ANNUAL
REPORT
2019
2
AKITA DRILLING | 2019 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, Métis and
Inuit 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 approximately 650 people.
The Company has ownership in 40 drilling rigs in all depth ranges.
11
AKITA DRILLING | 2019 Annual Report CONTENTS
1
Corporate Profile
6
4
Letter to the
Shareowners
8
Operational Performance
Share Performance
10
34
Management's
Discussion and Analysis
Management's
Responsibility for
Financial Reporting
36
Auditor's Report
40
Consolidated Financial
Statements
44
74
Notes to Consolidated
Financial Statements
10 Year Financial Review
77
Corporate Information
2
2
AKITA DRILLING | 2019 Annual Report
AKITA DRILLING | 2019 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 2019 Annual Report for
AKITA.
Annual Meeting
The annual meeting (the “Meeting”) of the shareholders of AKITA Drilling Ltd. (the “Company”)
will be held in a virtual only format via live webcast on Tuesday, May 12, 2020 at 10:00 a.m.
Mountain Daylight Time. Details on how to access the Meeting can be found in the Company’s
Management Proxy Circular.
3
AKITA DRILLING | 2019 Annual Report LETTER TO THE
SHAREOWNERS
We would like to express
a special thanks to
AKITA’s employees for
their adaptability, hard
work and commitment.
4
AKITA Drilling Ltd.’s net loss for the year ended December 31,
2019 was $19,875,000 (net loss of $0.50 per share (basic
and diluted)) on revenue of $175,890,000 compared to a
net loss of $15,939,000 ($0.65 loss per share (basic and
diluted)) on revenue of $118,361,000 in 2018. Earnings
before interest, depreciation, tax and amortization for the
current year was $19,131,000 compared to $16,447,000 in
2018, while net cash from operating activities for 2019 was
$21,558,000 compared to a loss of $8,494,000 in 2018.
In Canada, the Company’s utilization for the year decreased
to 19% in 2019 from 33% in 2018. Operating income for
the Canadian segment fell to $15,100,000 in 2019 from
$22,943,000 in 2018. The uncertainty in the Canadian oilfield
industry that characterized 2018 continued throughout 2019.
Regulated production cuts, pipeline capacity and political
and regulatory uncertainty weighed heavily on the Canadian
energy industry, which in turn affected drilling activity. One
segment especially impacted by the aforementioned factors
is the heavy oil segment which is the Company's primary
market in Canada. The Company’s operating margin per
day increased to $9,402 per day in 2019 from $8,194 in
2018, despite the significant decrease in activity in 2019.
This increase in operating margin per operating day is due
to the rig mix in 2019 and a continued focus on cost control.
Without a significant shift in demand for drilling rigs, or
a further reduction in the overall capacity of the Canadian
rig fleet, AKITA does not anticipate any significant pricing or
activity increases in Canada in the near future.
On November 13, 2019, the Canadian Association of Oilwell
Drilling Contractors (“CAODC”) released its 2020 industry
AKITA DRILLING | 2019 Annual ReportLETTER TO THE SHAREOWNERS drilling forecast, estimating 25% average rig utilization, up
The significant acquisition of Xtreme Drilling in 2018 increased
from the 23% actual average rig utilization in 2019, and
the Company's rig fleet and expanded its geographical
estimating 4,905 wells in 2020, up slightly from 4,896 in
2018. The 2019 forecast was based upon commodity price
diversification between Canada and the US. The Company's
focus in 2019 was on integrating the two companies. Focusing
assumptions of USD $65.00 per barrel for crude oil and CAD
on reducing costs through right-sizing the combined company
$2.19 per mcf for natural gas. Based on the CAODC forecast it
and improving efficiencies. The 2020 results should reflect the
would appear that 2020 will be very similar to 2019. Without
completed integration and allow the company to focus on cash
improvements to the existing take-away capacity in Canada,
generation and debt repayment in 2020.
growth in the Canadian market may remain challenged. The
Company’s focus in 2020 will be on continued cost control in
We would like to express a special thanks to AKITA’s employees
its Canadian operations, while increasing its active rig count.
for their adaptability, hard work and commitment. We would
like to express appreciation to our partners, customers and
suppliers who worked closely with us during 2019 to arrive at
AKITA’s utilization in the US was 60% in 2019, compared to
innovative solutions for working through challenging times in
61% (from when rigs were owed by AKITA) for 2018. Revenue
Canada and in establishing the Company’s presence in the US.
in the US division increased by 139% to $127,514,000
We also wish to acknowledge the contribution of our directors,
from $53,368,000 in 2018, which is directly attributable to
whose thoughtful counsel and guidance have helped to create,
the number of operating days in 2019 (3,747) compared to
maintain and grow a strong and successful Company. Finally,
2018 (1,783). Operating margin per operating day increased
we acknowledge AKITA Shareowners for their continued
to $10,806 in 2019 from $8,603 in 2018 as a result of
support and confidence in the Company.
higher day rates and lower costs. In the US, the Company is
looking to 2020 with optimism. At December 31, 2019, 14 of
On behalf of the Board of Directors,
the Company’s 17 US rigs were operating or getting ready to
operate and another drilling rig was preparing to move from
Canada to the US, which will result in 15 rigs out of 18 rigs
operating in January. With 13 rigs located in or around the
Permian Basin, demand for the Company’s rigs should remain
strong. This level of activity, coupled with the cost cutting
Linda A. Southern-Heathcott
Karl A. Ruud
measures that were implemented in 2019, should result in
Chairman of the Board
President and Chief
improvement in the US division for 2020, compared to 2019.
Executive Officer
The Company's dividend program was suspended in July 2019
March 4, 2020
to improve the Company's financial flexibility in the current
economic environment.
5
AKITA DRILLING | 2019 Annual ReportLETTER TO THE SHAREOWNERS
OPERATIONAL
PERFORMANCE
Revenue ($000's)
In 2019, AKITA’s US operations generated $127 million, 72% of
the total revenue. The Company’s total revenue for 2019 was
$176 million, a 49% improvement over 2018.
Net Earnings (Loss) ($000's)
AKITA’s net loss increased by 25% in 2019.
10,000
5,000
0
-5,000
-10,000
-15,000
-20,000
-25,000
-30,000
-35,000
-40,000
-45,000
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
200,000
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
6
AKITA DRILLING | 2019 Annual ReportOPERATIONAL PERFORMANCE Adjusted Funds Flow from Operations ($000's)
Capital Expenditures ($000's)
Adjusted funds flow from operations decreased by 10% in 2019
compared to 2018.
AKITA’s 2019 capital expenditure program was down from 2018.
40,000
30,000
20,000
10,000
0
25,000
20,000
15,000
10,000
5,000
0
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
7
AKITA DRILLING | 2019 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, 2019 with the cumulative total return of the S&P/TSX 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
250
200
150
100
50
0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
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
Dec 31
2019
100
103
112
120
185
149
100
96
101
111
170
127
85
75
110
116
97
96
59
58
18
21
100
118
107
115
130
144
132
160
174
159
195
100
110
123
109
134
83
60
79
47
33
25
AKITA Class A
Non-Voting Shares
AKITA Class B
Common Shares
S&P/TSX
Composite Index
TSX Oil & Gas
Drilling Sub-Index
8
AKITA DRILLING | 2019 Annual ReportSHARE PERFORMANCE Share Performance
Weighted average number of Class A and
Class B shares
17,988,552
17,969,415
17,948,502
24,551,542
39,608,191
Total number of Class A and Class B shares
17,969,415
17,948,502
17,945,661
39,608,191
39,608,191
2015
2016
2017
2018
2019
Market prices for Class A Non-Voting shares
High
$12.56
Volume
Market prices for Class B Common shares
Low
Close
High
Low
Close
$6.10
$6.79
$9.20
$5.88
$8.45
$9.88
$6.52
$7.36
$8.38
$3.41
$4.07
$4.42
$0.75
$1.19
1,603,746
930,748
1,324,111
2,192,522
8,875,748
$13.30
$11.00
$6.87
$6.87
$7.11
$8.53
$9.95
$6.94
$7.61
$8.16
$3.77
$4.60
$4.48
$1.25
$1.57
Volume
32,326
18,674
41,479
19,313
53,746
Dividend History
AKITA began paying dividends to shareholders in 1996. In July 2019, AKITA suspended its dividend program in light of the current
economic environment.
Dividends per share ($)
2015
0.34
2016
0.34
2017
0.34
2018
0.34
2019
0.17
9
AKITA DRILLING | 2019 Annual ReportSHARE PERFOMANCE 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, 2019, is dated March 4,
2020, 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, 2019. The MD&A should be read in conjunction with the audited
annual consolidated financial statements and related notes for the year ended December 31, 2019, 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.
Introduction
AKITA is a premier Canadian oil and gas drilling contractor
with a fleet of 40 drilling rigs. AKITA provides contract drilling
services through two geographical segments: Canada and the
United States (“US”). With a fleet of 23 rigs, AKITA’s Canadian
division operates in Alberta, British Columbia, Saskatchewan,
and from time to time, in the Yukon and the Northwest
Territories. The Canadian division operates both wholly-owned
rigs and rigs that are partially owned by AKITA and First
Nations, Métis or Inuit joint venture partners including; Akita
Mistiyapew Aski Drilling Ltd., Akita Equtak Drilling Ltd., and
Akita Wood Buffalo Drilling Ltd., each of which has defined
geographical boundaries. With a fleet of 17 rigs, AKITA’s US
division conducts operations in Colorado, Wyoming, Texas,
New Mexico, and Oklahoma.
With a focus on the efficient 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
.
10
AKITA DRILLING | 2019 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Financial Highlights
$Thousands except per share amounts
2019
2018
Change
% Change
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
Total debt
(1) See commentary in “Basis of Analysis in this MD&A and Non-GAAP Items”.
Operational Highlights
175,890
121,588
54,302
31%
19,131
0.48
12,925
0.33
19,875
0.50
15,238
6,734
39,608
369,116
84,019
118,361
86,575
31,786
27%
16,447
0.67
14,135
0.58
15,939
0.65
17,546
9,784
24,552
57,529
35,013
22,516
4%
2,684
(0.19)
(1,210)
(0.25)
3,936
(0.15)
(2,308)
(3,050)
15,057
403,641
(34,525)
82,939
1,080
49%
40%
71%
15%
16%
(28%)
(9%)
(43%)
25%
(23%)
(13%)
(31%)
61%
(9%)
1%
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 (3)
2019
2018
Change
% Change
1,606
3,747
33,415
34,031
24,013
23,225
19%
60%
2,800
1,783
31,354
29,932
23,160
21,329
33%
61%
(1,194)
1,964
2,061
4,099
853
1,896
(14%)
(1%)
(43%)
110%
7%
14%
4%
9%
(42%)
(1%)
(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 based on the number of days each rig was physically in the US and owned by the Company.
11
AKITA DRILLING | 2019 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS General Overview
in 2019 from $118,361,000
The 2019 financial results for the Company, when compared
increased by 49% to
to 2018, were mixed. Revenue
$175,890,000
in 2018,
operating margin increased 71% to $54,302,000 in 2019
compared to $31,786,000 in 2018 and adjusted EBITDA
increased to $19,131,000 in 2019, up from $16,447,000
in 2018. Adjusted funds flow from operations decreased to
$12,925,000 in 2019 from $14,135,000 in 2018 and the
Company’s net loss increased to $19,875,000 in 2019 from
$15,939,000 in 2018.
The Company’s US operating segment, which consisted of 17
rigs at December 31, 2019, started 2019 very active with 16
out of 17 rigs operating. This level of demand began to fall near
the end of the first quarter as many operators decreased their
capital budgets to operate within free cash flow, negatively
Industry Overview
WTI Prices ($USD) (1)
impacting demand for drilling services. This translated into
a decline in drilling activity for the industry, as well as AKITA,
and impacted the financial results in AKITA’s US segment.
Results in the US division were further impacted by AKITA’s
consolidation plan to move rigs to more active basins as part
of its strategic plan, which caused short term reductions in
activity and one-time costs. Despite this decline in activity, the
Company’s US division generated 72% of the Company’s 2019
revenue, up from 45% in 2018.
In Canada, 2019 results were significantly below 2018 as
decreased activity in Canada was driven by a lack of take-away
capacity, production curtailments and general uncertainty over
the future of the Canadian market, all of which contributed
towards sustained low dayrates and had a significant impact
on the Company's oil sands and heavy oil drilling operations,
which are the Canadian division's primary market.
Alberta Natural Gas Price ($CAD) (2)
2019
2018
2017
75.00
70.00
65.00
60.00
55.00
50.00
45.00
40.00
35.00
30.00
3
2.5
2
1.5
1
0.5
0
JAN
FEB MAR
APR MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
JAN
FEB MAR
APR MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
Industry Utilization Canada (3)
Active Rigs US (4)
60%
50%
40%
30%
20%
10%
1,200
1,100
1,000
900
800
700
600
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 | 2019 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. In 2019, West Texas
Intermediate ("WTI") prices fluctuated significantly throughout
the year. This volatility impacted the demand for drilling
services in North America.
In Canada, industry utilization continues to be below 2017
and 2018 levels. This reduced activity is primarily due to
uncertainty in the Canadian market over take-away capacity
and government policy, with WTI volatility a secondary factor.
In the US, industry activity has declined steadily throughout
2019 from the level set in the first quarter of 2019 due to two
factors, the volatility in oil and gas prices, and the pressure
on operators to operate within free cash flow. Both factors
have impacted the capital budgets of AKITA’s customers and
resultant demand for drilling services.
Results by Segment
Canada
$Thousands except per day amounts
Revenue (1)
Operating and maintenance (1)
Operating margin
Margin %
Operating days
Revenue per operating day (1) (2)
Operating and maintenance per operating day (1) (2)
Operating margin per operating day (1) (2)
Utilization
Rig count
2019
53,665
38,565
15,100
28%
1,606
33,415
24,013
9,402
19%
23
2018
Change
% Change
87,790
(34,125)
64,847
(26,282)
22,943
(7,843)
26%
2%
2,800
(1,194)
31,354
23,160
8,194
33%
23
2,061
853
1,208
(14%)
-
-
(39%)
(41%)
(34%)
8%
(43%)
7%
4%
15%
(42%)
(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
2019, AKITA achieved 1,606 operating days in Canada, which
corresponds to an annual utilization rate of 19%, compared to
2018 utilization rate of 33% (2,800 days), and a 2019 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 requiring trucks to move. The decreased demand in
oil sands drilling had the largest impact on the Company’s
utilization in 2019.
Activity in Canada, for AKITA and the industry, decreased
in 2019 from 2018 due to infrastructure constraints and
uncertainty over the future of the Canadian market which
affected the capital spending of Canadian oil and gas
companies. Activity was also impacted by lower average WTI
prices.
Canadian revenue of $53,665,000 in 2019 was 39% lower
than 2018 revenue of $87,790,000, due to decreased activity
in 2019. Revenue per day increased in 2019 to $33,415 per
day from $31,354 per day in 2018, a 7% increase, as a result
of a greater percentage of higher specification rigs working.
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 drilling rigs
as it does its wholly-owned rigs.
Operating and maintenance costs are tied to activity levels
and decreased to $38,565,000 in 2019 from $64,847,000
in 2018 including AKITA’s share of costs from its joint venture
rigs. On a per day basis, 2019 remained consistent with the
prior year, increasing only 4% in 2019 over 2018.
AKITA’s Canadian segment provided drilling services to 19
different customers in 2019 (2018 - 29 different customers),
including five customers that each provided more than 10% of
AKITA’s Canadian revenue for the year (2018 – two customers).
13
AKITA DRILLING | 2019 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS United States
$Thousands except per day amounts (CAD)
2019
2018
Change
% Change
Revenue
Operating and maintenance
Operating margin
Margin %
Operating days
Revenue per operating day (1)
Operating and maintenance per operating day (1) (2)
Operating margin per operating day (1)
Utilization (2)
Rig count
127,514
87,023
40,491
32%
3,747
34,031
23,225
10,806
60%
17
53,368
38,029
15,339
29%
1,783
29,932
21,329
8,603
61%
17
74,146
48,994
25,152
3%
1,964
4,099
1,896
2,203
(1%)
139%
129%
164%
10%
110%
14%
9%
26%
(1%)
-
-
(1) See commentary in “Basis of Analysis in this MD&A and Non-GAAP Items”.
(2) Utilization in the US is 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 Drilling
Corp. (“Xtreme”) in September of 2018, for a total US fleet of 17
rigs in the US at December 31, 2019. Activity in the US totaled
3,747 operating days in 2019 compared to 1,783 in 2018.
This 110% increase in operating days is attributable to the
drilling rigs acquired through the Xtreme acquisition being part
of the Company for a full year in 2019 as compared to 2018
when the acquired rigs were only included from September 12
to December 31 in 2018.
Revenue in the US was $127,514,000 for 2019 (2018 –
$53,368,000) equal to 72% of the Company’s total revenue.
Revenue increased as a direct result of having a larger rig
fleet with corresponding increased activity, as did operating
expenses which increased to $87,023,000 in 2019 from
$38,029,000 in 2018.
Seasonality
Operating margin per operating day increased by 26% in 2019
to $10,806 from $8,603 in 2018. This increase in operating
margin per operating day is a result of higher day rates.
Operating and maintaining costs per operating day increased
to $23,225 in 2019 from $21,239 in 2018 as a result of move
costs incurred as part of the Company's consolidation plan,
moving rigs to more active areas.
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 and more
diverse Company.
In the US, AKITA provided drilling services to 19 different
customers in 2019 (2018 – 16), including three customers
that each provided more than 10% of AKITA’s US revenue for
the year (2018 – four).
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 Canadian winter drilling season ends with "spring break-
up" at which time most drilling operations are curtailed due
to seasonal road bans (temporary prohibitions on road use)
and restricted access to agricultural land as frozen ground
thaws. 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
14
AKITA DRILLING | 2019 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS certain periods when authorities prioritize wildlife or habitat
protections. Such restrictions may affect activity levels and
operating results.
AKITA conducts drilling operations are infrequently subject to
weather constraints, especially in the southern states, but may
experience operational restrictions for other reasons.
While activity in the northern part of the US is subject to a
degree of seasonality, it is less affected by spring break-up than
are AKITA’s operations in Canada. Other areas in the US where
While seasonality can affect all rig classes, pad drilling rigs
are generally less susceptible to seasonality than conventional
rigs.
Depreciation and Amortization Expense
$Millions
Depreciation and amortization expense
2019
36.8
2018
26.6
Change
% Change
10.2
38%
TThe increase in depreciation and amortization expense to
While AKITA conducts some of its drilling operations via joint
$36,763,000 during 2019 from $26,614,000 during 2018 was
ventures, the drilling rigs used to conduct those activities are
attributable to the addition of the Xtreme rigs in late 2018. These
owned jointly by AKITA and its joint venture partners, and not by
assets totaled $188,781,000 and significantly increased the
the joint ventures themselves. As the joint ventures do not hold
Company’s depreciable asset base. Also adding to the increase
any property, plant, or equipment assets directly, the Company’s
in amortization in 2019 is the impact of IFRS 16 “Leases” which
depreciation expense includes depreciation on assets involved
was implemented on January 1, 2019. The total impact due to
in both wholly-owned and joint venture activities.
the adoption of IFRS 16 “Leases” on amortization is $1,926,000.
Drilling rig depreciation accounted for 97% of total depreciation
and amortization expense in 2019 (2018 – 97%).
Selling and Administrative Expenses
$Millions
Selling and administrative expenses
Selling and administrative expenses increased to $36,237,000
in 2019 from $22,611,000 in 2018. The increase in
2019 is related to the addition of the US-based selling and
administrative costs from the acquisition of Xtreme.
Asset Impairment
$Millions
Right-of-use asset impairment loss
2019
36.2
2018
22.6
Change
% Change
13.6
60%
Selling and administrative expenses equated to 21% of
revenue in 2019 compared to 19% in 2018. The single largest
component of selling and administrative expenses is salaries
and benefits which accounted for 45% of these expenses in
2019 (2018 – 33%).
2019
0.3
2018
Change
% Change
-
0.3
n/a
15
AKITA DRILLING | 2019 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, 2019,
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, 2019, 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, 2019 (2018 - nil). The Company also concluded
that there were no reversals of previous asset impairments
required at December 31, 2019.
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,
2019, management determined recoverable amounts for its
CGUs using a fair value less costs to dispose of each CGU.
IFRS considers this approach to constitute a Level 3 hierarchy
in its determination of value. External appraisals of the
Company’s assets were completed in October of 2019 and
Equity Income from Joint Ventures
Equity income from joint ventures is comprised of the following:
relied upon for testing at December 31, 2019. As industry and
asset conditions have not changed significantly since the time
that the appraisals were completed, management feels the
appraisals are still valid at year end.
At December 31, 2019, the total fair market value of each of
the Company’s CGUs was between 7% and 14% greater than
its book value and therefore management concluded that the
net book value of each CGU was consistent with the fair value
and allowed for variations in the fair value approximations of
$14 to $16 million per CGU.
During the third quarter of 2019, the Company relocated its US
office from Houston, Texas to Denver, Colorado. The Company
entered into a sublease for its Houston office lease’s remaining
four year term. The sublease was an onerous lease contract
which resulted in the Company derecognizing the Right-of-
Use (“ROU”) asset of $859,000, recording a lease receivable
of $583,000, which is an estimate of the unguaranteed
residual value of the sub-lease, and recognizing a ROU asset
impairment loss of $276,000. Additionally the Company
recognized interest receivable and unearned interest revenue
of $65,000. The amount of the lease receivable due within
the next twelve months is classified as prepaid expenses
and other while the remaining lease receivable is classified
as other long-term assets on the Company’s Statement of
Financial Position.
$Millions
2019
2018
Change
% Change
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
5.3
4.1
0.1
1.1
22.8
(17.5)
(77%)
16.3
(12.2)
(75%)
0.3
6.2
(0.2)
(67%)
(5.1)
(82%)
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 activity, revenue
per day as well as operating expenses. The decrease in both
revenue and expenses for the Company’s proportionate share
of joint ventures is related to the decreased activity for the
Company’s joint venture rigs in 2019 compared to the same
period in 2018.
16
AKITA DRILLING | 2019 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS
Other Income (Loss)
$Millions
Interest income
Interest expense
Gain (loss) on sale of assets
Net other gains
Total other loss
During 2019, the Company recorded interest expense of
$6,771,000 (2018 – $2,121,000). 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 interest on the debt
assumed as part of the acquisition.
During 2019, the Company disposed of non-core assets
resulting in a loss of $476,000 with total proceeds of
Income Tax Expense (Recovery)
$Millions, except income tax rate (%)
Current tax expense
Deferred tax expense (recovery)
Total income tax expense (recovery)
Effective income tax rate
2019
2018
Change
% Change
-
(6.8)
(0.4)
0.4
(6.8)
0.1
(2.1)
0.6
0.4
(1.0)
(0.1)
(4.7)
(1.0)
-
(100%)
(224%)
(167%)
-
(5.8)
(580%)
$1,823,000 compared to a gain of $567,000 in 2018 with
proceeds of $640,000.
In 2019, amounts reported as “Net Other Gains” of $393,000
included proceeds on non-depreciable assets of $608,000
which was offset by a foreign exchange loss of $305,000. In
2018, net other gains were $453,000 and included $227,000
in foreign exchange and other miscellaneous income.
2019
0.1
(4.9)
(4.8)
2018
Change
% Change
0.1
3.5
3.6
-
-
(8.4)
(8.4)
(240%)
(233%)
26.6%
27.0%
AKITA had an income tax recovery of $4,804,000 in 2019
compared to a tax expense of $3,651,000 in 2018. Deferred
tax decreased to a recovery of $4,872,000 in 2019 compared
to an expense of $3,508,000 in 2018. This change is a
result of intercompany asset sales between jurisdictions and
unrecognized deferred tax assets in 2018. Also affecting the
deferred tax recovery is the change in the provincial corporate
tax rate enacted by the Alberta Government whereby the
provincial corporate tax rate will be reduced from 12% to 8%
by January 1, 2022.
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)
(1) See commentary in “Basis of Analysis in this MD&A and Non-GAAP Items”.
2019
(19.9)
21.6
12.9
2018
(15.9)
(8.5)
14.1
Change
% Change
(4.0)
30.1
(1.2)
(25%)
354%
(9%)
17
AKITA DRILLING | 2019 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS
During 2019, the Company recorded a net loss of $19,875,000
(net loss of $0.50 per Class A Non-Voting and Class B
Common share (basic and diluted)) compared to a net loss
of $15,939,000 (net loss of $0.65 per Class A Non-Voting
and Class B Common share (basic and diluted)) in 2018.
There were several factors that influenced the decrease in net
earnings, year over year; interest costs increased by $4 million,
selling and administrative costs increased by $14 million,
depreciation increased by $10 million and equity income from
joint ventures decreased by $5 million, offset by $22 million
in higher operating profit and a tax recovery of $5 million. The
Summary of Quarterly Results
influencing factors noted above are discussed throughout this
MD&A.
Net cash from (used in) operating activities increased in 2019
to $21,558,000 in 2019 from negative $8,494,000 in 2018
due primarily to changes in non-cash working capital.
funds flow
from operations(1) decreased
Adjusted
to
$12,925,000 in 2019 from $14,135,000 in 2018 due to
increased interest expense and decreased equity income from
joint ventures.
The following table shows key selected quarterly financial information for the Company:
$Thousands, except per share (unaudited)
Mar. 31
Jun. 30
Sep. 30
Dec. 31
Annual
Totals
Three Months Ended
2019
Revenue
Net loss
52,342
39,119
42,610
41,819
175,890
(1,470)
(5,067)
(5,397)
(7,941)
(19,875)
Loss per share (basic and diluted) ($)
Adjusted funds flow from operations (1)
(0.04)
7,828
(0.13)
1,559
(0.14)
3,076
(0.19)
(0.50)
462
12,925
Cash flow from (used in) operations
(4,287)
24,903
(735)
1,677
21,558
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) ($)
(0.11)
(0.16)
Adjusted funds flow from (used in) operations (1)
Cash flow from (used in) operations
4,519
2,819
1,638
9,860
(0.24)
(637)
(0.14)
(0.65)
8,615
14,135
(7,428)
(13,745)
(8,494)
2017
Revenue
Net loss
19,193
17,986
14,908
19,111
71,198
(4,975)
(4,491)
(3,811)
(25,900)
(39,177)
Loss per share (basic and diluted) ($)
(0.28)
(0.25)
Adjusted funds flow from operations (1)
Cash flow from (used in) operations
1,824
3,399
3,254
3,407
(0.21)
1,472
(1.44)
57
969
(2,701)
(2.18)
6,607
5,074
(1) See commentary in “Basis of Analysis in this MD&A and Non-GAAP Items”.
18
AKITA DRILLING | 2019 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Key trends over the past 12 quarters, after giving consideration
to the seasonal nature of AKITA’s operations, are as follows:
• Day rates in Canada and the US continue to be below full
cycle returns resulting in lower than anticipated funds flow
• Activity levels, which directly impact revenue and net
income, decreased in 2019 compared to 2018 and 2017,
• Net cash from operating activities is not directly correlated to
which has had an impact on the Company’s financial
market strength on a quarterly basis. Changes in the balance
from operations and net earnings for the Company; and
results;
• The impact on revenue of the Company’s acquisition of
Xtreme at the end of the third quarter of 2018 is reflected
in the fourth quarter of 2018 and full year 2019 results;
of this account are tied to the timing of changes in various
non-cash working capital accounts.
Fourth Quarter Analysis Operational Highlights
For the three months ended December 31,
2019
2018
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
Operating margin per operating day (1)
Canada (2)
United States
Utilization
Canada
United States
390
756
637
1,233
(247)
(477)
(39%)
(39%)
34,913
40,481
25,479
30,811
30,413
4,500
30,359
10,122
23,086
2,393
19,929
10,882
9,434
9,670
7,327
10,430
2,107
(760)
15%
33%
10%
55%
29%
(7%)
18%
48%
30%
79%
(12%)
(31%)
(39%)
(39%)
(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 2019, the Company had 390
operating days in Canada compared to 637 operating days
during the corresponding period in 2018. Lack of take-away
capacity affected demand for drilling services in the Canadian
market along with mandated production cuts imposed on
unconventional oil by the Alberta government. This decrease
in activity in Canada was mirrored in the US as activity through
the year has declined quarter over quarter. This was magnified
in the fourth quarter with the Company moving drilling rigs
from other locations in the US to the Permian Basin for 2020
drilling programs.
AKITA incurred a net loss of $7,941,000 (net loss of $0.19
per Class A Non-Voting and Class B Common share (basic and
diluted)) for the fourth quarter of 2019 compared to a net loss
of $5,609,000 or $0.14 loss per share (basic and diluted) in
the fourth quarter of 2018. The increased loss in 2019 is a
direct result of decreased activity. Adjusted funds flow from
operations decreased to $462,000 in the fourth quarter of
2019 from $8,615,000 in the corresponding quarter in 2018
due to lower activity and increased overhead costs.
19
AKITA DRILLING | 2019 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 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 loss
Loss per share (basic and diluted)
Dividends per Class A Non-Voting and Class B Common share (1)
Adjusted funds flow from operations (2)
Net cash from (used in) operating activities
Year-end working capital
Year-end shareholders' equity
Year-end total assets
(1) The Company's dividend program was suspended in July of 2019.
(2) See commentary in “Basis of Analysis in this MD&A and Non-GAAP Items”.
Liquidity and Capital Resources
At December 31, 2019, AKITA had $4,155,000 in working
capital (working capital ratio of 1.14:1), compared to a working
capital of $11,166,000 (working capital ratio of 1.31:1)
and $1,503,000 cash for the previous year. In 2019, AKITA
generated $21,568,000 in cash from operating activities.
Positive cash was generated from joint venture distributions
($3,937,000), from reductions in restricted cash ($756,000)
and from proceeds on sales of assets ($1,823,000). During
the same period, cash was used for capital expenditures
($15,238,000) and payment of dividends ($10,101,000).
Accounts payable at year-end included $14,413,000 in
accrued expenses, three quarters of which related to routine
operations while the other quarter related to one-time items.
The Company has a syndicated operating loan facility totaling
$125,000,000 that is available until 2023. The interest rate on
the operating loan facility ranges from 50 to 200 basis points
over prime interest rates depending on the Funded Debt(1) 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 loan facility was
amended in December of 2019 to change the Funded Debt(1)
to EBITDA(1) ratio to allow the Company more financial flexibility.
The credit facility includes two financial covenants:
2019
2018
2017
175,890
(19,875)
(0.50)
0.17
12,925
21,558
4,155
245,134
369,116
118,361
(15,939)
(0.65)
0.34
14,135
(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
1. Funded Debt(1) to EBITDA(1) Ratio: the Company shall ensure
that:
i. for the Fiscal Quarters ending December 31, 2019 and
March 31, 2020, the Funded Debt(1) to EBITDA(1) Ratio
shall not be more than 4.00:1.00;
ii. for the Fiscal Quarters ending June 30, 2020 and
September 30, 2020, the Funded Debt(1) to EBITDA(1)
Ratio shall not be more than 3.50:1.00; and
iii. for the Fiscal Quarter ending December 31, 2020 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 is 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:
(1) Readers should be aware that each of the EBITDA, Funded 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.
20
AKITA DRILLING | 2019 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 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.
The 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. At
December 31, 2019, the Company was in compliance with its
covenants with a Funded Debt(1) to EBITDA(1) ratio of 3.78:1
and an EBITDA(1) to Interest Expense(1) ratio of 3.42:1.
At December 31, 2019, the Company had $77,535,000
outstanding on its operating loan facility (2018 – $74,991,000).
For the twelve months ended December 31, 2019 the average
interest rate on the Company’s operating loan facility was
5.66%.
In addition to the Company’s operating loan facility, the
Company also had $6,484,000 (2018 - $14,117,000) in debt
Property, Plant and Equipment
totalled $15,238,000
Capital expenditures
in 2019
($17,546,000 in 2018). Capital spending in 2019 was as
follows; $7,545,000 (2018 - $7,400,000) for certifications
and overhauls, $2,837,000 (2018 - $2,002,000) in drill pipe
and drill collars and $4,856,000 (2018 - $8,144,000) for
drilling rig equipment and upgrades.
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.
outstanding at December 31, 2019 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.
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. In the third quarter of 2019, the Company
suspended its dividend program to improve liquidity.
The Company did not have an outstanding normal course
issuer bid during 2019 or 2018.
During 2019, the Company sold ancillary assets for $1,823,000
(2018 - $640,000) that resulted in a loss of $476,000 (2018
– gain of $567,000).
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. 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.
(1) Readers should be aware that each of the EBITDA, Funded 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.
21
AKITA DRILLING | 2019 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
2019 and 2018 were made in the normal course of business
with regular payment terms and have been recorded at the
paid amounts. Operating purchases totaled $876,000, and
included sponsorship and advertising of $365,000, wellsite
trailer rentals of $458,000 and other miscellaneous purchases
of $53,000. At December 31, 2019, the outstanding
commitment of the Company’s multi-year sponsorship and
advertising contract with Spruce Meadows was $350,000.
Costs incurred related to this contract during 2019 were
$325,000 (2018 - $325,000). Costs and related services are
consistent with parties dealing at arm’s length.
$Thousands
Operating and maintenance expenses
Selling and administrative expenses
Year-end due to AKITA from partners
Year-end due to AKITA from joint ventures
Commitments and Contingencies
From time to time, the Company enters into drilling contracts
with its customers that are for extended periods. At December
31, 2019, the Company had 11 drilling rigs with multi-year
contracts. Of these contracts, nine are due to expire in 2020
and two in 2021.
The Company incurred legal fees of $134,000 (2018 -
$368,000) 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, 2019. At December 31, 2019,
$21,000 (December 31, 2018 - $5,000) of this amount was
included in accounts payable.
The Company is related to its joint ventures. The following
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.
2019
773
103
1,031
885
2018
3,288
448
278
1,021
The Company has entered into a two year contract with a
related party to provide sponsorship and advertising at an
annual cost of $175,000.
At December 31, 2019, the Company had capital expenditure
commitments of $1,406,000 (2018 – $3,302,000).
22
AKITA DRILLING | 2019 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Class A and Class B Share Dividends
Per share
Dividends per share ($)
2019
0.17
2018
0.34
Change
% Change
(0.17)
(50%)
During 2019, AKITA declared dividends totaling $6,374,000
($0.17 per share) on its Class A Non-Voting shares and Class B
Common shares, compared to $9,784,000 ($0.34 per share)
for 2018. The Company’s dividend program was suspended in
July of 2019 to improve the Company’s financial flexibility in
the current economic environment.
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, 2018
37,954,407
144,898
1,653,784
1,366
39,608,191
146,264
Shares issued in 2019
-
-
-
-
-
-
December 31, 2019
37,954,407
144,898
1,653,784
1,366
39,608,191
146,264
At March 4, 2020, 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 1,406,000 stock options outstanding, of which 914,000 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.
2323
AKITA DRILLING | 2019 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 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
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 writedown 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.
Business Risks and Risk Management
The following information is a summary only of certain risk
factors relating to the business of AKITA 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 indefinite periods of time. The price AKITA’s
customers receive for their production 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
both demand and day rates. High volatility in crude oil and
natural gas prices may also impact AKITA’s customers’ capital
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 $5,208,000 at
December 31, 2019 (2018 - $4,712,000). 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 2019, a key
assumption is the 3.0% discount rate (2018 – 3.6%).
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.
programs, causing delays in spending and lower overall
demand for drilling service.
Competition
The contract drilling industry is highly competitive and includes
a large number of drilling contractors with varied rig fleets.
Drilling contracts are usually awarded through a competitive
bid process with pricing and rig suitability and availability
being primary drivers in the bid process. Other factors that
influence the bid process include: mobility and efficiency of
the 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.
24
AKITA DRILLING | 2019 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 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.
AKITA’s
indemnification arrangements may
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 2019 from two major
customers. These were the only customers who individually
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 breakup, 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 and floods in the southern states,
or 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
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 industry is volatile. No assurance
25
AKITA DRILLING | 2019 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 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 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. As an oilfield service company, AKITA’s ability to
obtain additional debt or equity financing could be constrained
by pressure from investors and environmental groups to divest
from fossil fuel related investments. 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
("USD") and, accordingly, a material decrease in the value of
the USD 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,
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
26
AKITA DRILLING | 2019 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS adequate for the future financial obligations of AKITA or that
additional funds can be obtained if required.
AKITA’s credit facility is a revolving facility which matures on
September 11, 2023 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.
Carbon Emissions, Climate Change Activism and
Environmental Regulations
While AKITA’s operations, and those of its customers, 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, the
trend in environmental regulation has been to impose more
restrictions and limitations on activities that may impact the
environment, particularly regarding the generation of carbon
emissions. AKITA operates in jurisdictions that have regulated,
or proposed to regulate, industrial carbon emissions. Laws
and regulations implemented to reduce carbon emissions have
potential to impose significant compliance costs on the oil and
gas, potash and mining companies that the Company provides
drilling services for. Consequently, future oil and gas, potash
and mining development could face increased operating costs
relating to increased carbon regulation which could result in a
reduced demand for the drilling services that AKITA provides.
In recent years, public support for climate change action
and pressure by climate activists to shift from fossil fuels
to alternative and renewable energy technology has grown.
Climate change activist impact could reduce demand for
hydrocarbons in favour of low carbon intense fuels. Further,
within Canada,
increased climate change activism has
translated to opposition to new pipeline approvals, ongoing oil
sands development and the practice of hydraulic fracturing.
Laws, regulations and guidelines relating to carbon emissions,
spills, releases, and discharges of hazardous substances or
other waste materials into the environment, requiring removal
or remediation of pollutants or contaminants are increasingly
becoming more stringent and can impose 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.
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 its 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.
Dilution
AKITA’s articles permit the issuance of an unlimited number
of Class A Non-Voting or Class B Common shares and the
Company may make future acquisitions or enter into financings
or other transactions involving the issuance of securities of
AKITA which may be dilutive.
27
AKITA DRILLING | 2019 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 other purposes, 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
Risk Management
AKITA manages its risks by:
• maintaining a conservative balance sheet that includes
a low cost structure for the Company;
• 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 drilling contracts whenever
possible, but especially when tailoring rig construction
or reconfiguration to customer demand;
• maintaining an efficient fleet of drilling rigs through a
rigorous ongoing maintenance program;
• continually upgrading its rig fleet;
• employing well-trained, experienced and responsible
employees;
another entity. In addition, AKITA is required to satisfy and
maintain two financial ratio tests: Funded Debt to EBITDA
and EBITDA to Interest Expense. A failure to comply with the
obligations in the agreements in respect of 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
requirements,
conservation measures, alternative
opposition to fossil fuel energy, 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 flow.
• 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.
28
AKITA DRILLING | 2019 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.
The drilling industry in Canada, which has experienced low
demand since 2015, continues to struggle when compared to
its global peers. Insufficient pipeline capacity, arguably the
main challenge to the drilling industry in Canada, remains
unresolved. Continued court challenges for the Trans Mountain
pipeline expansion and Keystone XL pipeline increase the
uncertainty in the Canadian market. With limited access to
external markets, Canadian oil and gas producers have elected
to spend capital outside of the country if possible, or to not
spend. This lack of capital spending by Canadian oil and gas
companies directly affects the demand for drilling services.
There is an oversupply of rigs in Canada for the current demand
in the Canadian drilling market. Until there are clear and
proven take-away capacity improvements, the Company is not
expecting an improvement in Canadian activity. Accordingly,
the Company’s focus for its Canadian division in the near term
will be on financial discipline and maintaining a strong fleet
that is well-positioned to participate in the eventual Canadian
market recovery.
In contrast to Canada, the Company is anticipating improved
results in 2020 from its US division. Although overall demand
for drilling services declined in 2019, there is still strong
demand for high-specification drilling rigs in certain basins in
the US market. Throughout 2019, the Company has focused
on consolidation of its operating locations in the US and right-
sizing the US division to efficiently manage its fleet of 17 rigs.
US operations are now based out of just two locations, Midland,
Texas and Greeley, Colorado, formerly there were five. Of the
US division’s 17 drilling rigs, 11 were located in the Permian
Basin at year-end where demand for high-specification drilling
rigs remains strong. The Company has 11 rigs contracted with
steady programs through 2020 with two contracted through
2021. With significant cost reductions having taken place in
2019, and projected higher activity in 2020, the Company is
optimistic that 2020 will show improvements over 2019. The
Company also continues to market its Canadian fleet in the US,
looking for opportunities to redeploy idle assets from Canada
to the US.
The focus in 2020 will remain the same as it was in the
second half of 2019, debt reduction to improve the Company’s
financial strength. Only a modest capital program is planned
for Canada and the US with the majority of free cash flow going
to debt repayment. Management feels that this is the best use
of cash in the current market and should allow AKITA the ability
to pursue growth opportunities once the Company’s debt is
lower.
Disclosure Controls and Internal Controls Over Financial Reporting
As of December 31, 2019, 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, 2019.
As of December 31, 2019, 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, as
revised effective May 14, 2013 under the supervision of, and
with the participation of the CEO and CFO.
29
AKITA DRILLING | 2019 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 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, 2019.
There was no change in the Company’s internal control over
financial reporting that occurred during the period that began
on October 1, 2019 and ended December 31, 2019 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, 2019.
Basis of Analysis in this MD&A and Non-GAAP Items
Revenue and Operating and Maintenance Expenses in Canada and Adjusted Revenue and Adjusted
Operating and Maintenance Expenses
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. Adjusted revenue and
adjusted operating and maintenance expenses includes total
revenue and expenses from Canada including AKITA’s share of
joint ventures, as well as the US revenue and expenses.
$Thousands
Revenue from wholly-owned drilling rigs in Canada
Revenue from joint venture drilling rigs
Revenue in Canada
Revenue in the US
Adjusted revenue
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
Operating and maintenance expenses in the US
Adjusted operating and maintenance expenses
2019
2018
48,376
64,993
5,289
53,665
22,797
87,790
127,514
53,368
181,179
141,158
34,565
4,099
38,664
48,547
16,300
64,847
87,023
38,028
125,687
102,875
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 indicative of 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.
30
AKITA DRILLING | 2019 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Adjusted EBITDA
Adjusted earnings before interest, tax, depreciation and
amortization (“Adjusted EBITDA”) is not a recognized GAAP
measure under IFRS and users of this MD&A should note that
Adjusted EBITDA calculations may differ between AKITA and
other companies. Adjusted EBITDA is used by management
and investors to analyze the Company’s profitability based
on the Company’s principal business activities prior to how
these activities are financed, how assets are depreciated
and amortized and how the results are taxed in various
jurisdictions. AKITA calculates Adjusted EBITDA as follows:
$Thousands
Net loss attributable to shareholders
Interest expense
Income tax expense (recovery)
Depreciation and amortization
Right-of-use asset impairment loss
Adjusted EBITDA
2019
2018
(19,875)
(15,939)
6,771
(4,804)
2,121
3,651
36,763
26,614
276
-
19,131
16,447
Adjusted Funds Flow from Operations
Adjusted funds flow from operations is not a recognized GAAP
measure under IFRS and users of this MD&A 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
Interest paid
Interest expense
Post-employment benefits paid
Equity income from joint ventures
Change in non-cash working capital
Adjusted funds flow from operations
2019
2018
21,558
(305)
(67)
6,598
(6,771)
90
1,129
(9,307)
12,925
(8,494)
(2,812)
(143)
1,950
(2,121)
90
6,168
19,497
14,135
31
AKITA DRILLING | 2019 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 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.
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. There are no 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.
Other Information
Additional information is provided by the Company in its Annual
Information Form, Notice of Annual Meeting and Information
Circular all dated March 4, 2020. Copies of these documents
including additional copies of the Annual Report for the year
ended December 31, 2019 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.
32
AKITA DRILLING | 2019 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 33
AKITA DRILLING | 2019 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 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 | 2019 Annual Report
AKITA DRILLING | 2019 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
responsibilities.
in reports is disclosed, processed, 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
March 4, 2020
Darcy Reynolds
Vice President, Finance
and Chief Financial Officer
AKITA DRILLING | 2019 Annual Report 35
35
AKITA DRILLING | 2019 Annual Report
Independent auditor’s report
To the Shareholders of AKITA Drilling Ltd.
Our opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects,
the financial position of AKITA Drilling Ltd. and its subsidiaries (together, the Company) as at
December 31, 2019 and 2018, and its financial performance and its cash flows for the years then ended in
accordance with International Financial Reporting Standards as issued by the International Accounting
Standards Board (IFRS).
What we have audited
The Company’s consolidated financial statements comprise:
the consolidated statements of financial position as at December 31, 2019 and 2018;
the consolidated statements of net loss and 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.
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the Auditor’s responsibilities for the audit
of the consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
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
responsibilities in accordance with these requirements.
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.
PricewaterhouseCoopers LLP
111-5th Avenue SW, Suite 3100, Calgary, Alberta, Canada T2P 5L3
T: +1 403 509 7500, F: +1 403 781 1825
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
36
AKITA DRILLING | 2019 Annual ReportINDEPENDENT AUDITOR'S REPORT Our opinion on the consolidated financial statements does not cover the other information and we do not
express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the
other information identified above and, in doing so, consider whether the other information is materially
inconsistent with the consolidated 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 conclude that there is a material misstatement of this other information, we are
required to report that fact. We have nothing to report in this regard. When we read the information, other
than the consolidated financial statements and our auditor’s report thereon, included in the annual report,
if we conclude that there is a material misstatement therein, we are required to communicate the matter to
those charged with governance.
Responsibilities of management and those charged with governance for the
consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial
statements in 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.
In preparing the consolidated financial statements, management is responsible for assessing the
Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless management either intends to liquidate
the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as
a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s
report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with Canadian generally accepted auditing standards will always
detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered 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 professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those risks, and
37
AKITA DRILLING | 2019 Annual ReportINDEPENDENT AUDITOR'S REPORT obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk
of not detecting a material misstatement resulting from fraud is higher than for one resulting from
error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Company’s ability to continue as a going concern.
If we conclude that a material uncertainty exists, we are required to draw 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 up to
the date of our auditor’s report. However, future events or conditions may cause the Company to
cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements,
including the disclosures, and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the Company to express an opinion on the consolidated financial
statements. We are responsible for the direction, supervision and performance of the group audit.
We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope
and timing of the audit and significant audit findings, including any significant deficiencies in internal
control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and to communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence, and where applicable, related
safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Reynold Tetzlaff.
Chartered Professional Accountants
Calgary, Alberta
March 4, 2020
38
AKITA DRILLING | 2019 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
Right-of-use assets
Property, plant and equipment
TOTAL ASSETS
LIABILITIES
Current Liabilities
December 31,
2019
December 31,
2018
$ -
$ 1,503
Note 12
32,108
159
-
1,964
34,231
Note 11
-
1,959
1,648
2,951
Note 10
Note 8
Note 9
42,733
531
394
2,446
47,607
756
474
4,456
-
328,327
350,348
$ 369,116
$ 403,641
Accounts payable and accrued liabilities
Note 12
$ 18,942
$ 23,317
Deferred revenue
Dividends payable
Current portion of lease obligations
Current portion of long-term debt
Non-current Liabilities
Deferred income taxes
Deferred share units
Pension liability
Lease obligations
Long-term debt
Total Liabilities
SHAREHOLDERS' EQUITY
Class A and Class B shares
Contributed surplus
Note 16
Note 8
Note 14
Note 6
Note 18
Note 19
Note 8
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
40
Director
461
-
1,351
9,322
30,076
11,272
222
5,208
2,507
74,697
123,982
146,264
5,015
(213)
94,068
245,134
367
3,367
559
8,831
36,441
16,235
417
4,712
-
74,108
131,913
146,264
4,701
86
120,677
271,728
$ 369,116
$ 403,641
AKITA DRILLING | 2019 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
Right-of-use asset impairment loss
Selling and administrative
Total Costs and Expenses
Year Ended December 31
2019
2018
Note 4
$ 175,890
$ 118,361
Note 5
Note 9
Note 8
Note 5
121,588
36,763
86,575
26,614
276
-
36,237
194,864
22,611
135,800
Revenue Less Costs and Expenses
(18,974)
(17,439)
EQUITY INCOME FROM JOINT VENTURES
Note 10
1,129
6,168
OTHER INCOME (LOSS)
Interest income
Interest expense
Gain (loss) on sale of assets
Net other gains
Total Other Loss
Loss Before Income Taxes
20
(6,771)
(476)
393
(6,834)
84
(2,121)
567
453
(1,017)
(24,679)
(12,288)
Income tax expense (recovery)
Note 6
(4,804)
3,651
NET LOSS FOR THE PERIOD ATTRIBUTABLE TO SHAREHOLDERS
(19,875)
(15,939)
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)
(284)
(15)
(299)
364
217
581
COMPREHENSIVE LOSS FOR THE PERIOD ATTRIBUTABLE TO SHAREHOLDERS
$ (20,174)
$ (15,358)
NET LOSS PER CLASS A AND CLASS B SHARE
Note 3
Basic
Diluted
$ (0.50)
$ (0.65)
$ (0.50)
$ (0.65)
The accompanying notes are an integral part of these financial statements.
41
AKITA DRILLING | 2019 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
Income (Loss)
Class A
Non-Voting
Shares
Class B
Common
Shares
Retained
Earnings
Total
Equity
$ 22,505
$ 1,366
$ 23,871
$ 4,500
$ (495)
$ 146,579
$ 174,455
Shares issued for acquisition
122,393
$Thousands
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
Stock options charged to
expense
Dividends
BALANCE AT
DECEMBER 31, 2018
Net loss for the year
Foreign currency translation
adjustment
Remeasurement of pension
liability
Stock options charged
to expense
Dividends
BALANCE AT
DECEMBER 31, 2019
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
314
—
—
(19,875)
(19,875)
(15)
(284)
—
—
—
—
—
(15)
(284)
314
(6,734)
(6,734)
$ 144,898
$ 1,366 $ 146,264
$ 5,015
$ (213)
$ 94,068 $ 245,134
The accompanying notes are an integral part of these financial statements.
42
AKITA DRILLING | 2019 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) loss 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 expense
Interest paid
Current income tax expense
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
Change in long term assets
Proceeds from sale of assets
Net Cash Used In Investing Activities
FINANCING ACTIVITIES
Change in debt
Dividends paid
Change in lease obligations
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
Year Ended December 31
2019
2018
$ (19,875) $ (15,939)
Note 9
36,763
26,614
Note 6
Note 19
Note 18
Note 13
Note 10
Note 6
Note 9
Note 13
Note 10
276
-
(4,872)
3,508
37
120
476
-
9,307
(1,129)
(90)
6,771
(6,598)
67
305
21,558
-
(15,238)
(2,087)
3,937
756
(976)
1,823
(11,785)
298
230
(567)
(9)
(19,497)
(6,168)
(90)
2,121
(1,950)
143
2,812
(8,494)
(43,928)
(17,546)
2,615
5,808
1,525
-
640
(50,886)
Note 14
Note 16
1,024
(10,101)
68,884
(7,942)
(1,873)
-
(311)
(11,261)
(15)
(1,503)
1,503
(836)
60,106
217
943
560
$ -
$ 1,503
The accompanying notes are an integral part of these financial statements.
43
AKITA DRILLING | 2019 Annual ReportCONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTES CONTENTS
45
47
51
BUSINESS AND ENVIRONMENT
RESULTS FOR THE YEAR
LONG-TERM ASSETS
1. General Information
2. Basis of Preparation
45
45
3. Net Loss per Share
4. Revenue
5. Expenses by Nature
6. Income Taxes
7. Segmented Information
59
63
WORKING CAPITAL
DEBT AND EQUITY
12. Financial Instruments
59
14. Debt
13. Change in Non-Cash Working Capital 63
15. Capital Management
16. Dividends per Share
17. Share Capital
47
48
49
49
51
63
65
65
65
8. Leases
9. Property, Plant and Equipment
10. Investments in Joint Ventures
11. Restricted Cash
66
PERSONNEL
18. Share-Based Compensation Plans
19. Employee Future Benefits
51
55
57
59
66
69
71
OTHER NOTES
20. Commitments and Contingencies
21. Related Party Transactions
22. Business Combination
71
71
72
44
44
AKITA DRILLING | 2019 Annual Report
AKITA DRILLING | 2019 Annual Report NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
For the years ended December 31, 2019 and December 31, 2018
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,
in Canada and the United States (“US”). 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 First Nations, Métis or Inuit 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, 2019 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 4, 2020.
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 | 2019 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 US subsidiaries is the US 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 (“OCI”).
Change in accounting policy
IFRS 16, “Leases” was adopted by the Company effective January 1, 2019. The impact of the adoption of IFRS 16, “Leases”, and the
Company’s new accounting policies are disclosed in Note 8 - Leases.
Estimates and judgments
The preparation of these consolidated financial statements required 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:
46
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS • Note 4 - Revenue
• Note 6 - Income Taxes
• Note 8 - Leases
• Note 9 - Property, Plant and Equipment
• Note 12 – Financial Instruments
• Note 19 – Employee Future Benefits
• Note 22 – Business Combination
RESULTS FOR THE YEAR
3. 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.
Net loss ($Thousands)
Weighted average outstanding shares
Incremental shares for diluted loss calculation (1)
Weighted average outstanding shares for loss per share - diluted
Loss per share - basic
Loss per share - diluted
Year Ended
December 31
2019
December 31
2018
$ (19,875)
$ (15,939)
39,608,191
24,551,542
-
-
39,608,191
24,551,542
$ (0.50)
$ (0.65)
$ (0.50)
$ (0.65)
(1) For the year ended December 31, 2019, and the year ended December 31, 2018, the outstanding shares 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.
47
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. Revenue
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.
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
2019
December 31
2018
$ 86,560
$ 59,806
89,330
58,555
$ 175,890
$ 118,361
The majority of the Company’s contracts contain both a lease and a service element. IFRS 15, “Revenue from Contracts with Customers”
requires that contract revenue 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 2019, two customers (2018 – three 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.
48
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. 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:
$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
6. Income Taxes
Year Ended
December 31
2019
December 31
2018
$ 96,437
$ 69,534
21,882
26,760
12,746
6,668
20,969
12,015
$ 157,825
$ 109,186
$ 121,588
$ 86,575
36,237
22,611
$ 157,825
$ 109,186
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 year.
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
Deferred tax expense (recovery)
Total income tax expense (recovery)
Year Ended
December 31
2019
December 31
2018
$ 68
$ 143
(4,872)
3,508
$ (4,804)
$ 3,651
The following table reconciles the income tax expense (recovery) using a weighted average Canadian federal and provincial rate of
26.63% (2018 – 27.00%) to the reported tax expense (recovery). The rate decrease is due to the reduction in the Alberta corporate
tax rate. 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.
49
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $Thousands
Loss before income taxes
Year Ended
December 31
2019
December 31
2018
$ (24,679)
$ (12,288)
Expected income tax recovery at the statutory rate
(6,572)
(3,301)
Add (deduct):
Change in income tax rates
Permanent differences
Jurisdictional rate difference
Change in unrecognized deferred tax asset
Return to provision adjustment
Other
(1,265)
363
406
3,142
(390)
(488)
94
(123)
1,089
6,164
(342)
70
Total income tax expense (recovery)
$ (4,804)
$ 3,651
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, 2017
$ 13,538
$ (1,319)
$ -
$ 373
$ 12,592
Acquired with acquisition of Xtreme
19,867
-
(17,329)
(2,538)
-
Charged (credited) to net loss
Charged to other comprehensive loss
Balance as at December 31, 2018
Credited to net loss
Credited to other comprehensive income
10,614
-
44,019
(2,162)
-
22
135
(4,256)
(2,872)
-
-
(1,162)
(21,585)
(33)
(91)
(1,933)
-
(5,037)
(744)
-
3,508
135
16,235
(4,872)
(91)
Balance as at December 31, 2019
$ 41,857
$ (1,286)
$ (23,518)
$ (5,781)
$ 11,272
A net deferred tax asset has not been recognized for $54 million (2018 – $53M). This amount is primarily related to non-capital losses
carried forward.
Total gross tax losses available to the Company are $324,415,000 with $300,715,000 in the US and $23,700,000 in Canada. The first
of these losses will begin to expire in 2031.
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.
50
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
7. Segmented Information
The Company has 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 Drilling Corp.
(“Xtreme”) and AKITA approved an arrangement to combine their respective businesses. The business combination increased AKITA’s US
operations from four drilling rigs to 17 drilling rigs. Geographical information is provided below:
$Thousands
Revenue
Revenue less costs and
expenses
Year Ended December 31, 2019
Year Ended December 31, 2018
Canada
US
Total
Canada
US
Total
$ 48,376
$ 127,514
$ 175,890
$ 64,993
$ 53,368
$ 118,361
$ (17,832)
$ (1,142)
$ (18,974)
$ (18,399)
$ 960
$ (17,439)
$Thousands
Canada
US
Total
Canada
US
Total
December 31, 2019
December 31, 2018
Property, plant and equipment
$ 102,870
$ 225,457
$ 328,327
$ 116,630
$ 233,718
$ 350,348
LONG-TERM ASSETS
8. Leases
The Company has adopted IFRS 16, “Leases” using a modified retrospective approach from January 1, 2019. Under the modified
approach, the Company is not required to restate comparatives for the 2018 reporting year and has applied the standard prospectively.
Practical Expedients Applied
On adoption, the Company used the following practical expedients permitted by the standard:
• the use of a single discount rate to a portfolio of leases with reasonably similar characteristics;
• reliance on previous assessments on whether leases are onerous;
• accounting for lease payments as an expense and not recognizing a right-of-use (“ROU”) asset if the underlying asset is of low dollar
value;
• accounting for leases with a remaining lease term of less than 12 months as at January 1, 2019, as short-term leases;
• accounting for lease and non-lease components as a single lease component for lease liabilities; and
• the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
51
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The Company has also elected not to reassess whether a contract is, or contains, a lease at the date of initial application. Instead, for
contracts entered into before the transition date, the Company relied on its assessment made when applying International Accounting
Standards (“IAS”) 17, “Leases” and IFRIC 4, “Determining Whether an Arrangement Contains a Lease”.
Leasing Activities and Policies
The Company leases various offices, yards, rig equipment, vehicles and office equipment. Lease contracts are typically made for fixed
periods of two to five years, but may have extension or termination options. Lease terms are negotiated on an individual basis and
contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may
not be used as security for borrowing purposes.
Prior to January 1, 2019, leases were accounted for under IAS 17, “Leases” and were either classified as finance or operating leases.
Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight-line
basis over the period of the lease. Finance leases prior to January 1, 2019, were reclassified to ROU assets from property, plant and
equipment.
Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease
period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The ROU asset is
depreciated over the lease term on a straight-line basis.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value
of the following lease payments:
• fixed payments less any lease incentives receivable;
• amounts expected to be payable by the lessee under residual value guarantees;
• the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and
• payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee’s
incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset
of similar value in a similar economic environment with similar terms and conditions.
ROU assets are measured at cost comprising of the following:
• the amount of the initial measurement of the lease liability;
• any lease payments made at or before the commencement date less any lease incentives received;
• any initial direct costs; and
• restoration costs.
Payments associated with short-term leases and leases of low-value assets are recognized on a straight-line basis as an expense in
profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets are comprised of office and IT
equipment.
52
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Adjustments Recognized on Adoption of IFRS 16, “Leases”
On adoption of IFRS 16, “Leases” the Company recognized lease liabilities in relation to leases which had previously been classified
as ‘operating leases’ under the principles of IAS 17, “Leases”. These liabilities were measured at the present value of the remaining
lease payments, discounted using the Company’s incremental borrowing rate, adjusted for the lease term. The discount rates range
from 5.01% to 6.06%.
For leases previously classified as finance leases, the entity recognized the carrying amount of the lease asset and lease liability
immediately before transition as the carrying amount of the ROU asset and the lease liability at the date of initial application. The
measurement principles of IFRS 16, “Leases” are only applied after that date.
The change in accounting policy affected the following items in the statement of financial position on January 1, 2019:
• property, plant and equipment – decreased by $559,000 due to the transfer of finance lease assets to ROU assets
• ROU assets – increased by $3,356,000
• finance leases – decreased by $559,000
•
lease liabilities – increased by $3,356,000
Reconciliation of Commitments to Lease Liability
The following table provides a reconciliation of the commitments as at December 31, 2018 to the Company’s lease liabilities as at
January 1, 2019.
Disclosed commitments as at December 31, 2018
$ 4,081
Non-lease components
Short-term leases
Adjustment to commitment amount as at December 31, 2018
Finance leases under IAS 17, "Leases"
Lease liability commitments as at December 31, 2018
Impact of discounting
Lease liability as at January 1, 2019
(844)
(140)
715
559
4,371
(456)
$ 3,915
53
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Continuity of ROU Assets
The ROU assets were measured as if the standard had been applied since the commencement date of the lease but discounted using
AKITA's incremental borrowing rate as at the date of initial application (January 1, 2019). There were no onerous lease contracts that
would have required an adjustment to the ROU assets at the date of initial application.
$Thousands
Land and property
Rig equipment
Office equipment/software
Vehicles
Total ROU assets
Balance as
at January 1,
2019
Amortization
for the
year ended
December 31,
2019
Net ROU
additions
Balance as at
December 31,
2019
$ 1,786
$ (965)
$ 922
$ 1,743
934
833
362
(448)
(325)
(188)
-
40
-
486
548
174
$ 3,915
$ (1,926)
$ 962
$ 2,951
Impairment of Property, Plant and Equipment
During the third quarter of 2019, the Company relocated its US office from Houston, Texas to Denver, Colorado. The Company entered
into a sublease for its Houston office lease’s remaining four year term. The sublease was an onerous lease contract which resulted
in the Company derecognizing the ROU asset of $859,000, recording a lease receivable of $583,000, which is an estimate of the
unguaranteed residual value of the sub-lease, and recognizing a ROU asset impairment loss of $276,000. Additionally the Company
recognized interest receivable and unearned interest revenue of $65,000. The amount of the lease receivable due within the next
twelve months is classified as prepaid expenses and other, while the remaining lease receivable is classified as other long-term assets
on the Company’s Statement of Financial Position.
Lease Obligations
The Company recorded $183,000 (2018 - $nil) in interest expense related to its lease obligations.
Significant Estimates and Judgments
In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an
extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the
lease term if the lease is reasonably certain to be extended (or not terminated). Potential future cash outflows of $55,000 have not
been included in the lease liability because it is not reasonably certain that the leases will be extended (or not terminated).
The assessment is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment and
that is within the control of the lessee.
54
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 assets. 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, 2019, the Company changed its method for depreciating buildings from declining balance to straight-line.
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, 2019 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, 2019 is as
follows:
Equipment Class
Drilling rigs
Major inspection and overhaul expenditures
Drill pipe and other ancillary drilling equipment
Furniture, fixtures and equipment
Buildings
Depreciation Method
Depreciation Rates
Straight-line
Straight-line
Straight-line
Straight-line
Straight-line
10 to 20 years
3 to 5 years
2 to 8 years
10 years
10 to 20 years
The salvage values for the drilling rig equipment ranges from zero to 10% depending on the specific rig component. There are no
salvage values for the remaining equipment classes.
55
AKITA DRILLING | 2019 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, 2017
$ 4,302
$ 367,517
$ 8,097
$ 379,916
Additions
Xtreme additions
Disposals
2,601
2,546
-
14,376
184,126
(7,622)
569
2,109
(567)
17,546
188,781
(8,189)
Balance as at December 31, 2018
9,449
558,397
10,208
578,054
IFRS 16, "Leases" reclass to ROU assets
-
-
Additions
Disposals
138
14,986
(1,285)
(11,667)
(546)
114
(366)
(546)
15,238
(13,318)
Balance as at December 31, 2019
$ 8,302
$ 561,716
$ 9,410
$ 579,428
Accumulated Depreciation
$Thousands
Balance as at December 31, 2017
Disposals
Depreciation expense
Balance as at December 31, 2018
Land and
Buildings
Drilling Rigs
Other
Total
$ 1,424
$ 200,573
$ 7,320
$ 209,317
-
123
1,547
(7,555)
25,627
(560)
754
(8,115)
26,504
218,645
7,514
227,706
IFRS 16, "Leases" reclass to ROU assets
-
-
Disposals
Depreciation expense
(118)
445
(10,607)
33,368
(46)
(295)
648
(46)
(11,020)
34,461
Balance as at December 31, 2019
$ 1,874
$ 241,406
$ 7,821
$ 251,101
Net Book Value
$Thousands
As at December 31, 2017
As at December 31, 2018
As at December 31, 2019
Land and
Buildings
Drilling Rigs
Other
Total
$ 2,878
$ 166,944
$ 777
$ 170,599
$ 7,902
$ 339,752
$ 2,694
$ 350,348
$ 6,428
$ 320,310
$ 1,589
$ 328,327
At December 31, 2019, the Company had $74,000 in Property, Plant and Equipment that was not being depreciated, as these assets
were under construction (December 31, 2018 – $286,000).
In addition to depreciation on its Property, Plant and Equipment, the Company had amortization expense of $2,302,000 for the year
ended December 31, 2019 (2018 - $110,000).
56
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Impairment of Property, Plant and Equipment
IAS 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, 2019, 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, 2019, 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, 2019 (2018 - nil). The Company also concluded that there were no reversals of previous asset impairments required at December
31, 2019.
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, 2019, management determined
recoverable amounts for its CGUs using a fair value less costs to dispose of each CGU. IFRS considers this approach to constitute a
Level 3 hierarchy in its determination of value. External appraisals of the Company’s assets were completed in October of 2019 and
relied upon for testing at December 31, 2019. As industry and asset conditions have not changed significantly since the time that the
appraisals were completed, management feels the appraisals are still valid at year end.
At December 31, 2019, the total fair market value of each of the Company’s CGUs was between 7% and 14% of its book value and
therefore management concluded that the net book value of each CGU was consistent with the fair value and allowed for variations in
the fair value approximations of $14 to $16 million per CGU.
10. Investments in Joint Ventures
The Company conducts certain rig operations via joint ventures with First Nations, Métis or Inuit partners whereby rig assets are jointly
owned. Currently, there are eight different First Nations, Métis or Inuit groups with equity investments in six of AKITA’s active 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 First Nations, Métis or Inuit 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.
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.
57
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table lists the Company’s active joint ventures. All joint ventures operate in Canada.
AKITA
Ownership Interest
85%
85%
85%
70%
90%
50%
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 Mistiyapew Aski Joint Venture 56
AKITA Equtak Joint Venture 61
Continuity of Investments in Joint Ventures
$Thousands
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
Net income for the year ended December 31, 2019
Distributions for the year ended December 31, 2019
Balance as at December 31, 2019
Summarized Joint Venture Financial Information
Investments in
Joint Ventures
$ 4,096
6,168
(5,808)
4,456
1,129
(3,937)
$ 1,648
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.
$Thousands
Cash
Other current assets
Non-current assets
Total assets
Total liabilities
Net assets
December 31, 2019
December 31, 2018
AKITA % JV Partner %
Total
AKITA %
JV Partner %
Total
$ 220
$ 70
$ 290
$ 1,334
$ 261
$ 1,595
2,610
437
3,047
4,704
1,148
5,852
55
-
2,885
1,237
507
215
55
3,392
1,452
55
6,093
1,637
-
1,409
526
55
7,502
2,163
$ 1,648
$ 292
$ 1,940
$ 4,456
$ 883
$ 5,339
58
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2019
Year Ended December 31, 2018
AKITA % JV Partner %
Total
AKITA %
JV Partner %
Total
$ 5,289
$ 1,120
$ 6,409
$ 22,797
$ 4,737
$ 27,534
$ 1,129
$ 245
$ 1,374
$ 6,168
$ 1,246
$ 7,414
$Thousands
Revenue
Net income and
comprehensive income
11. Restricted Cash
During 2018, AKITA held restricted cash with a financial institution as security for two outstanding letters of credit. At December 31,
2019, the restricted cash balance was $nil (December 31, 2018 - $756,000) as the Company had met its obligations under the original
terms of the restriction.
WORKING CAPITAL
12. Financial Instruments
IFRS 9 "Financial Instruments" - Accounting Policies
Due to the short-term nature of the Company’s financial instruments, fair values approximate carrying values unless otherwise stated.
The Company discloses its financial instruments within a hierarchy prioritizing the inputs to fair value measurements at the following
three levels:
• Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities;
• Level 2 – inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and
• Level 3 – inputs that are not based on observable market data.
Classification and measurement
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, 2019, the Company’s financial assets in this category include
cash and accounts receivable.
59
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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, 2019, the Company's financial liabilities 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
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, 2019, 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, 2019, the Company held no financial instruments in this category.
Impairment of financial assets
The Company assesses, on a forward-looking basis, the expected credit losses associated with its debt instruments carried at amortized
cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk.
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.
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. 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.
60
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The terms of the Company’s contracts generally require payment within 30 days. The Company continuously monitors the recoverability
of its accounts receivable 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:
$Thousands
Within 30 days
31 to 60 days
61 to 90 days
Over 90 days
Estimated credit losses
Total accounts receivable
December 31, 2019
December 31, 2018
$ 23,566
$ 30,793
6,868
1,989
285
(600)
9,920
673
1,615
(268)
$ 32,108
$ 42,733
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, 2019, this risk was limited by positive cash flows from operations and by a banking
facility sufficient to meet all current liabilities.
Maturity information regarding the Company’s long-term debt is as follows:
$Thousands
US debt - principal
Bank credit facility - principal
US debt - interest
Bank credit facility - interest
Total
Less than 1 Year
1-4 Years
Total
$ 2,945
$ 3,539
$ 6,484
6,377
9,322
527
4,096
71,158
74,697
165
8,500
77,535
84,019
692
12,596
$ 13,945
$ 83,362
$ 97,307
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 geographical divisional operations are primarily denominated in their local currency with limited
exposure to foreign currency exchange transaction risk through capital expenditures or financial instruments. From time to time the
company may enter into forward currency contracts to manage this risk.
61
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 USD. In addition, the Company’s foreign subsidiaries are subject to unrealized foreign currency exchange translation
gains or losses on consolidation.
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 through 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, 2019
December 31, 2018
$ 3,516
$ 3,905
923
14,413
90
302
19,020
90
Total accounts payable and accrued liabilities
$ 18,942
$ 23,317
62
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13. Change in Non-Cash Working Capital
$Thousands
December 31, 2019
December 31, 2018
Year Ended
Change in non-cash working capital:
Accounts receivable
Inventory
Prepaid expenses and other
Accounts payable and accrued liabilities
Deferred revenue
Finance leases
Change in non-cash working capital
Pertaining to:
Operating activities
Investing activities
Change in non-cash working capital
DEBT AND EQUITY
14. Debt
$ 10,625
$ 2,780
394
482
(4,375)
586
(1,504)
(18,764)
94
-
-
20
$ 7,220
$ (16,882)
$ 9,307
$ (19,497)
(2,087)
2,615
$ 7,220
$ (16,882)
USD Debt
The Company has long-term debt of $6,484,000 ($5,135,000 USD). The loan is payable in monthly instalments of $228,000 USD
over 19 months, with a balloon payment due at the end of the term. The borrowing has an implied interest rate of approximately
12.9 percent. The effective annual rate agreement is approximately 11.7 percent. There are no debt covenants related to this debt
agreement.
Operating Loan Facility
The Company has a syndicated credit agreement with the Company’s principal banker as the agent on the syndication and three other
national banks in the syndication. The operating loan facility totals $125,000,000 with the term ending in 2023. The interest rate
ranges from 50 to 200 basis points over prime interest rates depending on the Funded Debt(1) 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:
63
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1)
Funded Debt(1) to EBITDA(1) Ratio: the Company shall ensure that:
(i) for the Fiscal Quarters ending December 31, 2019 and March 31, 2020, the Funded Debt(1) to EBITDA(1) Ratio shall
not be more than 4.00:1.00;
(ii) for the Fiscal Quarters ending June 30, 2020 and September 30, 2020, the Funded Debt(1) to EBITDA(1) Ratio shall not be
more than 3.50:1.00:
(iii) for the Fiscal Quarter ending December 31, 2020 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) The EBITDA(1) to Interest Expense(1) ratio, calculated quarterly on the last day of each Fiscal Quarter on a rolling four quarter
basis, shall not fall below 3.00:1.00.
The facility also includes a borrowing base calculation which is 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.
The Company is in compliance with its operating loan facility covenants.
The Company borrowed $77,535,000 from this facility as at December 31, 2019 (December 31, 2018 - $74,991,000).
(1 ) Funded Debt, EBITDA, Interest Expense, Eligible Accounts Receivable, Eligible Fixed Assets and Priority Payables are all defined terms in the Company’s credit agreement.
Continuity of Debt
$Thousands
Total Debt
Balance at December 31, 2018
$ 82,939
Drawn on credit facility
Repayment of debt
16,550
(15,470)
Total debt as at December 31, 2019
$ 84,019
$Thousands
Current portion
Long-term portion
Total debt as at December 31, 2019
Total Debt
$ 9,322
74,697
$ 84,019
64
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
15. Capital Management
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. The following table provides a history of dividends over the past two
years:
Declaration Date
Payment Date
March, 2018
May, 2018
August, 2018
November, 2018
March, 2019
May, 2019
April, 2018
July, 2018
October, 2018
January, 2019
April, 2019
July, 2019
17. Share Capital
Per Share
$ 0.085
$ 0.085
$ 0.085
$ 0.085
$ 0.085
$ 0.085
Total
($000's)
$ 1,525
$ 1,525
$ 3,367
$ 3,367
$ 3,367
$ 3,367
Authorized:
• 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
65
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The shares outstanding at December 31, 2019 and December 31, 2018 are:
Number of shares
Shares outstanding
Class A Non-Voting
Class B Common
Total
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.
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.
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.
66
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes stock options reserved, granted and available for future issuance:
Number of options
December 31,
2019
December 31,
2018
Reserved under the current stock option plan
3,100,000
3,100,000
Balance at beginning of year
Granted
Available for future issuance
644,500
(352,500)
292,000
822,000
(177,500)
644,500
A summary of the Company’s stock options is presented below:
2019
2018
Number of
Options
Weighted
Average
Exercise Price
Number of
Options
Weighted
Average
Exercise Price
Options outstanding at January 1
1,053,500
$
9.63
876,000
$ 10.45
Granted
352,500
$
3.03
177,500
$ 5.62
Options outstanding at December 31
1,406,000
$
8.20
1,053,500
$ 9.63
Options exercisable at December 31
914,000
$ 9.99
756,000
$ 10.74
The following table summarizes outstanding stock options at December 31:
Vesting
Period
(Years)
5
5
5
5
5
5
5
5
5
5
Exercise
Price
Number
Outstanding
$ 9.87
130,000
$ 10.32
$ 10.86
$ 13.81
76,000
82,500
87,500
$ 16.02
115,000
$ 10.28
90,000
$ 7.13
197,500
$ 8.26
$ 5.62
$ 3.93
97,500
177,500
352,500
Weighted Average
Contractual Life
2019
Remaining
Contractual
Life (Years)
0.2
1.2
2.2
3.7
4.7
5.3
6.3
7.3
8.7
9.2
6.0
Number
Exercisable
Number
Outstanding
130,000
130,000
76,000
82,500
87,500
76,000
82,500
87,500
115,000
115,000
90,000
90,000
158,000
197,500
58,500
71,000
45,500
97,500
177,500
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
130,000
76,000
82,500
87,500
115,000
72,000
118,000
39,000
33,500
67
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
A summary of the Company’s deferred share unit plan is presented below:
2019
2018
Deferred
Share Units
(#)
Fair
Value
($000's)
Deferred
Share Units
(#)
Fair
Value
($000's)
Deferred share units outstanding at January 1
102,370
$ 417
52,732
$ 388
Granted
Issued in lieu of dividends
Change in fair value
71,711
12,930
273
39
(507)
46,117
3,521
238
22
(231)
Deferred share units outstanding at December 31
187,011
$ 222
102,370
$ 417
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.
68
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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, 2019
December 31, 2018
$ 314
(194)
$ 120
$ 201
29
$ 230
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.
Risk-free interest rate
Expected volatility
Dividends yield rate
Option life
Weighted average share price
Forfeiture rate
Fair value of options
2019
1.70%
40.00%
6.50%
5.4 years
$ 3.93
0.00%
2018
2.30%
35.00%
5.40%
5.4 years
$ 5.62
0.00%
$ 0.96
$ 1.29
19. Employee Future Benefits
The Company has a defined contribution pension plan, registered under the Alberta Employment Pension Plans Act, which 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 pension 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 10, 2020, and was utilized in measuring the
December 31, 2019 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 pension plan is determined using the projected unit credit method. The defined
69
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS benefit pension 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.
$Thousands
Actuarial present value of defined benefit obligation at January 1
Interest cost
Current service cost
Benefits paid
Unrealized actuarial (gain) loss
2019
$ 4,802
173
37
(90)
376
2018
$ 4,922
171
298
(90)
(499)
Actuarial present value of defined benefit obligation at December 31
$ 5,298
$ 4,802
$Thousands
Pension liability allocated to:
Accounts payable and accrued liabilities
Non-current liabilities
Pension liability outstanding at December 31
Key Assumptions
2019
2018
$ 90
5,208
$ 5,298
$ 90
4,712
$ 4,802
Year Ended
December 31, 2019
December 31, 2018
Discount rate at beginning of the year
3.6%
3.3%
Anticipated retirement age of plan members
63 to 67 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 plans
Total expense
70
Year Ended
December 31, 2019
December 31, 2018
$ 173
$ 171
37
210
3,156
298
469
2,477
$ 3,366
$ 2,946
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 $5,208,000 at December 31, 2019 (December
31, 2018 - $4,712,000). AKITA utilizes the services of a third party to assist in the actuarial estimate of the Company’s defined
benefit pension expense and liability. At December 31, 2019, a key assumption is the discount rate of 3.0% (2018 – 3.6%). From the
perspective of a sensitivity analysis, a 1% decrease in the discount rate would result in a $717,000 increase in the defined benefit
obligation while a 1% increase in the discount rate would result in a $594,000 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 $105,000.
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, 2019,
the Company had 11 drilling rigs with multi-year contracts. Of these contracts, nine are due to expire in 2020 and two in 2021.
The Company has entered into a two year contract with a related party to provide sponsorship and advertising at an annual cost of
$175,000.
At December 31, 2019, the Company had capital expenditure commitments of $1,406,000 (2018 – $3,302,000).
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 –
General Information). The transactions and year-end balances with those affiliates are presented below:
$Thousands
Revenue (computer services, rent)
Purchases
Sponsorship and advertising (Note 20)
Selling and administrative
Operating
Year-end accounts payable
Year Ended
December 31, 2019
December 31, 2018
$
$
$
$
$
84
365
53
458
70
$
$
$
$
$
84
353
57
-
4
71
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
b)
Joint ventures and joint venture partners
The Company is related to its joint ventures and joint venture partners. The joint ventures’ and joint venture partners’
transactions and year-end balances with AKITA are presented below:
$Thousands
Operating
Selling and administrative
Year-end due to AKITA from partners
Year-end due to AKITA from joint ventures
Year Ended
December 31, 2019
December 31, 2018
$
773
$
103
$
$
1,031
885
$
$
$
$
3,288
448
278
1,021
c)
d)
Legal fees
The Company incurred legal fees of $134,000 (2018 - $368,000) 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, 2019. At December 31, 2019, $21,000
(December 31, 2018 - $5,000) 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
22. Business Combination
Year Ended
December 31, 2019
December 31, 2018
$
$
$
$
2,344
141
765
-
$
$
$
$
2,033
415
613
-
Effective September 11, 2018, AKITA and 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 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:
72
AKITA DRILLING | 2019 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$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.
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, the Xtreme assets 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, the
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.
73
AKITA DRILLING | 2019 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
2019
2018
2017
3
8
8
8
8
7
9
9
9
9
2
4
10
9
1
1
10
$
$
$
$
$
$
175,890
(22,679)
(4,804)
(19,875)
(8.1%)
(0.50)
12,862
5.2%
$
$
$
$
$
$
118,361
(12,228)
3,651
(15,939)
(5.9%)
(0.65)
14,135
5.2%
$
4,155
$ 11,166
1.14:1
1.31:01
$ 369,116
$ 403,641
$ 245,134
$ 271,728
$
$
$
$
$
6.19
$
6.86
15,238
36,763
10,101
0.17
$
$
$
$
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
Note: Readers should be aware that these revenue amounts reported for 2012 through 2019 include revenue
solely generated by the Company from its wholly-owned operations.
74
AKITA DRILLING | 2019 Annual Report10 YEAR FINANCIAL REVIEW 2016
2015
2014
2013
2012
2011
2010
$
$
$
$
$
$
$
$
$
$
$
$
$
$
61,061 $
112,488
7,535 $
(44,544)
2,206 $
(10,579)
5,329 $
(33,965)
2.4%
(14.2%)
0.30 $
(1.89)
34,500 $
38,510
15.7%
16.0%
$
$
$
$
$
$
165,274
28,121
7,042
21,079
8.3%
1.17
56,195
22.2%
34,907 $
16,002
$
(5,028)
4.49:1
2.45:1
0.90:1
257,907 $
254,516
219,646 $
220,200
12.24 $
12.27
13,193 $
17,960
23,959 $
36,748
6,100 $
0.34 $
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%
40,645
$
31,214
$
44,265
$
61,341
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
75
AKITA DRILLING | 2019 Annual Report10 YEAR FINANCIAL REVIEW CORPORATE INFORMATION
Directors
Loraine M. Charlton
Corporate Director
Calgary, Alberta
Douglas A. Dafoe
President and CEO
Ember Resources Inc.
Calgary, Alberta
Harish K. Mohan
Corporate Director
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
Nancy C. Southern
Chairman, President and
Chief Executive Officer,
ATCO Ltd., Canadian Utilities Limited, and
CU Inc.
Calgary, Alberta
Linda A. Southern-Heathcott
President and
Chief Executive Officer,
Spruce Meadows Ltd.,
President,
Team Spruce Meadows Inc.,
Chairman of the Board,
AKITA Drilling Ltd.
Calgary, Alberta
C. Perry Spitznagel, Q.C.
Vice Chairman,
Bennett Jones LLP
Calgary, Alberta
Henry G. Wilmot
Corporate Director
Calgary, Alberta
Charles W. Wilson
Corporate Director
Boulder, Colorado
Officers
Raymond T. Coleman
Senior Vice President and
Managing Director, US Operations
Colin A. Dease
Vice President, Canadian Operations
Corporate Secretary and Legal Counsel
Craig W. Kushner
Director of Human Resources
Darcy Reynolds
Vice President, Finance and
Chief Financial 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
Banker
ATB Financial
Calgary, Alberta
Counsel
Bennett Jones LLP
Calgary, Alberta
Auditors
PricewaterhouseCoopers LLP
Calgary, Alberta
Registrar and Transfer Agent
AST Trust Company (Canada)
Calgary, Alberta and Toronto, Ontario
1.800.387.0825
Share Symbol/TSX
Class A Non-Voting (AKT.A)
Class B Common (AKT.B)
Website
www.akita-drilling.com
AKITA DRILLING | 2019 Annual Report 77
HEAD OFFICE
AKITA Drilling Ltd.
1000, 333 - 7th Ave SW
Calgary, Alberta T2P 2Z1
Canada
www.akita-drilling.com