CALGARY, July 27, 2018 /CNW/ - AKITA Drilling Ltd.'s net
loss for the three months ended June 30,
2018, was $2,959,000 (net loss
of $0.16 per share basic &
diluted) on revenue of $17,293,000
compared to a net loss of $4,491,000
(net loss of $0.25 per share basic
& diluted) on revenue of $17,986,000 for the corresponding period of 2017.
Funds flow from operations decreased to $1,638,000 in the second quarter of 2018 from
$3,254,000 in the corresponding
period of 2017.
AKITA incurred a net loss of $4,870,000 for the six months ended June 30, 2018 ($0.27 per share basic & diluted) on revenue
of $44,382,000 compared to a net loss
of $9,466,000 ($0.53 per share basic & diluted) on revenue
of $37,179,000 in the comparative
period in 2017. Funds flow from operations for the January to June
period of 2018 was $6,157,000
compared to $5,078,000 for the same
period in 2017.
The second quarter of 2018 was less active for AKITA than the
corresponding period of 2017 due to several of the Company's
customers delaying rig reactivations as natural gas prices continue
to fall and take away capacity for Canadian oil remains uncertain.
In the United States, AKITA added
a third rig to its US fleet at the end of the quarter, as demand in
the US for quality equipment and operations continues to increase.
AKITA's strong first quarter improved the year to date results in
2018 for both net income and funds flow when compared to the first
half of 2017.
On June 4, 2018, AKITA and Xtreme
Drilling Corp ("Xtreme") agreed to enter into a plan of arrangement
to combine their respective businesses to create a leading
intermediate North American land drilling contractor. Under the
plan of arrangement, Xtreme shareholders will receive 0.3732394 of
a Class A Non-Voting share of AKITA or $2.65 in cash for each Xtreme share. An Xtreme
shareholder may elect to receive AKITA Non-Voting Class A shares,
cash or a combination of AKITA Non-Voting Class A shares and cash
such that the aggregate consideration to be paid by AKITA will not
exceed $45,000,000 and will not
exceed 22,235,458 Class A Non-Voting shares. The combined company
will effectively double the market capitalization of each company
on its own as well as double the drilling assets on a net book
value basis. Both AKITA and Xtreme view this combination as highly
complementary, the companies are like-sized, operate in different
geographical segments for different customers and have a strong
focus on safety and customer satisfaction. The transaction has
received unanimous board approval from both companies and is
subject to shareholder approval, as well as customary TSX, Court
and regulatory approvals and other closing conditions, and is
expected to be completed in the third quarter of 2018.
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 of crude oil and natural gas. The
average West Texas Intermediate crude oil prices for the second
quarter of 2018 increased 41% compared to the same period in 2017.
However, the impact of higher oil prices was offset by two factors.
The first is that average natural gas prices for the second quarter
of 2018, per Alberta Energy Company ("AECO") spot prices, have
decreased by 58% compared to the second quarter of 2017. The second
is the uncertainty around the takeaway capacity of oil in the
Canadian market which is causing Canadian producers to delay
capital spending or shift spending to other opportunities. This
delay in capital spending resulted in decreased activity for AKITA
in Canada when comparing the
second quarter of 2018 to the second quarter of 2017.
The impact of lower activity levels for AKITA in Canada was offset somewhat by increased day
rates in Canada, as well as higher
utilization in the United States
("US") for AKITA's US rigs.
Historically, the first quarter of the calendar year is the most
active in the Canadian drilling industry. Lower activity
levels that result from spring break-up and associated road bans on
public roads typically characterize the second quarter. In the
second quarter of 2018, breakup conditions persisted longer than
average which also had an impact on activity
levels.
Fleet and Rig Utilization
AKITA had 28 drilling rigs at June 30,
2018, including five that operated under joint ventures
(26.75 net to AKITA), the same as at June
30, 2017. During the second quarter of 2018, a third rig was
moved to the US leaving 25 rigs in Canada.
|
Three Months Ended
June 30
|
Six Months Ended June
30
|
|
2018
|
2017
|
Change
|
%
Change
|
2018
|
2017
|
Change
|
%
Change
|
Canada1
|
|
|
|
|
|
|
|
|
Operating
days
|
548
|
931
|
(422)
|
(45%)
|
1,681
|
1,892
|
(211)
|
(11%)
|
Utilization
rate
|
24%
|
37%
|
15
|
(41%)
|
37%
|
37%
|
0
|
0%
|
United
States2
|
|
|
|
|
|
|
|
|
Operating
days
|
136
|
-
|
136
|
-
|
177
|
-
|
177
|
-
|
Utilization
rate
|
50%
|
-
|
50
|
-
|
39%
|
-
|
39
|
-
|
1
|
Canadian utilization
was calculated based on 26 rigs for the first quarter of 2018 and
25 rigs for the second quarter of 2018. For 2017 utilization was
based on 28 rigs.
|
2
|
United States
utilization was calculated based on 2 rigs in the first quarter of
2018 and 3 rigs in the second quarter of 2018.
|
Utilization Rates
in Canada
|
Three Months
Ended
June 30
|
Six Months
Ended
June
30
|
|
AKITA
|
Industry(1)
|
AKITA
|
Industry(1)
|
2018
|
24%
|
17%
|
37%
|
29%
|
2017
|
37%
|
18%
|
37%
|
28%
|
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 because the majority of the Company's rig fleet are
high-demand pad drilling rigs.
The decline in utilization in Canada for AKITA was mainly attributable to
more rigs shutting down over break-up in the second quarter of 2018
compared to the same period in 2017. In the US, AKITA's third rig
was moved late in the second quarter which negatively impacted
utilization as the rig did not operate. Excluding the third rig
that was moving, US utilization was 75%.
Revenue and Operating & Maintenance Expenses
|
Three Months Ended
June 30
|
Six Months Ended June
30
|
$Millions
|
2018
|
2017
|
Change
|
% Change
|
2018
|
2017
|
Change
|
% Change
|
Total drilling
revenue
|
17.3
|
18.0
|
(0.7)
|
(4%)
|
44.3
|
37.1
|
7.2
|
19%
|
Operating &
maintenance expenses
|
12.1
|
14.6
|
(2.5)
|
(17%)
|
32.5
|
32.4
|
0.1
|
0%
|
|
|
|
|
|
|
|
|
|
$Dollars
|
2018
|
2017
|
Change
|
% Change
|
2018
|
2017
|
Change
|
% Change
|
AKITA and joint
ventures' revenue per operating day(1)
|
30,722
|
27,142
|
3,580
|
13%
|
29,863
|
26,748
|
3,115
|
12%
|
AKITA and joint
ventures' operating & maintenance expenses per operating
day(1)
|
22,224
|
21,434
|
790
|
4%
|
21,986
|
22,039
|
(53)
|
(0%)
|
AKITA and joint
ventures' operating margin per operating day
|
8,499
|
5,708
|
2,791
|
49%
|
7,877
|
4,709
|
3,168
|
67%
|
(1)
|
AKITA and joint
ventures' revenue per operating day and AKITA and joint ventures'
operating & maintenance expenses per operating day are non-GAAP
financial measures. See "Basis of Analysis in this MD&A,
Non-GAAP and Additional GAAP Items".
|
Second Quarter Comparatives
During the second quarter of 2018, revenue decreased slightly to
$17,293,000 from $17,986,000 due to fewer operating days worked by
the Company's drilling rigs. The impact of this decrease in
activity was offset by higher day rates which increased revenue per
day to $30,722 from $27,142 in the second quarter of 2017. Day rates
in the Canadian market are continuing a slow recovery which began
in the fourth quarter of 2017. Also contributing to the increase in
revenue per day is the US where day rates are typically higher than
in Canada.
Operating and maintenance expenses are directly related to
operating days and amounted to $12,087,000 ($22,224 per operating day for AKITA including
joint ventures) during the second quarter of 2018, compared to
$14,632,000 ($21,434 per operating day for AKITA including
joint ventures) during the same period of the prior year. The
decrease in operating and maintenance expense is due to fewer
operating days in the second quarter of 2018 compared to the second
quarter of 2017.
Year-to-Date Comparatives
During the first six months of 2018, revenue increased to
$44,382,000 from $37,179,000 during the first six months of 2017
as a result of higher revenue per day, which increased to
$29,863 in the first half of 2018
from $26,748 in the same period of
2017. In addition, the increased revenue per operating day was
impacted by the mix of rigs AKITA operated in the first quarter of
2018. Pad triple drilling rigs, which generally demand higher day
rates than other conventional drilling rigs, achieved more
operating days in the first quarter of 2018 compared to the same
period of 2017.
Operating and maintenance costs are tied to operating days and
amounted to $32,477,000 ($21,986 per operating day) during the first six
months of 2018 compared to $32,367,000 ($22,039 per operating day) in the same period of
the prior year. The decrease per operating day is a result of
higher maintenance costs due to more rigs starting up in the first
half of 2017 compared to the same period in 2018.
Depreciation and Amortization
Expense
|
Three Months Ended
June 30
|
Six Months Ended June
30
|
$ Millions
|
2018
|
2017
|
Change
|
% Change
|
2018
|
2017
|
Change
|
% Change
|
Depreciation and
amortization expense
|
5.5
|
7.7
|
(2.2)
|
29%
|
11.4
|
14.5
|
(3.1)
|
(21%)
|
Depreciation and amortization expense decreased to $5,487,000 during the second quarter of 2018 from
$7,735,000 during the corresponding
period in 2017, primarily due to an asset write-down and asset
impairment loss recorded in the fourth quarter of 2017, which
reduced the Company's depreciable property by $29,123,000. This asset write-down and asset
impairment loss also affected the depreciation and amortization
expense for the first six months of 2018 which decreased to
$11,413,000 compared to $14,471,000 for the corresponding period in
2017.
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 estimate effect of the change in depreciation
method on the Company's interim financial statements for the first
quarter of 2018 is not material. In the first six months of
2018, drilling rig depreciation accounted for 97% of total
depreciation expense (2017 - 97%).
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
|
Three Months Ended
June 30
|
Six Months Ended June
30
|
$ Millions
|
2018
|
2017
|
Change
|
% Change
|
2018
|
2017
|
Change
|
% Change
|
Selling and
administrative expenses
|
4.1
|
3.4
|
0.7
|
21%
|
8.6
|
7.4
|
1.2
|
16%
|
Selling and administrative expenses increased to $8,561,000 for the first six months of 2018 from
$7,387,000 for the same period of
2017 due to costs relating to AKITA's US operations as well as
costs associated with the proposed business combination with Xtreme
Drilling (see the future outlook section of this MD&A for
detail on the Xtreme Drilling transaction). Selling and
administrative expenses were 19% of revenue in the first six months
of 2018 compared to 20% of revenue in the first six months of 2017.
The single largest component of selling and administrative expenses
is salaries and benefits, which accounted for 46% of these expenses
(2017 - 47%).
Equity Income from Joint Ventures
|
Three Months Ended
June 30
|
Six Months Ended June
30
|
$ Millions
|
2018
|
2017
|
Change
|
%Change
|
2018
|
2017
|
Change
|
%Change
|
Proportionate share
of revenue from joint ventures
|
3.7
|
7.3
|
(3.6)
|
(49%)
|
11.1
|
13.4
|
(2.3)
|
(17%)
|
Proportionate share
of operating & maintenance expenses from joint
ventures
|
3.1
|
5.3
|
(2.2)
|
(42%)
|
8.4
|
9.3
|
(0.9)
|
(10%)
|
Proportionate share
of selling and administrative expenses from joint
ventures
|
0.1
|
0.1
|
0.0
|
0%
|
0.2
|
0.2
|
0.0
|
0%
|
Equity income from
joint ventures per interim financial statements
|
0.5
|
1.9
|
(1.4)
|
(74%)
|
2.5
|
3.9
|
(1.4)
|
(35%)
|
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 decrease in equity income from joint ventures in both the
second quarter of 2018 and year to date 2018, when compared to the
respective periods in 2017, is directly attributable to activity.
In the second quarter of 2018 activity for AKITA's joint venture
rigs dropped by 42% with 172 operating days in the second quarter
of 2018, compared to 297 in the second quarter of 2017. The drop
relates to a pause in capital spending by oilsands producers that
are assessing their capital programs for the balance of the year
and into 2019.
Other Income (Loss)
|
Three Months Ended
June 30
|
Six Months Ended June
30
|
$ Millions
|
2018
|
2017
|
Change
|
% Change
|
2018
|
2017
|
Change
|
% Change
|
Total other income
(loss)
|
0.0
|
0.2
|
(0.2)
|
(100%)
|
0.1
|
0.3
|
(0.2)
|
(67%)
|
Total other income (loss) 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 $40,000 in the first half of 2018 from
$231,000 in the same period of 2017.
The decrease is related to the collection of the interest-bearing
long-term receivable held related to contract cancellation revenue
recorded in 2016. This long term receivable was collected over
three years with the final payment received in the first quarter of
2018.
In the first half of 2018, the Company incurred interest expense
of $85,000 on the Company's line of
credit (2017 – nil), and $84,000 for
the future cost of the Company's defined benefit pension plan (2017
- $84,000).
During the first half of 2018, the Company sold ancillary assets
for proceeds of $23,000 resulting in
a gain of $23,000 compared to the
same period in 2017, when assets were sold for proceeds of
$167,000 that resulted in a gain of
$140,000.
During the first half of 2018, net other gains of $171,000 included $131,000 of proceeds on the sale of previously
written-off assets. In the first half of 2017, $39,000 of net other gains was recorded made up
of various balances.
Income Tax Expense
|
Three Months Ended
June 30
|
Six Months Ended June
30
|
$ Millions
|
2018
|
2017
|
Change
|
% Change
|
2018
|
2017
|
Change
|
% Change
|
Current tax
recovery
|
0.0
|
(1.0)
|
1.0
|
100%
|
0.0
|
(3.0)
|
3.0
|
100%
|
Deferred tax
recovery
|
(0.9)
|
(0.3)
|
(0.6)
|
(200%)
|
(0.6)
|
(0.3)
|
(0.3)
|
(100%)
|
Income tax
recovery
|
(0.9)
|
(1.3)
|
0.4
|
31%
|
(0.6)
|
(3.3)
|
2.7
|
82%
|
Income tax recovery decreased to $573,000 in the first six months of 2018 from
$3,343,000 in the corresponding
period in 2017 mainly due a smaller loss for tax purposes recorded
in the first half of 2018 compared to 2017. There was no current
tax recovery recorded in 2018 as all potential loss carryback
amounts have been utilized.
Net Loss, Funds Flow and Net Cash From Operating
Activities
|
Three Months Ended
June 30
|
Six Months Ended June
30
|
$ Millions
|
2018
|
2017
|
Change
|
% Change
|
2018
|
2017
|
Change
|
% Change
|
Net loss
|
(3.0)
|
(4.5)
|
1.5
|
33%
|
(4.9)
|
(9.5)
|
4.6
|
48%
|
Funds flow from
operations(1)
|
1.6
|
3.3
|
(1.7)
|
(52%)
|
6.2
|
5.1
|
1.1
|
22%
|
|
|
(1)
|
Funds flow from
operations is an additional GAAP measure under IFRS. See
"Basis of Analysis in this MD&A, Non-GAAP and Additional GAAP
Items".
|
During the three months ended June 30,
2018, the Company reported a net loss of $2,959,000 or $0.16
per Class A Non-Voting and Class B Common Share (basic and diluted)
compared to a net loss of $4,491,000
or $0.25 per share (basic and
diluted) in the comparative quarter of 2017. The reduction in the
net loss between the second quarter of 2018 and the same second
quarter of 2017 was caused by lower depreciation offset by lower
equity income from joint ventures and lower income tax
recovery.
Funds flow from operations decreased to $1,638,000 during the second quarter of 2018 from
$3,254,000 in the corresponding
quarter in 2017 due to decreased activity in 2018.
The Company incurred a net loss of $4,870,000 or $0.27
per Class A Non-Voting and Class B Common Share (basic and diluted)
for the first six months of 2018 compared to a net loss of
$9,466,000 or $0.53 per share (basic and diluted) in the
corresponding period of 2017. Funds flow from operations
increased to $6,157,000 during the
first six months of 2018 from $5,078,000 in the corresponding period in
2017. The reduction in net loss and increase in funds flow
from operations are both due to higher revenue in the first quarter
of 2018 compared to the same period in 2017 which was the result of
increased overall activity and higher day rates.
The following table reconciles funds flow and cash flow from
operations:
|
Three Months Ended
June 30
|
Six Months Ended June
30
|
$ Millions
|
2018
|
2017
|
Change
|
%
Change
|
2018
|
2017
|
Change
|
%
Change
|
Funds flow from
operations(1)
|
1.6
|
3.2
|
(1.6)
|
(50%)
|
6.2
|
5.1
|
1.1
|
22%
|
Change in non-cash
working capital
|
8.8
|
3.1
|
5.7
|
184%
|
9.2
|
8.6
|
0.6
|
7%
|
Equity income from
joint ventures
|
(0.5)
|
(1.9)
|
1.4
|
72%
|
(2.6)
|
(3.9)
|
1.3
|
33%
|
Post-employment
benefits
|
0.0
|
0.0
|
0.0
|
-
|
(0.1)
|
0.0
|
(0.1)
|
-
|
Current income tax
expense (recovery)
|
0.0
|
(1.0)
|
1.0
|
100%
|
0.0
|
(3.0)
|
3.0
|
(100%)
|
Net cash from
operating activities
|
9.9
|
3.4
|
6.5
|
191%
|
12.7
|
6.8
|
5.9
|
87%
|
|
|
(1)
|
Funds flow from
operations is an additional GAAP measure under IFRS. See
commentary in "Basis of Analysis in this MD&A, Non-GAAP and
Additional GAAP Items".
|
Liquidity and Capital Resources
Cash used for capital expenditures totalled $4,005,000 in the first six months of 2018 and
related to routine capital spending. In the first six months of
2017 capital expenditures were $12,202,000 of which 42% was related to new build
construction and the balance to routine items.
At June 30, 2018, AKITA's
Statements of Financial Position included working capital (current
assets minus current liabilities) of $16,219,000 compared to $24,557,000 at June 30,
2017, and $15,528,000 at
December 31, 2017. Readers
should be aware of the seasonal nature of AKITA's Canadian
operations and its effect on non-cash working capital
balances. Typically, non-cash working capital balances reach
annual maximum levels at the end of the first quarter or during the
second quarter as a result of spring break-up. Non-cash
working capital amounted to $9,117,000 at June 30,
2018, compared to non-cash working capital of $14,968,000 at December
31, 2017. Note that the non-cash working capital amount at
December 31, 2017, included
$10,641,000 in accounts receivable
related to contract cancellation compared to nil at June 30, 2018. Working capital at
June 30, 2018 decreased compared to
June 30, 2017, due to lower working
capital balances at December 31, 2017
($15,528,000) compared to
December 31, 2016 ($34,907,000).
The Company chooses to maintain a conservative Statement of
Financial Position due to the cyclical nature of the Canadian
drilling industry. In addition to its cash balances, the
Company has an operating loan facility with its principal banker
totalling $50,000,000 that is
available until 2019 and which is currently undrawn. The
facility has been provided in order to finance general corporate
needs, capital expenditures and acquisitions.
Management intends to increase its operating loan facility to
$125,000,000 in order to fund the
cash requirements of the Xtreme Drilling Corp. transaction. The
interest rate on the current facility is 1.25% over prime interest
rate or 2.5% over guaranteed notes, depending on the preference of
the Company. The Company drew on the facility in the first
quarter of 2018 to fund working capital and repaid those borrowings
in the second quarter of 2018. The Company did not have any
borrowings from this facility at June 30,
2018, or at any time during 2017.
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 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.
During the 10 year period since 2008, AKITA has repurchased and
cancelled 443,208 Class A Non-Voting shares through normal course
issuer bids and has issued 122,200 Class A Non-Voting shares upon
exercise of stock options.
The Company had two drilling rigs under multi-year contracts at
June 30, 2018, one of which is due to
expire in 2018 and one in 2020.
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 June 30, 2018, AKITA provided $787,000 in deposits with its bank for those
purposes (June 30, 2017 -
$2,253,000 and December 31, 2017 - $1,525,000). AKITA's security from its
partners for these guarantees includes interests in specific rig
assets. These balances have been classified as restricted
cash on the Interim Statements of Financial Position.
Future Outlook
The drilling industry is cyclical and certain key factors that
have an effect on AKITA's results are beyond management's control.
Like other drilling contractors, AKITA is exposed to the effects of
fluctuating oil and gas prices and changes in the exploration and
development budgets of its customers.
On June 4, 2018, Xtreme Drilling
Corp ("Xtreme") and AKITA agreed to combine their respective
businesses and entered into a plan of arrangement ("the
Arrangement"), a copy of which is available at www.sedar.com. Under
the Arrangement, Xtreme Shareholders will receive 0.3732394 of a
Class A Non-Voting Share of AKITA or $2.65 in cash for each Xtreme Share. An Xtreme
Shareholder may elect to receive AKITA Non-Voting Shares, cash or a
combination of AKITA Non-Voting Shares and cash, in each case
subject to proration such that the aggregate consideration to be
paid by AKITA will not exceed $45,000,000 and will not exceed 22,235,458 Class
A Non-Voting Shares of AKITA.
About Xtreme
Xtreme is a corporation existing under the laws of Alberta. Xtreme's primary business is to
design, build and operate a fleet of high specification AC drilling
rigs featuring leading-edge proprietary technology. Currently,
Xtreme operates one service line - Drilling Services (XDR) under
contracts with oil and natural gas exploration and production
companies and integrated oilfield service providers in the United States.
Strategic Rationale
The combination of AKITA and Xtreme:
- Combines two complementary companies, each with a focus on
high-spec drilling rigs and disciplined operations that deliver
leading performance for customers
- Provides AKITA with immediate scale in the US market, building
upon its recent strategic expansion into the Permian, and the
potential for premium day rates and margins
- Maintains a leading position in active Canadian markets,
including oil sands maintenance drilling operations, with leverage
to a longer-term recovery in Canadian drilling activity
- Expands operational and customer network across all major North
American resource basins providing the flexibility to deploy high
quality drilling rigs on both sides of the border to optimize
utilization and returns
- Provides greater financial capacity to support potential new
builds, including on Xtreme's 850XE premium spec platform or
AKITA's high spec multi rig platform design which both have a
proven premium value proposition for pad development
- Improves liquidity for all shareholders through increased scale
and a larger public float
- Offers meaningful value creation opportunity from an estimated
$8 million in annual recurring
synergies and efficiencies
- Provides a differentiated opportunity to invest in a pure play
drilling contractor with both Canadian and US exposure that has a
strong balance sheet and liquidity
The transaction is pending and requires the following
approvals:
Xtreme Shareholder Approval
A resolution approving the
Arrangement must be approved by at least 66 2/3% of the votes cast
by the shareholders of Xtreme present in person or represented by
proxy at a meeting of Xtreme shareholders o be held August 13, 2018 (the "Xtreme Meeting"). If the
resolution is not approved by Xtreme shareholders, the Arrangement
cannot be completed as contemplated.
AKITA Shareholder Approval
A resolution approving the
issuance of AKITA Class A Non-Voting Shares pursuant to the
Arrangement must be approved by AKITA shareholders holding a
majority of the AKITA Class B Common Shares. Pursuant to the
requirements of the Toronto Stock Exchange, it is expected that the
AKITA shareholder approval will be comprised of written evidence
that holders of more than 50% of the AKITA Class B Common Shares
are familiar with the terms of the transaction and are in favour of
it. If such AKITA shareholder approval is not given, the
Arrangement cannot be completed as contemplated.
Court Approval
On July 10,
2018, Xtreme obtained an interim court order providing for
the calling and holding of the Xtreme Meeting and other procedural
matters. If Xtreme and AKITA shareholder approvals are obtained,
Xtreme will make an application to the court for the final order.
The Arrangement is expected to be completed in the third quarter of
2018.
With demand in the Canadian market uncertain at this time due
primarily to take away capacity, expansion in the US has been
AKITA's focus year to date in 2018. The merger with Xtreme will add
the scale AKITA's is seeking in the US with the infrastructure in
place for successful operations. In Canada, AKITA's focus will remain on cost
control and pursuing all potential opportunities.
Basis of Analysis in this MD&A, Non-GAAP and Additional
GAAP Items
AKITA and its joint ventures' revenue per operating day and
AKITA and its joint ventures' operating and maintenance expenses
per operating day are not recognized GAAP measures under
International Financial Reporting Standards ("IFRS").
Management and certain investors may find "per operating day"
measures for AKITA and joint ventures' revenue indicate pricing
strength while AKITA and joint ventures' 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.
Funds flow from operations is considered an additional GAAP item
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, equity income from joint ventures, and income tax amounts
paid or recovered 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.
Forward-looking Statements
From time to time AKITA makes forward-looking statements.
These statements include, but are not limited to, comments with
respect to AKITA's objectives and strategies, financial condition,
results of operations, the outlook for the industry and risk
management.
By their nature, these forward-looking statements involve
numerous assumptions, inherent risks and uncertainties, both
general and specific, and the risk that the predictions and other
forward-looking statements will not be realized. Readers of
this 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 investors and others should
carefully consider the foregoing factors, as well as other
uncertainties and events, prior to making a decision to invest in
AKITA. Except as required by law, the Company does not
undertake to update any forward-looking statements, whether written
or oral, that may be made from time to time by it or on its
behalf.
Selected Financial Information for the Company is as
follows:
AKITA Drilling
Ltd.
|
|
|
|
|
|
|
Interim Statements
of Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
June
30,
|
June 30,
|
December
31,
|
$
Thousands
|
2018
|
2017
|
2017
|
ASSETS
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
|
$
|
7,100
|
$
|
7,606
|
$
|
560
|
|
Accounts
receivable
|
|
14,204
|
|
21,989
|
|
27,024
|
|
Income taxes
recoverable
|
|
3,076
|
|
5,405
|
|
3,076
|
|
Prepaid expenses and
other
|
|
902
|
|
705
|
|
89
|
|
|
|
25,282
|
|
35,705
|
|
30,749
|
Non-current
Assets
|
|
|
|
|
|
|
|
Restricted
cash
|
|
787
|
|
2,253
|
|
1,525
|
|
Other long-term
assets
|
|
584
|
|
858
|
|
528
|
|
Investments in joint
ventures
|
|
3,031
|
|
4,213
|
|
4,096
|
|
Property, plant and
equipment
|
|
163,210
|
|
203,682
|
|
170,599
|
TOTAL
ASSETS
|
$
|
192,894
|
$
|
246,711
|
$
|
207,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Accounts payable and
accrued liabilities
|
$
|
7,538
|
$
|
9,623
|
$
|
13,696
|
|
Dividends
payable
|
|
1,525
|
|
1,525
|
|
1,525
|
|
|
|
9,063
|
|
11,148
|
|
15,221
|
Non-current
Liabilities
|
|
|
|
|
|
|
|
Financial
instruments
|
|
1
|
|
22
|
|
9
|
|
Deferred income
taxes
|
|
12,019
|
|
23,408
|
|
12,592
|
|
Deferred share
units
|
|
299
|
|
368
|
|
388
|
|
Pension
liability
|
|
5,022
|
|
4,480
|
|
4,832
|
Total
Liabilities
|
|
26,404
|
|
39,426
|
|
33,042
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Class A and Class B
shares
|
|
23,871
|
|
23,871
|
|
23,871
|
|
Contributed
surplus
|
|
4,573
|
|
4,440
|
|
4,500
|
|
Accumulated other
comprehensive loss
|
|
(434)
|
|
(366)
|
|
(495)
|
|
Retained
earnings
|
|
138,480
|
|
179,340
|
|
146,579
|
Total
Equity
|
|
166,490
|
|
207,285
|
|
174,455
|
TOTAL LIABILITIES
AND EQUITY
|
$
|
192,894
|
$
|
246,711
|
$
|
207,497
|
AKITA Drilling
Ltd.
|
Interim Statements
of Net Loss and Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
Three Months
Ended June 30
|
Six Months Ended June
30
|
$
Thousands
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
REVENUE
|
$
|
17,293
|
$
|
17,986
|
$
|
44,382
|
$
|
37,179
|
|
|
|
|
|
|
|
|
|
COSTS AND
EXPENSES
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance
|
|
12,087
|
|
14,632
|
|
32,477
|
|
32,367
|
|
Depreciation and
amortization
|
|
5,487
|
|
7,735
|
|
11,413
|
|
14,471
|
|
Selling and
administrative
|
|
4,141
|
|
3,409
|
|
8,561
|
|
7,387
|
Total Costs and
Expenses
|
|
21,715
|
|
25,776
|
|
52,451
|
|
54,225
|
|
|
|
|
|
|
|
|
|
Revenue Less Costs
and Expenses
|
|
(4,422)
|
|
(7,790)
|
|
(8,069)
|
|
(17,046)
|
|
|
|
|
|
|
|
|
|
EQUITY INCOME FROM
JOINT VENTURES
|
|
546
|
|
1,849
|
|
2,561
|
|
3,911
|
|
|
|
|
|
|
|
|
|
OTHER INCOME
(LOSS)
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
22
|
|
111
|
|
40
|
|
231
|
|
Interest
expense
|
|
(85)
|
|
(42)
|
|
(169)
|
|
(84)
|
|
Gain on sale of
assets
|
|
23
|
|
64
|
|
23
|
|
140
|
|
Net other gains
(losses)
|
|
45
|
|
20
|
|
171
|
|
39
|
Total Other
Income
|
|
5
|
|
153
|
|
65
|
|
326
|
|
|
|
|
|
|
|
|
|
Loss Before Income
Taxes
|
|
(3,871)
|
|
(5,788)
|
|
(5,443)
|
|
(12,809)
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
(912)
|
|
(1,297)
|
|
(573)
|
|
(3,343)
|
|
|
|
|
|
|
|
|
|
NET LOSS FOR THE
PERIOD ATTRIBUTABLE TO
SHAREHOLDERS
|
|
(2,959)
|
|
(4,491)
|
|
(4,870)
|
|
(9,466)
|
|
Other comprehensive
income
|
|
41
|
|
-
|
|
61
|
|
-
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE LOSS
FOR THE PERIOD
ATTRIBUTABLE TO SHAREHOLDERS
|
$
|
(2,918)
|
$
|
(4,491)
|
$
|
(4,809)
|
$
|
(9,466)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
(LOSS) PER CLASS A AND
CLASS B SHARE
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.16)
|
$
|
(0.25)
|
$
|
(0.27)
|
$
|
(0.53)
|
|
Diluted
|
$
|
(0.16)
|
$
|
(0.25)
|
$
|
(0.27)
|
$
|
(0.53)
|
AKITA Drilling
Ltd.
|
|
|
|
|
|
|
|
|
Interim Statements
of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
Three Months
Ended June 30
|
Six Months
Ended June 30
|
$
Thousands
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
loss
|
$
|
(2,959)
|
$
|
(4,491)
|
$
|
(4,870)
|
$
|
(9,466)
|
Non-cash items
included in net loss:
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
5,487
|
|
7,735
|
|
11,413
|
|
14,471
|
|
Deferred income tax
recovery
|
|
(912)
|
|
(265)
|
|
(573)
|
|
(294)
|
|
Defined benefit
pension plan expense
|
|
116
|
|
112
|
|
234
|
|
225
|
|
Stock options and
deferred share units expense
|
|
(68)
|
|
236
|
|
(16)
|
|
301
|
|
Gain on sale of
assets
|
|
(23)
|
|
(64)
|
|
(23)
|
|
(140)
|
|
Unrealized gain on
financial guarantee contracts
|
|
(3)
|
|
(9)
|
|
(8)
|
|
(19)
|
Funds flow from
operations
|
|
1,638
|
|
3,254
|
|
6,157
|
|
5,078
|
Change in non-cash
working capital
|
|
8,831
|
|
3,058
|
|
9,210
|
|
8,736
|
Equity income from
joint ventures
|
|
(546)
|
|
(1,849)
|
|
(2,561)
|
|
(3,911)
|
Post-employment
benefits
|
|
(21)
|
|
(24)
|
|
(44)
|
|
(48)
|
Interest
paid
|
|
(42)
|
|
-
|
|
(83)
|
|
-
|
Current income tax
expense (recovery)
|
|
-
|
|
(1,032)
|
|
-
|
|
(3,049)
|
Net cash From
Operating Activities
|
|
9,860
|
|
3,407
|
|
12,679
|
|
6,806
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
(2,320)
|
|
(7,615)
|
|
(4,005)
|
|
(12,202)
|
Change in non-cash
working capital related to capital
|
|
(244)
|
|
504
|
|
(3,457)
|
|
(1,981)
|
Net distributions
from investments in joint ventures
|
|
2,521
|
|
1,889
|
|
3,626
|
|
2,950
|
Change in cash
restricted for loan guarantees
|
|
371
|
|
360
|
|
738
|
|
716
|
Proceeds on sale of
assets
|
|
23
|
|
87
|
|
23
|
|
167
|
Net Cash From
(Used In) Investing Activities
|
|
351
|
|
(4,775)
|
|
(3,075)
|
|
(10,350)
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Change in operating
loan facility
|
|
(6,500)
|
|
-
|
|
-
|
|
-
|
Dividends
paid
|
|
(1,525)
|
|
(1,525)
|
|
(3,050)
|
|
(3,050)
|
Loan commitment
fee
|
|
(75)
|
|
-
|
|
(75)
|
|
(50)
|
Net Cash Used In
Financing Activities
|
|
(8,100)
|
|
(1,525)
|
|
(3,125)
|
|
(3,100)
|
|
|
|
|
|
|
|
|
|
Foreign Currency
Translation
|
|
41
|
|
-
|
|
61
|
|
-
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease) in Cash
|
|
2,152
|
|
(2,893)
|
|
6,540
|
|
(6,644)
|
Cash, beginning of
period
|
|
4,948
|
|
10,499
|
|
560
|
|
14,250
|
|
|
|
|
|
|
|
|
|
CASH, END OF
PERIOD
|
$
|
7,100
|
$
|
7,606
|
$
|
7,100
|
$
|
7,606
|
SOURCE AKITA Drilling Ltd.