Annual Report
2018
2
AKITA DRILLING LTD. | 2018 Annual Report
CORPORATE
PROFILE
AKITA Drilling Ltd. is a premier oil and gas drilling contractor with drilling
operations throughout North America. The Company strives to be the
industry leader in customer relations, First Nations and Aboriginal
partnerships, employee expertise, safety, equipment quality and
drilling performance. In addition to conventional drilling, the Company
specializes in pad and other purpose-built drilling rigs and is active in
directional, horizontal and underbalanced drilling providing specialized
drilling services to a broad range of independent and multinational oil and
gas companies. AKITA currently employs, at full operations, approximately
1,000 people. The Company has ownership in 40 drilling rigs in all depth
ranges.
AKITA DRILLING LTD. | 2018 Annual Report
1
1
AKITA DRILLING LTD. | 2018 Annual Report CONTENTS
1
4
Corporate Profile
Operational Performance
6
8
Share Performance
Letter to the Shareowners
10
34
Management's Discussion and
Analysis
Management's Responsibility
for Financial Reporting
36
Auditor's Report
44
39
Consolidated Financial
Statements
74
Notes to Consolidated Financial
Statements
10 Financial Year Review
77
Corporate Information
2
2
AKITA DRILLING LTD. | 2018 Annual Report
AKITA DRILLING LTD. | 2018 Annual Report FORWARD-LOOKING
STATEMENTS
From time to time AKITA Drilling Ltd. (“AKITA” or the “Company”) makes written and verbal forward-
looking statements. These forward-looking statements include but are not limited to comments
with respect to our objectives and strategies, financial condition, the results of our operations and
our business, our outlook for our industry and our risk management discussion. Forward-looking
statements are typically identified with words such as “believe”, “expect”, “forecast”, “anticipate”,
“intend”, “estimate”, “plan” and “project” and similar expressions of future or conditional events such
as “will”, “may”, “should”, “could” or “would".
By their nature these forward-looking statements involve numerous assumptions, inherent risks
and uncertainties, both general and specific, and the risk that predictions and other forward-looking
statements will not be achieved. We caution readers of this Annual Report not to place undue
reliance on these forward-looking statements as a number of important factors could cause actual
future results to differ materially from the plans, objectives, expectations, estimates and intentions
expressed in such forward-looking statements.
Forward-looking statements may be influenced by the following factors: the level of exploration and
development activity carried on by AKITA’s customers, world oil and North American natural gas prices,
weather, access to capital markets and government policies. We caution that the foregoing list of
important factors is not exhaustive and that when 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.
Additional information about these and other factors can be found under the “Business Risks and Risk
Management” section of the Management’s Discussion and Analysis of this 2018 Annual Report for
AKITA.
Annual Meeting
The annual meeting (the “Meeting”) of the shareholders of AKITA Drilling Ltd. (the “Company”)
will be held in the Grand Lecture Theater, The Metropolitan Conference Centre, 333 – 4th Avenue
S.W., Calgary, Alberta on Tuesday, May 14, 2019 at 10:00 a.m. Shareholders and other interested
parties are encouraged to attend.
3
AKITA DRILLING LTD. | 2018 Annual Report OPERATIONAL
PERFORMANCE
Revenue ($000's)
Net Earnings (Loss) ($000's)
In 2018, revenue was 66% higher than 2017 with the expansion
AKITA’s net loss improved by 60%.
into the United States.
30,000
20,000
10,000
0
-10,000
-20,000
-30,000
-40,000
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
200,000
150,000
100,000
50,000
0
4
AKITA DRILLING LTD. | 2018 Annual ReportOPERATIONAL PERFORMANCE Funds Flow from Continuing Operations ($000's)
Capital Expenditures ($000's)
Annual funds flow improved 117% in 2018 compared to 2017.
AKITA’s 2018 capital expenditure program was down from 2017
as AKITA did not build any new rigs in 2018.
60,000
50,000
40,000
30,000
20,000
10,000
0
120,000
100,000
80,000
60,000
40,000
20,000
0
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
5
AKITA DRILLING LTD. | 2018 Annual ReportOPERATIONAL PERFOMANCE SHARE
PERFORMANCE
The graph below compares the cumulative return over the last ten years on the Class A Non-Voting shares and Class B
Common shares of the Company from December 31, 2018 with the cumulative total return of the TSX/S&P Composite
Stock Index and the TSX Oil & Gas Drilling Sub-Index over the same period, assuming reinvestment of dividends.
Ten Year Total Return on $100 Investment
300
250
200
150
100
50
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Dec 31
2008
Dec 31
2009
Dec 31
2010
Dec 31
2011
Dec 31
2012
Dec 31
2013
Dec 31
2014
Dec 31
2015
Dec 31
2016
Dec 31
2017
Dec 31
2018
AKITA Class A
Non-Voting Shares
AKITA Class B
Common Shares
TSX/S&P
Composite Index
TSX Oil & Gas
Drilling Sub-Index
100
155
160
174
186
287
231
131
171
180
100
167
160
168
185
284
212
126
162
161
100
135
159
145
155
176
194
178
216
235
100
114
126
140
124
152
95
68
90
54
91
96
214
38
6
AKITA DRILLING LTD. | 2018 Annual ReportSHARE PERFORMANCE Share Performance
Weighted average number of Class A and
Class B shares
17,988,552
17,969,415
17,948,502
17,945,661
24,551,542
Total number of Class A and Class B shares
17,988,552
17,969,415
17,948,502
17,945,661
39,608,191
2014
2015
2016
2017
2018
Market prices for Class A Non-Voting shares
High
$17.86
$12.56
Low
$11.15
Close
$12.40
$6.10
$6.79
$9.20
$5.88
$8.45
$9.88
$6.52
$7.36
$8.38
$3.41
$4.07
Volume
2,093,823
1,603,746
930,748
1,324,111
2,192,522
Market prices for Class B Common shares
High
Low
$18.30
$13.30
$11.00
$11.75
Close
$12.00
$6.87
$6.87
$7.11
$8.53
$9.95
$6.94
$7.61
$8.16
$3.77
$4.60
Volume
21,019
32,326
18,674
41,479
19,313
Dividend History
AKITA began paying dividends to shareholders in 1996. It is the current intention of the Board of Directors to continue to pay quarterly
dividends in the future. Nevertheless, the payment of any dividend is at the discretion of the Board of Directors and depends upon the
financial condition of the Company and other factors.
Dividends per share ($)
2014
0.34
2015
0.34
2016
0.34
2017
0.34
2018
0.34
7
AKITA DRILLING LTD. | 2018 Annual ReportSHARE PERFOMANCE LETTER TO THE
SHAREOWNERS
In the US the Company is
looking to 2019 with optimism.
Demand for AKITA's US rigs
AKITA Drilling Ltd.’s net loss for the year ended December 31,
2018 was $15,939,000 (net loss of $0.65 per share (basic
and diluted)) on revenue of $118,361,000 compared to a
net loss of $39,177,000 or $2.18 loss per share (basic and
diluted) on revenue of $71,198,000 in 2017. Included in the
2017 net loss is an asset decommissioning and impairment
expense of $29,123,000 (after tax effect of $15,320,000
or $0.85 per share). Funds flow from operations for the
remains strong.
current year was $14,306,000 compared to $6,607,000 in
2017, while net cash from operating activities for 2018 was
($8,494,000) compared to $5,074,000 in 2017.
On September 11, 2018, AKITA closed on its transformational
acquisition of Xtreme Drilling Corp. (“Xtreme”), a TSX listed
United States (“US”) based contract drilling company with a
fleet of 13 high specification AC triple drilling rigs, operating
throughout major resource plays of the US, plus spare
equipment and real estate. With this acquisition, and the
movement of three rigs from AKITA’s Canadian fleet to the US
in 2018 in addition to the rig deployed in Q4 of 2017, AKITA’s
fleet of rigs in the US has increased to 17 rigs. The Company
is now well-balanced with 23 rigs in Canada and 17 in the US.
In Canada, the Company’s utilization for the year decreased
to 33% in 2018 from 36% in 2017. Sentiment in the Canadian
energy industry shifted from optimism in the first quarter of
2018 to pessimism in the fourth quarter of 2018. Regulated
production cuts, pipeline access and political and regulatory
uncertainty are all weighing heavily on the Canadian energy
industry, which in turn is affecting drilling activity. There is
still an oversupply of rigs in Canada and day rates remain
low, despite improving to $31,354 per operating day in 2018
from $26,704 in 2017. Without a significant shift in demand
for rigs or a reduction in the overall Canadian rig fleet, AKITA
8
AKITA DRILLING LTD. | 2018 Annual ReportLETTER TO THE SHAREOWNERS does not anticipate any significant price increases or activity
We would like to express a special thanks to AKITA’s employees
increases in Canada in the near future.
for their adaptability, hard work and commitment. We would
also like to express our appreciation to our partners, customers
On November 22, 2018, the Canadian Association of Oilwell
and suppliers who worked closely with us during 2018 to come
Drilling Contractors (“CAODC”) released its 2019 industry
up with innovative solutions for working through challenging
drilling forecast, estimating 33% average rig utilization, up
times in Canada and in establishing the Company’s presence
from the 29% actual average rig utilization in 2018, and
in the US. Finally, we wish to acknowledge the contribution of
estimating 6,962 wells in 2019, up from 6,911 in 2018. The
our directors, whose thoughtful counsel and guidance have
2019 forecast was based upon commodity price assumptions
helped to create, maintain and grow a strong and successful
of US $58.75 per barrel for crude oil and CAD $2.00 per mcf for
Company, and the AKITA Shareowners for their continued
natural gas. Based on the CAODC forecast it would appear that
support and confidence in the Company.
2019 will be very similar to 2018. Without improvements to the
existing takeaway capacity in Canada, growth in the Canadian
On behalf of the Board of Directors,
market may remain challenged. The Company’s focus in 2019
will be on reducing costs in its Canadian operations.
AKITA’s activity in the US, on a weighted average basis,
calculated on the days that the rigs were owned by AKITA and
physically in the US was 61% for 2018 and 79% for the three
Linda A. Southern-Heathcott
Karl A. Ruud
months ended December 31, 2018. In the US the Company
Chairman of the Board
President and Chief
Executive Officer
March 5, 2019
is looking to 2019 with optimism. Demand for AKITA’s US rigs
remains strong as AKITA’s culture of “best-in-class” operations
permeates through its US division. At December 31, 2018,
15 of the Company’s 17 US rigs were operating and strong
utilization is expected to continue through 2019. Together
with ongoing evaluation of opportunities to move additional
Canadian rigs to the US, synergy realization related to the
Xtreme acquisition and a modest capital program will be the
focus of AKITA in the US.
Despite 2018 proving to be another challenging year, AKITA’s
Board of Directors maintained a quarterly dividend to
shareowners in the amount of $.085 cents per share.
9
AKITA DRILLING LTD. | 2018 Annual ReportLETTER TO THE SHAREOWNERS
MANAGEMENT’S
DISCUSSION & ANALYSIS
The following management’s discussion and analysis (“MD&A”) of the financial condition and results of operations is intended to
help the reader understand the current and prospective financial position and operating results of AKITA Drilling Ltd. (“AKITA” or the
“Company”). The MD&A discusses the operating and financial results for the year ended December 31, 2018, is dated March 5,
2019, and takes into consideration information available up to that date. The MD&A is based on the audited annual consolidated
financial statements of AKITA for the year ended December 31, 2018. The MD&A should be read in conjunction with the audited
annual consolidated financial statements and related notes for the year ended December 31, 2018, prepared in accordance with
International Financial Reporting Standards (IFRS).
Additional information is available on AKITA’s website (www.AKITA-Drilling.com) and all previous public filings, including the most
recently filed Annual Report and Annual Information Form, are available through SEDAR (www.sedar.com).
All amounts are denominated in Canadian dollars (CAD$) unless otherwise identified. All amounts are stated in thousands unless
otherwise identified.
Financial Highlights
($thousands except per share amounts)
Revenue
Operating expenses
Operating margin (1)
Margin % (1)
Adjusted EBIDTA (1)
Per share
Adjusted funds flow from operations (1)
Per share
Net loss
Per share
Capital expenditures
Dividend declared
Weighted average shares outstanding
Total Assets
(1) See commentary in “Basis of Analysis in this MD&A and Non-GAAP Items”.
10
2018
118,361
86,575
31,786
27%
16,447
0.67
14,306
0.58
15,939
0.65
17,546
9,784
24,552
2017
Change
% Change
71,198
62,156
9,042
13%
3,187
0.18
6,607
0.37
39,177
2.18
20,569
6,100
17,946
47,163
24,419
22,744
14%
13,260
0.49
7,699
0.21
(23,238)
(1.53)
(3,023)
3,684
6,606
66%
39%
252%
108%
416%
272%
117%
57%
(59%)
(70%)
(15%)
60%
37%
95%
403,641
207,497
196,144
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Operational Highlights
Operating days (1)
Canada
United States
Revenue per operating day (1)
Canada (2)
United States
Operating and maintenance per operating day (1)
Canada (2)
United States
Utilization (1)
Canada
United States (3)
2018
2017
Change
% Change
2,800
1,783
3,659
-
(859)
1,783
31,354
26,704
4,650
29,932
-
29,932
23,160
21,329
22,226
934
-
21,329
33%
61%
36%
-
(3%)
61%
(23%)
n/a
17%
n/a
4%
n/a
(8%)
n/a
(1) See commentary in “Basis of Analysis in this MD&A and Non-GAAP Items”.
(2) Includes AKITA's share of Joint Venture revenue and expenses. See commentary in “Basis of Analysis in this MD&A and Non-GAAP” items.
(3) Utilization in the US is a weighted average for the year based on the number of days each rig was physically in the US and owned by the Company.
Introduction
AKITA is a premier Canadian oil and gas drilling contractor with
operations in Canada and the United States (“US”) with a fleet
of 40 rigs. In 2018, AKITA began providing drilling services
through two geographical segments: Canada and the US.
With a fleet of 23 rigs, AKITA’s Canadian division conducts
operations in Alberta, British Columbia, Saskatchewan, and
from time to time, in the Yukon and the Northwest Territories,
primarily with its wholly-owned rigs and through its active joint
ventures, the newly established Akita Mistiyapew Aski Drilling
Ltd. (owned 50% by AKITA), Akita Equtak Drilling Ltd. (owned
50% by AKITA), and Akita Wood Buffalo Drilling Ltd. (owned 50%
by AKITA), each of which has defined geographical boundaries.
With a fleet of 17 rigs, AKITA’s US division conducts operations
in North Dakota, Colorado, Utah, Wyoming, Texas, New Mexico,
Oklahoma and Ohio.
With a singular focus on the provision of drilling services,
rigorous crew training, rig maintenance and safety processes
and adherence to a leading quality assurance – quality control
program, AKITA strives to ensure it is well positioned to meet the
most demanding requirements of global operators who offer
long-lasting resource based drilling programs. The Company
has utilized this strategy to enhance its development of pad
drilling rigs designed for both heavy oil and unconventional
natural gas formations.
11
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS General Overview
The financial results for the Company for 2018, when compared
to 2017, improved in almost all metrics. Revenue increased
to $118,361,000 from $71,198,000, net loss decreased to
$15,939,000 from $39,177,000 and adjusted funds flow from
operations(1) increased to $14,306,000 from $6,607,000.
During 2018, AKITA focused on geographical diversification to
the US as the Canadian oil and gas market struggled to sustain
the slow recovery that began in 2017.
AKITA began its geographical diversification in the first quarter
of 2018 with one drilling rig working in the Permian Basin in
New Mexico and ended 2018 with 15 active rigs out of a total
of 17 US-based drilling rigs. This growth was primarily the
result of AKITA’s acquisition of Xtreme Drilling Corp. (“Xtreme”),
bolstered organically by the move of three additional Canadian
rigs to the US over the course of 2018.
Industry Overview
WTI Prices ($USD) (1)
2018
2017
2016
On September 11, 2018, AKITA closed its previously announced
acquisition of Xtreme. The acquisition of Xtreme added 13
high-specification AC triple drilling rigs to the Company’s US rig
fleet as well as facilities, a skilled workforce and infrastructure
throughout the US. The acquisition of Xtreme was funded with
$122 million in Class A Non-Voting shares and cash of $45
million.
Conditions in the US continued to improve through 2018 until
the fourth quarter of 2018 when prices for crude oil declined
significantly which had a leveling effect on growth. In Canada,
the growth was more subdued than in the US and the decrease
in oil prices in the fourth quarter has had a more significant
impact with many operators pausing or canceling capital
spending. In 2018 three customers each provided more than
10% of AKITA’s revenue for the year (2017 – two customers).
1 See commentary in “Basis of Analysis in this MD&A and Non-GAAP Items”.
Alberta Natural Gas Price ($CAD) (2)
75.00
70.00
65.00
60.00
55.00
50.00
45.00
40.00
35.00
30.00
JAN
FEB MAR
APR MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
3.5
3
2.5
2
1.5
1
0.5
0
JAN
FEB MAR
APR MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
Industry Utilization Canada (3)
Active Rigs US (4)
45%
40%
35%
30%
25%
20%
15%
10%
5%
1,200
1,100
1,000
900
800
700
600
500
400
JAN
FEB MAR
APR MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
JAN
FEB MAR
APR MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
1) Source: U.S. Energy Information Administration
2) Source: Natural Gas Exchange
3) Source: Canadian Association of Oilwell Drilling Contractors (CAODC)
4) Source: Baker Hughes North American Rotary Rig Count
12
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Oil and gas contract drilling activity is cyclical and is affected
by numerous factors, most importantly world crude oil prices
and North American natural gas prices. Overall demand for
drilling services improved in 2018 compared to 2017 in the
US, and remained flat in Canada.
Driving the increase in activity in the US was the steady
increase in oil prices through 2018, with the average West
Texas Intermediate (“WTI”) price increasing 26% in 2018
compared to 2017.
Results by Segment
Canada
$Thousands except per day amounts
Revenue (1)
Operating and maintenance (1)
Operating income
Margin %
Operating days
Revenue per operating day (1) (2)
Operating and maintenance per operating day (1) (2)
Utilization
Rig count
2018
2017
Change
% Change
87,790
64,847
22,943
26%
2,800
31,354
23,160
33%
23
97,711
81,325
16,386
17%
3,659
26,704
22,226
36%
27
(9,921)
(16,478)
6,557
9%
(859)
4,650
934
(3%)
(4)
(10%)
(20%)
40%
53%
(23%)
17%
4%
(8%)
(15%)
(1) Includes AKITA's share of Joint Venture revenue and expenses. See commentary in “Basis of Analysis in this MD&A and Non-GAAP Items”.
(2) See commentary in "Basis of Analysis in this MD&A and Non-GAPP Items".
Utilization rates are a key statistic for the drilling industry since
they directly affect total revenue and influence pricing. During
2018, AKITA achieved 2,800 operating days in Canada, which
corresponds to an annual utilization rate of 33%, compared
to 2017 utilization of 36% (3,659 days), and a 2018 industry
average of 29%. Historically, AKITA’s utilization in Canada has
been above industry standard due to the higher than average
number of pad drilling rigs in AKITA’s fleet. Pad drilling rigs
typically have higher utilization than conventional drilling rigs
as pad drilling is a more efficient way to drill multiple wells
without needing trucks to move.
Activity in Canada, for AKITA and the industry, decreased
in 2018 from 2017 despite higher average WTI prices.
Infrastructure constraints and uncertainty over the future
of the Canadian market affected the capital spending of
Canadian oil and gas companies.
Canadian revenue of $87,790,000 in 2018 was 10% lower
than 2017 revenue of $97,711,000, due to decreased activity
in 2018. Through a greater percentage of higher specification
rigs working, revenue per day increased in 2018 to $31,354
per day from $26,704 per day in 2017, a 17% increase. This
increase in revenue per day resulted in a 40% increase in
operating income from the Canadian operating segment.
Included in the Canadian operating results is AKITA’s share of
revenue and costs from its joint ventures as AKITA provides the
same drilling services through its joint venture rigs as it does
its wholly-owned rigs.
Operating and maintenance costs are tied to activity levels
and decreased to $64,847,000 in 2018 from $81,325,000
in 2017 including AKITA’s share of costs from its joint venture
rigs. On a per day basis, 2018 remained consistent with the
prior year, increasing only 4% in 2018 over 2017.
AKITA’s Canadian segment provided drilling services to 29
different customers in 2018 (2017 - 35 different customers),
including two customers that each provided more than 10% of
AKITA’s Canadian revenue for the year (2017 – two customers).
13
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS United States
$Thousands (CAD) except per day amounts
Revenue
Operating and maintenance
Operating income
Margin %
Operating days
Revenue per operating day (1)
Operating and maintenance per operating day (1)
Utilization (2)
Rig count
2018
53,368
38,029
15,339
29%
1,783
29,932
21,329
61%
17
(1) See commentary in “Basis of Analysis in this MD&A and Non-GAAP Items”.
(2) Utilization in the US is a weighted average for the year based on the number of days each rig was physically in the US and owned by the Company.
AKITA moved one drilling rig from Canada to the Permian
Basin in December of 2017, one in the first quarter of 2018
and two more in the third quarter of 2018. The Company
added an additional 13 rigs through its acquisition of Xtreme
in September of 2018, to end the year with a fleet of 17 rigs
in the US.
Revenue in the US was $53,368,000 for 2018 (2017 – n/a)
equal to 45% of the Company’s total revenue. This revenue
includes the full year for AKITA’s US based rigs prior to the
acquisition of Xtreme, and revenue from September 12 to
December 31, 2018 generated by the acquired Xtreme assets.
Total operating income, which is operating revenue less direct
Seasonality
The Canadian drilling industry is seasonal with activity typically
building in the fall as the ground freezes and peaking during
the winter months. Northern transportation routes become
available once areas with muskeg conditions freeze to allow
the movement of rigs and other heavy equipment. The peak
Canadian drilling season typically ends with "spring break-up"
at which time drilling operations are curtailed due to seasonal
road bans (temporary prohibitions on road use) and restricted
access to agricultural land as frozen ground melts. The summer
drilling season begins when road bans are lifted. Some areas
are subject to environmental orders for specific well leases
which can prevent drilling activity during certain periods when
authorities prioritize wildlife or habitat protections. Such
restrictions may affect activity levels and operating results.
operating and maintenance costs, was $15,339,000 for the
year.
Since the acquisition of Xtreme in September of 2018 the
Company has focused on integrating AKITA and Xtreme to
maximize the efficiencies available to the larger more diverse
Company.
In the US, AKITA provided drilling services to 16 different
customers in 2018 (2017 – n/a), including four customers
that each provided more than 10% of AKITA’s US revenue for
the year (2017 – n/a).
While activity in the northern part of the US is subject to a
degree of seasonality, North Dakota’s Williston Basin, where
AKITA operates, is less affected by spring break-up than are
AKITA’s operations in northern Canada. Other areas in the
US where AKITA conducts drilling operations are infrequently
subject to weather constraints, especially in the southern
states, but may experience operational restrictions for other
reasons.
While seasonality can affect all rig classes, pad drilling rigs
are generally less susceptible to seasonality than conventional
rigs.
14
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Depreciation and Amortization Expense
$Millions
Depreciation and amortization expense
2018
26.6
2017
27.1
Change
% Change
(0.5)
(2%)
The decrease in depreciation and amortization expense to
of time plays a more significant role than operating days in
$26,614,000 during 2018 from $27,126,000 during 2017
determining a drilling rig’s life. Accordingly, the straight-line
was attributable to the asset decommissioning and asset
depreciation method matches the new lifecycle more accurately
impairment expense of $29,123,000 that was recorded in 2017.
than the unit-of-production depreciation method. The estimated
This expense decreased the Company’s depreciable asset base.
effect of the change in depreciation method on the Company’s
Drilling rig depreciation accounted for 97% of total depreciation
financial statements for 2018 is not material.
and amortization expense in 2018 (2017 – 96%).
While AKITA conducts some of its drilling operations via joint
On January 1, 2018, AKITA changed its depreciation method
ventures, the drilling rigs used to conduct those activities are
to a straight-line calculation from a unit-of-production basis on
owned jointly by AKITA and its joint venture partners, and not by
drilling rig assets. The rationale for this change was to have rig
the joint ventures themselves. As the joint ventures do not hold
depreciation more closely match the new lifecycle of rigs. Drilling
any property, plant, or equipment assets directly, the Company’s
technology is a critical component of modern drilling rigs and
depreciation expense includes depreciation on assets involved
drilling rigs’ useful lives are reduced as new technologies are
in both wholly-owned and joint venture activities.
utilized for modern drilling programs. As a result, the passage
Selling and Administrative Expenses
$Millions
Selling and administrative expenses
2018
22.6
2017
13.7
Change
% Change
8.9
65%
Selling and administrative expenses increased to $22,611,000
in 2018 from $13,659,000 in 2017. The increase in 2018 is
related to transaction costs of $2.4 million for the acquisition
of Xtreme and the addition of the US-based selling and
administrative costs to the Company’s total cost.
Selling and administrative expenses equated to 19% of revenue
in 2018, the same as in 2017. The single largest component of
selling and administrative expenses was salaries and benefits
which accounted for 33% of these expenses in 2018 (2017 –
51%).
Asset Decommissioning and Impairment
$Millions
Asset impairment loss
Asset decommissioning loss
Asset decommissioning and impairment loss
2018
2017
Change
% Change
-
-
-
16.0
13.1
29.1
(16.0)
(13.1)
(29.1)
(100%)
(100%)
(100%)
15
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS International Accounting Standard 36, “Impairment of Assets”,
requires an entity to consider both internal and external
factors when assessing whether there are indications of asset
impairment at each reporting period. At December 31, 2018,
there were no internal indicators of impairment, however
there were external indicators of impairment. The uncertainty
around oil prices impacts the earnings potential of the
Company’s cash generating units (“CGUs”) and at December
31, 2018, the book value of the Company’s net assets was
greater than its market capitalization; therefore, the Company
tested its CGUs for impairment.
Upon completion of its asset impairment testing, the Company
concluded that there was no asset impairment required at
December 31, 2018 (2017 - $16,000,000). The Company
also concluded that there were no reversals of previous asset
impairments required at December 31, 2018.
The accuracy of asset impairment testing is affected by
estimates and judgments in respect of the inputs and
parameters that are used to determine recoverable amounts.
In performing its asset impairment test at December 31,
2018, management determined value-in-use for each of its
CGUs using estimated discounted cash flows, which included
estimates of future cash flows, expectations regarding cash
flow variability, a determination of the discount rate and
consideration of the recoverable amount and salvage value of
each CGU. At December 31, 2018, management determined
recoverable amounts for its CGUs using a combination of value-
in-use and fair value less costs to dispose. IFRS considers this
approach to constitute a Level 3 hierarchy in its determination
of value.
The assumptions used in the value-in-use impairment tests
were based on the Company’s Board approved 2019 budget
and business plan covering a three year period and applied
an average growth rate ranging from 2% to 9% over a 10 year
period depending on the CGU being analyzed. In forecasting
its projected cash flows the Company assumed that current
market conditions will not persist into the future. The Company
assumed a pre-tax discount rate of 13%, in order to calculate
the present value of projected cash flows. Determination of
this discount rate included analysis of the cost of debt and
equity for the Company and the Canadian drilling industry
incorporating a risk premium based on current market
conditions. This valuation has a fair value hierarchy of Level 3.
Asset impairment testing is subject to numerous assumptions,
inherent risks and uncertainties, both general and specific,
and the risk that the predictions will not be realized. As a
result, the following sensitivity analysis has been performed to
recognize that additional outcomes are possible:
• Reduced future revenue assumptions by 5%;
•
•
Increased inflation for cash outflows to 5%; and
Increased the pre-tax discount rate from 13% 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 from $9 million to $32 million. As the base
case test represented management’s best estimates, these
sensitivity changes were not included in the recoverable
amounts used in the 2018 asset impairment testing or the
2017 asset impairment loss reported.
16
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Equity Income from Joint Ventures
Equity income from joint ventures is comprised of the following:
$Millions
Proportionate share of revenue from joint ventures
Proportionate share of operating & maintenance expenses from joint
ventures
Proportionate share of selling and administrative expenses from joint
ventures
Equity income from joint ventures
2018
22.8
16.3
0.3
6.2
2017
Change
% Change
26.5
19.2
0.4
6.9
(3.7)
(14%)
(2.9)
(15%)
(0.1)
(25%)
(0.7)
(10%)
The Company provides the same drilling services and utilizes
the same management, financial and reporting controls
for its joint venture activities as it does for its wholly-owned
operations. The analyses of these activities are incorporated
throughout the relevant sections of this MD&A relating to
increased activity, revenue per day as well as operating
expenses.
Other Income (Loss)
$Millions
Interest income
Interest expense
Gain on sale of assets
Net other gains
Total other income (loss)
2018
2017
Change
% Change
0.1
(2.1)
0.6
0.4
(1.0)
0.4
(0.2)
0.2
0.3
0.7
(0.3)
(1.9)
0.4
0.1
(75%)
(950%)
200%
33%
(1.7)
(243%)
Interest income decreased to $84,000 in 2018 from $439,000
in 2017 due primarily to less interest accrued on a long-term
receivable that was paid in early 2018.
During 2018, the Company recorded interest expense of
$2,121,000 (2017 – $168,000). The increase in interest
is due to the use of the Company's credit facility to fund the
acquisition of Xtreme, as well as the debt assumed as part of
the transaction.
During 2018, the Company disposed of non-core assets
resulting in a gain of $567,000 (2017 – $194,000).
In 2018, amounts reported as “Net Other Gains” of $453,000
included $227,000 in foreign exchange.
17
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS
Income Tax Expense (Recovery)
$Millions, except income tax rate (%)
Current tax expense (recovery)
Deferred tax expense (recovery)
Total income tax expense (recovery)
Effective income tax rate
2018
0.1
3.5
3.6
2017
(3.0)
(11.1)
(14.1)
Change
% Change
3.1
14.6
17.7
103%
132%
126%
27.0%
26.8%
AKITA had an income tax expense of $3,651,000 in 2018
compared to a tax recovery of $14,053,000 in 2017. The
current tax expense in 2018 relates to the true-up of the
2017 tax return to the provision. Deferred tax increased to an
expense of $3,508,000 in 2018 compared to a recovery of
$11,063,000 in 2017. This change is a result of intercompany
asset sales between jurisdictions and unrecognized deferred
tax assets in 2018 compared to the asset impairment and
decommissioning expense recorded in 2017 that reduced the
Company’s future tax liability.
Net Loss, Adjusted Funds Flow and Net Cash From (Used In)
Operating Activities
$Millions
Net loss
Net cash from (used in) operating activities
Adjusted funds flow from operations (1)
2018
(15.9)
(8.5)
14.3
2017
(39.2)
5.0
6.6
Change
% Change
23.3
(13.5)
7.7
59%
(270%)
117%
Net cash from (used in) operating activities decreased in 2018
to negative $8,494,000 in 2018 from positive $5,074,000 in
2017 due primarily to changes in non-cash working capital.
increased
funds flow
from operations(1)
Adjusted
to
$14,306,000 in 2018 from $6,607,000 in 2017 due to
an increase in operating days and revenue per day for the
company as a whole. Increased US activity more than offset
the decline in the Canadian market, resulting in an overall
increase for the Company.
the Company recorded a net
loss of
During 2018,
$15,939,000 (net loss of $0.65 per Class A Non-Voting and
Class B Common share (basic and diluted) compared to a net
loss of $39,177,000 (net loss of $2.18 per Class A Non-Voting
and Class B Common share (basic and diluted)) in 2017. The
material difference in net income from 2017 to 2018 is largely
attributable to the asset decommissioning and impairment
expense in 2017 of $29,123,000, and the deferred tax
recovery of $11,063,000 in 2017.
(1) See commentary in “Basis of Analysis in this MD&A and Non-GAAP Items”.
18
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS
Summary of Quarterly Results
The following table shows key selected quarterly financial information for the Company:
$Thousands, except per share (Unaudited)
Mar. 31
Jun. 30
Sep. 30
Dec. 31
Annual
Totals
Three Months Ended
2018
Revenue
Net loss
27,089
17,293
22,465
51,514
118,361
(1,912)
(2,959)
(5,459)
(5,609)
(15,939)
Loss per share (basic and diluted) ($)
(0.11)
(0.16)
Adjusted funds flow from (used in) operations (1)
Cash flow from (used in) operations
4,519
2,819
1,638
9,860
(0.24)
(638)
(0.14)
(0.65)
8,787
14,306
(7,428)
(13,745)
(8,494)
2017
Revenue
Net loss
19,193
17,986
14,908
19,111
71,198
(4,975)
(4,491)
(3,811)
(25,900)
(39,177)
Loss per share (basic and diluted) ($)
(0.28)
(0.25)
(0.21)
(1.44)
Adjusted funds flow from operations (1)
Cash flow from (used in) operations
2016
Revenue
Net income (loss)
1,824
3,399
41,991
18,173
3,254
3,407
1,472
969
57
(2,701)
3,646
6,616
8,808
61,061
(4,062)
(4,668)
(4,114)
Earnings (loss) per share (basic and diluted) ($)
1.01
(0.23)
Adjusted funds flow from operations (1)
Cash flow from (used in) operations
25,368
12,843
2,688
2,219
(0.26)
2,197
(0.23)
4,247
(2,158)
(1,012)
11,892
(2.18)
6,607
5,074
5,329
0.30
34,500
(1) See commentary in “Basis of Analysis in this MD&A and Non-GAAP Items”.
Key trends over the past 12 quarters, after giving consideration
to the seasonal nature of AKITA’s operations, are as follows:
• Strengthening activity has had a positive impact on day
rates in both the US and Canada; however, demand for
drilling services has not recovered sufficiently to allow for
• Activity levels, which are directly correlated to revenue
significant day rate increases; and
and net income, reached a low point of the current cycle
in the second quarter of 2016 and were on the rise until
• Net cash from operating activities is not directly correlated
the fourth quarter of 2018, and since then they have
to market strength on a quarterly basis. Changes in the
stalled in the US and declined in Canada;
balance of this account are tied to the timing of changes
in various non-cash working capital accounts.
19
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Fourth Quarter Analysis Operational Highlights
For the three months ended December 31,
2018
2017
Change
% Change
Operating days
Canada
United States
Revenue per operating day (1)
Canada (2)
United States
Operating and maintenance per operating day (1)
Canada (2)
United States
Utilization
Canada
United States
637
957
1,233
-
(320)
1,233
30,413
27,213
3,200
30,359
-
30,359
23,086
19,929
24,257
(1,171)
-
19,929
30%
79%
37%
-
(7%)
79%
(33%)
n/a
12%
n/a
(5%)
n/a
(19%)
n/a
(1) See commentary in “Basis of Analysis in this MD&A and Non-GAAP Items”.
(2) Includes AKITA's share of Joint Venture revenue and expenses. See commentary in "Basis of Analysis in this MD&A and Non-GAAP Items”.
During the fourth quarter of 2018, the Company achieved
637 operating days in Canada compared to 957 operating
days during the corresponding period in 2017. Falling crude oil
prices have significantly affected demand for drilling services
in the Canadian market along with mandated production cuts
imposed by the Alberta government. This decrease in activity
in Canada was offset by a busy fourth quarter for the Company
in the US. The Company’s 17 rigs in the US generated 1,233
days for a strong utilization of 79%.
AKITA incurred a net loss of $5,609,000 (net loss of $0.14
per Class A Non-Voting and Class B Common share (basic and
diluted)) for the fourth quarter of 2018 compared to a net loss
of $25,900,000 or $1.44 loss per share (basic and diluted)
in the fourth quarter of 2017. The loss in 2017 is primarily
attributable to the asset impairment and decommissioning
expense of $29,123,000 recorded in the quarter. Adjusted
funds flow from operations increased to $8,787,000 in the
fourth quarter of 2018 from $57,000 in the corresponding
quarter in 2017 due to the addition of the US operating
segment in 2018.
Three Year Annual Financial Summary
The following table highlights AKITA’s annual financial results for the last three years:
Three Year Summary
$Thousands, except per share (Unaudited)
Revenue
Net income (loss)
Earnings (loss) per share (basic and diluted)
Dividends per class A Non-Voting and Class B Common share
Adjusted funds flow from operations(1)
Net cash from (used in) operating activities
Year-end working capital
Year-end shareholders' equity
Year-end total assets
(1) See commentary in “Basis of Analysis in this MD&A and Non-GAAP Items”.
20
2018
2017
118,361
(15,939)
(0.65)
0.34
14,306
(8,494)
11,166
271,728
403,641
71,198
(39,177)
(2.18)
0.34
6,607
5,074
15,528
174,455
207,497
2016
61,061
5,329
0.30
0.34
34,500
11,892
34,907
219,646
257,907
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Liquidity and Capital Resources
At December 31, 2018, AKITA had $11,166,000 in working
capital (working capital ratio of 1.31:1) including $1,503,000
in cash, compared to a working capital of $15,528,000
(working capital ratio of 2.02:1) and $560,000 cash for the
previous year. In 2018, AKITA used $8,494,000 in cash for
operating activities. Positive cash was generated from joint
venture distributions ($5,808,000), from reductions in cash
balances restricted for loan guarantees ($1,525,000) and
from proceeds on sales of assets ($640,000). During the same
period, cash was used for capital expenditures ($17,546,000)
and payment of dividends ($7,942,000). Accounts payable at
year end included $19,020,000 in accrued expenses, three
quarters of which related to routine operations while the other
quarter related to one-time items.
The Company chooses to maintain a conservative Statement
of Financial Position due to the cyclical nature of the industry.
In conjunction with the closing of the Xtreme acquisition,
the Company entered into a new operating loan facility with
its principal banker totalling $125,000,000 that is available
until 2022. The operating loan facility was syndicated in the
fourth quarter of 2018 with the Company’s principal banker
as the agent on the syndication and three other national
banks joining the group. The interest rate on the operating
loan facility ranges from 50 to 200 basis points over prime
interest rates depending on the funded debt to EBITDA(1) ratio.
Security for this facility includes all present and after-acquired
property of the Company and a first floating charge over all
other present and after-acquired property of the Company
including real property.
The credit facility includes two financial covenants:
1. Funded Debt(1) to EBITDA(1) Ratio: the Company shall ensure
that:
i. for the Fiscal Quarter ending December 31, 2018, the
Funded Debt(1) to EBITDA(1) Ratio shall not be more than
4.00:1.00;
ii. for the Fiscal Quarter ending March 31, 2019, the
Funded Debt(1) to EBITDA(1) Ratio shall not be more than
3.50:1.00; and
iii. for the Fiscal Quarter ending June 30, 2019, and each
Fiscal Quarter ending thereafter, the Funded Debt(1) to
EBITDA(1) Ratio shall not be more than 3.00:1.00.
The Funded Debt(1) to EBITDA(1) Ratio shall be calculated
quarterly on the last day of each Fiscal Quarter on a rolling
four quarter basis; and
2. EBITDA(1) to Interest Expense(1) Ratio: the Company shall not
permit the EBITDA(1) to Interest Expense(1) Ratio, calculated
quarterly on the last day of each Fiscal Quarter on a rolling
four quarter basis, to fall below 3.00:1.00.
The facility also includes a borrowing base calculation as
follows:
The sum of:
i. 75% of Eligible Accounts Receivable(1); plus
ii. 40% of the net book value of all Eligible Fixed Assets(1);
less
iii. Priority Payables(1) of the Loan Parties.
(1) Readers should be aware that each of the EBITDA, fundable debt, interest
expense, eligible accounts receivable, priority payables and eligible fixed
assets have specifically set out definitions in the loan facility agreement
and are not necessarily defined by or consistent with either GAAP or
determinations by other users for other purposes.
The new operating loan facility has been classified as
long-term debt as the credit agreement has no required
repayment obligations prior to the end of the loan facility
term. The Company is in compliance with its operating loan
facility covenants. At December 31, 2018, the Company had
$68,822,000 outstanding on its operating loan facility (2017
- nil).
In addition to the Company’s operating loan facility, the
Company also had $14,117,000 in debt outstanding at
December 31, 2018 that was assumed upon the acquisition
of Xtreme.
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 further
growth opportunities.
21
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS
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.
The Company did not have an outstanding normal course
issuer bid during 2018 or 2017.
The following table provides a summary of contractual
obligations for the Company:
Contractual Obligations
$Thousands
Operating leases
Purchase obligations
Capital expenditure commitments
Long-term pension obligations
Total contractual obligations
Total
Less than 1 year
1-5 years
4,081
650
3,302
4,712
12,745
1,859
325
3,302
Note
2,222
325
Nil
Note
Note: Timing of pension payments is dependent upon retirement dates for respective employees. The cost for year one ranges from $90,000 to $242,000, for year two and
beyond, from $90,000 to $315,000.
Property, Plant and Equipment
totalled $17,546,000
Capital expenditures
in 2018
($20,569,000 in 2017). Capital spending in 2018 was
as follows; $7,400,000 for certifications and overhauls,
$2,002,000 for drill pipe and drill collars and $8,144,000 for
drilling rig equipment and upgrades. The costs incurred during
2017 for capital were $7,500,000 for the construction of a
new pad double drilling rig, $7,574,000 for certifications and
overhauls, $2,671,000 for drill pipe and drill collars and
$2,551,000 for drilling rig equipment and upgrades and the
balance of capital expenditures was for other equipment.
During 2018, the Company sold ancillary assets for
$640,000 (2017 - $221,000) that resulted in a gain of
$567,000 (2017 – $194,000).
Financial Instruments
The Company’s financial assets and liabilities include cash,
accounts receivable, restricted cash, accounts payable,
accrued liabilities and financial instruments. Fair values
approximate carrying values unless otherwise stated.
AKITA’s expansion into the US increases the Company’s
exposure to risks inherent in foreign operations. The Company
is exposed to risks caused by fluctuations in currency exchange
rates. US contracts are denominated in United States dollars
and, accordingly, a material decrease in the value of the US
dollar could negatively impact revenues. The Company does
not currently use hedges to offset this risk.
Despite the effect of weak commodity prices for crude
oil and natural gas on AKITA’s customers, management
continues to consider the credit risk associated with
accounts receivable to be generally low as substantially
all counterparties are well-established and financed
oil and gas companies. AKITA has conservative credit-
granting procedures and in certain situations requires
customers to make advance payment prior to provision of
services or takes other measures to mitigate credit risk.
Provisions have been estimated by management and are
included in the accounts to recognize potential bad debts.
22
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Off Balance Sheet Transactions
AKITA has not entered into any arrangements that involve off
balance sheet transactions.
Related Party Transactions
AKITA is affiliated with the ATCO Group of companies and with
Spruce Meadows, an equestrian show jumping facility, through
its majority shareholder. All related party transactions in
2018 and 2017 were made in the normal course of business
with regular payment terms and have been recorded at the
paid amounts. Operating purchases totaled $410,000 and
included sponsorship and advertising of $353,000 and other
miscellaneous purchases of $57,000. At December 31, 2018,
the outstanding commitment of the Company’s multi-year
sponsorship and advertising contract with Spruce Meadows
was $650,000. Costs incurred related to this contract during
2018 were $325,000 (2017 - $325,000). Costs and related
services are consistent with parties dealing at arm’s length.
$Thousands
Revenue(1)
Operating and maintenance expenses
Selling and administrative expenses
Year-end accounts payable
The Company incurred legal fees of $368,000 (2017 -
$107,000) during the year for services related to various legal
matters with a law firm of which a director of the Company
was a partner at December 31, 2018. At December 31, 2018,
$5,000 (December 31, 2017 - $22,000) of this amount was
included in accounts payable.
The Company is related to its joint ventures. The accompanying
table summarizes transactions and annual balances with its
joint ventures. These transactions were made in the normal
course of business with regular payment terms and have been
recorded at the paid amounts.
2018
-
3,288
448
1,299
2017
6
4,736
531
1,044
(1) Joint venture revenue from related parties includes only intercompany asset movements and does not relate to drilling operations.
Class A and Class B Share Dividends
During 2018, AKITA declared dividends totalling $9,784,000
($0.34 per share) on its Class A Non-Voting shares and Class B
Common shares, compared to $6,100,000 ($0.34 per share)
for 2017. The payment of any dividends is at the discretion
of the Board of Directors and depends upon the financial
condition of AKITA and other factors. Since the inception of the
quarterly dividend program in 1997, dividends have been paid
in each quarter of every year and the dividend rate has never
been decreased. The most recent dividend was declared on
March 5, 2019 with a dividend rate of $0.085 per share.
Per share
Dividends per share ($)
2018
0.34
2017
0.34
Change
% Change
0.00
0%
AKITA DRILLING LTD. | 2018 Annual Report 23
23
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Class A Non-Voting and Class B Common Shares
Authorized
An unlimited number of Class A Non-Voting shares
An unlimited number of Class B Common shares
Issued
$Thousands, except share
amounts
Class A Non-Voting
Class B Common
Total
Number of
Shares
Consideration
Number of
Shares
Consideration
Number of
Shares
Consideration
December 31, 2017
16,291,877
$ 22,505
1,653,784
$ 1,366
17,945,661
$ 23,871
Shares issued in 2018
21,662,530
122,393
-
-
21,662,530
122,393
December 31, 2018
37,954,407
$ 144,898
1,653,784
$ 1,366
39,608,191
$ 146,264
At March 5, 2019, the Company had 37,954,407 Class A Non-Voting shares and 1,653,784 Class B Common shares outstanding. At
that date, there were also 1,053,000 stock options outstanding, of which 756,000 were exercisable.
Accounting Estimates
The preparation of AKITA’s consolidated financial statements
requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities
and disclosure of contingent liabilities as at the date of
the consolidated financial statements as well as reported
amounts for revenue and expenses for the year. Estimates
and judgments are continually evaluated and are based upon
historical experience and other factors including expectations
of future events that are believed to be reasonable in the
circumstances. Actual outcomes could differ materially from
these estimates.
The Company makes assumptions relating to transactions that
were incomplete at the Statement of Financial Position date.
Depending on the actual transaction, total assets and liabilities
of the Company as well as results of operations, including
net income, could be either understated or overstated as a
result of differences between amounts accrued for incomplete
transactions and the subsequent actual balances.
The preparation of AKITA’s consolidated financial statements
requires management to make significant estimates relating
to the useful lives of drilling rigs. Depreciation methods and
rates have been selected so as to amortize the net cost of
each asset over its expected useful life to its estimated
residual value. The estimated useful lives, residual values and
depreciation methods are reviewed at the end of each annual
reporting period.
Effective January 1, 2018, the Company changed its method for
depreciating drilling rigs from unit-of-production to straight-line
and revised estimates related to drilling rig salvage values. The
change in depreciation methodology reflects the technological
developments within the drilling industry and management
believes that straight-line depreciation better reflects the
future economic benefits related to these assets. The change
in depreciation methodology was applied prospectively. The
estimated effect of the change in depreciation method on the
Company’s financial statements for the year ended December
31, 2018 is not material.
AKITA’s depreciation estimates do not have any effect on
the changes to the financial condition for the Company, as
depreciation is a non-cash item. However, total assets and
24
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS results of operations, including net income, could be either
understated or overstated as a result of excessively high or low
depreciation estimates.
At each reporting date, the Company assesses whether there
are indicators of asset impairment. If such indicators exist, the
Company performs an asset impairment test and, if required,
the Company recognizes an asset impairment loss calculated
as the lesser of the difference between the amortized cost of
the asset and the present value of the estimated future cash
flows or the recoverable amount. The carrying amount of the
asset is reduced by the impairment loss.
AKITA’s asset impairment estimates do not have any effect
on the changes to financial condition for the Company, as any
asset write-down would be a non-cash item. However, total
assets and results of operations, including net income, could
be overstated as a result of projections of discounted future
cash flows that are too high.
Commitments
A significant estimate used in the preparation of AKITA’s
consolidated financial statements relates to the long-term
defined benefit pension liability for certain employees and
retired employees that was recorded as $4,712,000 at
December 31, 2018 (2017 - $4,832,000). Changes in
AKITA’s pension liability estimates do not have any effect on
the changes to the financial condition of the Company, since
the defined benefit pension is a non-cash item. However, total
liabilities and results of operations, including net income, could
be either understated or overstated as a result of pension
estimates that are either too high or too low. AKITA utilizes the
services of a third party to assist in the actuarial estimate of
the Company’s pension expense and liability. For 2018, a key
assumption is the 3.6% discount rate (2017 – 3.3%).
The Company makes assumptions relating to deferred income
taxes, including future tax rates, timing of reversals of timing
differences and the anticipated tax rules that will be in place
when timing differences reverse. Consequently, total liabilities
of the Company as well as results of operations, including net
income, could be either understated or overstated.
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, 2018,
AKITA had no deposits with its bank for those purposes
(December 31, 2017 - $1,525,000). These funds have been
classified as “restricted cash” on the Consolidated Statements
of Financial Position.
Business Risks and Risk Management
The following information is a summary only of certain risk
factors and is qualified in its entirety by reference to and must
be read in conjunction with, the detailed information appearing
elsewhere in this document. Shareholders and potential
shareholders should consider carefully the
information
contained herein and, in particular, the following risk factors.
Crude Oil and Natural Gas Prices
Fluctuations and uncertainty surrounding the future price
of commodities could lead to changes in demand for oil
and natural gas, and may impact the economics of planned
drilling projects and ongoing production projects, resulting in
the curtailment, reduction, delay or postponement of such
projects for an indefinite period of time. The price that AKITA’s
customers receive for their product has a direct impact on
the cash flow available to them and the subsequent demand
for drilling services provided by AKITA. An extended period
of lower oil and natural gas prices could result in a decline
in demand and reduced day rates. High volatility in crude oil
and natural gas prices may also impact AKITA’s customers’
capital programs, causing delays in spending and lower overall
demand for drilling services.
25
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Competition
The contract drilling industry is highly competitive and includes
a large number of drilling contractors with varied drilling rig
fleets. Drilling contracts are usually awarded through a
competitive bid process with pricing and drilling rig suitability
and availability being primary drivers in the bid process. Other
factors that influence the bid process include: mobility and
efficiency of the drilling rig; experience and quality of service
provided by rig crews; safety record of the rig as well as the
contractor as a whole; and the adaptability of equipment to
utilize new technologies. Rigs can be moved from one region
to another depending on the competitive environment within
that region and therefore a contractor’s competitive advantage
in a region can be quickly eroded by other contractors moving
in equipment from other regions. Reduced levels of activity in
the oil and gas industry can also increase competition and
therefore lower day rates.
Operating Hazards
AKITA’s operations are subject to numerous hazards inherent
to the drilling industry, including but not limited to: fires or
explosions, hydrocarbon influx or kicks, loss of well control,
well blow-outs, cratering, collapse of the well, damage to,
or loss of, drilling equipment and equipment lost down the
hole. AKITA’s insurance policies and contractual indemnity
rights may not adequately cover all losses, and therefore, the
Company may not have adequate insurance coverage or rights
to indemnity for all risks. Pollution and environmental risks
may not be fully insurable. AKITA generally attempts to obtain
contractual protection against uninsured operating risks from
its customers. However, customers who provide contractual
indemnification protection may not in all cases maintain
adequate insurance or otherwise have the financial resources
necessary
indemnification obligations.
indemnification arrangements may
AKITA’s
not adequately protect it against liability or loss from all
operating hazards. Further, certain states in the US where
AKITA operates have anti-indemnity legislation that could
preclude operator indemnification in certain circumstances.
The occurrence of a significant event that has not been fully
insured or indemnified against, the failure of a customer to
meet its indemnification obligations to the Company, or the
applicability of anti-indemnification legislation could materially
and adversely affect the results of operations and financial
condition.
insurance or
to support
their
Dependence on Major Customers
AKITA earned 34% of its total revenue in 2018 from three major
customers. These were the only customers who individually
26
provided over 10% of the Company’s revenue for the year. The
loss of one or more major customers or a significant reduction
in the business done with any customer without offsetting
new revenue could have a material adverse effect on AKITA’s
business, results of operations and prospects.
Seasonal Nature of Industry
In Canada, the level of activity in the contract drilling industry,
particularly for conventional rigs, is influenced by seasonal
weather patterns. Spring break-up, which typically occurs
between mid-March and mid-June, makes the ground unstable
leaving many secondary roads temporarily incapable of
supporting the weight of heavy equipment, thereby reducing
drilling activity levels. In addition, during excessively rainy
periods, equipment moves may be delayed, thereby adversely
affecting revenue.
Typically, there is greater demand for contract drilling services
in the winter, as freezing permits the movement and operation
of heavy equipment. Drilling activities tend to increase in the
fall as the ground begins to freeze and peak in the winter
months of November through February as areas having muskeg
conditions also become accessible to drilling operations.
Variability in the weather can therefore create unpredictability
in activity and utilization rates. Unusually warm weather may
limit access to drilling sites and could have a material adverse
effect on the Company’s business, financial condition, results
of operations and cash flows.
Generally speaking, AKITA’s US operations are less affected
by seasonality than AKITA’s Canadian operations. Areas in the
US where AKITA operates are infrequently subject to weather
constraints like hurricanes in the southern states, but may
experience operational constraints such as floods, blizzards
and other extreme winter conditions in the Rocky Mountain
region in addition to operational restrictions for a variety
of other reasons. These restrictions could have a material
adverse effect on the Company’s business, financial condition,
results of operations and cash flows.
Volatility of Industry Conditions
The demand, pricing and terms for contract drilling services
are dependent upon the level of industry activity for Canadian
and US crude oil and natural gas exploration and development.
Industry conditions are influenced by numerous factors
which AKITA does not control including (without limitation):
current crude oil and natural gas prices, expectations about
future crude oil and natural gas prices, the cost of exploring
for, producing and delivering crude oil and natural gas, the
expected rates of decline in current production for AKITA’s
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS customers, discovery rates of new oil and gas reserves by
AKITA’s customers, available pipeline and other oil and
gas transportation capacity, weather conditions, political,
regulatory and economic conditions, influences from special
interest groups, the use of energy generated from sources that
are not crude oil or natural gas based, the ability of oil and
gas companies to raise equity capital or debt financing and
technological advances in the exploration and production of
crude oil and natural gas.
The level of activity in both the Canadian and US oil and gas
exploration and production industries is volatile. No assurance
can be given that the expected trends in oil and gas exploration
and production activities will continue or that demand for
contract drilling services will reflect the level of activity in the
industry. Current global economic events and uncertainty have
significantly affected, and may continue to significantly affect,
commodity pricing. Any prolonged substantial reduction in
crude oil and natural gas prices would likely continue to affect
oil and gas production levels and therefore adversely affect
the demand for drilling services to oil and gas customers. Any
elimination or curtailment of government incentives or adverse
changes in government regulation could have a significant
impact on the contract drilling industry in Canada or in the US.
These factors could lead to a further decline in demand for
AKITA’s services which could result in a material adverse effect
on AKITA’s business, financial condition, results of operations
and cash flows.
Labour
The contract drilling industry is dependent upon attracting,
developing and maintaining a skilled and safe workforce.
During periods of peak activity levels, AKITA is susceptible
to increased labour costs as a result of a competitive labour
market or may be faced with a lack of experienced personnel
to operate AKITA’s equipment. AKITA is also faced with the
challenge of retaining employees during periods of low
utilization. The Company’s financial results depend, at least in
part, upon its ability to attract, develop and maintain a skilled
workforce, while maintaining a cost structure that varies with
activity levels.
A number of AKITA’s key customers evaluate the ability of
contract drilling companies to provide and maintain a high
standard of safe operations prior to their selecting a drilling
contractor for the provision of drilling services. AKITA’s
financial success is related to its ability to continue to meet
those expectations.
Capital Overbuild in Contract Drilling Industry
Drilling rigs have a long life span. Further, there is a significant
lag between when the decision to build a rig is made and when
the construction is complete. These two factors contribute to
the supply of rigs in the industry not always aligning with the
demand for drilling rigs. High demand typically spurs greater
capital expenditures by drilling contractors which may, in turn,
lead to excessive supply in future periods. A potential capital
overbuild could lead to a general reduction in day rates in the
industry as a whole, which could have a material adverse effect
on AKITA’s business, financial condition, results of operations
and cash flows.
Access to Additional Financing
AKITA may find it necessary in the future to obtain additional
debt or equity financing to support ongoing operations,
undertake capital expenditures or undertake acquisitions
or other business combination activities. There can be no
guarantee that AKITA will have access to the required capital
as its ability to do so is dependent on, among other factors, the
overall state of capital markets, interest rates, the oil and gas
industry as well as the appetite for investment in the oilfield
drilling industry. An inability to obtain necessary financing, on
terms that are acceptable to AKITA, could limit AKITA’s growth
and could have a material adverse effect on AKITA’s business,
financial condition and cash flows in the future.
Foreign Exchange and Foreign Operations Risk
AKITA’s expansion into the US increases the Company’s
exposure to risks inherent in foreign operations. The Company
is exposed to risks caused by fluctuations in currency exchange
rates. US contracts are denominated in United States dollars
and, accordingly, a material decrease in the value of the United
States dollar could negatively impact revenues.
In addition to foreign exchange, risks include, but are not
limited to: different taxation regimes, potential litigation and
potential political protectionist measures. While AKITA has
increased its insurance coverage to offset the increased
chance of litigation and has engaged third party experts to
assist in taxation matters, there can be no assurance that the
Company will be fully effective in mitigating foreign operation
risks. Such risks could have material adverse effects on
AKITA’s business, financial condition, results of operations and
cash flows.
Debt Service
AKITA has a syndicated credit facility. Variations in interest
rates and principal repayments, under the terms of the facility,
27
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS could result in significant changes in the amount required to
be applied to debt service before payment of any amounts by
AKITA. Although management’s view is that AKITA’s current
facility is sufficient, there is no assurance that it will be
adequate for the future financial obligations of AKITA or that
additional funds can be obtained if required.
restrictions and limitations have increased operating costs for
both AKITA and AKITA’s customers. Any regulatory changes that
impose additional environmental restrictions or requirements
on AKITA or AKITA’s customers could adversely affect AKITA
through increased operating costs or decreased demand for
AKITA’s services, or both.
AKITA’s credit facility is a revolving facility which matures on
September 11, 2022 and is subject to annual extensions of
an additional year on each anniversary date of the closing
date, contingent upon the consent of the lenders holding two-
thirds of the aggregate commitments under the facility. To the
extent the facility is not extended, the drawn down principal
would be due on the maturity date. Interest payments are
required quarterly and are based on the Canadian prime rate
for Canadian prime rate loans and the US prime rate for US
rate loans.
Regulation of Industry
AKITA’s operations are subject to a variety of federal, provincial,
state and local laws, regulations and guidelines relating to
health and safety, the conduct of operations, the operation of
equipment used in drilling operations and the transportation of
materials and equipment provided to customers. Compliance
with, or breaches of, such laws, or costs or implications of
changes to such laws, regulations and guidelines could have a
material effect on AKITA’s business, financial condition, results
of operations and cash flows.
Environmental Regulations
AKITA’s operations are subject to numerous laws, regulations
and guidelines governing the management, transportation and
disposal of hazardous substances and other waste materials
and otherwise relating to the protection of the environment.
These laws, regulations and guidelines include those relating
to spills, releases, emissions and discharges of hazardous
substances or other waste materials into the environment,
requiring removal or remediation of pollutants or contaminants
and imposing civil and criminal penalties for violations. Some
of the laws, regulations and guidelines that apply to AKITA’s
operations also authorize the recovery of natural resource
damages by governmental authorities, injunctive relief and
the imposition of stop, control, remediation and abandonment
orders. The costs arising from compliance with such laws,
regulations and guidelines may be material to AKITA. The
trend in environmental regulation has been to impose more
restrictions and limitations on activities that may impact the
environment, including the generation and disposal of wastes
and the use and handling of chemical substances. These
related activities have been
Certain general oilfield
controversial. In recent years, development of oil sands, the
use of hydraulic fracturing on sedimentary rock formations
and transportation of crude oil and natural gas have each
encountered opposition. Ongoing delays or cancellation of
these types of activities could reduce demand for AKITA’s
services.
While AKITA maintains liability insurance, including insurance
for environmental claims, there can be no assurance that
insurance will continue to be available to AKITA on commercially
reasonable terms, that the possible types of liabilities that may
be incurred by AKITA will be covered by AKITA’s insurance, or
that the dollar amount of such liabilities will not exceed AKITA’s
policy limits.
Even a partially uninsured claim, if successful and of sufficient
magnitude, could have a material adverse effect on AKITA’s
business, results of operations and prospects.
Key Management
The success and growth of AKITA are dependent upon AKITA’s
key management personnel. The loss of services of any of
such persons, without suitable replacements, could have
a material adverse effect on the business and operations
of AKITA. While this risk is mitigated by ongoing succession
planning, no assurance can be provided that AKITA will be able
to retain key management members.
Dividends
Any decision to pay dividends on AKITA shares will be made by
the Board of Directors, at the Board’s sole discretion. There
can be no assurance that AKITA will pay dividends in the future.
Dilution
AKITA may make future acquisitions or enter into financings
or other transactions involving the issuance of securities of
AKITA, which may be dilutive.
28
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Leverage and Restrictive Covenants
AKITA has third party debt service obligations under its credit
facility. The degree to which AKITA is leveraged could have
important consequences to shareholders, including:
1. a portion of the consolidated cash flow from operations
could be dedicated to the payment of the principal and
interest on its indebtedness, thereby reducing cash
available for dividend payments; and
2. certain borrowings are at variable rates of interest,
which exposes AKITA to the risk of increased interest
rates.
AKITA's ability to make scheduled payments of principal and
interest on, or to refinance, its indebtedness will depend on its
future operating performance and cash flow, which are subject
to prevailing economic conditions, prevailing interest rate
levels and financial, competitive, business and other factors,
many of which are beyond its control.
AKITA’s credit facilities contain certain customary operating
covenants that limit the discretion of management to incur
additional indebtedness, to create liens or other encumbrances,
to pay dividends or make certain other payments, investments,
loans and guarantees and to sell or otherwise dispose of assets
and merge or consolidate with another entity. In addition, AKITA
is required to satisfy and maintain two financial ratio tests, Debt
to EBITDA and EBITDA to Interest Expense. A failure to comply
with the obligations in the agreements with respect to the credit
facilities, could result in an event of default which, if not cured
or waived, could permit acceleration of the repayment of the
relevant indebtedness. If the repayment of the indebtedness
under the credit facilities were to be accelerated, there can be
no assurance that AKITA's assets would be sufficient to repay
the debt.
fuel
Energy Alternatives
AKITA’s management cannot predict the impact of changing
demand for crude oil and natural gas products. Fuel
conservation measures, alternative
requirements,
increasing consumer demand for alternatives to crude oil and
gas and technological advances in fuel economy and energy
generation devices could reduce the demand for crude oil,
natural gas and other liquid hydrocarbons. Any major change in
demand for crude oil, natural gas or other liquid hydrocarbons
could result in a reduction in the demand for drilling services
and could have a material adverse effect on AKITA’s business,
financial condition, results of operations and cash flows.
Risk Management
AKITA manages its risks by:
• maintaining a conservative balance sheet that
includes a low cost structure for the Company
including limited use of financial leverage;
• having its risk management committee deliberate
periodically to assess, evaluate and develop a plan
to deal with the risk conditions for the Company;
• developing an annual strategic business plan and
budget to help determine the levels of capital and
operating expenditures;
• continuously developing long-term relationships with
a core base of customers who maintain ongoing
drilling programs during all phases of the economic
cycle;
• obtaining multi-year rig contracts whenever
possible, but especially when tailoring rig
construction or reconfiguration to customer
demand;
• maintaining an efficient fleet of rigs through a
rigorous ongoing maintenance program;
• continually upgrading its rig fleet;
• employing well trained, experienced and responsible
employees;
• ensuring that all employees comply with clearly
defined safety standards;
• reducing health, safety and operational risk by
maintaining its API Q2 certification in Canada;
•
improving the skills of its employees through training
programs;
• maintaining effective systems of internal control to
safeguard assets and ensure timely and accurate
reporting of financial results;
• maintaining comprehensive insurance policies with
respect to its operations;
• reducing environmental risk through the
implementation of industry-leading standards,
policies and procedures;
• developing and maintaining a succession plan to
provide for a smooth transition in the event of key
personnel turnover; and
• most recently by diversifying into the US market
where demand for drilling services is correlated
to West Texas Intermediate pricing, rather
than Western Canadian Select pricing as in
Canada, which allows AKITA to generate revenue
denominated in US currency.
29
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Future Outlook and Strategy
The drilling industry is cyclical and certain key factors that
have an impact 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.
In Canada, sustained low commodity prices for crude oil and
natural gas continued to have a significant dampening effect
on the drilling industry in 2018, which translated to reduced
capital spending by oil and gas companies. Reduced spending
resulted in lower utilization and significant pricing pressure on
day rates. The downward trend in the prices of crude oil and
natural gas that began in 2014 showed signs of recovery early
in 2018, then began to weaken again over the course of the
fourth quarter.
The Company is not anticipating a significant recovery in
Canadian activity in 2019. Insufficient pipeline capacity,
arguably the main challenge to the Canadian drilling industry
in Canada, remains unresolved. There is an oversupply of rigs
in the Canadian market compared to the current demand.
While this situation may change if drillers continue to move
rigs into the more profitable US market from Canada, until
fundamentals improve, the Company is not expecting improved
economics in Canada. Accordingly, the Company’s focus
for its Canadian division in 2019 will be on cost control and
maintaining a strong fleet that is well-positioned to participate
in the eventual Canadian market recovery.
With both higher day rates and utilization levels, drilling
conditions across the US were much more robust than in
Canada over the course of 2018. As operators continue to
migrate to higher specification drilling rigs in the US, AKITA’s
high specification US fleet is well equipped to satisfy this
demand. Strong relationships with key operators in the US
were established by the Company in only its first year of
operations since it entered the US. The Company plans to
leverage the relationships it forged on its own, together with
the strong customer base it inherited in the Xtreme acquisition,
to potentially add drilling rigs to its 17 rig US fleet. Additional
rigs will improve upon the economy of scale in the US that
AKITA has already established. Accordingly, the Company’s
focus for its US division in 2019 will be on retaining strong
performance and utilization over the course of the entire
year, while evaluating opportunities to transfer additional, idle
drilling rigs from Canada to the stronger US market.
AKITA is planning a Canadian capital budget of maintenance
capital. In the US capital spending will be focused on
maintenance capital with discretionary rig upgrades depending
on customer demand and the expected resulting return.
Disclosure Controls and Internal Controls over Financial Reporting
As of December 31, 2018, the Company’s management
evaluated the effectiveness of the Company’s disclosure
controls and procedures as required by the Canadian Securities
Administrators (“CSA”). This evaluation was performed under
the supervision of, and with the participation of the President
and Chief Executive Officer (“CEO”) and the Vice President,
Finance and Chief Financial Officer (“CFO”).
Disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed
in documents filed with the securities regulatory authorities is
recorded, processed, summarized and reported on a timely
basis. The controls also seek to assure that this information
is accumulated and communicated to management, including
the CEO and CFO, as appropriate, to allow timely decisions on
required disclosure. Based on this evaluation, the CEO and
CFO have concluded that the Company’s disclosure controls
and procedures were effective at December 31, 2018.
As of December 31, 2018, management evaluated the
effectiveness of the Company’s internal control over financial
reporting as required by the CSA. This evaluation was
performed utilizing the framework developed by the Committee
of Sponsoring Organizations of the Treadway Commission
(“COSO Framework”), as revised effective May 14, 2013 under
the supervision of, and with the participation of the CEO and
CFO.
The Company’s internal control over financial reporting is
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements in accordance with IFRS.
Based on this evaluation, the CEO and CFO have concluded
that the Company’s internal control over financial reporting
was effective at December 31, 2018.
30
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS There was no change in the Company’s internal control over
financial reporting that occurred during the period that began
on October 1, 2018 and ended December 31, 2018 that
materially affected, or is reasonably likely to materially affect,
the Company’s internal control over financial reporting. There
was also no change in the Company’s internal control over
financial reporting that has occurred since December 31, 2018.
Basis of Analysis in this MD&A and Non-GAAP Items
Total Revenue and Total Operating and Maintenance Expenses in Canada
Revenue and operating and maintenance expenses in AKITA’s
Canadian operating segment include revenue and expenses
from AKITA’s wholly-owned drilling rigs as well as its share of
joint venture revenue and expenses.
$Thousands
Revenue from wholly-owned drilling rigs in Canada
Revenue from joint venture drilling rigs
Total revenue in Canada
Operating and maintenance expenses from wholly-owned drilling rigs in Canada
Operating and maintenance expenses from joint venture drilling rigs
Total operating and maintenance expenses in Canada
2018
2017
64,993
22,797
87,790
48,547
16,300
64,847
71,198
26,513
97,711
62,156
19,167
81,323
Per Operating Day
AKITA’s revenue per operating day and AKITA’s operating and
maintenance expenses per operating day are not recognized
GAAP measures under IFRS. Management and certain
investors may find “per operating day” measures for AKITA’s
revenue indicate pricing strength while AKITA’s 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.
Adjusted EBITDA
Adjusted earnings before Interest, Tax, Depreciation and
Amortization (“Adjusted EBITDA”) is not a recognized GAAP
measure under IFRS and users of these financial statements
should note that Adjusted EBITDA calculations may differ
between AKITA and other companies. AKITA calculated
Adjusted EBITDA as follows:
$Thousands
Net loss attributable to shareholders
Interest expense
Income tax expense (recovery)
Depreciation and amortization
Asset impairment and asset write down
Adjusted EBITDA
2018
2017
(15,939)
(39,177)
2,121
3,651
168
(14,053)
26,614
27,126
-
29,123
16,447
3,187
31
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Adjusted Funds Flow from Operations
Adjusted funds flow from operations is not a recognized GAAP
measure under IFRS and users of these financial statements
should note that AKITA’s method of determining adjusted
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 adjusted 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.
$Thousands
Net cash from (used in) operating activities
Income tax recoverable
Current income tax expense (recovery)
Interest paid
Post-employment benefits paid
Equity income from joint ventures
Change in non-cash working capital
Adjusted funds flow from operations
2018
(8,494)
(2,812)
(143)
1,950
90
6,168
17,547
14,306
2017
5,074
(2,270)
2,990
1
142
6,939
(6,269)
6,607
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; global liquified natural
gas (LNG) demand; 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.
32
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Upcoming Accounting Standard Changes
Certain new or amended standards or interpretations have
been issued by the International Accounting Standards
Board or the International Financial Reporting Interpretations
Committee that are not required to be adopted in the current
period. The Company has not early adopted these standards or
interpretations. The standards which the Company anticipates
may have a material effect on the financial statements or note
disclosures are described below. The Company is currently
evaluating the impact of these new standards on its financial
statements.
IFRS 16, “Leases”, replaces the previous guidance on leases
and sets out the principles for the recognition, measurement,
presentation, and disclosure of leases for both parties to a
contract. It will result in almost all leases being recognized on
the balance sheet, as the distinction between operating and
finance leases is removed. Under the new standard, an asset
(the right-to-use the leased item) and a financial liability are
recognized.
On initial adoption, Management anticipates they will elect
to use the following practical expedients permitted under the
standard:
Other Information
• Apply a single discount rate to a portfolio of leases with
similar characteristics;
• Account for leases with a remaining term of less than 12
months as at January 1, 2019 as short-term leases;
• Account for lease payments as an expense and not
recognize a right-of-use (“ROU”) asset if the underlying
asset is of low dollar value; and
• The use of hindsight in determining the lease term where
the contract contains terms to extend or terminate the
lease.
IFRS 16 is mandatory for the first interim periods within annual
reporting periods beginning on or after January 1, 2019. The
company is still assessing the standard and anticipates IFRS
16 to have a material effect on the financial statements once
adopted.
There are no other standards and interpretations that have
been issued, but are not yet effective, that the Company
anticipates will have a material effect on the financial
statements once adopted.
Additional information is provided by the Company in its Annual
Information Form, Notice of Annual Meeting and Information
Circular all dated March 5, 2019. Copies of these documents
including additional copies of the Annual Report for the year
ended December 31, 2018 may be obtained upon request
from the Vice President, Finance and Chief Financial Officer
of the Company at 1000, 333 – 7th Avenue S.W., Calgary,
Alberta, T2P 2Z1 or at www.sedar.com.
33
AKITA DRILLING LTD. | 2018 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS MANAGEMENT’S RESPONSIBILIT Y FOR FINANCIAL REPORTING
MANAGEMENT’S
RESPONSIBILITY FOR
FINANCIAL
REPORTING
The accompanying consolidated financial statements of AKITA
Drilling Ltd., Management's Discussion and Analysis and other
information relating to AKITA contained in this Annual Report are
the responsibility of management and have been approved by the
Board of Directors. The consolidated financial statements have
been prepared in accordance with accounting policies detailed
in the notes to the consolidated financial statements and are
in conformity with International Financial Reporting Standards
(also referred to as “IFRS”) using methods appropriate for the
industry in which the Company operates. Where necessary,
management made estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as at the date of the financial
statements including estimates related to transactions and
operations that were incomplete at year-end, the useful lives of
drilling rigs and other assets, the measurement of the defined
benefit pension liability, assumptions around future income
tax calculations, the fair value of the purchase price allocation
related to the business combination, the estimated credit
losses and the measurement of asset impairments. Financial
information throughout this Annual Report is consistent with the
consolidated financial statements except as noted.
34
34 AKITA DRILLING LTD. | 2018 Annual Report
AKITA DRILLING LTD. | 2018 Annual Report MANAGEMENT’S RESPONSIBILIT Y FOR FINANCIAL REPORTING
Management ensures the integrity of the consolidated financial
PricewaterhouseCoopers LLP, the Company's
independent
statements by maintaining a system of internal control. This
auditors, have conducted an examination of the consolidated
system of internal control is based on the control criteria
financial statements and have had full access to the Audit
framework of the Committee of Sponsoring Organizations of the
Committee.
Treadway Commission published in their report titled, Internal
Control – Integrated Framework, as revised effective May 14,
The Board of Directors, through its Audit Committee comprised
2013. The system is designed to provide reasonable assurance
of four independent directors as defined in National Instrument
that transactions are executed as authorized and accurately
52-110 – Audit Committees (“NI 52-110”), and one director who
recorded; that assets are safeguarded; and that accounting
is exempt from the independence requirements of NI 52-110,
records are sufficiently reliable to permit the preparation of
oversees management's responsibilities for financial reporting.
financial statements that conform in all material respects
The Audit Committee meets regularly with management and the
with accounting principles generally accepted in Canada.
independent auditors to discuss auditing and financial matters
The Company maintains disclosure controls and procedures
and to gain assurance that management is carrying out its
designed to ensure that information required to be disclosed in
responsibilities.
reports is disclosed, processed and summarized and reported
within specified time periods. Internal controls are monitored
through self-assessments and are reinforced through a Code of
Business Conduct, which sets forth the Company’s commitment
to conduct business with integrity, and within both the letter and
the spirit of the law.
Karl A. Ruud
President and Chief
Executive Officer
Darcy Reynolds
Vice President, Finance
and Chief Financial Officer
AKITA DRILLING LTD. | 2018 Annual Report 35
35
AKITA DRILLING LTD. | 2018 Annual Report
INDEPENDENT
AUDITOR'S REPORT
To the Shareholders of AKITA Drilling Ltd.
Our Opinion
In our opinion, the accompanying consolidated financial
Basis for opinion
We conducted our audit in accordance with Canadian generally
statements present fairly, in all material respects, the financial
accepted auditing standards. Our responsibilities under those
position of AKITA Drilling Ltd. and its subsidiaries (together, the
standards are further described in the Auditor's responsibilities for
Company) as at December 31, 2018 and 2017, and its financial
the audit of the consolidated financial statements section of our
performance and its cash flows for the years then ended in
report.
accordance with International Financial Reporting Standards
(IFRS).
We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our opinion.
What we have Audited
The Company's consolidated financial statements comprise:
• the consolidated statements of financial position as at
December 31, 2018 and 2017;
Independence
We are independent of the Company in accordance with the ethical
requirements that are relevant to our audit of the consolidated
financial statements in Canada. We have fulfilled our other ethical
• the consolidated statements of net loss and
responsibilities in accordance with these requirements.
comprehensive loss for the years then ended;
• the consolidated statements of changes in shareholders'
equity for the years then ended;
• the consolidated statements of cash flows for the years
then ended; and
• the notes to the consolidated financial statements,
which include a summary of significant accounting
policies.
Other information
Management is responsible for the other information. The other
information comprises the Management's Discussion and Analysis,
which we obtained prior to the date of this auditor's report and the
information, other than the consolidated financial statements and
our auditor's report thereon, included in the annual report, which is
expected to be made available to us after that date.
36
AKITA DRILLING LTD. | 2018 Annual ReportINDEPENDENT AUDITOR'S REPORT
Our opinion on the consolidated financial statements does not
In preparing the consolidated financial statements, management
cover the other information and we do not and will not express
is responsible for assessing the Company's ability to continue as
an opinion or any form of assurance conclusion thereon.
a going concern, disclosing, as applicable, matters related to going
In connection with our audit of the consolidated financial
management either intends to liquidate the Company or to cease
statements, our responsibility is to read the other information
operations, or has no realistic alternative but to do so.
identified above and, in doing so, consider whether the other
Those charged with governance are responsible for overseeing the
information is materially inconsistent with the consolidated
Company's financial reporting process.
concern and using the going concern basis of accounting unless
financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated.
If, based on the work we have performed on the other information
that we obtained prior to the date of this auditor's report, we
Auditor's responsibilities for the audit of the
consolidated financial statements
Our objectives are to obtain reasonable assurance about whether
conclude that there is a material misstatement of this other
the consolidated financial statements as a whole are free from
information, we are required to report that fact. We have nothing
material misstatement, whether due to fraud or error, and to issue
to report in this regard. When we read the information, other
an auditor's report that includes our opinion. Reasonable assurance
than the consolidated financial statements and our auditor's
is a high level of assurance, but is not a guarantee that an audit
report thereon, included in the annual report, if we conclude
conducted in accordance with Canadian generally accepted auditing
that there is a material misstatement therein, we are required
standards will always detect a material misstatement when it exists.
to communicate the matter to those charged with governance.
Misstatements can arise from fraud or error and are considered
Responsibilities of management and those
charged with governance for the consolidated
financial statements
Management is responsible for the preparation and fair
material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the
basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted
auditing standards, we exercise professional judgment and maintain
presentation of the consolidated financial statements in
professional skepticism throughout the audit. We also:
accordance with IFRS, and for such internal control as
management determines is necessary to enable the preparation
of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
37
AKITA DRILLING LTD. | 2018 Annual ReportINDEPENDENT AUDITOR'S REPORT •
Identify and assess the risks of material misstatement
• Evaluate the overall presentation, structure and content
of the consolidated financial statements, whether due
of the consolidated financial statements, including the
to fraud or error, design and perform audit procedures
disclosures, and whether the consolidated financial
responsive to those risks, and obtain audit evidence that
statements represent the underlying transactions and
is sufficient and appropriate to provide a basis for our
events in a manner that achieves fair presentation.
opinion. The risk of not detecting a material misstatement
resulting from fraud is higher than for one resulting from
• Obtain sufficient appropriate audit evidence regarding
error, as fraud may involve collusion, forgery, intentional
the financial information of the entities or business
omissions, misrepresentations, or the override of internal
activities within the Company to express an opinion on the
control.
consolidated financial statements. We are responsible for
the direction, supervision and performance of the group
• Obtain an understanding of internal control relevant to
audit. We remain solely responsible for our audit opinion.
the audit in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose
We communicate with those charged with governance
of expressing an opinion on the effectiveness of the
regarding, among other matters, the planned scope and
Company's internal control.
timing of the audit and significant audit findings, including
any significant deficiencies in internal control that we identify
• Evaluate the appropriateness of accounting policies used
during our audit.
and the reasonableness of accounting estimates and
related disclosures made by management.
We also provide those charged with governance with a
statement that we have complied with relevant ethical
• Conclude on the appropriateness of management's use
requirements regarding independence, and to communicate
of the going concern basis of accounting and, based
with them all relationships and other matters that may
on the audit evidence obtained, whether a material
reasonably be thought to bear on our independence, and
uncertainty exists related to events or conditions that
where applicable, related safeguards.
may cast significant doubt on the Company's ability
to continue as a going concern. If we conclude that a
The engagement partner on the audit resulting in this
material uncertainty exists, we are required to draw
independent auditor's report is Reynold Tetzlaff.
attention in our auditor's report to the related disclosures
in the consolidated financial statements or, if such
disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained
Chartered Professional Accountants
up to the date of our auditor's report. However, future
events or conditions may cause the Company to cease to
Calgary, Alberta
March 5, 2019
continue as a going concern.
38
AKITA DRILLING LTD. | 2018 Annual ReportINDEPENDENT AUDITOR'S REPORT
Consolidated Statements of Financial Position
$Thousands
ASSETS
Current Assets
Cash
Accounts receivable
Income taxes recoverable
Inventory
Prepaid expenses and other
Non-current Assets
Restricted cash
Other long-term assets
Investments in joint ventures
Property, plant and equipment
TOTAL ASSETS
LIABILITIES
Current Liabilities
December 31,
2018
December 31,
2017
Note 12
Note 11
Note 10
Note 9
$ 1, 503
$ 560
42,733
531
394
2,446
47,607
756
474
4,456
350,348
27,024
3,076
-
89
30,749
1,525
528
4,096
170,599
$ 403,641
$ 207,497
Accounts payable and accrued liabilities
Note 12
$ 23,317
$ 13,696
Deferred revenue
Dividends payable
Finance leases
Current portion of long-term debt
Non-current Liabilities
Financial instruments
Deferred income taxes
Deferred share units
Pension liability
Long-term debt
Total Liabilities
SHAREHOLDERS' EQUITY
Class A and Class B shares
Contributed surplus
Note 16
Note 14
Note 12
Note 7
Note 18
Note 19
Note 14
Note 17
Accumulated other comprehensive income (loss)
Retained earnings
Total Equity
TOTAL LIABILITIES AND EQUITY
The accompanying notes are an integral part of these financial statements.
Approved by the Board,
Director
Director
367
-
3,367
1,525
559
-
8,831
-
36,441
15,221
-
16,235
417
4,712
9
12,592
388
4,832
74,108
-
131,913
33,042
146,264
4,701
86
120,677
271,728
23,871
4,500
(495)
146,579
174,455
$ 403,641
$ 207,497
39
AKITA DRILLING LTD. | 2018 Annual ReportCONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Net Loss & Comprehensive Loss
$Thousands, except per share amounts
REVENUE
COSTS AND EXPENSES
Operating and maintenance
Depreciation and amortization
Asset writedown and impairment loss
Selling and administrative
Total Costs and Expenses
Year Ended December 31
2018
2017
Note 5
$ 118,361
$ 71,198
Note 6
Note 9
Note 9
Note 6
86,575
26,614
-
22,611
135,800
62,156
27,126
29,123
13,659
132,064
Revenue Less Costs and Expenses
(17,439)
(60,866)
EQUITY INCOME FROM JOINT VENTURES
Note 10
6,168
6,939
OTHER INCOME (LOSS)
Interest income
Interest expense
Gain on sale of assets
Net other gains
Total Other Income (Loss)
Loss Before Income Taxes
84
(2,121)
567
453
(1,017)
439
(168)
194
232
697
(12,288)
(53,230)
Income tax expense (recovery)
Note 7
3,651
(14,053)
NET LOSS FOR THE PERIOD ATTRIBUTABLE TO SHAREHOLDERS
(15,939)
(39,177)
OTHER COMPREHENSIVE INCOME (LOSS)
Items that will not subsequently be reclassified to profit or loss
Remeasurement of pension liability and other
Items that may be subsequently be reclassified to profit or loss
Foreign currency translation adjustment
Total Other Comprehensive Income (Loss)
364
217
581
(129)
-
(129)
COMPREHENSIVE LOSS FOR THE PERIOD ATTRIBUTABLE TO SHAREHOLDERS
$ (15,358)
$ (39,306)
NET LOSS PER CLASS A AND CLASS B SHARE
Note 4
Basic
Diluted
$ (0.65)
$ (2.18)
$ (0.65)
$ (2.18)
The accompanying notes are an integral part of these financial statements.
40
AKITA DRILLING LTD. | 2018 Annual ReportCONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Changes in Shareholders’ Equity
Attributable to the Shareholders of the Company
Total
Class A
and
Class B
Shares
Contributed
Surplus
Accumulated
Other
Comprehensive
Gain (Loss)
Class A
Non-Voting
Shares
Class B
Common
Shares
Retained
Earnings
Total
Equity
$ 22,505
$ 1,366
$ 23,871
$ 4,285
$ (366)
$ 191,856
$ 219,646
—
—
—
—
—
—
—
—
—
—
—
—
—
—
215
—
—
(39,177)
(39,177)
(129)
—
—
—
—
(129)
215
(6,100)
(6,100)
$ 22,505
$ 1,366
$ 23,871
$ 4,500
$ (495)
$ 146,579
$ 174,455
—
—
—
—
Note 3
122,393
—
—
—
—
—
—
—
—
—
—
—
—
—
122,393
—
—
—
—
—
—
—
201
—
—
—
217
364
—
—
—
(179)
(179)
(15,939)
(15,939)
—
—
—
—
217
364
122,393
201
(9,784)
(9,784)
$ 144,898
$ 1,366 $ 146,264
$ 4,701
$ 86 $ 120,677 $ 271,728
$Thousands
BALANCE AT
DECEMBER 31, 2016
Net loss for the year
Remeasurement of
pension liability
Stock options charged
to expense
Dividends
BALANCE AT
DECEMBER 31, 2017
January 1, 2018
increase in
estimated credit loss
resulting from the
implementation of
IFRS 9
Net loss for the year
Foreign currency
translation adjustment
Remeasurement of
pension liability
Shares issued for
acquisition
Stock options charged
to expense
Dividends
BALANCE AT
DECEMBER 31, 2018
The accompanying notes are an integral part of these financial statements.
41
AKITA DRILLING LTD. | 2018 Annual ReportCONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Cash Flows
$Thousands
OPERATING ACTIVITIES
Net loss
Non-cash items included in net loss:
Depreciation and amortization
Asset writedown and impairment loss
Deferred income tax expense (recovery)
Defined benefit pension plan expense
Stock options and deferred share units expense
Gain on sale of assets
Unrealized gain on financial guarantee contracts
Change in non-cash working capital
Equity income from joint ventures
Post-employment benefits
Interest paid
Current income tax expense (recovery)
Income taxes recoverable
Net Cash From (Used In) Operating Activities
INVESTING ACTIVITIES
Net cash consideration for Xtreme shares
Capital expenditures
Change in non-cash working capital related to capital
Distributions from investments in joint ventures
Change in restricted cash
Proceeds on sale of assets
Net Cash Used In Investing Activities
FINANCING ACTIVITIES
Change in debt
Dividends paid
Loan commitment fee
Net Cash From (Used In) Financing Activities
Effect of Foreign Exchange on Cash
Increase (Decrease) In Cash
Cash, beginning of year
CASH, END OF YEAR
The accompanying notes are an integral part of these financial statements.
42
Note 9
Note 7
Note 19
Note 18
Note 13
Note 10
Note 7
Note 3
Note 9
Note 13
Note 10
Note 14
Note 16
Year Ended December 31
2018
2017
$ (15,939) $ (39,177)
26,614
-
3,508
469
230
(567)
(9)
(17,547)
(6,168)
(90)
(1,950)
143
2,812
(8,494)
27,126
29,123
(11,063)
443
381
(194)
(32)
6,269
(6,939)
(142)
(1)
(2,990)
2,270
5,074
(43,928)
(17,546)
-
(20,569)
2,615
5,808
1,525
640
190
6,095
1,444
221
(50,886)
(12,619)
68,884
(7,942)
(836)
60,106
-
(6,100)
(45)
(6,145)
217
-
943
560
(13,690)
14,250
$ 1,503
$ 560
AKITA DRILLING LTD. | 2018 Annual ReportCONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTES CONTENTS
45
48
53
BUSINESS AND ENVIRONMENT
RESULTS FOR THE YEAR
LONG-TERM ASSETS
4. Net Loss per Share
5. Revenue
6. Expenses by Nature
7. Income Taxes
8. Segmented Information
62
DEBT AND EQUITY
14. Debt
15. Capital Management
16. Dividends per Share
17. Share Capital
48
49
50
51
52
62
63
63
64
9. Property, Plant and Equipment
10. Investments in Joint Ventures
11. Restricted Cash
65
PERSONNEL
18. Share-Based Compensation Plans
19. Employee Future Benefits
53
55
57
65
68
1. General Information
2. Basis of Preparation
3. Business Combination
57
WORKING CAPITAL
12. Financial Instruments
13. Change in Non-Cash Working Capital
70
OTHER NOTES
20. Commitments and Contingencies
21. Related Party Transactions
45
45
47
57
61
70
70
22. Accounting Changes Not Yet Adopted 72
44
44
AKITA DRILLING LTD. | 2018 Annual Report
AKITA DRILLING LTD. | 2018 Annual Report NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
For the years ended December 31, 2018 and December 31, 2017
BUSINESS AND ENVIRONMENT
1. General Information
AKITA Drilling Ltd. and its subsidiaries (the “Company” or “AKITA”) provide contract drilling services, primarily to the oil and gas industry.
The Company owns and operates 40 drilling rigs (38.65 net of joint venture ownership).
The Company conducts certain rig operations via joint ventures with Aboriginal and First Nations partners whereby rig assets are jointly
owned. While joint venture interests are at least 50% owned by the Company, in each case the joint venture is governed on a joint
basis.
The Company is a limited liability company incorporated and domiciled in Alberta, Canada. The address of its registered office is 1000,
333 – 7th Avenue SW, Calgary, Alberta. The Company is listed on the Toronto Stock Exchange. The Company is controlled by Sentgraf
Enterprises Ltd. and its controlling share owner, the Southern family.
2. Basis of Preparation
The consolidated financial statements for the year ended December 31, 2018 have been prepared in accordance with International
Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These consolidated
financial statements have been prepared under the historical cost convention, except as specifically noted within these notes.
These consolidated financial statements were approved by the Company’s Board of Directors on March 5, 2019.
Consolidation
The financial statements of the Company consolidate the accounts of AKITA and its subsidiaries which are entities over which the
Company has control. Control exists when the Company has the power, directly or indirectly, to direct the relevant activities of an
entity so as to obtain benefit from its activities. Subsidiaries are fully consolidated from the date on which control is transferred to the
Company and are deconsolidated from the date that control ceases. Inter-company transactions, balances and unrealized gains and
losses from inter-company transactions are eliminated on consolidation.
45
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Functional and presentation currency
Items included in the financial statements of each of the Company's entities are measured using the currency of the primary economic
environment in which the entity operates ("the functional currency"). The functional currency of the Company and its Canadian
subsidiaries is the Canadian dollar ("CAD") while the functional currency of its United States subsidiaries is the United States dollar
("USD").
The consolidated financial statements are presented in CAD, which is the Company's presentation currency.
Foreign currency translation
(i)
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the
transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of
monetary assets and liabilities denominated in foreign currencies at year end exchange rates are recognized in the statement
of net income and comprehensive income.
(ii) Group companies
The results and financial position of foreign operations (none of which has the currency of a hyper-inflationary economy) that
have a functional currency different from the presentation currency are translated into the presentation currency as follows:
• assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that
balance sheet;
•
income and expenses for each statement of net income and comprehensive income are translated at average exchange
rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates,
in which case income and expenses are translated at the dates of the transactions); and
• all resulting exchange differences are recognized in other comprehensive income.
Estimates and judgments
The preparation of these consolidated financial statements requires management to make estimates and judgments. Estimates and
judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that
are believed to be reasonable in the circumstances. Actual results could differ materially from these estimates. Estimates and judgments
which are material to the consolidated financial statements are found in the following notes:
• Note 3 – Business Combination
• Note 7 - Income Taxes
• Note 9 - Property, Plant and Equipment
• Note 12 – Financial Instruments
• Note 19 – Employee Future Benefits
46
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. Business Combination
Effective September 11, 2018, AKITA and Xtreme Drilling Corp. (“Xtreme”) combined their respective businesses under a plan of
arrangement (the "Arrangement”), pursuant to which AKITA acquired all of the issued and outstanding common shares of Xtreme (the
"Xtreme Shares"). Pursuant to the Arrangement, AKITA issued 21,662,530 Class A Non-Voting shares of AKITA and $45,000,000 in
cash in consideration for the Xtreme Shares. Under the Arrangement, Xtreme shareholders received 0.3732394 of a Class A Non-
Voting share of AKITA or $2.65 in cash for each Xtreme Share. The cash consideration was financed from AKITA's cash balances and a
new credit facility of $125,000,000 which was entered into by AKITA concurrently with the completion of the Arrangement.
Xtreme was a drilling company that operated land-based contract drilling rigs in the United States (“US”). The Arrangement increased
AKITA’s US-based rigs from four rigs to 17 rigs.
The following summarizes the major classes of consideration transferred at the Arrangement date:
$Thousands
Cash paid
Shares issued
Total consideration
September 11, 2018
$ 45,000
122,393
$ 167,393
The following table summarizes the recognized amounts of assets acquired and liabilities assumed at the Arrangement date.
$Thousands
Cash
Accounts receivable
Income tax recoverable
Inventory
Prepaid expenses
Restricted cash
Assets held for sale
Drilling rigs
Property and equipment
Land and building
Accounts payable and accrued liabilities
Current portion of long-term debt
Long-term debt
Total consideration
September 11, 2018
$ 1,072
18,668
410
980
853
756
1,971
175,756
10,479
2,546
(30,683)
(4,475)
(10,940)
$ 167,393
The purchase price allocation is based on Management’s best estimate of fair value and has been retrospectively adjusted to reflect
new information obtained between September 11, 2018 and December 31, 2018 about conditions that existed at the acquisition date.
47
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As part of the Arrangement, AKITA assumed an asset held for sale valued at $1,971,000 ($1,500,000 USD). In October 2018, the
Company sold this asset for its fair value.
At September 11, 2018, Xtreme had an unrecognized deferred tax asset. AKITA did not recognize this deferred tax asset in the purchase
price allocation as management felt that the recoverability of this asset is uncertain.
The Arrangement has been accounted for using the acquisition method, whereby the assets acquired and the liabilities assumed were
recorded at their fair values. The Company assessed the fair values of the net assets acquired based on management’s best estimate
of the market value, which takes into consideration the condition of the assets acquired, current industry conditions and the discounted
future cash flows expected to be received from the assets, as well as the amount that is expected to settle the outstanding liabilities.
Subsequent to the Arrangement date, Xtreme’s operating results have been included in the Company’s revenues, expenses and capital
spending.
From the date of the Arrangement on September 11, 2018, Xtreme contributed an estimated $35.3 million of revenue and $3.1 million
of net income before taxes for the Company. If the business combination had been completed on January 1, 2018, Xtreme’s estimated
additional contribution to the revenue and net loss before income tax for the year ended December 31, 2018, would have been $65.0
million and $14.0 million, respectively.
The Company incurred costs related to the Arrangement for the year ended December 31, 2018 of $2.4 million. These costs mainly relate
to due diligence and external legal fees. These costs have been included in the selling and administrative expenses on the consolidated
statements of net loss.
RESULTS FOR THE YEAR
4. Net Loss per Share
Basic earnings per share is calculated by dividing the net income for the period attributable to shareholders of the Company by the
weighted average number of Class A Non-Voting and Class B Common shares outstanding during the period.
Diluted earnings per share is calculated by adjusting the weighted average number of Class A Non-Voting and Class B Common shares
outstanding to assume conversion of all dilutive potential Class A Non-Voting shares, typically stock options granted to directors and
employees. The calculation is performed for the stock options to determine the number of shares that could have been acquired at fair
value (determined as the average quarterly or annual, as appropriate, market share price of the Company’s outstanding Class A Non-
Voting shares) based on the monetary value of the subscription rights attached to outstanding stock options. The number of shares
calculated as above is compared with the number of shares that would have been issued assuming the exercise of stock options.
48
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Net loss ($Thousands)
Weighted average outstanding shares
Incremental shares for diluted earnings (1)
Weighted average outstanding shares for earnings per share - diluted
Loss per share - basic
Loss per share - diluted
Year Ended
December 31
2018
December 31
2017
$ (15,939)
$ (39,177)
24,551,542
17,945,661
—
—
24,551,542
17,945,661
$ (0.65)
$ (2.18)
$ (0.65)
$ (2.18)
(1) For the year ended December 31, 2018, 1,053,500 of the outstanding shares (2017 – 779,500) that would have been issued under the Stock Option Plan were excluded in
calculating the weighted average number of diluted shares as the Company incurred a net loss during the year and therefore the shares were considered anti-dilutive.
5. Revenue
IFRS 15 Revenue from Contracts with Customers – Impact of Adoption
The Company has applied IFRS 15 Revenue from Contracts with Customers effective January 1, 2018 on a modified retrospective
basis. The adoption of IFRS 15 resulted in changes in accounting policies which are described below.
The Company’s 2017 revenue policy is that revenue resulting from the supply of contracted services is recorded by the percentage of
completion method. Contract revenue resulting from daywork contracts is recorded based upon the passage of time. The receipt of
unearned contract revenue is recorded as deferred revenue until the contracted passage of time has occurred. There are no substantial
differences between the accounting policies adopted under IFRS 15 and the revenue accounting polices previously adopted by the
Company. There are no adjustments to amounts recognized in the financial statements as a result of the adoption of this standard.
IFRS 15 Revenue from Contracts with Customers – Accounting Policies
Revenue is recognized when the Company satisfies a performance obligation by transferring promised goods or services to a customer
and the amount recorded is measured at the fair value of the consideration received. A typical contract with a customer includes
performance obligations to provide drilling services and rig equipment, which are satisfied over time. Once determined, the transaction
price will be allocated to each performance obligation based on stand-alone selling prices. Where stand-alone selling prices are not
directly observable, the Company will make an estimate based on expected cost-plus margin.
Where possible, the Company will apply the practical expedient not to disclose the transaction price for unsatisfied performance if the
performance obligation is part of a contract that has an original expected duration of one year or less. The Company does not expect to
have any contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer
exceeds one year. Consequently, the Company does not adjust any of the transaction prices for the time value of money.
The receipt of unearned contract revenue is recorded as deferred revenue until the contracted passage of time has occurred. Contract
cancellation revenue is recognized when both parties to the contract have agreed upon an amount, collection is probable, and the
Company does not have any further services to render in order to earn the estimated revenue.
49
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Significant Estimates and Judgments – Relative Stand-Alone Selling Price
The Company’s revenue streams are comprised of the following:
$Thousands
Contract drilling services
Rig lease rental
Total Revenue
Year Ended
December 31
2018
December 31
2017
$ 59,806
$ 34,454
58,555
36,744
$ 118,361
$ 71,198
The majority of the Company’s contracts contain both a lease and a service element. IFRS 15 requires that revenue from contracts
with customers be presented separately from lease revenue. In this case, the transaction price will be allocated to each of the lease
and service elements based on the stand-alone selling prices. Where these are not directly observable, they are estimated based on
expected cost-plus margin.
Significant Customers
During 2018, three customers (2017 – two customers) each provided more than 10% of the Company’s revenue. While the loss of one
or more of these customers may have a material adverse effect on the financial results of the Company, in management’s assessment,
the future viability of the Company is not dependent upon these major customers.
6. Expenses by Nature
The Company presents certain expenses in the consolidated Statements of Net Loss and Comprehensive Loss by function. The
following table presents those expenses by their nature:
Year Ended
December 31
2018
December 31
2017
$ 69,534
$ 48,983
6,668
20,969
12,015
7,408
13,377
6,047
$ 109,186
$ 75,815
$ 86,575
$ 62,156
22,611
13,659
$ 109,186
$ 75,815
$Thousands
Expenses
Salaries, wages and benefits
Materials and supplies
Repairs and maintenance
External services and facilities
Total Expenses
Allocated to:
Operating and maintenance
Selling and administrative
Total Expenses
50
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 7. Income Taxes
Income taxes are comprised of current and deferred income taxes.
Current taxes are calculated using tax rates and tax laws that have been enacted or substantively enacted at the end of the reporting
period.
Deferred tax is recognized, using the liability method, on temporary differences arising between the tax basis of assets and liabilities
and their carrying amounts in the consolidated financial statements. Deferred taxes are measured using tax rates that are enacted or
substantively enacted at the end of the reporting period and are expected to apply when the deferred tax asset is realized or the liability is
settled. Deferred tax assets are recognized to the extent that it is probable that the assets can be recovered.
Income taxes are comprised of the following:
$Thousands
Current tax expense (recovery)
Deferred tax expense (recovery)
Total income tax expense (recovery)
Year Ended
December 31
2018
December 31
2017
$ 143
$ (2,990)
3,508
(11,063)
$ 3,651
$ (14,053)
The following table reconciles the income tax expense (recovery) using a weighted average Canadian federal and provincial rate of
27.00% (2017 – 26.83%) to the reported tax expense (recovery). The rate increase is due to more of the Company’s revenue being
earned in higher tax rate jurisdictions. The reconciling items represent, aside from the impact of tax rate differentials and changes,
non-taxable benefits or non-deductible expenses arising from permanent differences between the local tax base and the financial
statements.
$Thousands
Loss before income taxes
Year Ended
December 31
2018
December 31
2017
$ (12,288)
$ (53,230)
Expected income tax recovery at the statutory rate
$ (3,301)
$ (14,281)
Add (deduct):
Change in income tax rates
Permanent differences
Jurisdictional rate difference
Rate difference on loss carryback
Change in unrecognized deferred tax asset
Return to provision adjustment
Other
94
(123)
1,089
-
6,164
(342)
70
(97)
107
(20)
168
71
132
(133)
Total income tax expense (recovery)
$ 3,651
$ (14,053)
51
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The deferred tax balance consists of the following:
$Thousands
Property,
Plant and
Equipment
Defined
Benefit
Pension Plan
Benefits
Non-capitlal
Losses
Other
Total
Balance as at December 31, 2016
$ 24,386
$ (1,183)
$ -
$ 499
$ 23,702
Credited to the statement of net loss
Credited to other comprehensive loss
Balance as at December 31, 2017
Charged (credited) to net loss
Credited to other comprehensive income
(10,848)
-
13,538
9,781
-
(89)
(47)
-
-
(1,319)
-
22
135
(6,150)
-
-
(126)
(11,063)
-
373
(145)
(47)
12,592
3,508
135
Balance as at December 31, 2018
$ 23,319
$ (1,162)
$ (6,150)
$ 228
$ 16,235
A net deferred tax asset has not been recognized for $53 million (2017 – Nil), this amount is primarily non-capital losses carried
forward.
Significant Estimates and Judgments - Deferred Income Taxes
The Company makes estimates and judgments relating to the measurement of deferred income taxes, including future tax rates, timing of
reversals of temporary timing differences and the anticipated tax rules that will be in place when timing differences reverse.
8. Segmented Information
The Company operates one operating segment, providing contract drilling services primarily to the oil and gas industry. From time to
time, the Company is involved in other forms of drilling related to potash mining and the development of storage caverns. The Company
determines its operating segments based on internal information regularly reviewed by management to allocate resources and assess
performance.
During 2018 the Company commenced operations in the US. During the third quarter of 2018, the shareholders of Xtreme and AKITA
approved the Arrangement to combine their respective businesses (Note 3 – Business Combination). The Arrangement increased AKITA’s
US operations from four rigs to 17 rigs. Geographical information is provided for the Company’s operating segments below:
$Thousands
Revenue
Revenue less costs and
expenses
Year Ended December 31, 2018
Year Ended December 31, 2017
Canada
US
Total
Canada
US
Total
$ 64,993
$ 53,368
$ 118,361
$ 71,198
$ -
$ 71,198
$ (18,399)
$ 960
$ (17,439)
$ (60,866)
$ -
$ (60,866)
$Thousands
Canada
US
Total
Canada
US
Total
December 31, 2018
December 31, 2017
Property, plant and equipment
$ 116,630
$ 233,718
$ 350,348
$ 170,599
$ -
$ 170,599
52
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
LONG-TERM ASSETS
9. Property, Plant and Equipment
Property, plant and equipment are recognized at cost less accumulated depreciation and impairment.
Cost includes expenditures directly attributable to the acquisition of the item. The cost of assets constructed by the Company includes
the cost of all materials and services used in the construction and direct labour on the project. Costs cease to be capitalized as soon
as the asset is ready for productive use. Subsequent costs associated with equipment upgrades that result in increased capabilities or
performance enhancements of property, plant and equipment are capitalized. Costs incurred to repair or maintain property, plant and
equipment are charged to expense as incurred. The carrying amount of a replaced asset is derecognized when replaced.
Significant Estimates and Judgments - Useful Lives of Drilling Rigs
Depreciation is recognized on property, plant and equipment excluding land. Depreciation methods and rates have been selected
so as to amortize the net cost of each asset over its expected useful life to its estimated residual value. The estimated useful lives,
residual values and depreciation methods are reviewed at the end of each annual reporting period.
Effective January 1, 2018, the Company changed its method for depreciating drilling rigs from unit-of-production to straight-line and
revised estimates related to drilling rig salvage values. The change in depreciation methodology reflects the technological developments
within the drilling industry and management believes that straight-line depreciation better reflects the future economic benefits related
to these assets. The change in depreciation methodology was applied prospectively. The estimated effect of the change in depreciation
method on the Company’s financial statements for the year ended December 31, 2018 is not material.
Major renovations are depreciated over the remaining useful life of the related asset or to the date of the next major renovation,
whichever is sooner.
A summary of depreciation methodologies for the Company’s major property and equipment classes as at December 31, 2018 is as
follows:
Equipment Class
Drilling rigs
Major inspection and overhaul expenditures
Drill pipe and other ancillary drilling equipment
Furniture, fixtures and equipment
Depreciation Method
Depreciation Rates
Straight-line
Straight-line
Straight-line
Straight-line
10 to 20 years
3 to 5 years
2 to 8 years
10 years
Buildings
Declining balance
4% to 10% per annum
The salvage values for the drilling rig equipment ranges from zero to 10% depending on the specific rig component. There is no salvage
values for the remaining equipment classes.
53
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment Continuity
Cost
$Thousands
Land and
Buildings
Drilling Rigs
Other
Total
Balance as at December 31, 2016
$ 4,302
$ 405,935
$ 7,964
$ 418,201
Additions
Disposals
Asset writedowns and impairment loss
Balance as at December 31, 2017
Additions
Xtreme additions
Disposals
-
-
-
4,302
2,601
2,546
-
20,307
(20,817)
262
(129)
(37,908)
-
367,517
14,376
184,126
(7,622)
8,097
569
2,109
(567)
20,569
(20,946)
(37,908)
379,916
17,546
188,781
(8,189)
Balance as at December 31, 2018
$ 9,449
$ 558,397
$ 10,208
$ 578,054
Accumulated Depreciation
$Thousands
Balance as at December 31, 2016
Disposals
Depreciation expense
Asset writedowns and impairment loss
Balance as at December 31, 2017
Disposals
Depreciation expense
Land and
Buildings
Drilling Rigs
Other
Total
$ 1,351
$ 204,186
$ 6,772
$ 212,309
-
73
(20,799)
25,971
(119)
667
-
(8,785)
-
(20,918)
26,711
(8,785)
1,424
200,573
7,320
209,317
-
123
(7,555)
25,627
(560)
754
(8,115)
26,504
Balance as at December 31, 2018
$ 1,547
$ 218,645
$ 7,514
$ 227,706
Net Book Value
$Thousands
As at December 31, 2016
As at December 31, 2017
As at December 31, 2018
Land and
Buildings
Drilling Rigs
Other
Total
$ 2,951
$ 201,749
$ 1,192
$ 205,892
$ 2,878
$ 166,944
$ 777
$ 170,599
$ 7,902
$ 339,752
$ 2,694
$ 350,348
At December 31, 2018, the Company had $286,000 in Property, Plant and Equipment that was not being depreciated, as these assets
were under construction (December 31, 2017 – $16,000).
In addition to depreciation on its Property, Plant and Equipment, the Company had amortization expense of $110,000 for the year
ended December 31, 2018 (2017 - $415,000).
Impairment of Assets
International Accounting Standard 36, “Impairment of Assets”, requires an entity to consider both internal and external factors when
assessing whether there are indications of asset impairment at each reporting period. At December 31, 2018, there were no internal
54
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
indicators of asset impairment, however there were external indicators of asset impairment. The uncertainty around oil prices impacts
the earnings potential of the Company’s CGUs and at December 31, 2018 the book value of the Company’s net assets was greater than
its market capitalization; therefore, the Company tested its CGUs for asset impairment.
Upon completion of its asset impairment testing, the Company concluded that there was no asset impairment required at December
31, 2018 (2017 - $16,000,000). The Company also concluded that there were no reversals of previous asset impairments required
at December 31, 2018.
The accuracy of asset impairment testing is affected by estimates and judgments in respect of the inputs and parameters that are used
to determine recoverable amounts. In performing its asset impairment test at December 31, 2018, management determined value in
use for each of its CGUs using estimated discounted cash flows, which included estimates of future cash flows, expectations regarding
cash flow variability, a determination of the discount rate and consideration of the recoverable amount and salvage value of each CGU.
At December 31, 2017, management determined recoverable amounts for its CGUs using a combination of value-in-use and fair value
less costs to dispose. IFRS considers this approach to constitute a Level 3 hierarchy in its determination of value.
The assumptions used in the value-in-use impairment tests were based on the Company’s Board approved 2019 budget and business
plan covering a three year period and applied an average growth rate ranging from 2% to 9% over a 10 year period depending on the
CGU being analyzed. In forecasting its projected cash flows the Company assumed that current market conditions will not persist into
the future. The Company assumed a pre-tax discount rate of 13%, in order to calculate the present value of projected cash flows.
Determination of this discount rate included an analysis of the cost of debt and equity for the Company and the Canadian drilling
industry incorporating a risk premium based on current market conditions. This valuation has a fair value hierarchy of Level 3.
Asset impairment testing is subject to numerous assumptions, inherent risks and uncertainties, both general and specific, and the risk
that the predictions will not be realized. As a result, the following sensitivity analysis has been performed to recognize that additional
outcomes are possible:
• Reduced future revenue assumptions by 5%;
•
Increased inflation for cash outflows to 5%; and
•
Increased the pre-tax discount rate from 13% 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 from $9 million to $32 million. As the base case test
represented management’s best estimates, these sensitivity changes were not included in the recoverable amounts used in the 2018
asset impairment testing or the 2017 asset impairment loss reported.
10. Investments in Joint Ventures
The Company conducts certain rig operations via joint ventures with Aboriginal or First Nations partners whereby rig assets are jointly
owned. Currently, there are seven different Aboriginal or First Nations groups with equity investments in five of AKITA’s rigs. These
equity investments are facilitated through joint venture agreements. Each joint venture operates the rig with the joint venture partners
owning a share of each rig directly. The equity ownership for each Aboriginal or First Nations partner varies between rigs and groups
and ranges from 5% to 50% per group per rig. While joint venture interests are at least 50% owned by the Company, in each case
the joint venture is governed on a joint basis. The accounting policies of the joint ventures are consistent with the policies described
herein.
55
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The Company has assessed the nature of its joint arrangements and determined them to be joint ventures. Joint ventures are
accounted for using the equity method of accounting whereby the Company’s share of individual assets and liabilities are recognized
as an investment in the joint venture account on the consolidated statements of financial position, and revenues and expenses are
recognized with net earnings as a gain/loss from investment in the joint venture account on the consolidated statements of income
and comprehensive income.
The following table lists the Company’s active joint ventures:
Active Joint Ventures
AKITA Wood Buffalo Joint Venture 25
AKITA Wood Buffalo Joint Venture 26
AKITA Wood Buffalo Joint Venture 27
AKITA Wood Buffalo Joint Venture 28
AKITA Equtak Joint Venture 61
Continuity of Investments in Joint Ventures
$Thousands
Balance as at December 31, 2016
Net income for the year ended December 31, 2017
Distributions for the year ended December 31, 2017
Balance as at December 31, 2017
Net income for the year ended December 31, 2018
Distributions for the year ended December 31, 2018
Balance as at December 31, 2018
Summarized Joint Venture Financial Information
Operating
Location
AKITA
Ownership Interest
Canada
Canada
Canada
Canada
Canada
85%
85%
85%
70%
50%
Investments in
Joint Ventures
$ 3,252
6,939
(6,095)
4,096
6,168
(5,808)
$ 4,456
This summarized financial information is a reconciliation of the Company’s investments in joint ventures to the aggregate of the
amounts included in the IFRS financial statements of the joint ventures which include both the Company’s and joint venture partners’
interests.
56
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$Thousands
Cash
Other current assets
Non-current assets
Total assets
Total liabilities
Net assets
$Thousands
Revenue
Net income and
comprehensive income
December 31, 2018
December 31, 2017
AKITA % JV Partner %
Total
AKITA %
JV Partner %
Total
$ 1,334
$ 261
$ 1,595
$ 1,027
$ 217
$ 1,244
4,704
1,148
55
-
6,093
1,637
1,409
526
5,852
55
7,502
2,163
5,622
1,193
6,815
55
6,704
2,608
-
1,410
555
55
8,114
3,163
$ 4,456
$ 883
$ 5,339
$ 4,096
$ 855
$ 4,951
Year Ended December 31, 2018
Year Ended December 31, 2017
AKITA % JV Partner %
Total
AKITA %
JV Partner %
Total
$ 22,797
$ 4,737
$ 27,534
$ 26,513
$ 5,915
$ 32,428
$
6,168
$ 1,246
$
7,414
$ 6,939
$ 1,331
$ 8,270
11. Restricted Cash
Restricted cash is comprised of the following:
$Thousands
Bank loan guarantee
Letter of credit security
Total restricted cash
December 31, 2018
December 31, 2017
$ —
$ 1,525
756
—
$ 756
$ 1,525
As part of the Arrangement, AKITA assumed restricted cash held with a financial institution as security for two outstanding letters of
credit. At December 31, 2018, the restricted cash balance was $756,000. The restrictions are in the process of being removed as the
Company has met its obligations under the original terms of the restriction.
WORKING CAPITAL
12. Financial Instruments
IFRS 9 Financial Instruments
IFRS 9 replaces the provisions of IAS 39 that relate to recognition, classification and measurement of financial assets and financial
liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting. The adoption of IFRS 9
Financial Instruments on January 1, 2018, resulted in changes in accounting policies. The new accounting policies are set out below.
57
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Impairment – Impact of Adoption
The Company was required to revise its impairment methodology under IFRS 9 for accounts receivable. The impact of the change in
impairment methodology on the Company’s financial statements is immaterial.
For trade receivables, the Company applies the simplified approach to measuring expected credit losses which uses a lifetime expected
loss allowance for all trade receivables.
To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit-risk
characteristics and analyzed. The adjustments arising from the new impairment rules are not reflected in the statement of financial
position as at December 31, 2017, but are recognized in the opening statement of financial position on January 1, 2018.
The loss allowance increased by $179,000 to $229,000 for accounts receivable as at January 1, 2018.
Accounts receivable are written-off when there is no reasonable expectation of recovery. Indicators that there is no reasonable
expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the Company and a failure
to make contractual payments for a period of greater than 180 days past due.
IFRS 9 Financial Instruments – Accounting policies applied from January 1, 2018
Due to the short-term nature of the Company’s financial instruments, fair values approximate carrying values unless otherwise stated.
A. Classification and measurement
From January 1, 2018, the Company classifies its financial instruments in the following measurement categories depending on the
company’s business model for managing financial assets and the contractual terms of the cash flows:
i. Financial assets at amortized cost:
Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest
are measured at amortized cost. Interest income from these financial assets is included in finance income using the effective interest
rate method. Any gain or loss arising on derecognition is recognized directly in profit or loss and presented in other gains/(losses),
together with foreign exchange gains and losses. As at December 31, 2018, the Company’s financial assets included in this category
include cash, restricted cash and accounts receivable.
ii. Financial liabilities at amortized cost:
Financial liabilities that are measured at amortized cost are initially recognized at the amount required to be paid less, when material,
a discount to reduce the payables and accrued liabilities to fair value. Subsequently, financial liabilities are measured at amortized
cost using the effective interest method. As at December 31, 2018, the Company's financial liabilities included in this category include
accounts payable and accrued liabilities and its operating loan facility.
iii. Fair value through other comprehensive income (“FVOCI”):
Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent
solely payments of principal and interest, are measured at FVOCI. Movements in the carrying amount are taken through Other
Comprehensive Income (“OCI”), except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains
and losses which are recognized in profit or loss. When the financial asset is derecognized, the cumulative gain or loss previously
58
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS recognized in OCI is reclassified from equity to profit or loss and recognized in other gains/(losses) and impairment expenses are
presented as a separate line item on the statement of profit or loss. As at December 31, 2018, the Company held no financial
instruments in this category.
iv. Fair value through profit or loss (“FVPL”):
Assets that do not meet the criteria for amortized cost or FVOCI are measured at FVPL. A gain or loss on a debt investment that is
subsequently measured at FVPL is recognized in profit or loss and presented net within other gains/(losses) in the period in which it
arises.
Financial assets at FVPL are financial assets held for trading. Derivatives are also categorized as held for trading and measured at
FVPL unless they are designated as hedges. As at December 31, 2018, the Company held no financial instruments in this category.
B. Impairment of financial assets
From January 1, 2018, the Company assesses, on a forward-looking basis, the expected credit losses associated with its debt instruments
carried at amortized cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in
credit risk.
Financial Guarantee Contracts
The Company guarantees bank loans made to joint venture partners and has provided an assignment of monies on deposit with respect
to these loans. The Company has recorded the loan guarantee benefit at its fair value of $nil at December 31, 2018 (December 31, 2017
- $9,000). The fair value measurement of the financial guarantee benefit was based on a valuation model that utilized indirect observable
market data.
Financial Instrument Risk Exposure and Management
The Company is exposed to the following risks associated with its financial instruments:
Credit risk
Credit risk is the risk of financial loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations
and arises primarily from the Company’s trade and other receivables. The credit risk is managed via the Company’s credit-granting
procedures which include an evaluation of the customer’s financial condition and payment history. In certain circumstances the
Company may require customers to make advance payment prior to the provision of services, issue a letter of credit or take other
measures to reduce credit risk. Management has estimated provisions to recognize potential impairments, which have been included
in the accounts.
The terms of the Company’s contracts generally require payment within 30 days. The Company continuously monitors the recoverability
of its accounts receivables balances and subject to agreed payment terms, generally considers the balance to be overdue when it ages
over 90 days. In management’s judgment there is no significant credit risk exposure in the balances outstanding at:
59
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $Thousands
Within 30 days
31 to 60 days
61 to 90 days
Over 90 days
Estimated credit losses
Total trade accounts receivable
Contract cancellation receivable
Total accounts receivable
December 31, 2018
December 31, 2017
$ 30,793
$ 11,459
9,920
673
1,615
(268)
42,733
-
3,908
846
220
(50)
16,383
10,641
$ 42,733
$ 27,024
Significant Estimates and Judgments – Estimated Credit Losses
The loss allowances for financial assets are based on assumptions about risk of default and expected loss rates. The Company uses
judgment in making these assumptions and selecting the inputs to the impairment calculation, based on the Company’s past history,
existing market conditions as well as forward-looking estimates at the end of each reporting period.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company mitigates
liquidity risk through management of its working capital balance, monitoring actual and forecasted cash flows and using its operating
loan facility when necessary. At December 31, 2018, this risk was limited by having a banking facility sufficient to meet all current
liabilities.
Maturity information regarding the Company’s long-term debt is as follows:
$Thousands
Less than 1 Year
1-4 Years
Total
Debt assumed from acquisition - principal
$ 4,004
$ 10,113
$ 14,117
Debt assumed from acquisition - interest
Bank credit facility - principal
Bank credit facility - interest
Total
1,709
4,827
4,287
1,464
63,995
7,483
3,173
68,822
11,770
$ 14,827
$ 83,055
$ 97,882
Foreign currency exchange - transaction risk
Foreign currency exchange transaction risk is the risk that future cash flows will fluctuate as a result of changes in foreign currency
exchange rates. The Company’s Canadian operations are primarily denominated in Canadian dollars with limited exposure to foreign
currency exchange transaction risk through it’s US denominated capital expenditures or financial instruments. From time to time the
company may enter into forward currency contracts to manage this risk.
Foreign currency exchange - translation risk
The Company is exposed to foreign currency exchange translation risk as revenues, expenses and working capital from its US operations
are denominated in US dollars. In addition, the Company’s foreign subsidiaries are subject to unrealized foreign currency exchange
translation gains or losses on consolidation.
60
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Interest rate risk
The Company is exposed to changes in interest rates on borrowings under its operating loan facility which is subject to floating interest
rates.
Commodity risk
The Company is exposed to the effects of fluctuating crude oil and natural gas prices as well as the resultant changes in the exploration
and development budgets of its customers.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities are comprised of the following:
$Thousands
Trade payables
Statutory liabilities
Accrued expenses
Post-employment benefits
December 31, 2018
December 31, 2017
$ 3,905
$ 3,511
302
19,020
90
694
9,401
90
Accounts payable and accrued liabilities
$ 23,317
$ 13,696
13. Change in Non-Cash Working Capital
$Thousands
Change in non-cash working capital:
Accounts receivable
Inventory
Prepaid expenses and other
Accounts payable and accrued liabilities
Finance leases
Year Ended
December 31, 2018
December 31, 2017
$ 2,780
$ 1,196
586
-
(1,504)
(16,814)
(15)
5,278
20
-
Total change in non-cash working capital
$ (14,932)
$ 6,459
Pertaining to:
Operating activities
Investing activities
$ (17,547)
$ 6,269
2,615
190
Total change in non-cash working capital
$ (14,932)
$ 6,459
61
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DEBT AND EQUITY
14. Debt
As part of the Arrangement, AKITA assumed $9,694,000 ($7,376,000 USD) in debt held by Xtreme. The loan is payable in monthly
installments of $295,000 ($228,000 USD) over 31 months, with a balloon payment due at the end of the term. The borrowing has an
implied interest rate of approximately 11.7 percent. The effective annual rate agreement is approximately 12.9 percent. There are no
debt covenants related to this debt agreement.
As part of the Arrangement, AKITA assumed $4,771,000 ($3,631,000 USD) in debt held by Xtreme. This loan is secured by one of
the Company’s new rigs. The loan is payable in monthly installments of $153,000 ($118,000 USD) over 30 months, with a balloon
payment due at the end of the term. The borrowing has an implied interest rate of approximately 17.7 percent. There are no debt
covenants related to this debt agreement.
Operating Loan Facility
The Company had an operating loan facility with its principal banker which concluded at the Arrangement date. The facility totaled
$50,000,000 with an interest rate of 1.25% over prime interest rates or 2.50% over guaranteed notes, depending on the preference
of the Company. Security for this facility included a General Security Agreement covering all current and future assets. For the period
January 1, 2018 to September 11, 2018, the Company drew and repaid $13,900,000 from this operating loan facility.
The operating loan facility was replaced by a new credit agreement with the Company’s principal banker. The new operating loan facility
totals $125,000,000 with the term ending in 2022. The interest rate ranges from 50 to 200 basis points over prime interest rates
depending on the Funded Debt to EBITDA(1) ratio. Security for this facility includes all present and after-acquired personal property and
a first floating charge over all other present and after-acquired property including real property. The financial covenants are:
1)
Funded Debt(1) to EBITDA(1) Ratio: the Company shall ensure that:
(i) for the Fiscal Quarter ending December 31, 2018, the Funded Debt(1) to EBITDA(1) Ratio shall not be more than 4.00:1.00;
(ii) for the Fiscal Quarter ending March 31, 2019, the Funded Debt(1) to EBITDA(1) Ratio shall not be more than 3.50:1.00; and
(iii) for the Fiscal Quarter ending June 30, 2019 and each Fiscal Quarter ending thereafter, the Funded Debt(1) to EBITDA(1)
Ratio shall not be more than 3.00:1.00.
The Funded Debt(1) to EBITDA(1) Ratio shall be calculated quarterly on the last day of each Fiscal Quarter on a rolling four
quarter basis; and
2) EBITDA(1) to Interest Expense Ratio: the Company shall not permit the EBITDA(1) to Interest Expense Ratio, calculated quarterly
on the last day of each Fiscal Quarter on a rolling four quarter basis, to fall below 3.00:1.00.
The facility also includes a borrowing base calculation as follows:
The sum of:
(i)
(ii)
75% of Eligible Accounts Receivable(1); plus
40% of the net book value of all Eligible Fixed Assets(1); less
(iii)
Priority Payables(1) of the Loan Parties.
62
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company is in compliance with its operating loan facility covenants.
(1) Funded Debt, EBITDA, Eligible Accounts Receivable, Eligible Fixed Assets and Priority Payables are all defined terms in the Company’s
credit agreement.
The Company borrowed $74,991,000 from this facility as at December 31, 2018, to pay the cash consideration from the Arrangement
and related costs.
$Thousands
December 31, 2018
Balance at December 31, 2017
$ -
Debt assumed
Drawn on credit facility
Repayment of debt
Total debt
$Thousands
Current portion
Long-term portion
Total debt at December 31, 2018
15. Capital Management
14,836
74,210
(6,107)
$ 82,939
December 31, 2018
$ 8,831
74,108
$ 82,939
The Company has determined capital to include long-term debt and share capital. 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 the capital structure and makes adjustments to it 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 shares, issue new shares, sell assets, or take on long-term debt.
16. Dividends per Share
Dividend distribution to the Company’s shareholders is recognized as a liability in the Company’s financial statements in the period in
which the Company’s Board of Directors approves the dividends.
63
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following table provides a history of dividends over the past two years:
Declaration Date
Payment Date
March, 2017
May, 2017
August, 2017
November, 2017
March, 2018
May, 2018
August, 2018
November, 2018
April, 2017
July, 2017
October, 2017
January, 2018
April, 2018
July, 2018
October, 2018
January, 2019
17. Share Capital
Authorized:
Per Share
$ 0.085
$ 0.085
$ 0.085
$ 0.085
$ 0.085
$ 0.085
$ 0.085
$ 0.085
Total
($000's)
$ 1,525
$ 1,525
$ 1,525
$ 1,525
$ 1,525
$ 1,525
$ 3,367
$ 3,367
• An unlimited number of Series Preferred shares, issuable in series, designated as First Preferred shares, no par value
• An unlimited number of Series Preferred shares, issuable in series, designated as Second Preferred shares, no par value
• An unlimited number of Class A Non-Voting shares, no par value
• An unlimited number of Class B Common shares, no par value
Issued:
• All issued shares are fully paid
The shares outstanding at December 31, 2018 and December 31, 2017 are:
(Number of Shares)
Class A Non-Voting
Class B Common
Total
Shares outstanding at December 31, 2017
16,291,877
1,653,784
17,945,661
Shares issued for Arrangement
21,662,530
-
21,662,530
Shares outstanding at December 31, 2018
37,954,407
1,653,784
39,608,191
Each Class B Common share may be converted into one Class A Non-Voting share at the shareholder’s option.
In the event that an offer to purchase Class B Common shares is made to all or substantially all shareholders of Class B Common
shares while at the same time an offer to purchase Class A Non-Voting shares on the same terms and conditions is not made to the
shareholders of Class A Non-Voting shares, and shareholders of more than 50% of the Class B Common shares do not reject the offer
in accordance with the terms of AKITA’s articles of incorporation, then the shareholders of Class A Non-Voting shares will be entitled to
exchange each Class A Non-Voting share for one Class B Common share for the purpose of depositing the resulting Class B Common
share pursuant to the terms of the takeover bid. The two classes of shares rank equally in all other respects.
Incremental costs attributable to the issue of new shares or options are recorded as a reduction in equity, net of income taxes.
64
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Shares repurchased by the Company are recorded as a reduction of shareholders’ equity based upon the consideration paid, including any
directly incremental costs, net of income taxes. All shares repurchased by the Company are cancelled upon repurchase.
The Company did not establish a normal course issuer bid in 2018 or 2017.
PERSONNEL
18. Share-Based Compensation Plans
The Company has three share-based compensation plans. Stock options qualify as an equity-settled share-based payment plan while
deferred share units (“DSUs”) and share appreciation rights (“SARs”) qualify as cash-settled share-based payment plans. For all three
of the share-based compensation plans, associated services received are measured at fair value and are calculated by multiplying the
number of options, DSUs or SARs expected to vest with the fair value of one option, DSU or SAR as of the grant date.
Stock Options
Subject to the approval of the Company’s Board of Directors, the Company’s Corporate Governance, Nomination, Compensation and
Succession Committee may designate directors, officers, employees and other persons providing services to the Company to be granted
options to purchase Class A Non-Voting shares.
The vesting provisions and exercise period (which cannot exceed 10 years) are determined at the time of the grant. Each tranche is
considered a separate award with its own vesting period and grant date fair value. The fair value of each tranche is measured at the
date of grant using either the Binomial or the Black Scholes option pricing model. The number of awards expected to vest is reviewed
at least annually, with any impact being recognized immediately.
The following table summarizes stock options reserved, granted and available for future issuance:
(Number of options)
December 31, 2018
December 31, 2017
Reserved under the current stock option plan (1)
Balance at beginning of year
Expired during the year
Granted during the year
Available for future issuance
3,100,000
822,000
-
(177,500)
644,500
3,100,000
818,500
101,000
(97,500)
822,000
(1) The number of shares reserved under the current stock option plan (May 14, 1998 to present) was revised in May, 2017 to include the shares reserved under the Company’s
initial stock option plan (January 1, 1993 to May 14, 1998).
65
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS A summary of the Company’s stock options is presented below:
2018
2017
Options outstanding at January 1
Granted
Expired
Number of
Options
876,000
177,500
—
Weighted
Average
Exercise Price
$
$
10.45
5.62
—
Number of
Options
Weighted
Average
Exercise Price
879,500
$
10.83
97,500
$
8.26
(101,000)
$
$
11.67
10.45
Options outstanding at December 31
1,053,500
$
9.63
876,000
Options exercisable at December 31
756,000
$ 10.74
620,500
$
11.16
The following table summarizes outstanding stock options at December 31:
Vesting
Period
(Years)
5
5
5
5
5
5
5
5
5
Exercise
Price
$ 9.87
$10.32
$10.86
$13.81
$16.02
$10.28
$ 7.13
$ 8.26
$ 5.62
Number
Outstanding
130,000
76,000
82,500
87,500
115,000
90,000
197,500
97,500
177,500
Weighted Average
Contractual Life
2018
Remaining
Contractual
Life (Years)
1.2
2.2
3.2
4.7
5.7
6.2
7.3
8.3
9.7
5.9
Number
Exercisable
Number
Outstanding
130,000
130,000
76,000
82,500
87,500
76,000
82,500
87,500
115,000
115,000
72,000
90,000
118,500
197,500
39,000
35,500
97,500
2017
Remaining
Contractual Life
(Years)
2.2
3.2
4.2
5.7
6.7
7.2
8.3
9.3
6.1
Number
Exercisable
130,000
76,000
82,500
87,500
92,000
54,000
79,500
19,500
Deferred Share Units
The Company has a cash-settled share-based long-term incentive compensation plan for certain employees. Each DSU granted equates
to one Class A Non-Voting share and entitles the holder to receive a cash payment equal to the Company’s share price on the payment
date. DSU holders are entitled to share in dividends which are credited as additional DSUs at each dividend payment date. DSUs vest
immediately but are not exercisable until resignation or retirement from management and/or the Board of Directors.
Units issued under the Company’s DSU plan are measured at fair value using the intrinsic value method when granted and subsequently
re-measured at each reporting date using the Company’s Class A Non-Voting share price at the reporting date with the associated
expense recognized in general and administrative expense. The Company assumes a zero forfeiture rate.
66
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company’s deferred share unit plan is presented below:
Deferred share units outstanding at January 1
Granted during the year
Redeemed during the year
Issued in lieu of dividends
Change in fair value
Deferred share units outstanding at December 31
2018
2017
Deferred
Share Units
(#)
52,732
46,117
Fair
Value
($000's)
$388
238
-
-
3,521
-
102,370
22
(231)
$417
Deferred
Share Units
(#)
32,402
24,705
(6,134)
1,759
-
Fair
Value
($000's)
$274
210
(52)
13
(57)
52,732
$388
Share Appreciation Rights
SARs may be granted to directors, officers and key employees of the Company. The vesting provisions (which range from three to eight
years) and exercise period (which cannot exceed 10 years) are determined at the time of grant. The holder is entitled on exercise to
receive a cash payment from the Company equal to any increase in the market price of the Class A Non-Voting shares over the base
value of the SAR exercised. The base value is equal to the closing price of the Class A Non-Voting shares on the day before the grant.
Share-Based Compensation Expense
The fair value of the services received is recognized as selling and administrative expense. In the case of equity-settled share-based
payment plans, the selling and administrative expense results in a corresponding increase in contributed surplus over the vesting
period of the respective plan. When stock options are exercised, shares are issued and the amount of the proceeds, together with the
amount recorded in contributed surplus, is recognized in share capital. For cash-settled share-based payment plans, a corresponding
liability is recognized. The fair value of the cash-settled share-based payment plans is remeasured at each Statement of Financial
Position date through the Statement of Net Income and Comprehensive Income until settlement.
Share-based compensation expense consists of the following:
$Thousands
Stock option expense
Deferred share unit expense
Total share-based compensation expense
Year Ended
December 31, 2018
December 31, 2017
$ 201
29
$ 230
$ 215
166
$ 381
The stock option expense was determined using the Binomial Model based on the following assumptions. Expected volatility is
calculated by examining a historical 60 month (5 year) trading history up to the grant date, where significant outliers are excluded to
provide a better estimate.
67
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Risk-free interest rate
Expected volatility
Dividends yield rate
Option life
Weighted average share price
Forfeiture rate
Fair value of options
2018
2.30%
35.00%
5.40%
5.4 years
$ 5.62
0.00%
$ 1.29
2017
1.10%
32.00%
4.20%
5.4 years
$ 8.26
0.00%
$ 1.78
19. Employee Future Benefits
The Company has a defined contribution pension plan, registered under the Alberta Employment Pension Plans Act, that covers
substantially all of its Canadian employees. Under the provisions of the plan, the Company contributes 5% of regular earnings for
eligible employees on a current basis. In addition, employees having eligible terms of service are subject to admission into the
Company’s group RRSP. The Company makes contributions on behalf of these plans to a separate entity and has no legal or constructive
obligations to pay further contributions if the plans do not hold sufficient assets to pay the employee benefits relating to employee
service in current or prior periods.
Contributions to the Company’s defined contribution pension plan and the group RRSP are recognized as employee benefit expense
when they are due.
The Company has also established an unregistered defined benefit pension plan for certain current and retired employees. The defined
benefit plan, which provides for pensions based upon the age of the retiree at the date of retirement, is non-contributory and unfunded.
The Company obtains an actuarial valuation from an independent actuary subsequent to each year-end or if circumstances change.
The most recent evaluation was dated January 14, 2019, and was utilized in measuring the December 31, 2018 balances.
The defined benefit pension plan liability is the present value of the defined benefit obligation at the Statement of Financial
Position date. The cost of the defined benefit plan is determined using the projected unit credit method. The defined benefit
obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality Canadian
denominated corporate bonds that have terms to maturity approximating the terms of the related pension liability. Past service
costs are recognized in net income when incurred. Post-employment benefits expense is comprised of the interest on the
net defined benefit liability, calculated using a discount rate based on market yields on high quality bonds, and the current
service cost. Remeasurements consisting of actuarial gains and losses, the actual return on plan assets (excluding
the net interest component) and any change in the asset ceiling are recognized in other comprehensive income.
68
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$Thousands
Actuarial present value of defined benefit obligation at January 1
Interest cost
Current service cost
Benefits paid
Unrealized actuarial (gain) loss
2018
$ 4,922
171
298
(90)
(499)
2017
$ 4,393
166
277
(90)
176
Actuarial present value of defined benefit obligation at December 31
$ 4,802
$ 4,922
$Thousands
Pension liability allocated to:
Accounts payable and accrued liabilities
Non-current liabilities
Penison liability outstanding at December 31
Key Assumptions
$Thousands
Discount rate at beginning of the year
2018
2017
$ 90
4,712
$ 4,802
$ 90
4,832
$ 4,922
Year Ended
December 31, 2018
December 31, 2017
3.3%
3.6%
Anticipated retirement age of plan members
61 to 65 years
61 to 65 years
The Company’s pension expense is recorded in selling and administrative expenses and interest expense and is comprised of the
following:
$Thousands
Defined benefit pension plan
Interest cost
Service cost
Expense for defined benefit plan
Expense for defined contribution plan
Total pension expense
Year Ended
December 31, 2018
December 31, 2017
$ 171
$ 166
298
469
2,477
277
443
2,233
$ 2,946
$ 2,676
Significant Estimates and Judgments – Defined Benefit Pension Liability
Significant estimates used in the preparation of AKITA’s financial statements relate to the measurement of the non-current defined
benefit pension liability for selected current and retired employees that was recorded as $4,712,000 at December 31, 2018 (December
31, 2017 - $4,832,000). AKITA utilizes the services of a third party to assist in the actuarial estimate of the Company’s defined
69
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
benefit pension expense and liability. At December 31, 2018, a key assumption is the discount rate of 3.6% (2017 – 3.3%). From the
perspective of a sensitivity analysis, a 1% decrease in the discount rate would result in a $664,000 increase in the defined benefit
obligation while a 1% increase in the discount rate would result in a $550,000 decrease in the defined benefit obligation. Additionally,
if members’ lives should be one year longer than actuarial expectations, the defined benefit obligation would increase by $88,000.
Except for the impact on the discount rate used in the pension assumptions, recent changes in the global economy and related markets
have not otherwise affected the measurement of the Company’s defined benefit pension liability.
OTHER NOTES
20. Commitments and Contingencies
From time to time, the Company enters into drilling contracts with its customers that are for extended periods. At December 31, 2018,
the Company had twelve drilling rigs with multi-year contracts. Of these contracts, nine are due to expire in 2019 and three in 2020.
The Company has entered into two contracts with a related party to provide sponsorship and advertising at an annual cost of $325,000.
The Company is committed to operating leases for office and field facilities and finance leases for right-to-use assets. The table below
details approximate annual base rental and finance lease payments.
$Thousands
Less than 1 year
Between 1 and 5 years
December 31, 2018
December 31, 2017
$ 1,859
2,222
$ 4,081
$ 810
-
$ 810
As part of the Arrangement the Company assumed two equipment leases which are classified as finance leases. The leases have
stated interest rates of 5.55 percent and 5.71 percent and include bargain purchase options of $74,000 and $65,000 at the end of
the lease periods in December 2021.
At December 31, 2018, the Company had capital expenditure commitments of $3,302,000 due in 2019 (2017 – $2,532,000 due in
2018).
21. Related Party Transactions
All related party transactions were made in the normal course of business with regular payment terms and have been recorded at the
amounts agreed upon with the related parties.
a) ATCO Group and Spruce Meadows
The Company is related to the ATCO Group of companies and to Spruce Meadows through its controlling shareholder (see Note 1). The
transactions and period end balances with those affiliates are presented below:
70
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $Thousands
Revenue (computer services, rent)
Purchases
Operating (sponsorship and advertising (Note 21, other))
Selling and administrative
Year-end accounts payable
Year Ended
December 31, 2018
December 31, 2017
$ 84
$ 353
$ 57
$ 4
$ 84
$ 341
$ 53
$ 1
b)
Joint ventures and joint venture partners
The Company is related to its joint ventures. The joint ventures’ transactions and period balances with AKITA are presented
below:
$Thousands
Revenue
Operating costs
Selling and administrative costs
Year-end accounts payable
Year Ended
December 31, 2018
December 31, 2017
$ -
$ 3,288
$ 448
$ 1,299
$ 6
$ 4,736
$ 531
$ 1,044
c)
d)
Legal fees
The Company incurred legal fees of $368,000 (2017 - $107,000) during the year for services related to various legal matters
with a law firm of which a director of the Company was a partner at December 31, 2018. At December 31, 2018, $5,000
(December 31, 2017 - $22,000) of this amount was included in accounts payable.
Key management compensation
Key management includes the officers and directors of the Company. The compensation paid or payable to key management
for services in the capacity as either officers or directors is shown below:
$Thousands
Salaries, director's fees and other short-term benefits
Post-employment benefits
Share-based payments
Year-end compensation payable
Year Ended
December 31, 2018
December 31, 2017
$ 2,033
$ 415
$ 613
$ -
$ 1,784
$ 550
$ 531
$ 240
71
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
22. Accounting Changes Not Yet Adopted
Certain new or amended standards or interpretations have been issued by the International Accounting Standards Board or the
International Financial Reporting Interpretations Committee that are not required to be adopted in the current period. The Company
has not early adopted these standards or interpretations. The standards which the Company anticipates may have a material effect
on the financial statements or note disclosures are described below. The Company is currently evaluating the impact of these new
standards on its financial statements.
IFRS 16, “Leases”, replaces the previous guidance on leases and sets out the principles for the recognition, measurement, presentation,
and disclosure of leases for both parties to a contract. It will result in almost all leases being recognized on the balance sheet, as the
distinction between operating and finance leases is removed. Under the new standard, an asset (the right-to-use the leased item) and
a financial liability are recognized.
On initial adoption, Management anticipates they will elect to use the following practical expedients permitted under the standard:
• Apply a single discount rate to a portfolio of leases with similar characteristics;
• Account for leases with a remaining term of less than 12 months as at January 1, 2019 as short-term leases;
• Account for lease payments as an expense and not recognize a right-of-use asset if the underlying asset is of low dollar value; and
• The use of hindsight in determining the lease term where the contract contains terms to extend or terminate the lease.
IFRS 16 is mandatory for the first interim periods within annual reporting periods beginning on or after January 1, 2019. The company
is still assessing the standard and anticipates IFRS 16 to have a material effect on the financial statements once adopted.
There are no other standards and interpretations that have been issued, but are not yet effective, that the Company anticipates will
have a material effect on the financial statements once adopted.
72
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 73
AKITA DRILLING LTD. | 2018 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10 YEAR FINANCIAL REVIEW
$Thousands (except per share)
Summary of Operations
Revenue
Income (loss) before income taxes
Income taxes expense (recovery)
Net income (loss)
As a percentage of average shareholders’ equity
Earnings (loss) per Class A and Class B share (basic)
Funds flow from operations
As a percentage of average shareholders’ equity
Financial Position at Year End
Working capital (deficiency)
Current ratio
Total assets
Shareholders’ equity
per share
Other
Capital expenditures (net)
Depreciation and amortization
Dividends paid
per share
Annual
Ranking
2018
2017
2016
6
8
5
8
8
8
9
9
9
1
1
1
10
8
5
1
1
$
$
$
$
$
$
118,361
(12,228)
3,651
(15,939)
(5.9%)
(0.65)
14,306
5.3%
$ 11,166
1.31:01
$ 403,641
$ 271,728
$
$
$
$
$
6.86
17,546
26,614
7,942
0.34
$
$
$
$
$
$
$
$
$
$
$
$
$
$
71,198
(53,230)
(14,053)
(39,177)
(22.5%)
2.18
6,607
3.8%
15,528
2.02:1
207,497
174,455
9.72
20,348
27,126
6,100
0.34
$
$
$
$
$
$
$
$
$
$
$
$
$
$
61,061
7,535
2,206
5,329
2.4%
0.30
34,500
15.7%
34,907
4.49:1
257,907
219,646
12.24
13,193
23,959
6,100
0.34
Note: Financial information has been calculated under Canadian GAAP for the year 2009 and under IFRS for
the years 2010 through 2018. Readers should be aware that these two sets of accounting standards are
not consistent with each other. Revenue amounts reported for 2012 through 2018 include revenue solely
generated by the Company from its wholly-owned operations.
74
AKITA DRILLING LTD. | 2018 Annual Report10 YEAR FINANCIAL REVIEW 2015
2014
2013
2012
2011
2010
2009
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
112,488
(44,544)
(10,579)
(33,965)
(14.2%)
(1.89)
38,510
16.0%
165,274
28,121
7,042
21,079
8.3%
1.17
56,195
22.2%
16,002
$
(5,028)
2.45:1
0.90:1
254,516
220,200
12.27
17,960
36,748
6,101
0.34
$
$
$
$
$
$
$
340,926
259,841
14.48
103,949
30,200
6,015
0.34
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
168,111
35,682
9,167
26,515
11.3%
1.48
57,619
24.6%
$
$
$
$
$
$
203,440
38,413
9,658
28,755
13.5%
1.60
59,474
28.0%
$
$
$
$
$
$
199,934
31,762
8,409
23,353
12.1%
1.29
42,895
22.3%
$
$
$
$
$
$
145,138
10,932
3,462
7,470
4.1%
0.41
32,798
17.9%
106,263
11,901
3,521
8,380
4.2%
0.46
23,960
12.0%
40,645
$
31,214
$
44,265
$
61,341
$
69,819
2.93:1
291,748
245,288
13.65
35,113
26,825
5,567
0.32
$
$
$
$
$
$
$
1.70:1
2.37:1
292,994
223,998
12.49
65,356
24,342
5,038
0.28
$
$
$
$
$
$
$
247,130
201,104
11.15
54,509
20,933
5,066
0.28
$
$
$
$
$
$
$
4.04:1
218,587
183,739
10.19
36,293
24,540
5,079
0.28
$
$
$
$
$
$
$
7.02:1
234,215
201,446
11.05
11,835
17,476
5,105
0.28
75
AKITA DRILLING LTD. | 2018 Annual Report10 YEAR FINANCIAL REVIEW 76
AKITA DRILLING LTD. | 2018 Annual Report
CORPORATE INFORMATION
CORPORATE INFORMATION
Directors
Directors
Loraine M. Charlton
Loraine M. Charlton
Corporate Director
Corporate Director
Calgary, Alberta
Calgary, Alberta
Douglas Dafoe
Douglas Dafoe
President and CEO
President and CEO
Ember Resources Inc.
Ember Resources Inc.
Calgary, Alberta
Calgary, Alberta
Harish K. Mohan
Corporate Director
Calgary, Alberta
Harish K. Mohan
Corporate Director
Calgary, Alberta
Dale R. Richardson
Vice President,
Sentgraf Enterprises Ltd.
Calgary, Alberta
Dale R. Richardson
Vice President,
Sentgraf Enterprises Ltd.
Calgary, Alberta
Karl A. Ruud
President and Chief Executive Officer,
AKITA Drilling Ltd.
Calgary, Alberta
Karl A. Ruud
President and Chief Executive Officer,
AKITA Drilling Ltd.
Calgary, Alberta
Nancy C. Southern
Nancy C. Southern
Chairman, President and
Chairman, President and
Chief Executive Officer,
Chief Executive Officer,
ATCO Ltd., Canadian Utilities Limited, and
ATCO Ltd., Canadian Utilities Limited, and
CU Inc.
CU Inc.
Calgary, Alberta
Calgary, Alberta
Linda A. Southern-Heathcott
Linda A. Southern-Heathcott
President and
President and
Chief Executive Officer,
Chief Executive Officer,
Spruce Meadows Ltd.,
Spruce Meadows Ltd.,
President,
President,
Team Spruce Meadows Inc.,
Team Spruce Meadows Inc.,
Chairman of the Board,
Chairman of the Board,
AKITA Drilling Ltd.
AKITA Drilling Ltd.
Calgary, Alberta
Calgary, Alberta
C. Perry Spitznagel, Q.C.
C. Perry Spitznagel, Q.C.
Vice Chairman,
Vice Chairman,
Bennett Jones LLP
Bennett Jones LLP
Calgary, Alberta
Calgary, Alberta
Henry G. Wilmot
Corporate Director
Calgary, Alberta
Henry G. Wilmot
Corporate Director
Calgary, Alberta
Charles W. Wilson
Corporate Director
Boulder, Colorado
Charles W. Wilson
Corporate Director
Boulder, Colorado
Officers
Officers
Raymond T. Coleman
Raymond T. Coleman
Senior Vice President and
Senior Vice President and
Managing Director, US Operations
Managing Director, US Operations
Colin A. Dease
Colin A. Dease
Corporate Secretary
Corporate Secretary
Fred O. Hensel
Fred O. Hensel
Vice President,
Vice President,
Canadian Operations
Canadian Operations
Craig W. Kushner
Craig W. Kushner
Director of Human Resources
Director of Human Resources
Darcy Reynolds
Darcy Reynolds
Vice President, Finance and
Vice President, Finance and
Chief Financial Officer
Chief Financial Officer
Karl A. Ruud
President and Chief Executive Officer
Karl A. Ruud
President and Chief Executive Officer
Head Office
AKITA Drilling Ltd.,
1000, 333 - 7th Avenue SW
Calgary, Alberta T2P 2Z1
403.292.7979
Head Office
AKITA Drilling Ltd.,
1000, 333 - 7th Avenue SW
Calgary, Alberta T2P 2Z1
403.292.7979
Banker
Banker
ATB Financial
Calgary, Alberta
ATB Financial
Calgary, Alberta
Counsel
Counsel
Bennett Jones LLP
Calgary, Alberta
Bennett Jones LLP
Calgary, Alberta
Auditors
Auditors
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Calgary, Alberta
Calgary, Alberta
Registrar and Transfer Agent
Registrar and Transfer Agent
AST Trust Company (Canada)
AST Trust Company (Canada)
Calgary, Alberta and Toronto, Ontario
Calgary, Alberta and Toronto, Ontario
1.800.387.0825
1.800.387.0825
Share Symbol/TSX
Share Symbol/TSX
Class A Non-Voting (AKT.A)
Class A Non-Voting (AKT.A)
Class B Common (AKT.B)
Class B Common (AKT.B)
Website
Website
www.akita-drilling.com
www.akita-drilling.com
HEAD OFFICE
AKITA Drilling Ltd.
1000, 333 - 7th Ave SW
Calgary, Alberta T2P 2Z1
Canada
www.akita-drilling.com