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Press release from CNW Group

/R E P E A T -- AKITA Drilling Ltd. Announces A Positive Second Quarter/

Monday, July 30, 2012

/R E P E A T -- AKITA Drilling Ltd. Announces A Positive Second Quarter/09:25 EDT Monday, July 30, 2012CALGARY, July 27, 2012 /CNW/ - AKITA Drilling Ltd.'s net income for the three months ended June 30, 2012 was $2,092,000 ($0.12 per share) on revenue of $43,784,000 compared to $1,498,000 ($0.08 per share) on revenue of $31,651,000 for the corresponding period in 2011.  Funds flow from operations for the quarter ended June 30, 2012 was $8,364,000 compared to $3,239,000 in the corresponding quarter in 2011.Net income for the six months ended June 30, 2012 was $15,996,000 ($0.89 per share) on revenue of $122,558,000.  Comparative figures for 2011 were net income of $9,450,000 ($0.52 per share) on revenue of $89,095,000.  Funds flow from operations for the January to June period in 2012 was $28,726,000 compared to $16,952,000 for the comparative period in 2011.Western Canada experienced an unusually wet spring during the second quarter.  While it is normal for the industry to experience spring break-up, conditions typically improve by mid to late May when conventional operations resume.  This year second quarter opportunities for our conventional fleet were limited due to a very wet June which greatly reduced operations versus 2011.Pad drilling rigs, of which AKITA has 15, are generally unaffected by spring break-up or rain as these rigs operate on multi-well pads with existing infrastructure such as all-weather roads and stockpiled services.  AKITA's positive results in the second quarter of 2012 were primarily driven by pad rigs and some of its deeper fleet rigs which also operated during break-up and contributed to our results.As reported in the first quarter, AKITA is adding to its pad fleet with construction of two new pad rigs plus an upgrade conversion of an existing rig, each with multi-year contracts.  Management anticipates that completion of the upgrade will occur early in the fourth quarter and that the first of the new rigs will be completed late in the fourth quarter of 2012, followed by the second new rig early in 2013.Although the industry appears to be facing a more challenging outlook due to weakening prices for crude oil and related liquids and persistently low gas prices, management anticipates most of our customers will remain active, especially where customized pad rigs are the desired solution.Selected information from AKITA Drilling Ltd.'s Management's Discussion and Analysis from the Quarterly Report is as follows:Revenue and Operating & Maintenance Expenses          $ MillionThree Months Ended June 30 Six Months Ended June 30 20122011Change%Change 20122011Change%ChangeRevenue(2)43.831.712.138% 122.689.133.538%Operating & Maintenance Expenses(2)30.321.68.740% 79.558.221.337%          $ Three Months Ended June 30 Six Months Ended June 30 20122011Change%Change 20122011Change%ChangeRevenue per operating day(2)37,71232,1335,57917% 33,40429,6793,72513%Operating & Maintenance Expenses(2)per operating day26,12121,8834,23819% 21,67519,3882,28712%Operating margin(1) per operating day11,59110,2501,34113% 11,72910,2911,43814%(1)     Operating margin is the difference between revenue and operating & maintenance expenses.(2)    Revenue, operating & maintenance expenses and operating margin includes the Company's rig construction for third parties. AKITA does not disclose its margin on rig construction activity for competitive reasons.During the second quarter of 2012, overall revenue increased to $43,784,000 or $37,712 per operating day compared to $31,651,000 or $32,133 per operating day for the corresponding period in 2011.  Increases in rig activity and associated rig rates for the Company's triple and pad rigs in the second quarter of 2012 compared to the second quarter of 2011 were the primary contributors to the increase in the quarterly revenue. In addition, the Company earned $5,557,000 in rig construction revenue (2011 - $Nil).Operating and maintenance expenses for the second quarter amounted to $30,327,000 or $26,121 per operating day during 2012, compared to $21,555,000 or $21,883 per operating day for 2011, primarily due to increased activity for the Company's triple and pad rigs and general cost increases. Rig inactivity for conventional rigs due to the early start to break-up and the unfavourable wet weather throughout the second quarter created an opportunity to expand the spring maintenance program thereby increasing maintenance costs.The Company's "per-day" operating margin for the second quarter of 2012 was $11,591 compared to a "per-day" operating margin of $10,250 during the corresponding quarter in 2011.Revenue increased to $122,558,000 or $33,404 per operating day during the first six months of 2012 from $89,095,000 or $29,679 per operating day during the first six months of 2011 primarily as a result of the strong market conditions in the first quarter for all rig categories and the continued strength in the triple and pad rigs market in the second quarter of 2012 as these two rig categories are less impacted by break-up and wet weather.Operating and maintenance expenses are tied to activity levels and amounted to $79,527,000 or $21,675 per operating day during the first six months of 2012 compared to $58,202,000 or $19,388 per operating day in the corresponding period of the prior year.  The Company's year to date "per-day" operating margin at June 30, 2012 was $11,728 compared to a "per-day" operating margin of $10,291 during the corresponding period in 2011.From time to time, the Company requires customers to make pre-payments prior to the provision of drilling services.  At June 30, 2012, the Company had not received any pre-payments from customers for drilling services (June 30, 2011 - $100,000).Depreciation Expense          $ MillionThree Months Ended June 30 Six Months Ended June 30 20122011Change% Change 20122011Change% ChangeDepreciation Expense5.64.31.330% 12.910.02.929%The increase in depreciation expense to $5,631,000 during the second quarter of 2012 from $4,296,000 in the corresponding period in 2011 was primarily attributable to the increase in rig activity in addition to a higher average cost base of the Company's pad rigs.  On a quarterly basis, drilling rig depreciation accounted for 96% of total depreciation expense (second quarter of 2011 - 95%).A similar increase in depreciation expense occurred during the first six months of 2012 compared to the corresponding period in 2011. In the first six months of 2012, drilling rig depreciation accounted for 97% of total depreciation expense (2011 - 96%).Selling and Administrative Expense          $ MillionThree Months Ended June 30 Six Months Ended June 30 20122011Change% Change 20122011Change% ChangeSelling & Administrative Expense5.13.91.231% 10.08.51.518%Selling and administrative expenses were 8.2% of total revenue in the first six months of 2012 compared to 9.5% of total revenue in the comparative period of 2011, largely as a result of increased revenue in 2012.  The single largest component was salaries and benefits, which accounted for 58% of these expenses (58% in 2011).Other Income          $ MillionThree Months Ended June 30 Six Months Ended June 30 20122011Change% Change 20122011Change% ChangeInterest Income0.10.2(0.1)(50%) 0.20.3(0.1)(33%)Gain (Loss) on Sale of Assets and Other Gains and Losses   0.00.1(0.1)(100%) 1.10.20.9450%The Company invests any cash balances in excess of its ongoing operating requirements in bank guaranteed highly liquid investments.  Interest income for the first six months of 2012 decreased to $221,000 from $342,000 for the corresponding period in 2011, primarily due to holding lower cash and term-deposits balance in 2012 as a result of current capital projects.The gain on sale of joint venture interests in rigs and other assets totalled $1,062,000 in the first six months of 2012 ($218,000 in the first six months of 2011) and  includes the disposal of the Company's interests in two arctic drilling camps and other non-core assets.  The 2012 second quarter loss on sale of joint venture interests in rigs and other assets of $94,000 (2011- gain of $185,000) resulted from the disposal of non-core assets.Income Tax Expense         $ MillionThree Months Ended June 30 Six Months Ended June 30 20122011Change% Change 20122011Change% ChangeCurrent Tax Expense0.33.2(2.9)(90%) 4.96.0(1.1)(18)%Deferred Tax Expense0.4(2.5)2.9116% 0.5(2.5)3.0120%Total Income Tax Expense0.70.70.0Nil 5.43.51.954%Income tax expense increased to $5,422,000 in the first six months of 2012 from $3,523,000 in the corresponding period in 2011, due to higher pre-tax income which was partially offset by a reduction in the Canadian federal tax rate.Net Income and Funds Flow          $ MillionThree Months Ended June 30 Six Months Ended June 30 20122011Change% Change 20122011Change% ChangeNet Income 2.11.50.640% 16.09.46.670%Funds Flow From Operations(1)8.43.25.2162% 28.717.011.769%(1): See commentary regarding non-standard accounting measure.Net income increased to $2,092,000 or $0.12 per Class A Non-Voting and Class B Common Share (basic and diluted) for the second quarter of 2012 from $1,498,000 or $0.08 per share (basic and diluted) in the second quarter of 2011.  Funds flow from operations increased to $8,364,000 in the second quarter of 2012 from $3,239,000 in the corresponding quarter in 2011.  The increases in net income and funds flow from operations were attributable to the on-going positive results in the pad and triple rig categories.Net income increased to $15,996,000 or $0.89 per Class A Non-Voting and Class B Common Share (basic and diluted) for the first six months of 2012 from $9,450,000 or $0.52 per share (basic and diluted) in the corresponding period of 2011.  Funds flow from operations increased to $28,726,000 in the first six months of 2012 from $16,952,000 in the corresponding period in 2011.  The 2012 increases in net income and funds flow from operations were directly attributable to higher activity levels and increased operating margins per day versus the corresponding period of 2011, primarily as a result of the record results reported in the first quarter of 2012.Non Standard Accounting MeasureFunds flow from operations is not a recognized measure under IFRS.  AKITA's method of determining funds flow from operations may differ from methods used by other companies and involves including cash flow from operating activities before working capital changes.  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.  The following table reconciles funds flow and cash flow from operations:       $MillionThree MonthsEnded June 30 Six Months Ended June 30 20122011 20122011Funds Flow from Operations8.43.2 28.716.9Change in Non-Cash Working Capital21.28.5 14.51.7Non-Cash Income Tax Expense0.33.1 4.96.0Income Tax Paid(1.6)(0.3) (7.1)(1.1)Cash flow from operations28.314.5 41.023.5Fleet and Rig UtilizationAKITA had 38 drilling rigs, including eight that operated under joint ventures (35.075 net to AKITA), at the end of the second quarter of 2012 compared to 37 rigs (34.075 net) in the corresponding period of 2011.  At June 30, 2012, all of the Company's rigs were located in Canada.  The Company's utilization results are shown in the table below:           Three MonthsEnded June 30 Six Months Ended June 30  2012 2011 2012 2011Operating Days 1,161 985 3,669 3,002Utilization Rate 33.6% 30.0% 53.1% 46.0%Liquidity and Capital ResourcesCash used for capital expenditures totalled $34,296,000 in the first six months of 2012 (2011 - $22,952,000) and included $26,438,000 for current period expenditures with the balance relating to changes in non-cash working capital.  The most significant expenditures for 2012, including in the second quarter, were construction costs related to completion of two new heavy oil pad rigs and the conversion of a triple rig to a pad rig.  Additional capital included certification and overhaul costs as well as routine capital expenditures.At June 30, 2012, AKITA's balance sheet included working capital (current assets minus current liabilities) of $44,759,000 compared to working capital of $55,851,000 at June 30, 2011 and working capital of $44,265,000 at December 31, 2011.  The Company has made significant investment in constructing and retrofitting drilling rigs due to the opportunities present in the current drilling environment especially for pad rigs, which are a strategic focus of the Company.  Readers should also be aware of the seasonal nature of AKITA's business and its impact 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 break-up.The Company chooses to maintain a conservative balance sheet due to the cyclical nature of the industry.  In addition to its cash and term deposit balances, during 2011, the Company established an operating loan facility with its principal banker totalling $50,000,000, having an initial five year term.  Although the facility has been advanced in order to provide financing for a broad range of alternatives, including general corporate purposes, 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 0.4% to 1.4% over prime interest rates or 1.4% to 2.4% over guaranteed notes, depending on the preference of the Company. The Company accessed this facility during the second quarter of 2012 on a short-term basis, having repaid the amount borrowed prior to June 30, 2012.  The Company did not access this facility in 2011 or during the first three months of 2012.The Company had nine rigs under multi-year contracts at June 30, 2012.  Of these contracts, one is anticipated to expire in 2012, five in 2013 and three in 2014.  In addition to the foregoing, the Company is constructing two additional rigs with associated multi-year contracts and constructing one rig for sale with an associated multi-year labour contract.During 2011, the Company guaranteed bank loans made to joint venture partners totalling $2,700,000 for a period of four years.  The Company has provided an assignment of monies on deposit totalling $3,000,000 with respect to these loans.  These funds have been classified as "restricted cash" on the balance sheet.  The Company's security from its partners for these guarantees includes interests in specific rig assets.Forward-Looking StatementsFrom time to time AKITA makes forward-looking statements.  These statements include, but are not limited to, comments with respect to AKITA's objectives and strategies, financial condition, results of operations, the outlook for the industry and risk management.By their nature, these forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, and therefore carry the risk that the predictions and other forward-looking statements will not be realized.  Readers of this MD&A are cautioned not to place undue reliance on these statements as a number of important factors could cause actual future results to differ materially from the plans, objectives, estimates and intentions expressed in such forward-looking statements.Forward-looking statements may be influenced by factors such as the level of exploration and development activity carried on by AKITA's customers; world crude oil prices and North American natural gas prices; weather; access to capital markets and government policies.  We caution that the foregoing list of factors is not exhaustive and that investors and others should carefully consider the foregoing factors as well as other uncertainties and events prior to making a decision to invest in AKITA.Selected financial information for the Company is as follows:        AKITA Drilling Ltd.   Interim Consolidated Statements of Financial Position          UnauditedJune 30June 30December 31$ Thousands201220112011Assets   Current Assets    Cash and cash equivalents$ 30,180 $29,724$18,228 Term deposits2,500 18,4909,500 Accounts receivable33,794 25,89348,351 Prepaid expenses and other745 794413  67,219 74,90176,492Non-current Assets   Restricted cash3,000 -3,000Other long term assets188 -200Investment property613 -626Property, plant and equipment180,328 146,696166,812Total Assets$ 251,348 $221,597$247,130          Liabilities   Current Liabilities    Accounts payable and accrued liabilities$ 20,102 $13,751$27,550 Deferred revenue- 100146 Dividends payable1,262 1,2671,262 Income taxes payable1,096 3,9323,269  22,460 19,05032,227Non-current Liabilities   Deferred income taxes12,815 10,74112,264Pension liability1,731 1,5621,535Total Liabilities37,006 31,35346,026     Shareholders' Equity   Class A and Class B shares23,257 23,39323,308Contributed surplus2,906 2,6342,758Retained earnings188,179 164,217175,038Total Equity214,342 190,244201,104Total Liabilities and Equity$ 251,348 $221,597$247,130           AKITA Drilling Ltd.    Interim Consolidated Statements of Net Income   and Comprehensive Income           Three Months Ended Six Months EndedUnaudited June 30  June 30June 30 June 30$ Thousands 2012 2011 2012 2011     Revenue$ 43,784 $31,651$ 122,558 $89,095     Costs and expenses     Operating and Maintenance30,327 21,55579,527 58,202 Depreciation5,631 4,29612,897 9,959 Selling and administrative5,057 3,94910,020 8,500Total costs and expenses41,015 29,800102,444 76,661     Revenue less costs and expenses2,769 1,85120,114 12,434     Other income (losses)     Interest income109 175221 342 Interest expense- (5)(1)(8) Gain (loss) on sale of joint venture interests in rigs and other assets(94)1851,062 218 Other gains and losses (net)10 (43)22 (13)Total other income 25 3121,304 539     Income before income taxes2,794 2,16321,418 12,973     Income taxes702 6655,422 3,523     Net income for the period attributable to shareholders2,092 1,49815,996 9,450     Other comprehensive income (loss)    Cumulative translation adjustment- -- (50)     Comprehensive income for the period attributable to shareholders $ 2,092 $1,498$ 15,996 $9,400          Earnings per Class A and Class B Share     $ 0.12 $0.08$ 0.89 $0.52 $ 0.12 $0.08$ 0.89 $0.52           AKITA Drilling Ltd.    Interim Consolidated Statements of Cash Flow               Three Months Ended Six Months EndedUnaudited June 30June 30 June 30June 30$ Thousands2012201120122011     Operating Activities    Net income$ 2,092 $1,498$ 15,996 $9,450Non-cash items included in net income:     Depreciation5,631 4,29612,897 9,959 Deferred income taxes371 (2,497)551 (2,494) Expense for defined benefit pension plan98 66196 133 Stock options charged to expense77 61148 122 Gain (loss) on sale of joint venture interests in rigs and other assets95 (185)(1,062)(218) 8,364 3,23928,726 16,952Change in non-cash working capital:     Accounts receivable28,333 17,93014,557 7,446 Prepaid expenses and other265 299(332)(572) Accounts payable and accrued liabilities(7,356)(9,597)411 (5,246) Deferred revenue- (122)(146)100 21,242 8,51014,490 1,728 29,606 11,74943,216 18,680 Interest paid- (2)(1)(3) Income tax expense - non cash331 3,1624,871 6,017 Income tax paid(1,573)(354)(7,044)(1,153)Net Cash from operating activities28,364 14,55541,042 23,541     Investing Activities    Capital expenditures (12,192)(9,779)  (34,296)(22,952)Change in cash restricted for loan guarantees- -- 2,500Change in term deposits5,000 (15,990)7,000 (8,490)Proceeds on sale of joint venture interests in rigs and other assets(45)1941,112 228Net Cash used in investing activities(7,237)(25,575)  (26,184)(28,714)     Financing Activities    Dividends paid(1,263)(1,267)(2,524)(2,539)Repurchase of share capital(382)(478)(382)(478)Net Cash used in financing activities(1,645)(1,745)(2,906)(3,017)     Effect of exchange rate changes on cash and cash equivalents- -- (50)     Increase (Decrease) in Cash and Cash Equivalents19,482 (12,765)11,952 (8,240)Cash and cash equivalents, beginning of period10,698 42,48918,228 37,964     Cash and Cash Equivalents, End of Period$  30,180 $29,724$ 30,180 $29,724    SOURCE: AKITA Drilling Ltd.For further information: Murray Roth Vice President, Finance and Chief Financial Officer (403) 292-7950 Website: http/www.akita-drilling.com