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Press release from CNW Group

/R E P E A T -- AKITA Drilling Ltd. is pleased to report third quarter results/

Monday, October 29, 2012

/R E P E A T -- AKITA Drilling Ltd. is pleased to report third quarter results/09:25 EDT Monday, October 29, 2012CALGARY, Oct. 26, 2012 /CNW/ - AKITA Drilling Ltd.'s net income for the three months ended September 30, 2012 was $4,331,000 ($0.24 per share) on revenue of $52,111,000 compared to $6,926,000 ($0.38 per share) on revenue of $54,874,000 for the corresponding period in 2011.  Funds flow from operations for the quarter ended September 30, 2012 was $10,800,000 compared to $12,825,000 in the corresponding quarter in 2011.Net income for the nine months ended September 30, 2012 was $20,327,000 ($1.13 per share) on revenue of $174,669,000.  Comparative figures for 2011 were net income of $16,375,000 ($0.90 per share) on revenue of $143,969,000.  Funds flow from operations for the January to September period in 2012 was $39,527,000 compared to $29,776,000 for the comparative period in 2011.Rig activity declined during the third quarter of 2012 to 1,529 operating days or 43.7% utilization compared to 2,140 operating days or 62.9% utilization for the corresponding quarter in 2011.  This decline was attributable to weakened market conditions for AKITA's conventional single and double capacity rigs.  By contrast AKITA's conventional triples and pad rigs continue to achieve strong utilization.Management anticipates completion of the first of two pad rigs under construction later in the fourth quarter of 2012 with the second rig being completed early in 2013.  These rigs are contracted for either four years or five years.  In addition, the Company recently completed the conversion of a conventional triple into a pad rig.  This rig is set to recommence operations during the fourth quarter of 2012 under a two-year contract.  The Company has entered into a contract with a third party to build a rig and upon completion, estimated to be in the fourth quarter of 2012, the third party will purchase the rig.  The third party has contracted with AKITA to provide multi-year labour services to operate the rig.Although the weak natural gas and associated natural gas liquids prices are having a negative impact on conventional drilling activity, management remains optimistic on ongoing pad rig activity as well as opportunities to continue drilling with conventional triples.  It appears that no significant increase in activity levels for singles and doubles will occur prior to the upcoming winter drilling season.Selected information from AKITA Drilling Ltd.'s Management's Discussion and Analysis from the Quarterly Report is as follows:Revenue and Operating and Maintenance Expenses $ MillionThree Months Ended September 30 Nine Months Ended September 30 20122011Change%Change 20122011Change%ChangeRevenue (1)52.154.9(2.8)(5%) 174.7144.030.721%Operating & Maintenance Expenses (1)36.335.80.51% 115.8  94.021.823%Operating Margin (2) (3)15.819.1(3.3)(17%) 58.9  50.0  8.918%          $ DollarsThree Months Ended September 30 Nine Months Ended September 30 20122011Change%Change 20122011Change%ChangeRevenue per operating day (3)34,10425,6428,46233% 33,68726,0787,60929%Operating & Maintenance Expenses per operating day (3)23,72716,7366,99142% 22,33017,8964,43425%Operating margin per operating day (2) (3)10,377  8,9061,47117% 11,357  8,1823,17539%Notes:(1)     Revenue, operating & maintenance expenses and 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.(2)     Operating margin is the difference between revenue and operating & maintenance expenses.(3)     Operating margin, revenue per operating day, operating & maintenance expenses per operating day and operating margin per operating day are non-standard accounting measures.  See commentary regarding non-standard accounting measures.During the third quarter of 2012, overall revenue decreased to $52,111,000 compared to $54,874,000 for the corresponding quarter in 2011 while revenue per operating day increased to $34,104 during the third quarter of 2012 compared to $25,642 per operating day during the third quarter of 2011.  Decreased rig activity for conventional rigs was the primary contributor to the drop in overall third quarter revenue.  Pad rigs were more active in the third quarter of 2012 compared to the corresponding quarter in 2011 and earned higher day rates thus resulting in a higher per operating day revenue measurement.Operating and maintenance costs are tied to activity levels and amounted to $36,255,000 or $23,727 per operating day during the third quarter of 2012, compared to $35,814,000 or $16,736 per operating day for 2011.  Although AKITA's fleet was not as active during the third quarter of 2012 compared to the corresponding quarter in 2011, the reduction in activity was associated with conventional doubles and singles, thereby resulting in a higher operating cost per day since these two rig categories have lower operating costs than pad rigs or conventional triples.The Company's operating margin decreased to $15,856,000 during the third quarter of 2012 compared to $19,060,000 during the third quarter of 2011.  This reduction was entirely associated with weaker market conditions for the Company's conventional singles and doubles.  Continuing strength for both pad rigs and conventional triples resulted in per operating day margins increasing to $10,377 during the third quarter of 2012 compared to $8,906 for the corresponding quarter in 2011.Overall revenue increased to $174,669,000 or $33,687 per operating day during the first nine months of 2012 from $143,969,000 or $26,078 per operating day during the first nine months of 2011 due to stronger market conditions for conventional singles and doubles during the first quarter of 2012 and ongoing strong market conditions for pad rigs and conventional triples.  Since the first quarter of 2012, market conditions for conventional singles and doubles have weakened relative to 2011.Operating and maintenance costs amounted to $115,782,000 or $22,330 per operating day during the first nine months of 2012 compared to $94,017,000 or $17,896 per operating day in the corresponding period of the prior year.  The rise in operating and maintenance costs and operating maintenance costs per operating day is consistent with the increase in revenue and the shift to increased pad rig and conventional triple activity, both forms of drilling associated with increased costs relative to conventional singles and doubles.On a nine month basis, the Company's operating margin was $58,887,000 or $11,357 per operating day during 2012, compared to an operating margin of $49,952,000 or $8,182 per operating day during the corresponding period in 2011.  The increase in operating margin and operating margin per day was due mainly to the impact of a strong first quarter for all classes of rigs as well as ongoing market strength for pad rigs and conventional triples.In addition to revenue and operating and maintenance costs achieved from drilling activities, the Company earned $11,308,000 in rig construction revenue during the first nine months of 2012 including $5,750,000 in the third quarter.  The Company does not disclose its construction costs or operating margin separately for this activity for competitive reasons.From time to time, the Company requires customers to make pre-payments prior to the provision of drilling services.  At September 30, 2012, the Company did not hold any drilling service prepayments (September 30, 2011 - $815,000).Non Standard Accounting MeasuresOperating 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 metric as it provides an indication of the profitability of the business prior to the inclusion of depreciation, overhead expenses, financing costs and income taxes.  Management and certain investors may find per operating day measures for revenue and operating margin per operating day provide key indicators of pricing strength while operating and maintenance expense per operating day are indications of the degree of cost control and a proxy for specific inflation rates being 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, rig construction revenue and rig construction costs in its determination of per operating day results.Depreciation Expense $ MillionThree Months Ended September 30 Nine Months Ended September 30 20122011Change% Change 20122011Change% ChangeDepreciation Expense5.65.6(0.0)(0%) 18.515.62.919%Depreciation expense of $5,578,000 during the three months ended September 30, 2012 was comparable to $5,647,000 for the corresponding period in 2011.  Drilling rig depreciation is calculated based upon usage and accounted for 96% during the quarter of total depreciation expense (three months ended September 30, 2011 - 96%).  Although the overall number of drilling days was lower in the third quarter of 2012 compared to the third quarter of 2011, the most active rigs were also rigs in AKITA's fleet with the highest average cost base per rig.Year-to-date depreciation expense of $18,475,000 for the Company was higher in the first nine months of 2012 compared to depreciation expense of $15,606,000 during the corresponding period in 2011, primarily as a result of a higher average cost base for drilling rigs.  In the first nine months of 2012, drilling rig depreciation accounted for 97% of total depreciation expense (2011 - 96%).Selling and Administrative Expense $ MillionThree Months Ended September 30 Nine Months Ended September 30 20122011Change%Change 20122011Change%ChangeSelling & Administrative Expense4.64.20.410% 14.612.71.915%Selling and administrative expenses were 8.4% of total revenue in the first nine months of 2012 compared to 8.8% 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 60% of these expenses (60% in 2011).Other Income  $ MillionThree Months Ended September 30 Nine Months Ended September 30 20122011Change% Change 20122011Change% ChangeInterest Income0.10.2(0.1)(50%) 0.30.5(0.2)(40%)Gain on Sale of Other Assets0.00.0(0.0)N/A 1.10.30.8267%Other Income (Losses)0.10.2(0.1)(50%) 1.40.80.675%The Company invests any cash balances in excess of its ongoing operating requirements in bank guaranteed highly liquid investments.  Interest income for the first nine months of 2012 decreased to $325,000 from $505,000 for the corresponding period in 2011 as a consequence of having lower cash and term-deposit balances in the current year as a result of capital expenditures.The gain on sale of joint venture interests in rigs and other assets totalled $1,066,000 in the first nine months of 2012 ($275,000 in the first nine months of 2011) and includes the disposal of the Company's interests in two arctic drilling camps and other non-core assets.Income Tax Expense  $ MillionThree Months Ended September 30 Nine Months Ended September 30 20122011Change% Change 20122011Change% ChangeCurrent Tax Expense0.82.3(1.5)(65%) 5.68.3(2.7)(33%)Deferred Tax Expense0.70.20.5250% 1.3(2.2)3.5159%Total Income Tax Expense1.52.5(1.0)(40%) 6.96.10.813%Income tax expense increased to $6,900,000 in the first nine months of 2012 from $6,050,000 in the corresponding period in 2011, due to higher pre-tax income which was partially offset by a reduction in the Canadian federal income tax rate.  AKITA's significant capital expenditure program has resulted in a larger proportion of the Company's income tax expense being classified as deferred.Net Income and Funds Flow  $ MillionThree Months Ended September 30 Nine Months Ended September 30 20122011Change% Change 20122011Change% ChangeNet Income  4.3  6.9(2.6)(38%) 20.316.34.025%Funds Flow From Operations(Note)10.812.8(2.0)(16%) 39.529.89.733%Note: See commentary regarding additional GAAP measureNet income decreased to $4,331,000 or $0.24 per Class A Non-Voting and Class B Common Share (basic and diluted) for the third quarter of 2012 from $6,926,000 or $0.38 per share (basic and diluted) in the third quarter of 2011.  Funds flow from operations decreased to $10,800,000 in the third quarter of 2012 from $12,825,000 in the corresponding quarter in 2011.  The lower income and funds flow that occurred in the third quarter of 2012 compared to the corresponding period in 2011 were directly attributable to decreased demand for AKITA's conventional single and double rigs.Net income increased to $20,327,000 or $1.13 per Class A Non-Voting and Class B Common Share (basic and diluted) for the first nine months of 2012 from $16,375,000 or $0.90 per share (basic and diluted) in the corresponding period of 2011.  Funds flow from operations increased to $39,527,000 in the first nine months of 2012 from $29,776,000 in the corresponding period in 2011.  Higher income and funds flow from operations that occurred in 2012 were directly attributable to increased operating margins per day as the Company increased its percentage of drilling services from pad rigs and conventional triples.  During the third quarter of 2012 operating margins declined due to lower activity levels, although operating margins per operating day remained higher than during the corresponding quarter in 2011.A reconciliation from funds flow to cash flow is included in the following section of this MD&A.Additional GAAP MeasureFunds 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 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 Months Ended September 30 Nine Months Ended September 30 20122011 20122011Funds Flow from Operations10.812.8 39.529.8Change in Non-Cash Working Capital(5.8)(11.7) 8.7(5.6)Non-Cash Income Tax Expense0.82.4 5.78.4Income Tax Paid (Net of Recoveries)(2.4)(4.0) (9.4)(6.2)Cash flow from operations3.4(0.5) 44.526.4Fleet and Rig UtilizationAKITA had 38 drilling rigs, including eight that operated under joint ventures, (35.025 net to AKITA) at the end of the third quarter of 2012 compared to 37 rigs (34.075 net) in the corresponding period of 2011.Utilization rates expressed In percentagesThree Months Ended September 30 Nine Months Ended September 30 20122011 20122011Operating Days1,5292,140 5,1985,142Utilization Rate43.7%62.9% 49.9%51.9%It should be noted that AKITA calculates utilization rates based upon rigs actively operating.  From time to time, AKITA has rigs receiving standby revenue.  Those rigs are not considered as contributing to the utilization statistic in AKITA's calculations.Liquidity and Capital ResourcesCash used for capital expenditures totalled $46,501,000 in the first nine months of 2012 (2011 - $35,420,000).  The most significant capital expenditures for 2012 to date, including in the third quarter, were costs related to the construction of two new heavy oil pad rigs and the conversion of a conventional triple rig into a pad rig.  Additional capital included certification and overhaul costs as well as routine capital expenditures.At September 30, 2012, AKITA's balance sheet included working capital (current assets minus current liabilities) of $33,722,000 compared to working capital of $53,730,000 at September 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 and decline thereafter annually as a result of increased drilling activity.During the third quarter of 2012, the Company repurchased 62,603 Class A Non-Voting Shares (2011 - 49,420 shares) at an average cost of $10.68 per share pursuant to its Normal Course Issuer Bid.  On a year-to-date basis, AKITA repurchased 98,306 Class A Non-Voting Shares at an average cost of $10.40 per share.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 relating to drilling contracts that it might be awarded.  The interest rate on the facility varies depending 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 at other times during 2012.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 $3,000,000 with respect to these loans.  These funds have been classified as "restricted cash" on the balance sheet.  The Company's security from its partners for these guarantees includes interests in specific rig assets.Forward-Looking StatementsFrom time to time AKITA makes forward-looking statements.  These statements include, but are not limited to, comments with respect to AKITA's objectives and strategies, financial condition, results of operations, the outlook for the industry and risk management.By their nature, these forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, and therefore carry the risk that the predictions and other forward-looking statements will not be realized.  Readers of this MD&A are cautioned not to place undue reliance on these statements as a number of important factors could cause actual future results to differ materially from the plans, objectives, estimates and intentions expressed in such forward-looking statements.Forward-looking statements may be influenced by factors such as the level of exploration and development activity carried on by AKITA's customers; world crude oil prices and North American natural gas prices; weather; access to capital markets and government policies.  We caution that the foregoing list of factors is not exhaustive and that investors and others should carefully consider the foregoing factors as well as other uncertainties and events prior to making a decision to invest in AKITA.  Except as required by law, the Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by it or on its behalf.Selected financial information for the Company is as follows:AKITA Drilling Ltd.Interim Consolidated Statements of Financial Position             Unaudited$ Thousands  September 302012September 302011December 312011Assets    Current Assets     Cash and cash equivalents $ 13,620$ 18,288$ 18,228 Term deposits 2,50012,9919,500 Accounts receivable 49,07245,39048,351 Prepaid expenses and other 410608413  66,10777,27776,492Non-current Assets    Restricted cash 3,000- 3,000Other long term assets 187- 200Investment property 607- 626Property, plant and equipment 194,719154,253166,812Total Assets $ 264,620$ 231,530$ 247,130          Liabilities    Current Liabilities     Accounts payable and accrued liabilities $ 31,128$ 19,216$ 27,550 Deferred revenue -  815146 Dividends payable 1,2571,2641,262 Income taxes payable -  2,2523,269  32,38523,54732,227Non-current Liabilities    Deferred income taxes 13,53610,92212,264Pension liability 1,8291,6281,535Total Liabilities 47,75036,09746,026     Shareholders' Equity    Class A and Class B shares 23,19423,32323,308Contributed surplus 2,9832,6962,758Retained earnings 190,693169,414175,038Total Equity 216,870195,433201,104Total Liabilities and Equity $ 264,620$ 231,530$ 247,130AKITA Drilling Ltd.Interim Consolidated Statements of Net Income and Comprehensive Income                    Three Months Ended Nine Months EndedUnaudited  September 30 September 30 September 30September 30$ Thousands 20122011 20122011       Revenue $ 52,111$ 54,874 $ 174,669$ 143,969       Costs and expenses       Operating and maintenance 36,25535,814 115,78294,017 Depreciation and amortization 5,5785,647 18,47515,606 Selling and administrative 4,5774,168 14,59712,669Total costs and expenses 46,41045,629 148,854122,292       Revenue less costs and expenses 5,7019,245 25,81521,677       Other income (losses)       Interest income 104163 325505 Interest expense (1)(4) (3)(11) Gain on sale of joint venture interests in rigs and other assets 557 1,066275 Other gains and losses (net) 1(8) 24(21)Total other income  109208 1,412748       Income before income taxes 5,8109,453 27,22722,425       Income taxes 1,4792,527 6,9006,050       Net income for the period attributable to shareholders   4,3316,926 20,32716,375       Other comprehensive income (loss)      Cumulative translation adjustment -  -  -  (50)Comprehensive income for the     period attributable to shareholders    $ 4,331 $ 6,926 $ 20,327 $ 16,325              Earnings per Class A and Class B Share       Basic $ 0.24$ 0.38 $ 1.13$ 0.90 Diluted $ 0.24$ 0.38 $ 1.13$ 0.90AKITA Drilling Ltd.Interim Consolidated Statements of Cash Flow                     Three Months Ended Nine Months EndedUnaudited September 30September 30 September 30September 30       Operating Activities      Net income  $ 4,331$ 6,926 $ 20,327$ 16,375Non-cash items included in net income:       Depreciation and amortization 5,5785,647 18,47515,606 Deferred income taxes 721181 1,272(2,313) Expense for defined benefit pension plan 9866 294199 Stock options charged to expense 7762 225184 Gain on sale of joint venture interests in rigs and other assets (5)(57) (1,066)(275)Funds flow from operations 10,80012,825 39,52729,776Change in non-cash working capital:       Accounts receivable (15,278)(19,497) (721)(12,051) Prepaid expenses and other 335186 3(386) Income tax recoverable (505)-  (505)-   Accounts payable and accrued liabilities 9,1786,924 9,5906,080 Deferred revenue -  715 (146)815  (6,270)(11,672) 8,221(5,542)  4,5301,153 47,74824,234 Interest paid (2)(4) (3)(9) Income tax expense - current 7582,346 5,6288,363 Income tax paid (1,854)(4,024) (8,897)(6,193)Net Cash from operating activities 3,432(529) 44,47626,395       Investing Activities      Capital expenditures (20,064)(13,317) (46,501)(35,420)Change in non-cash working capital related to capital 1,845(1,460) (6,014)(5,693)Change in cash restricted for loan guarantees -  -  -  2,500Change in term deposits -  5,499 7,000(2,991)Proceeds on sale of joint venture interests in rigs and other assets 107170 1,217398Net Cash used in investing activities (18,112)(9,108) (44,298)(41,206)       Financing Activities      Dividends paid (1,257)(1,264) (3,781)(3,802)Proceeds received on exercise of stock options 18-  18- Repurchase of share capital (641)(535) (1,023)(1,013)Change in non-cash working capital -  -  -  - Net Cash used in financing activities (1,880)(1,799) (4,786)(4,815)       Effect of exchange rate changes on cash and cash equivalents -  -  -  (50)       (Decrease) in Cash and Cash Equivalents (16,560)(11,436) (4,608)(19,676)Cash and cash equivalents, beginning of period 30,18029,724 18,22837,964       Cash and Cash Equivalents, End of Period $ 13,620$ 18,288 $ 13,620$ 18,288              SOURCE: AKITA Drilling Ltd.For further information: Murray Roth Vice President, Finance (403)292-7950 website: http://www.akita-drilling.com