|
|
|
1,525
|
|
|
|
1,439
|
|
Income taxes
payable
|
|
|
|
|
-
|
|
|
|
422
|
|
|
|
|
|
|
50,289
|
|
|
|
21,060
|
Non-current
Liabilities
|
|
|
|
|
|
|
|
|
|
Financial
instruments
|
|
|
|
|
226
|
|
|
|
106
|
Deferred income
taxes
|
|
|
|
|
27,053
|
|
|
|
22,738
|
Pension
liability
|
|
|
|
|
3,426
|
|
|
|
2,556
|
Deferred share
units
|
|
|
|
|
91
|
|
|
|
-
|
Total
Liabilities
|
|
|
|
|
81,085
|
|
|
|
46,460
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
|
Class A and Class B
shares
|
|
|
|
|
23,871
|
|
|
|
23,908
|
Contributed
surplus
|
|
|
|
|
3,557
|
|
|
|
3,185
|
Accumulated other
comprehensive income (loss)
|
|
|
|
|
(280)
|
|
|
|
88
|
Retained
earnings
|
|
|
|
|
232,693
|
|
|
|
218,107
|
Total
Equity
|
|
|
|
|
259,841
|
|
|
|
245,288
|
Total Liabilities and
Equity
|
|
|
|
$
|
340,926
|
|
|
$
|
291,748
|
AKITA Drilling
Ltd.
|
Consolidated Statements
of Net Income and Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
$ Thousands except
per share amounts
|
|
|
|
2014
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
$
|
165,274
|
|
|
$
|
168,111
|
|
|
|
|
|
|
|
|
|
Costs and
expenses
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance
|
|
|
|
112,590
|
|
|
|
106,281
|
|
Depreciation and
amortization
|
|
|
|
30,200
|
|
|
|
26,825
|
|
Selling and
administrative
|
|
|
|
18,136
|
|
|
|
18,843
|
Total costs and
expenses
|
|
|
|
160,926
|
|
|
|
151,949
|
|
|
|
|
|
|
|
|
|
Revenue less costs
and expenses
|
|
|
|
4,348
|
|
|
|
16,162
|
|
|
|
|
|
|
|
|
Equity income from
joint ventures
|
|
|
|
22,996
|
|
|
|
18,792
|
|
|
|
|
|
|
|
|
|
Other income
(losses)
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
172
|
|
|
|
345
|
|
Interest
expense
|
|
|
|
(262)
|
|
|
|
(108)
|
|
Gain on sale of
assets
|
|
|
|
536
|
|
|
|
106
|
|
Net other
gains
|
|
|
|
331
|
|
|
|
385
|
Total other
income
|
|
|
|
777
|
|
|
|
728
|
|
|
|
|
|
|
|
|
|
Income before income
taxes
|
|
|
|
28,121
|
|
|
|
35,682
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
|
7,042
|
|
|
|
9,167
|
|
|
|
|
|
|
|
|
|
Net income for the
year attributable to shareholders
|
|
|
|
21,079
|
|
|
|
26,515
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
income (loss)
|
|
|
|
(368)
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
Comprehensive
income for the year attributable to shareholders
|
|
|
$
|
20,711
|
|
|
$
|
26,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per
Class A and Class B Share
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$
|
1.17
|
|
|
$
|
1.48
|
|
|
Diluted
|
|
|
$
|
1.17
|
|
|
$
|
1.47
|
AKITA Drilling
Ltd.
|
Consolidated Statements of Cash
Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
$
Thousands
|
|
|
|
|
2014
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
$
|
21,079
|
|
|
$
|
26,515
|
Non-cash items
included in net income:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
|
|
30,200
|
|
|
|
26,825
|
|
Deferred income
taxes
|
|
|
|
|
4,315
|
|
|
|
3,852
|
|
Expense for defined
benefit pension plan
|
|
|
|
|
392
|
|
|
|
369
|
|
Expense for stock
options and deferred share units
|
|
|
|
|
463
|
|
|
|
293
|
|
Gain on sale of
assets
|
|
|
|
|
(536)
|
|
|
|
(106)
|
|
Unrealized foreign
currency (gain) loss
|
|
|
|
|
162
|
|
|
|
(235)
|
|
Unrealized loss on
financial guarantee contracts
|
|
|
|
|
120
|
|
|
|
106
|
Funds flow from
operations
|
|
|
|
|
56,195
|
|
|
|
57,619
|
Change in non-cash
working capital:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
|
|
2,361
|
|
|
|
17,662
|
|
Prepaid expenses and
other
|
|
|
|
|
(54)
|
|
|
|
(206)
|
|
Income tax
recoverable
|
|
|
|
|
(3,011)
|
|
|
|
4,487
|
|
Accounts payable and
accrued liabilities
|
|
|
|
|
8,853
|
|
|
|
(21,866)
|
|
Deferred
revenue
|
|
|
|
|
(159)
|
|
|
|
239
|
|
|
|
|
|
|
7,990
|
|
|
|
316
|
|
Equity income from
joint ventures
|
|
|
|
|
(22,996)
|
|
|
|
(18,792)
|
|
Pension benefits
paid
|
|
|
|
|
(15)
|
|
|
|
(15)
|
|
Interest
paid
|
|
|
|
|
(130)
|
|
|
|
4
|
|
Income tax expense -
current
|
|
|
|
|
2,602
|
|
|
|
5,352
|
|
Income tax
paid
|
|
|
|
|
(3,024)
|
|
|
|
(4,930)
|
Net cash from
operating activities
|
|
|
|
|
40,622
|
|
|
|
39,554
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
|
|
(103,949)
|
|
|
|
(35,113)
|
Change in non-cash
working capital related to capital
|
|
|
|
|
1,087
|
|
|
|
(2,177)
|
Net distributions
from investments in joint ventures
|
|
|
|
|
26,874
|
|
|
|
13,525
|
Change in cash
restricted for loan guarantees
|
|
|
|
|
(3,431)
|
|
|
|
(2,950)
|
Change in term
deposits
|
|
|
|
|
5,000
|
|
|
|
(5,000)
|
Proceeds on sale of
assets
|
|
|
|
|
8,316
|
|
|
|
443
|
Net cash used in
investing activities
|
|
|
|
|
(66,103)
|
|
|
|
(31,272)
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
Change in operating
loan facility
|
|
|
|
|
20,000
|
|
|
|
-
|
Dividends
paid
|
|
|
|
|
(6,015)
|
|
|
|
(5,567)
|
Proceeds received on
exercise of stock options
|
|
|
|
|
-
|
|
|
|
566
|
Repurchase of share
capital
|
|
|
|
|
(390)
|
|
|
|
(126)
|
Loan commitment fee
paid
|
|
|
|
|
(100)
|
|
|
|
(160)
|
Net cash from (used
in) financing activities
|
|
|
|
|
13,495
|
|
|
|
(5,287)
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease)
in cash
|
|
|
|
|
(11,986)
|
|
|
|
2,995
|
Cash, beginning of
year
|
|
|
|
|
13,998
|
|
|
|
11,003
|
|
|
|
|
|
|
|
|
|
|
|
Cash, End of
Year
|
|
|
|
$
|
2,012
|
|
|
$
|
13,998
|
SOURCE AKITA Drilling Ltd.