2020
Annual Report
2
AKITA DRILLING | 2020 Annual Report CORPORATE
PROFILE
AKITA Drilling Ltd. is a premier oil and gas drilling contractor with
drilling operations throughout North America. The Company
strives to be the industry leader in customer relations, First
Nations and Aboriginal partnerships, employee expertise, safety,
equipment quality and drilling performance. In addition to
conventional drilling, the Company specializes in pad and other
purpose-built drilling rigs and is active in directional, horizontal
and underbalanced drilling providing specialized drilling
services to a broad range of independent and multinational oil
and gas companies. AKITA currently employs, at full operations,
approximately 1,000 people. The Company has ownership in 37
drilling rigs in all depth ranges.
11
AKITA DRILLING | 2020 Annual Report CONTENTS
1
Corporate Profile
6
4
Letter to the
Shareowners
8
Operational Performance
Share Performance
10
36
Management's
Discussion and Analysis
Management's
Responsibility for
Financial Reporting
38
Auditor's Report
44
Consolidated Financial
Statements
48
78
Notes to Consolidated
Financial Statements
10 Year Financial Review
81
Corporate Information
2
2
AKITA DRILLING | 2020 Annual Report
AKITA DRILLING | 2020 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 factors such as prevailing economic conditions (including
as may be affected by the COVID-19 pandemic); 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.
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 2020 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 11, 2021 at
10:00 a.m. Mountain Daylight Time. Details on how to access the Meeting can be found in the
Company’s Management Information Circular.
3
AKITA DRILLING | 2020 Annual Report LETTER TO THE
SHAREOWNERS
We would like to express appreciation to our partners,
customers and suppliers who worked closely with us
during 2020 to arrive at innovative solutions for working
through challenging times in Canada and the US.
AKITA Drilling Ltd.’s net loss for the year ended December 31,
2020, making 2020 one of the worst years on record in the
2020, was $93,274,000 (net loss of $2.35 per share (basic
Canadian drilling industry. The Company’s operating margin
and diluted)) on revenue of $119,644,000 compared to a net
per day increased to $8,734 per day in 2020 from $8,249 in
loss of $19,875,000 ($0.50 loss per share (basic and diluted))
2019, due primarily to the mix of rigs that worked in 2020. The
on revenue of $175,890,000 in 2019. The Company recorded
federal government's CEWS program provided the Company
an asset impairment loss of $80,000,000 in 2020. Adjusting
with $2,269,000 in Canadian Emergency Wage Subsidy
for the asset impairment loss, the Company’s net loss was
(“CEWS”) in 2020.
$20,674,000 (net loss of $0.52 per share (basic and diluted)).
Earnings before interest, depreciation, tax and amortization for
On November 18, 2020, the Canadian Association of Oilwell
the current year was $15,617,000 compared to $19,131,000
Drilling Contractors (“CAODC”) released its 2021 industry
in 2019, while net cash from operating activities for 2020 was
drilling forecast, estimating 19% average rig utilization, up from
$22,860,000 compared to $21,558,000 in 2019.
the 16% actual average rig utilization in 2020, and estimating
3,771 wells in 2021, up 475 from 3,296 in 2020. The 2021
The impact of the North American economic slowdown as a
forecast was based upon commodity price assumptions of
result of initiatives implemented to mitigate the spread of the
USD $51.25 per barrel for crude oil and CAD $2.27 per mcf
COVID-19 global pandemic can be seen in the activity levels in
for natural gas. Based on the CAODC forecast it would appear
both of the Company’s geographical segments. In Canada, the
that 2021 will be slightly better than 2020. However, without
Company’s utilization for the year decreased to 13% in 2020
improvements to the existing take-away capacity in Canada,
from 19% in 2019. Operating income for the Canadian segment
growth in the Canadian market may remain challenged. The
fell to $8,254,000 in 2020 from $13,278,000 in 2019. The
Company’s focus in 2021 will be on continued cost control in
uncertainty in the Canadian oilfield industry that characterized
its Canadian operations, while increasing its active rig count.
2019 was further exacerbated by the impact of COVID-19 in
4
AKITA DRILLING | 2020 Annual ReportLETTER TO THE SHAREOWNERS In the US, AKITA’s utilization decreased to 41% (2,555 operating
industry, operational excellence and he has been instrumental
days) in 2020, compared to 60% (3,747 operating days) for
in building a strong and knowledgeable team to assume his
2019. The Company began the year with 15 rigs operating in
duties at AKITA. I would like to sincerely thank Karl for his long
the US but this decreased to five rigs by September of 2020.
and exemplary tenure with AKITA and its predecessors, and
The impact of COVID-19 on demand for oil, which influences
wish him all the best in his future endeavours” says AKITA’s
the price of WTI, is the dominant factor contributing to the
Chairman Linda Southern-Heathcott.
decrease in activity. Revenue in the US division decreased
by 28% to $91,198,000 from $127,514,000 in 2019, due to
Assuming the position of Executive Chair and Chief Executive
reduced operating days in 2020. At December 31, 2020, the
Officer will be Linda Southern-Heathcott, AKITA’s current Board
Company’s active rig count increased to eight active rigs in
Chair and a founding board member of the Company.
the US, as the price of oil continued to recover. In the US, the
Company is looking at 2021 with some optimism as the active
We would like to express a special thanks to AKITA’s employees
rig count continues to improve. However, a significant recovery
for their adaptability, hard work, sacrifices and commitment. We
is not expected in 2021 and the Company’s focus for 2021 will
would like to express appreciation to our partners, customers
be on continued cost control.
and suppliers who worked closely with us during 2020 to
arrive at innovative solutions for working through challenging
In the first quarter of 2020, the Company underwent a
times in Canada and the US. We also wish to acknowledge the
significant cost cutting exercise to give the Company the
contribution of our directors, whose thoughtful counsel and
financial flexibility required in the depressed market conditions.
guidance have helped to create, maintain and grow a strong
The Company reduced its total selling and administrative
and successful Company. Finally, we acknowledge AKITA
expenses to $12,686,000 in 2020 from $20,339,000 in 2019.
Shareowners for their continued support and confidence in
Additionally the Company repaid $9,953,000 in debt during
the Company.
2020 including the high interest debt that was assumed with
the acquisition of Xtreme Drilling Corp. in September of 2018.
On behalf of the Board of Directors,
After providing 45 years of dedicated service to the Company,
on January 27, 2021, the Company announced the retirement
of its President and Chief Executive Officer, Karl Ruud,
Linda A. Southern-Heathcott Karl A. Ruud
effective May 15, 2021. “Karl is a man of great character and
Chairman of the Board President and Chief
strength. He was the driving force behind the negotiations on
the Xtreme Acquisition and has built a great legacy at AKITA,
a legacy that includes one of the best safety records in the
March 11, 2021
Executive Officer
5
AKITA DRILLING | 2020 Annual ReportLETTER TO THE SHAREOWNERS
OPERATIONAL
PERFORMANCE
Revenue ($000's)
Net Earnings (Loss) ($000's)
200,000
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
20,000
0
-20,000
-40,000
-60,000
-80,000
-100,000
2016
2017
2018
2019
2020
2016
2017
2018
2019
2020
Funds Flow from Continuing Operations ($000's)
Capital Expenditures ($000's)
25,000
20,000
15,000
10,000
5,000
0
2016
2017
2018
2019
2020
2016
2017
2018
2019
2020
40,000
30,000
20,000
10,000
0
6
AKITA DRILLING | 2020 Annual ReportOPERATIONAL PERFORMANCE INTEGRITY
RESPECT
COMMITMENT
At AKITA - integrity,
respect and
commitment are the
foundational values
and guiding principles
engrained into every
aspect of our operations.
SHARE
PERFORMANCE
The graph below compares the cumulative return over the last five years on the Class A Non-Voting shares and Class B
Common shares of the Company from December 31, 2020 with the cumulative total return of the TSX/S&P Composite
Stock Index and the TSX Energy Services Sub-Index over the same period, assuming reinvestment of dividends.
Five Year Total Return on $100 Investment
200
150
100
50
0
2015
Dec. 31,
2015
100
100
100
100
AKITA Class A
Non-Voting Shares
AKITA Class B
Common Shares
TSX/S&P
Composite Index
TSX Energy
Services Sub-Index
2016
2017
2018
2019
2020
Dec. 31,
2016
Dec. 31,
2017
Dec. 31,
2018
Dec. 31,
2019
Dec. 31,
2020
130
129
121
137
137
128
132
108
70
77
120
77
22
28
148
53
9
35
156
17
8
AKITA DRILLING | 2020 Annual ReportSHARE PERFORMANCE Share Performance
Weighted average number of Class A and
Class B shares
17,988,552
17,969,415
24,551,542
39,608,191
39,608,191
Total number of Class A and Class B shares
17,948,502
17,945,661
39,608,191
39,608,191
39,608,191
Market prices for Class A Non-Voting shares
High $ 9.20
$ 9.88
$ 8.38
$ 4.42
$ 1.22
2016
2017
2018
2019
2020
Low $ 5.88
$ 6.52
$ 3.41
$ 0.75
$ 0.25
Close $ 8.45
$ 7.36
$ 4.07
$ 1.19
$ 0.48
Volume
930,748
1,324,111
2,192,522
8,875,748
21,339,080
Market prices for Class B Common shares
High $ 11.00
$ 9.95
$ 8.16
$ 4.48
$ 2.89
Low $ 7.11
$ 6.94
$ 3.77
$ 1.25
$ 0.67
Close $ 8.53
$ 7.61
$ 4.60
$ 1.57
$ 0.77
Volume
18,674
41,479
19,313
53,746
45,986
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 ($)
2016
0.34
2017
0.34
2018
0.34
2019
0.17
2020
0.00
9
AKITA DRILLING | 2020 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, 2020, is dated March 11, 2021, 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,
2020. The MD&A should be read in conjunction with the audited annual consolidated financial statements and related
notes for the year ended December 31, 2020, 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) and stated in thousands unless otherwise identified.
Introduction
AKITA is a premier Canadian oil and gas drilling contractor
with a fleet of 37 drilling rigs. AKITA provides contract drilling
services through two geographical segments: Canada and the
United States (“US”). With a fleet of 20 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,
Metis 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 and an equity interest in select AKITA rigs. With
a fleet of 17 rigs, AKITA’s US division conducts operations in
North Dakota, Colorado, Wyoming, Texas, Utah, 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 | 2020 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Financial Highlights
$Thousands except per share amounts
2020
2019
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 “Basis of Analysis in this MD&A and Non-GAAP Items”.
Operational Highlights
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
119,664
91,855
27,809
23%
15,617
0.39
10,321
0.26
93,274
2.35
7,593
-
39,608
251,521
74,303
175,890
137,486
38,404
22%
19,130
0.48
12,925
0.33
19,875
0.50
15,238
6,734
39,608
369,116
84,019
(56,226)
(45,631)
(10,595)
1%
(3,513)
(0.09)
(2,604)
(0.07)
73,399
1.85
(7,645)
(6,734)
-
(117,595)
(9,716)
(32%)
(33%)
(28%)
5%
(18%)
(19%)
(20%)
(21%)
369%
370%
(50%)
(100%)
0%
(32%)
(12%)
2020
2019
Change
% Change
945
2,555
35,513
35,694
26,779
27,750
13%
41%
1,606
3,747
33,415
34,031
25,166
27,000
19%
60%
(661)
(1,192)
(41%)
(32%)
2,098
1,663
1,613
750
(6%)
(19%)
6%
5%
6%
3%
(32%)
(32%)
(1) See “Basis of Analysis in this MD&A and Non-GAAP Items”.
(2) Includes AKITA's share of joint venture revenue and expenses. See “Basis of Analysis in this MD&A and Non-GAAP” items.
11
AKITA DRILLING | 2020 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS General Overview
The impact of the North American economic slowdown as a
result of initiatives implemented to mitigate the spread of the
COVID-19 global pandemic can be seen in the Company’s 2020
results. The Company recorded a net loss of $93,274,000 in
2020, compared to a loss of $19,875,000 in 2019. Included
in the Company’s net loss for 2020 is an $80,000,000 asset
impairment expense. Adjusting for impairment, the Company’s
net loss for 2020 was $20,674,000. Adjusted funds flow
from operations decreased to $10,321,000 in 2020 from
$12,925,000 in 2019 and adjusted EBITDA decreased to
$15,617,000 from $19,130,000 over the same period.
The Company began 2020 with 10 rigs operating in Canada
and 15 rigs operating in the US. As global oil demand decreased
due to the impact of COVID-19 related shut downs, however,
the Company’s customers put drilling programs on hold and
the Company’s operating rigs dropped to one in Canada and
four in the US, in September of 2020. This decrease in active
Industry Overview
WTI Prices ($USD) (1)
rig count resulted in a material decrease in operating days. In
Canada, operating days fell by 41% to 945 operating days in
2020 from 1,606 operating days in 2019. In the US, activity
fell 32% to 2,555 operating days in 2020 from 3,747 operating
days in 2019.
In the first quarter of 2020, as a result of both reduced activity
and a significant oil price decline, the Company underwent a
significant cost cutting initiative, reducing costs in all areas
of the Company. As a result of the cost cutting initiative, the
Company’s selling and administrative expenses decreased
to $12,686,000
in 2019.
Notwithstanding the reduction in the Company’s adjusted
funds flow from operations, however, AKITA reduced total
debt to $74 million at December 31, 2020 from $84 million
at December 31, 2019. The debt reduction included the high
interest debt assumed with the acquisition of Xtreme Drilling
Corp. (“Xtreme”) in September of 2018.
in 2020 from $20,339,000
Alberta Natural Gas Price ($CAD/GJ) (2)
2020
2019
2018
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
3.0
2.5
2.0
1.5
1.0
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)
US Active Rig Count (4)
50%
40%
30%
20%
10%
0%
1,200
1,100
1,000
900
800
700
600
500
400
300
200
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: NGX (Natural Gas Exchange)
3) Source: Canadian Association of Oilwell Drilling Contractors (CAODC)
4) Source: Baker Hughes North American Rotary Rig Count
12
AKITA DRILLING | 2020 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 March 2020, the World
Health Organization declared a global pandemic related to
COVID-19. To date, the COVID-19 related economic slowdown
has resulted in significant declines and volatility in the stock
markets, as well as steep reductions in both global oil demand
and prices. Additionally, an increase in the global oil supply,
brought about by the Saudi Arabia and Russia oil price war in
the first quarter of 2020, placed further negative pressure on
oil prices, which reached cycle lows in April of 2020. There is
significant ongoing uncertainty surrounding the future impact
of COVID-19 on both demand and prices for the Company’s
drilling services.
In Canada, industry utilization was higher at the beginning
of the first quarter of 2020 than at the same point in 2019,
but declined rapidly in March as the above mentioned factors
reduced demand for drilling services. This decline in demand
reached a low point in June of 2020 before it began to slowly
improve, however, demand over the year ended well below
2019 levels. By the end of December 2020, the Company’s
Canadian division had three active rigs.
In the US, the activity decline that began in the latter part of
2019, due to the volatility in oil and gas prices and the pressure
on operators to operate within free cash flow, continues to
impact results. These pressures were exacerbated in late Q1
2020, by the combined effects of the Saudi Arabia and Russia
oil price war and the effects of the COVID-19 global pandemic.
Several of the Company’s drilling rigs operating in the first
quarter shut down drilling operations as prices dropped further,
leaving five active rigs at the end of September 2020, down
from 11 active rigs at the end of March 2020. The Company
ended the year with eight active rigs in December of 2020.
The total active rig count in the US dropped 67% from 790 rigs
at the start of 2020 to 261 rigs at the end of September 2020
before increasing to 341 rigs by year-end.
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
2020
33,560
25,306
8,254
25%
945
35,513
26,779
8,734
13%
20
2019
Change
% Change
53,665
(20,105)
40,417
(15,111)
13,248
(4,994)
25%
1,606
33,415
25,166
8,249
19%
23
0%
(661)
2,098
1,613
485
(6%)
(3)
(37%)
(37%)
(38%)
0%
(41%)
6%
6%
6%
(32%)
(13%)
(1) Includes AKITA's share of joint venture revenue and expenses. See “Basis of Analysis in this MD&A and Non-GAAP Items”.
(2) See "Basis of Analysis in this MD&A and Non-GAPP Items".
13
AKITA DRILLING | 2020 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Utilization rates are a key statistic for the drilling industry since
they directly affect total revenue and influence pricing. During
2020, AKITA achieved 945 operating days in Canada, which
corresponds to an annual utilization rate of 13%, compared
to a 2020 industry average of 16% and a 2019 utilization rate
for the Company of 19% (1,606 days). 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 in 2020 had the largest
impact on the Company’s Canadian utilization as oil sands
drilling has been a key market for the Company’s Canadian
rigs.
Canadian revenue of $33,560,000 in 2020 was 37% lower
than 2019 revenue of $53,665,000, due to decreased activity
in 2020. Revenue per day increased in 2020 to $35,513 per
day from $33,415 per day in 2019, a 6% 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 $25,306,000 in 2020 from $40,417,000 in 2019
including AKITA’s share of costs from its joint venture rigs. On
a per day basis, 2020 costs increased by 6%, consistent with
the increase in revenue per day. Also affecting operating and
maintenance expense for 2020 is $1,526,000 in Canadian
Emergency Wage Subsidy (“CEWS”) payments from the federal
government that reduced total expense.
AKITA moved one rig from its Canadian fleet to the US in 2020
and delisted two rigs taking the Company’s Canadian rig count
to 20 rigs at December 31, 2020 from 23 at December 31,
2019.
AKITA’s Canadian segment provided drilling services to eight
different customers in 2020 (2019 - 19 different customers),
including four customers that each provided more than 10% of
AKITA’s Canadian revenue for the year (2019 – five customers).
United States
$Thousands except per day amounts (CAD)
Revenue
Operating and maintenance
Operating margin
Margin %
Operating days
Revenue per operating day (1)
Operating and maintenance per operating day (1)
Operating margin per operating day (1)
Utilization
Rig count
(1) See “Basis of Analysis in this MD&A and Non-GAAP Items”.
2020
91,198
70,901
20,297
22%
2,555
35,694
27,750
7,944
41%
17
2019
Change
% Change
127,514
(36,316)
101,168
(30,267)
26,346
(6,049)
21%
1%
3,747
(1,192)
34,031
27,000
7,031
60%
17
1,663
750
913
(19%)
(28%)
(30%)
(23%)
5%
(32%)
5%
3%
13%
(32%)
-
-
Activity levels in the US were impacted by the collapse in oil
prices as drilling rigs began to shut down near the end of the
first quarter and continued to shut down into the third quarter
of 2020 before ending the year slightly improved from the lows
seen in the third quarter.
Revenue in the US was $91,198,000 for 2020, down from
$127,514,000 in 2019. This 28% drop in revenue is attributable
to the decrease in operating days, which fell 32% to 2,555
operating days in 2020 from 3,747 operating days over the
same period in 2019. The impact of COVID-19 on demand for
14
AKITA DRILLING | 2020 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS oil, which influences the price of WTI, is the dominant factor
contributing to the decrease in activity. Revenue in the US
accounted for 76% of the Company’s total 2020 revenue, up
from 72% in 2019.
In the US, AKITA provided drilling services to 13 different
customers in 2020 (2019 – 19), including two customers that
each provided more than 10% of AKITA’s US revenue for the
year (2019 – three).
Operating margin per operating day increased to $7,944 in
2020 from $7,031 in 2019 due to standby revenue received
on two of the Company’s rigs.
Seasonality
The Canadian drilling industry is seasonal with activity typically
building in the fall as the ground freezes and peaking during
the winter months. Northern transportation routes become
available once areas with muskeg conditions freeze to allow
the movement of drilling rigs and other heavy equipment.
The peak Canadian drilling season ends with "spring break-
up" at which time drilling operations are curtailed due to
seasonal road bans (temporary prohibitions on road use)
and restricted access to agricultural land as frozen ground
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
certain periods when authorities prioritize wildlife or habitat
protections. Such restrictions may affect activity levels and
operating results.
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 AKITA’s operations in northern Canada. Other areas
in the US where AKITA conducts drilling operations are
infrequently subject to weather constraints, especially in the
southern states, but may experience operational restrictions
for other reasons.
While seasonality can affect all rig classes, pad drilling rigs
are generally less susceptible to seasonality than conventional
drilling rigs.
Depreciation and Amortization Expense
$Millions
Depreciation and amortization expense
2020
32.7
2019
36.8
Change
% Change
(4.1)
(11%)
The decrease in depreciation and amortization expense to
$32,681,000 during 2020 from $36,763,000 during 2019, is
due to the impact of the $80,000,000 asset impairment loss
the Company recorded in 2020.
AKITA depreciates its drilling rig assets on a straight-line basis
where the estimated useful lives and residual values of various
rig components have been chosen to match the expected life
of that component. In 2020, drilling rig depreciation accounted
for 97% of total depreciation expense, compared to 97% in
2019.
While AKITA conducts some of its drilling operations via joint
ventures, the drilling rigs used to conduct those activities are
owned jointly by AKITA and its joint venture partners, and
not by the joint ventures themselves. As the joint ventures
do not hold any property, plant, or equipment assets directly,
the Company’s depreciation expense includes depreciation
on assets involved in both wholly-owned and joint venture
activities.
15
AKITA DRILLING | 2020 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Selling and Administrative Expenses
$Millions
Selling and administrative expenses
2020
12.7
2019
Change
% Change
20.3
(7.6)
(37%)
to
Selling and administrative expenses decreased
$12,686,000 in 2020 from $20,339,000 in 2019. The
decrease in 2020 is related to the cost cutting measures
implemented by the company in the first quarter of 2020
in light of the low demand for the Company’s services. Also
contributing to the decrease in selling and administrative costs
is the receipt of COVID-19 related government grants totalling
$723,000. Reductions in selling and administrative expenses
were partially offset by the payment of a one-time, long-service
retiring allowance of $3,177,000 in the year.
Selling and administrative expenses equated to 11% of
revenue in 2020 compared to 12% in 2019. The single largest
component of selling and administrative expenses is salaries
and benefits which accounted for 75% of these expenses in
2020 (2019 – 45%).
Asset Impairment
$Millions
Asset impairment loss
During the year ended December 31, 2020, the Company
determined that two external indicators of impairment existed:
the uncertainty and volatility of oil prices, which impacts
the future earnings potential of the Company’s CGUs (cash
generating units), and the Company’s book value of its net
assets exceeding its market capitalization and therefore, the
Company tested its CGUs for asset impairment.
In the first quarter of 2020, the Company recorded an asset
impairment loss of $30,000,000 in each of its Canadian and
US CGUs respectively. In the fourth quarter of 2020, both
CGU's were tested again for impairment and the Company's
US CGU's carrying amount exceeded the recoverable amount
resulting in an additional impairment of $20,000,000. The
total asset impairment loss for the year ended December 31,
2020 was $80,000,000.
The recoverable amounts of these CGUs were determined
using a discounted cash flow model. Assumptions used in the
discounted cash flow models include the Company’s Board of
Directors approved budgets and an average revenue growth
rate ranging from 5% to 15% over a 10 year period depending
on the CGU being analyzed. In forecasting its projected cash
flows the Company assumed a slow recovery commencing in
2021 for both Canada and the US with improvements in activity
and revenue per day over the forecast period. Discounted
future cash flows are determined by applying a discount rate
of 14.5%. This valuation has a IFRS fair value hierarchy of
2020
80.0
2019
Change
% Change
0.3
79.7
n/a
Level 3. Additionally, in the fourth quarter, management also
obtained external equipment appraisals from independent
third party experts which supported the fair value less cost to
sell.
Asset impairment testing is subject to numerous assumptions,
inherent risks and uncertainties, both general and specific,
and the risk that the predictions will not be realized. As a
result, the following sensitivity analysis has been performed to
recognize that additional outcomes are possible:
• Changed future revenue assumptions by 5% resulting
in increases to the Company’s CGUs from $15 million to
$35 million per CGU and reductions ranging from $15
million to $35 million per CGU; and
• Changed the Company’s pre-tax discount rate by 1%
resulting in reductions between $4 million and $11
million per CGU and increases from $4 million to $10
million per CGU.
As drilling rigs are long lived assets, no sensitivity adjustment
was made for the projected forecast period.
As the base case test represented management’s best
estimates, these sensitivity reductions were not included in
the asset impairment loss reported.
16
AKITA DRILLING | 2020 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Equity Income from Joint Ventures
Equity income from joint ventures is comprised of the following:
$Millions
2020
2019
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
5.1
4.4
0.1
0.6
5.3
4.1
0.1
1.1
(0.2)
(4%)
0.3
-
7%
0%
(0.5)
(45%)
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 revenue for the Company’s proportionate share
of joint ventures is related to the decreased activity for the
Company’s joint venture rigs in 2020 compared to the same
period in 2019.
Other Income (Loss)
$Millions
Interest income
Interest expense
Loss on sale of assets
Net other gains
Total other loss
During 2020, the Company recorded interest expense of
$5,637,000 (2019 – $6,771,000). The reduction of the
Company’s interest expense relates to the repayment of the
Company’s high interest US dollar denominated debt that was
assumed with the acquisition of Xtreme Drilling Corp. in 2018
and repaid during 2020.
2020
2019
Change
% Change
-
(5.6)
(0.2)
-
(5.8)
-
(6.8)
(0.4)
0.4
(6.8)
-
1.2
0.2
(0.4)
1.0
n/a
18%
50%
(100%)
15%
During 2020, the Company disposed of non-core assets
resulting in a loss of $156,000 with total proceeds of
$2,142,000 compared to a loss of $476,000 and proceeds of
$1,823,000 in 2019.
17
AKITA DRILLING | 2020 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS
Income Tax Expense (Recovery)
$Millions, except income tax rate (%)
Current tax expense (recovery)
Deferred tax recovery
Total income tax recovery
Effective income tax rate
AKITA had an income tax recovery of $9,427,000 in 2020
compared to an income tax recovery of $4,804,000 in
2019. Deferred tax recovery increased to $9,311,000 in
2020 compared to $4,872,000 in 2019. The increase in the
Company’s deferred tax recovery relates to the impact of the
2020
(0.1)
(9.3)
(9.4)
2019
0.1
(4.9)
(4.8)
Change
% Change
(0.2)
(4.4)
(4.6)
(200%)
(90%)
(96%)
24.6%
26.6%
asset impairment loss recorded in 2020. To a lesser extent,
the reduction in the Alberta corporate tax rate from 11.5% in
2019 to 8% in 2020 affected the deferred tax expense.
Net Loss, Adjusted Funds Flow and Net Cash From Operating Activities
2020
(93.3)
22.9
10.3
2019
(19.9)
21.6
12.9
Change
% Change
(73.4)
(369%)
1.3
(2.6)
6%
(20%)
administrative expenses, decreased interest expense and
an increased income tax recovery in the year. The influencing
factors noted above are discussed throughout this MD&A.
Net cash from operating activities increased in 2020 to
$22,860,000 from $21,558,000 in 2019 due primarily to
changes in non-cash working capital.
funds flow
Adjusted
to
10,321,000 in 2020 from $12,295,000 in 2019 due to
decreased revenue in the year.
from operations(1) decreased
$Millions
Net loss
Net cash from operating activities
Adjusted funds flow from operations (1)
(1) See “Basis of Analysis in this MD&A and Non-GAAP Items”.
the Company recorded a net
loss of
During 2020,
$93,274,000 (net loss of $2.35 per Class A Non-Voting and
Class B Common share (basic and diluted)) compared to
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))
in 2019. The primary factor influencing net income in 2020
was the $80,000,000 asset impairment loss. After adjusting
for the impairment, the Company’s net loss for the year was
$20,674,000, a 4% increase in net loss, year-over-year. Also
influencing the Company’s net loss was a decrease in revenue
due to decreased activity offset by decreased selling and
18
AKITA DRILLING | 2020 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS
Summary of Quarterly Results
The following table shows key selected quarterly financial information for the Company:
$Thousands, except per share (unaudited)
Mar. 31
Jun. 30
Sep. 30
Dec. 31
Annual
Totals
Three Months Ended
2020
Revenue
Net loss
53,572
26,359
18,849
20,884
119,664
(52,257)
(5,221)
(8,203)
(27,593)
(93,274)
Loss per share (basic and diluted) ($)
(1.32)
(0.13)
Adjusted funds flow from (used in) operations (1)
10,154
2,099
(0.21)
(669)
(0.69)
(2.35)
(1,263)
10,321
Cash flow from operations
4,583
13,621
3,374
1,282
22,860
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) ($)
Adjusted funds flow from operations (1)
(0.04)
7,828
(0.13)
1,559
Cash flow from (used in) operations
(4,287)
24,903
(0.14)
3,076
(735)
(0.19)
462
1,677
(0.50)
12,925
21,558
2018
Revenue
Net loss
27,089
17,293
22,465
51,514
118,361
(1,912)
(2,959)
(5,459)
(5,609)
(15,939)
Loss per share (basic and diluted) ($)
Adjusted funds flow from (used in) operations (1)
Cash flow from (used in) operations
(0.11)
4,519
2,819
(0.16)
1,638
9,860
(0.24)
(637)
(0.14)
8,615
(0.65)
14,135
(7,428)
(13,745)
(8,494)
(1) See “Basis of Analysis in this MD&A and Non-GAAP Items”.
Key trends over the past 12 quarters, after giving consideration
to the seasonal nature of AKITA’s operations, are as follows:
• Day rates in Canada and the US continue to be below full
cycle returns resulting in lower than anticipated funds
flow from operations and net earnings for the Company;
• The impact on revenue of the Company’s acquisition of
and
Xtreme at the end of the third quarter of 2018 is reflected
in the fourth quarter of 2018;
• Revenue in the first quarter of 2020 and 2019 is very
similar but the impact of COVID-19 on demand over
the balance of 2020 is striking when compared to the
subsequent quarters of prior years;
• Net cash from operating activities is not directly correlated
to market strength on a quarterly basis. Changes in the
balance of this account are tied to the timing of changes
in various non-cash working capital accounts.
19
AKITA DRILLING | 2020 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Fourth Quarter Analysis Operational Highlights
For the three months ended December 31,
2020
2019
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
100
507
46,850
32,083
39,473
24,525
7,377
7,558
5%
32%
390
756
(290)
(249)
34,910
11,940
40,483
(8,400)
26,553
12,920
35,631
(11,106)
9,434
9,670
(2,057)
(2,112)
18%
48%
(13%)
(16%)
(74%)
(33%)
34%
(21%)
49%
(31%)
(22%)
(22%)
(71%)
(33%)
(1) See “Basis of Analysis in this MD&A and Non-GAAP Items”.
(2) Includes AKITA's share of joint venture revenue and expenses. See "Basis of Analysis in this MD&A and Non-GAAP Items”.
During the fourth quarter of 2020, the Company had 100
operating days in Canada compared to 390 operating days
during the corresponding period in 2019. In the US, operating
days decreased by 33% to 507 in the fourth quarter of 2020
from 756 in the fourth quarter of 2019. The negative impact of
COVID-19 on oil prices was the key driver for the 2020 fourth
quarter activity decline.
AKITA incurred a net loss of $27,593,000 (net loss of $0.69
per Class A Non-Voting and Class B Common share (basic and
diluted)) for the fourth quarter of 2020 compared to a net loss
of $7,941,000 (net loss of $0.19 (basic and diluted)) in the
fourth quarter of 2019. The increased loss in 2020 is a result
of the asset impairment loss recorded on the Company’s US
CGU. Decreased activity also contributed to the increased
loss. Adjusted funds flow from operations decreased to a loss
of $1,262,000 in the fourth quarter of 2020 from $462,000
in the corresponding quarter in 2019 due to lower activity and
one-time selling and administrative expenses.
20
AKITA DRILLING | 2020 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)
2020
2019
2018
Revenue
Net loss
Loss per share (basic and diluted)
119,664
(93,274)
(2.35)
Dividends per Class A Non-Voting and Class B Common share (1)
-
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
10,321
22,860
8,683
152,266
251,521
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 “Basis of Analysis in this MD&A and Non-GAAP Items”.
Liquidity and Capital Resources
At December 31, 2020, AKITA had $8,683,000 in working
capital (working capital ratio of 1.56:1) with $7,108,000 of
cash, compared to a working capital of $4,155,000 (working
capital ratio of 1.14:1) and nil cash for the previous year. In
2020, AKITA generated $22,860,000 in cash from operating
activities. Positive cash was generated from joint venture
distributions ($1,411,000) and from proceeds on sales of
assets ($2,142,000). During the same period, cash was
used for capital expenditures ($7,593,000) and repayment
of debt ($9,953,000). Accounts payable at year-end included
$5,907,000 in accrued expenses, two thirds of which related
to routine operations and one third of which related to one-
time items.
The Company has a syndicated credit agreement with the
Company’s principal banker as the agent on the syndication
and three other Canadian banks in the syndication. The
operating loan facility totals $110,000,000 with the term
ending in 2023. The credit agreement was amended on July
17, 2020, to include a covenant relief period that extended
to June 30, 2021. The facility was further amended two
more times to add additional quarters of covenant relief for
September 30, 2021 and December 31, 2021. The interest
rate during the covenant relief period ranges from 225 to 350
basis points over prime interest rates depending on the Funded
Debt(1) to Tangible Net Worth(1) Ratio. Security for this facility
includes all present and after-acquired personal property and
a first floating charge over all other present and after-acquired
property including real property. The financial covenants are:
1. The Funded Debt(1) to Tangible Net Worth(1) Ratio: the
Company shall ensure that for the fiscal quarters ended
December 31, 2020 to December 31, 2021, the Funded
Debt(1) to Tangible Net Worth(1) Ratio shall not be more than
0.75:1.00.
The Funded Debt(1) to Tangible Net Worth(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: the Company shall
ensure that:
(i)
For the fiscal quarter ended December 31, 2020, the
EBITDA(1) to Interest Expense(1) Ratio shall not be less
than 1.25:1.00;
(ii) For the fiscal quarters ended March 31, 2021, and
June 30, 2021, the EBITDA(1) to Interest Expense(1)
Ratio is waived, and
(iii) For the fiscal quarter ended September 30, 2021, the
EBITDA(1) to Interest Expense(1) Ratio shall not be less
than 0.75:1.00;
(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 | 2020 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS (iv) For the fiscal quarter ended December 31, 2021, the
EBITDA(1) to Interest Expense(1) Ratio shall not be less
than 1.25:1.00
The EBITDA(1) to Interest Expense(1) Ratio shall be calculated
quarterly on the last day of each Fiscal Quarter on a rolling
four quarter basis; and
3. A minimum trailing twelve month EBITDA(1) test will be
required quarterly during the Covenant Relief Period, with
EBITDA(1) varying each period in line with agreed upon
forecasts.
Upon the end of the Covenant Relief Period the Company’s
covenants revert back to:
(i)
Funded Debt(1) to EBITDA(1) Ratio of not more than
3.00:1.00
(ii) EBITDA(1) to Interest Expense(1) Ratio of not less than
3.00:1.00
At December 31, 2020, the Company was in compliance with
its covenants with a Funded Debt(1) to Tangible Net Worth(1)
Ratio of 0.38:1.00, an EBITDA(1) to Interest Expense(1) Ratio of
3.94:1.00 and a trailing twelve month EBITDA(1) in excess of
the $17,612,000 minimum threshold.
Property, Plant and Equipment
totaled $7,593,000
Capital expenditures
in 2020
($15,238,000 in 2019). Capital spending in 2020 was as
follows: $2,920,000 (2019 - $7,545,000) for certifications
and overhauls, $1,592,000 (2019 - $2,837,000) in drill pipe
and drill collars and $3,081,000 (2019 - $4,856,000) for
drilling rig equipment and upgrades.
The facility also includes a borrowing base calculation which
is the sum of:
(i)
75% of Eligible Accounts Receivable(1); plus
(ii) 50% of the orderly liquidation value of all Eligible Rig
Assets(1); less
(iii) Priority Payables(1) of the Loan Parties.
At December 31, 2020, the Company’s borrowing base totalled
$116,796,000.
The Company borrowed $75,000,000 from this facility as at
December 31, 2020 (December 31, 2019 - $77,535,000).
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 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.
the Company sold ancillary assets
During 2020,
for
$2,142,000 (2019 - $1,823,000) that resulted in a loss of
$156,000 (2019 – $476,000).
(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.
22
AKITA DRILLING | 2020 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 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 credit losses.
Financial Instruments
The Company’s financial assets and liabilities include cash,
accounts receivable, accounts payable, accrued liabilities and
financial instruments. Fair values approximate carrying values
unless otherwise stated.
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.
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
2020 and 2019 were made in the normal course of business
with regular payment terms and have been recorded at the
paid amounts. Operating purchases totaled $851,000, and
included sponsorship and advertising of $175,000, wellsite
trailers of $57,000, operational costs of $570,000 and other
miscellaneous purchases of $49,000. At December 31, 2020,
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
2020 were $175,000 (2019 - $325,000). Costs and related
services are consistent with parties dealing at arm’s length.
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.
$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, 2020, the Company had four drilling rigs with multi-year
contracts. These multi-year contracts are due to expire in
2021.
2020
837
115
991
123
2019
773
103
1,031
885
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, 2020, the Company had capital expenditure
commitments of $422,000 (2019 – $1,406,000).
2323
AKITA DRILLING | 2020 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Class A and Class B Share Dividends
Per share
Dividends per share ($)
2020
-
2019
0.17
Change
% Change
(0.17)
(100%)
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. The Company’s dividend program was
suspended in July of 2019 to improve the Company’s financial
flexibility in response to the weakened industry 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, 2019
37,954,407
144,898
1,653,784
1,366
39,608,191
146,264
Shares issued in 2020
-
-
-
-
-
-
December 31, 2020
37,954,407
144,898
1,653,784
1,366
39,608,191
146,264
At March 11, 2021, 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 842,500 stock
options outstanding, of which 249,000 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.
24
AKITA DRILLING | 2020 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 write down would be a non-cash item. However, total
assets and results of operations, including net income, could
be overstated as a result of projections of discounted future
cash flows that are too high.
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 an indefinite period 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 demand and
dayrates. High volatility in crude oil and natural gas prices
may also impact AKITA’s customers’ capital programs, causing
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 $5,710,000 at
December 31, 2020 (2019 - $5,208,000). 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 2020, a key
assumption is the 2.3% discount rate (2019 – 3.0%).
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.
delays in spending and lower overall demand for drilling
services.
Pandemic Risk
On March 11, 2020, the World Health Organization declared a
global pandemic in relation to the spread of COVID-19. As the
virus spread across the world, many businesses closed and
isolation and social distancing practices were implemented
to reduce the spread. The virus and its impact on transacting
business resulted in a decline in the world economy. Among
other effects, demand for oil decreased materially over the
balance of 2020, which resulted in an acute reduction in
demand for the Company’s drilling services. In addition to the
reduced demand for drilling services, the pandemic presented
operational challenges for the Company’s staff and rig crews.
An outbreak of COVID-19 at a rig site could lead to suspended
or cancelled operations. 2020’s financial results were
negatively impacted by ongoing COVID-19 related disruptions.
The Company expects further COVID-19 related disruptions to
persist, however, the Company cannot currently estimate the
severity of such impact, which may be material.
25
AKITA DRILLING | 2020 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 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
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.
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:
i. a portion of the consolidated cash flow from operations
could be dedicated to the payment of the principal and
interest on indebtedness, thereby reducing cash available
for other initiatives; and
ii. certain borrowings are at variable rates of interest, which
exposes AKITA to the risk of increased interest rates.
AKITA's ability to make scheduled payments of principal and
interest on, or to refinance, its indebtedness will depend on its
future operating performance and cash flow, which are subject
to prevailing economic conditions, prevailing interest rate
levels and financial, competitive, business and other factors,
many of which are beyond its control.
AKITA’s credit facilities contain certain customary operating
covenants that
limit the discretion of management to
incur additional indebtedness, to create liens or other
encumbrances, to pay dividends or make certain other
payments, investments, loans and guarantees and to sell or
otherwise dispose of assets and merge or consolidate with
another entity. In addition, AKITA is required to satisfy and
maintain two financial ratio tests, Debt to EBITDA and EBITDA
to Interest Expense. A failure to comply with the obligations in
the agreements 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. Currently AKITA is
in a covenant relief period whereby the financial covenants are
relaxed or waived until December 31, 2021.
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.
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
26
AKITA DRILLING | 2020 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS their
to support
insurance or
its customers. However, customers who provide contractual
indemnification protection may not in all cases maintain
adequate insurance or otherwise have the financial resources
indemnification obligations.
necessary
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.
Dependence on Major Customers
AKITA earned 61% of its total revenue in 2020 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 in the southern states, but the
Company may experience operational constraints such as
floods, blizzards and other extreme winter conditions in the
Rocky Mountain region in addition to operational restrictions
for a variety of other reasons. These restrictions could have a
material adverse effect on the Company’s business, financial
condition, results of operations and cash flows.
Volatility of Industry Conditions
The demand, pricing and terms for contract drilling services
are dependent upon the level of industry activity for Canadian
and US crude oil and natural gas exploration and development.
Industry conditions are influenced by numerous factors
which AKITA does not control including (without limitation):
current crude oil and natural gas prices, expectations about
future crude oil and natural gas prices, the cost of exploring
for, producing and delivering crude oil and natural gas, the
expected rates of decline in current production for AKITA’s
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
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
27
AKITA DRILLING | 2020 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 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
work force, 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. The cyclical nature of AKITA’s business makes
the impact of this risk significant.
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. Access to financing also impacts AKITA’s
customers, potentially limiting capital budgets and therefore
the demand for AKITA’s services.
Foreign Exchange and Foreign Operations Risk
AKITA’s expansion into the United States increases the
Company’s exposure to risks inherent in foreign operations.
The Company is exposed to risks caused by fluctuations in
currency exchange rates. US contracts are denominated in
United States dollars and, accordingly, a material decrease in
the value of the United States dollar could negatively impact
revenues.
In addition to foreign exchange, risks include, but are not
limited to: different taxation regimes, potential litigation and
potential political protectionist measures. While AKITA has
increased its insurance coverage to offset the increased
chance of litigation and has engaged third party experts to
assist in taxation matters, there can be no assurance that the
Company will be fully effective in mitigating foreign operation
risks. Such risks could have material adverse effects on
AKITA’s business, financial condition, results of operations and
cash flows.
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.
28
AKITA DRILLING | 2020 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 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.
fuel
Energy Alternatives
AKITA’s management cannot predict the impact of changing
demand for crude oil and natural gas products. Fuel
conservation measures, alternative
requirements,
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.
Carbon Emissions, Climate Change Activism and
Environmental Regulations
While AKITA’s operations, and those of its customers, are
laws, regulations and guidelines
subject to numerous
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 Corporation
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 activism
impact could reduce demand
for hydrocarbons in favour of lower carbon intense fuels.
Further, within Canada, increased climate change activism
has translated to opposition to new pipeline approvals, to
ongoing oil sands development and to the practice of hydraulic
fracturing. In the US, the Biden Administration has recently
implemented restrictions of drilling permits on federal lands
and has stopped the construction of the Keystone pipeline.
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
29
AKITA DRILLING | 2020 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Risk Management
AKITA manages its risks by:
• maintaining a conservative balance sheet that
• reducing health, safety and operational risk by
includes a low cost structure for the Company;
maintaining its API Q2 certification in Canada;
• having its risk management committee deliberate
•
improving the skills of its employees through training
periodically to assess, evaluate and develop a plan to
programs;
deal with the risk conditions for the Company;
• maintaining effective systems of internal control to
• developing an annual strategic business plan and
safeguard assets and ensure timely and accurate
budget to help determine the levels of capital and
reporting of financial results;
operating expenditures;
• maintaining comprehensive insurance policies with
• continuously developing long-term relationships with
respect to its operations;
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;
• ensuring that all employees comply with clearly
defined safety standards;
• 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
• 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 and which allows AKITA
to generate revenue denominated in US currency.
Furthermore, in response to the COVID-19 pandemic, the Company actively assessed and responded to the effects of
the COVID-19 pandemic on employees, customers, suppliers and service providers, and evaluated governmental actions
being taken to curtail its spread. The Company successfully implemented a mandatory work-from-home program for a
portion of the year for those employees who could perform their day-to-day activities working remotely. At our operation
facilities and for active rig personnel, in accordance with applicable laws, the Company implemented measures to
safeguard employees unable to work remotely through enhanced administrative controls, employee monitoring strategies,
more rigorous cleaning practices, as well as physical distancing and through provision of personal protective equipment.
The Company also implemented measures to reduce corporate overhead through wage and employee reductions together
with qualification for COVID-19 related government assistance programs
30
AKITA DRILLING | 2020 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
outlook for the drilling industry continues to be uncertain. The
impact of COVID-19 on demand for oil should begin to decrease
as COVID-19 vaccinations ramp up globally and mobility
restrictions are eased. This should have a corresponding
effect on the demand for drilling services and the first signs of
this can already be seen in Canada and the US as demand has
begun to improve from the lows seen in September of 2020.
The drilling industry in Canada, has begun to see some
signs of improvement from the lows seen in 2020 which is
positive, however, insufficient pipeline capacity, arguably the
main challenge to the drilling industry in Canada, remains
unresolved. This may limit the speed and size of any recovery
that the Canadian industry may see. One area that is showing
a significant improvement over 2020 is SAGD drilling in the
oil sands. With multiple Aboriginal joint ventures in the area,
and several of its newest rigs tailored for SAGD drilling, the oil
sands market has always been a key focus of the Company.
Low oil sands activity over the last two years, however, has
resulted in reduced utilization for AKITA’s Canadian fleet.
Improved activity in the oil sands market should improve
results in the Canadian segment. Despite the strengthening
in the oil sands market there is still an oversupply of drilling
rigs for the Canadian drilling industry as a whole which affects
both utilization and pricing for drilling services. Accordingly, the
Company’s focus for its Canadian division in the near term will
be financial discipline.
Similar to Canada, the US has begun to recover from the
lows seen in September of 2020 but the active rig count still
remains below 400 rigs, less than half the number of rigs that
were active at the start of 2020. Demand for high specification
rigs remains steady and is anticipated to grow as activity levels
rebound. Pricing for drilling services is still low, however, and
it will take more rigs going back to work before contractors
are able to influence prices. The impact that the new US
administration will have on the oil and gas industry and the
demand for drilling services is still unknown. The Company
is optimistic that 2021 will build on from the gains made in
the first quarter of 2020 (before the gains dropped off in the
second quarter of the year) and remain strong throughout the
balance of the year. Until there is more certainty in the size and
stability of a recovery, cost control remains a priority in the US.
The focus in 2021 will be 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 debt
repayment is the best use of cash in the current market and
the strategy should allow AKITA the ability to pursue growth
opportunities once the Company’s debt is reduced.
Disclosure Controls and Internal Controls Over Financial Reporting
As of December 31, 2020, 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”).
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, 2020.
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
As of December 31, 2020, management evaluated the
effectiveness of the Company’s internal control over financial
reporting as required by the CSA. This evaluation was
31
AKITA DRILLING | 2020 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 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.
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, 2020.
There was no change in the Company’s internal control
over financial reporting that occurred during the period that
began on October 1, 2020 and ended December 31, 2020
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,
2020.
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 includes 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 US revenue and expenses.
$Thousands
Revenue from wholly-owned drilling rigs in Canada
Revenue from joint venture drilling rigs
Revenue in Canada
Operating and maintenance expenses from wholly-owned drilling rigs in Canada
Operating and maintenance expenses from joint venture drilling rigs
Operating and maintenance expenses in Canada
2020
2019
28,466
48,376
5,094
5,289
33,560
53,665
20,954
36,248
4,352
4,169
25,306
40,417
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, however, 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.
32
AKITA DRILLING | 2020 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 recovery
Depreciation and amortization
Asset impairment loss
Adjusted EBITDA
2020
2019
(93,274)
(19,875)
5,637
(9,427)
32,681
80,000
6,771
(4,804)
36,763
275
15,617
19,130
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. Nonetheless, 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 operating activities
Income tax recoverable
Current income tax expense (recovery)
Interest paid
Interest expense
Post-employment benefits paid
Equity income from joint ventures
Change in non-cash working capital
Adjusted funds flow from operations
2020
2019
22,859
21,558
(276)
117
5,479
(5,637)
104
650
(12,975)
(305)
(67)
6,598
(6,771)
90
1,129
(9,307)
10,321
12,925
33
AKITA DRILLING | 2020 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 prevailing economic conditions (including as may be
affected by the COVID-19 pandemic); 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 11, 2021. Copies of these documents
including additional copies of the Annual Report for the year
ended December 31, 2020 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.
34
AKITA DRILLING | 2020 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS 35
AKITA DRILLING | 2020 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 (“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.
36
36 AKITA DRILLING | 2020 Annual Report
AKITA DRILLING | 2020 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 IFRS. The Company maintains disclosure controls and
independent auditors to discuss auditing and financial matters
procedures designed to ensure that information required to be
and to gain assurance that management is carrying out its
disclosed in reports is disclosed, processed and summarized
responsibilities
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 11, 2021
Darcy Reynolds
Vice President, Finance
and Chief Financial Officer
AKITA DRILLING | 2020 Annual Report 37
37
AKITA DRILLING | 2020 Annual Report
38
AKITA DRILLING | 2020 Annual ReportINDEPENDENT AUDITOR'S REPORT 39
AKITA DRILLING | 2020 Annual ReportINDEPENDENT AUDITOR'S REPORT 40
AKITA DRILLING | 2020 Annual ReportINDEPENDENT AUDITOR'S REPORT 41
AKITA DRILLING | 2020 Annual ReportINDEPENDENT AUDITOR'S REPORT 42
AKITA DRILLING | 2020 Annual ReportINDEPENDENT AUDITOR'S REPORT Consolidated Statements of Financial Position
$Thousands
ASSETS
Current Assets
Cash
Accounts receivable
Income taxes recoverable
Prepaid expenses and other
Non-current Assets
Other long-term assets
Investments in joint ventures
Right-of-use assets
Property, plant and equipment
TOTAL ASSETS
LIABILITIES
Current Liabilities
December 31,
2020
December 31,
2019
$ 7,108
$ -
Note 12
Note 7
15,128
-
1,834
24,070
1,782
887
2,199
32,108
159
1,964
34,231
1,959
1,648
2,951
Note 11
Note 9
Note 10
222,583
328,327
$ 251,521
$ 369,116
Accounts payable and accrued liabilities
Note 12
$ 13,916
$ 18,942
422
1,049
-
15,387
1,859
77
5,710
1,919
74,303
99,255
146,264
5,197
11
794
152,266
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
$ 251,521
$ 369,116
Deferred revenue
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 9
Note 14
Note 7
Note 17
Note 18
Note 9
Note 14
Note 16
Accumulated other comprehensive income (loss)
Retained earnings
Total Equity
TOTAL LIABILITIES AND EQUITY
The accompanying notes are an integral part of these financial statements.
Approved by the Board,
Director
Director
44
AKITA DRILLING | 2020 Annual ReportCONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Net Loss & Comprehensive Loss
$Thousands, except per share amounts
REVENUE
COSTS AND EXPENSES
Operating and maintenance
Depreciation and amortization
Asset impairment loss
Selling and administrative
Total Costs and Expenses
Year Ended December 31
2020
2019
Note 4
$ 119,664
$ 175,890
Note 6
Note 10
Note 10
Note 6
91,855
32,681
80,000
12,686
217,222
137,486
36,763
276
20,339
194,864
Revenue Less Costs and Expenses
(97,558)
(18,974)
EQUITY INCOME FROM JOINT VENTURES
Note 11
650
1,129
OTHER INCOME (LOSS)
Interest income
Interest expense
Loss on sale of assets
Net other gains (losses)
Total Other Loss
Loss Before Income Taxes
35
(5,637)
(156)
(35)
(5,793)
20
(6,771)
(476)
393
(6,834)
(102,701)
(24,679)
Income tax recovery
Note 7
(9,427)
(4,804)
NET LOSS FOR THE PERIOD ATTRIBUTABLE TO SHAREHOLDERS
(93,274)
(19,875)
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)
314
(90)
224
(284)
(15)
(299)
COMPREHENSIVE LOSS FOR THE PERIOD ATTRIBUTABLE TO SHAREHOLDERS
$ (93,050)
$ (20,174)
NET LOSS PER CLASS A AND CLASS B SHARE
Note 3
Basic
Diluted
$ (2.35)
$ (0.50)
$ (2.35)
$ (0.50)
The accompanying notes are an integral part of these financial statements.
45
AKITA DRILLING | 2020 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
$ 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
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
182
—
(93,274)
(93,274)
538
(314)
—
—
—
—
538
(314)
182
$ 144,898
$ 1,366 $ 146,264
$ 5,197
$ 11 $ 794 $ 152,266
$Thousands
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
Net loss for the year
Foreign currency translation
adjustment
Remeasurement of pension
liability
Stock options charged
to expense
BALANCE AT
DECEMBER 31, 2020
The accompanying notes are an integral part of these financial statements.
46
AKITA DRILLING | 2020 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 impairment loss
Deferred income tax recovery
Defined benefit pension plan expense
Stock options and deferred share units expense
Loss on sale of assets
Change in non-cash working capital
Equity income from joint ventures
Post-employment benefits
Interest expense
Interest paid
Current income tax expense (recovery)
Income tax recoverable
Net Cash From Operating Activities
INVESTING ACTIVITIES
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 Used In Financing Activities
Effect of Foreign Exchange on Cash
Increase (Decrease) In Cash
Cash, beginning of year
CASH, END OF YEAR
The accompanying notes are an integral part of these financial statements.
Year Ended December 31
2020
2019
$ (93,274) $ (19,875)
32,681
80,000
(9,311)
19
51
156
12,975
(650)
(104)
5,637
(5,479)
(116)
275
36,763
276
(4,872)
37
120
476
9,307
(1,129)
(90)
6,771
(6,598)
67
305
22,860
21,558
Note 10
Note 7
Note 18
Note 17
Note 13
Note 11
Note 7
Note 10
Note 13
Note 11
(7,593)
(930)
1,411
-
(10)
2,142
(4,980)
Note 14
(9,953)
-
(1,187)
(165)
(11,305)
533
7,108
-
(15,238)
(2,087)
3,937
756
(976)
1,823
(11,785)
1,024
(10,101)
(1,873)
(311)
(11,261)
(15)
(1,503)
1,503
$ 7,108 $ -
47
AKITA DRILLING | 2020 Annual ReportCONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTES CONTENTS
49
51
56
BUSINESS AND ENVIRONMENT
RESULTS FOR THE YEAR
LONG-TERM ASSETS
1. General Information
2. Basis of Preparation
49
49
3. Net Loss per Share
4. Revenue
5. Government Subsidies
6. Expenses by Nature
7. Income Taxes
8. Segmented Information
63
67
WORKING CAPITAL
DEBT AND EQUITY
12. Financial Instruments
63
14. Debt
13. Change in Non-Cash Working Capital 67
15. Capital Management
16. Share Capital
9. Leases
10. Property, Plant and Equipment
11. Investments in Joint Ventures
56
58
61
71
PERSONNEL
17. Share-Based Compensation Plans
18. Employee Future Benefits
71
74
51
51
52
53
53
55
67
69
70
76
OTHER NOTES
19. Commitments and Contingencies
20. Related Party Transactions
76
76
48
48
AKITA DRILLING | 2020 Annual Report
AKITA DRILLING | 2020 Annual Report NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
For the years ended December 31, 2020 and December 31, 2019
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 37 drilling rigs (35.65 net of joint venture ownership).
The Company conducts certain rig operations via joint ventures with First Nations, Metis 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, 2020, 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 stated within these notes.
These consolidated financial statements were approved by the Company’s Board of Directors on March 11, 2021.
Consolidation
The consolidated 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.
49
AKITA DRILLING | 2020 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
Transactions and balances
(i)
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 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”).
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:
• Note 4 - Revenue
• Note 7 - Income Taxes
• Note 9 - Leases
• Note 10 - Property, Plant and Equipment
• Note 12 – Financial Instruments
• Note 18 – Employee Future Benefits
In March 2020, the World Health Organization declared a global pandemic related to COVID-19. To date, the COVID-19 related economic
slowdown has resulted in significant declines and volatility in the stock markets, as well as steep reductions in both global oil demand and
prices. Additionally, an increase in the global oil supply has placed further negative pressure on oil prices. There is significant ongoing
uncertainty surrounding the future impact of COVID-19 on demand and prices for the Company’s drilling services.
50
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The economic conditions resulting from COVID-19 and the increase in global oil supply have affected the Company’s financial results for
the year ended December 31, 2020. The Company recorded an asset impairment loss of $60,000,000 in the first quarter of 2020 and an
additional asset impairment loss of $20,000,000 in the fourth quarter of 2020 (Note 10), and increased its expected credit loss (Note 12).
In the current environment, assumptions about future commodity prices, exchange rates, interest rates and customer credit performance
are subject to greater variability than normal, which could in future significantly affect the valuation of the Company’s assets.
RESULTS FOR THE YEAR
3. Net Loss per Share
Basic earnings per share is calculated by dividing the net income for the period attributable to shareholders of the Company by the
weighted average number of Class A Non-Voting and Class B Common shares outstanding during the period.
Diluted earnings per share is calculated by adjusting the weighted average number of Class A Non-Voting and Class B Common shares
outstanding to assume conversion of all dilutive potential Class A Non-Voting shares, typically stock options granted to directors and
employees. The calculation is performed for the stock options to determine the number of shares that could have been acquired at fair
value (determined as the average quarterly or annual, as appropriate, market share price of the Company’s outstanding Class A Non-
Voting shares) based on the monetary value of the subscription rights attached to outstanding stock options. The number of shares
calculated as above is compared with the number of shares that would have been issued assuming the exercise of stock options.
Net loss ($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
2020
December 31
2019
$ (93,274)
$ (19,875)
39,608,191
39,608,191
-
-
39,608,191
39,608,191
$ (2.35)
$ (0.50)
$ (2.35)
$ (0.50)
(1) For the year ended December 31, 2020 and the year ended December 31, 2019, 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.
4. Revenue
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.
51
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 revenue.
Significant Estimates and Judgments – Relative Stand-Alone Selling Price
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.
The Company’s revenue streams are comprised of the following:
$Thousands
Contract drilling services
Rig lease rental
Total revenue
Year Ended
December 31
2020
December 31
2019
$62,491
57,173
$86,560
89,330
$119,664
$175,890
Significant Customers
During 2020 two customers (2019 – two customers) each provided more than 10% of the Company’s revenue. While the loss of one
or more of these customers may have a material adverse effect on the financial results of the Company, in management’s assessment,
the future viability of the Company is not dependent upon these major customers.
5. Government Subsidies
During the year ended December 31, 2020, the Company adopted the following accounting policy as a result of qualifying for the
Canada Emergency Wage Subsidy (“CEWS”) program as enacted on April 11, 2020, by the federal government of Canada. The program
is in effect from March 15, 2020 to June 30, 2021 and provides a 75 percent wage subsidy, to a maximum of $847 per employee per
week.
Government subsidies are recognized when there is reasonable assurance that the subsidy will be received and that the Company
will comply with all relevant conditions. Government subsidies related to current expenses are recorded as a reduction of the related
expenses.
For the year ended December 31, 2020, the Company recorded $2,269,000 from the CEWS program.
52
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. Expenses by Nature
The Company presents certain expenses in the consolidated Statements of Net Loss and Comprehensive Loss by function. The
following table presents those expenses by their nature:
$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
Year Ended
December 31
2020
December 31
2019
$ 60,855
$ 96,437
18,340
15,707
9,639
21,882
26,760
12,746
$ 104,541
$ 157,825
$ 91,855
$ 137,486
12,686
20,339
$ 104,541
$ 157,825
Prior Period Reclassification
During 2020, management reviewed the Company’s financial statement presentation and determined that certain costs more closely
aligned with the operating and maintenance function of the Company resulting in the prior period reclassification of costs from selling and
administrative expenses to operating and maintenance expenses to conform with the current period financial statement presentation.
The Company reclassified $1,800,000 related to the Canadian division’s field operations costs and $14,000,000 related to the US
division’s field and rig manager costs. This reclassification had no effect on the previously reported net loss.
7. Income Taxes
Income taxes are comprised of current and deferred income taxes.
Current taxes are calculated using tax rates and tax laws that have been enacted or substantively enacted at the end of the reporting 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.
53
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Income taxes are comprised of the following:
$Thousands
Current tax expense (recovery)
Deferred tax recovery
Total income tax recovery
Year Ended
December 31
2020
December 31
2019
$ (116)
$ 68
(9,311)
(4,872)
$ (9,427)
$ (4,804)
The following table reconciles the income tax expense (recovery) using a weighted average Canadian federal and provincial rate of
25.17% (2019 – 26.63%) 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.
$Thousands
Loss before income taxes
Year Ended
December 31
2020
December 31
2019
$ (102,701)
$ (24,679)
Expected income tax at the statutory rate
(25,853)
(6,572)
Add (deduct):
Change in income tax rates
Permanent differences
Jurisdictional rate difference
Change in unrecognized deferred tax asset
Return to provision adjustment
Other
Total income tax recovery
36
47
1,193
15,248
(40)
(58)
(1,265)
363
406
3,142
(390)
(488)
$ (9,427)
$ (4,804)
54
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The deferred tax balance consists of the following:
$Thousands
Property,
Plant and
Equipment
Defined
Benefit
Pension Plan
Benefits
Non-Capitlal
Losses
Other
Total
Balance as at December 31, 2018
$ 44,019
$ (1,162)
$ (21,585)
$ (5,037)
$ 16,235
Credited to net loss
Credited to OCI
Balance as at December 31, 2019
Charged (credited) to net loss
Credited to OCI
(2,162)
-
41,857
(8,177)
-
(33)
(91)
(1,933)
(744)
(4,872)
-
-
(1,286)
(23,518)
(37)
(102)
2,971
-
(5,781)
(4,068)
-
(91)
11,272
(9,311)
(102)
Balance as at December 31, 2020
$ 33,680
$ (1,425)
$ (20,547)
$ (9,849)
$ 1,859
A net deferred tax asset has not been recognized for $67 million (2019 – $54 million). This amount is primarily related to non-capital
losses carried forward.
Total gross tax losses available to the Company are $368,594,000 with $340,020,000 in the US and $28,574,000 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.
8. 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.
Geographical information is provided below:
$Thousands
Revenue
Revenue less costs and
expenses
Year Ended December 31, 2020
Year Ended December 31, 2019
Canada
US
Total
Canada
US
Total
$ 28,466
$ 91,198
$ 119,664
$ 48,376
$ 127,514
$ 175,890
$ (43,106)
$ (54,452)
$ (97,558)
$ (17,832)
$ (1,142)
$ (18,974)
$Thousands
Canada
US
Total
Canada
US
Total
December 31, 2020
December 31, 2019
Property, plant and equipment
$ 53,394
$ 169,189
$ 222,583
$ 102,870
$ 225,457
$ 328,327
55
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS LONG-TERM ASSETS
9. Leases
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.
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.
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 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. The discount rates range from 5.01% to 6.06%.
The Right of Use (“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.
ROU assets are depreciated over the lease term on a straight-line basis.
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
software.
ROU assets are reviewed for internal and external indicators of impairment at each reporting date or when facts and circumstances
suggest that the carrying amount may exceed its recoverable amount. If indicators of impairment exist, the recoverable amount of the
ROU asset is estimated as the greater of value-in-use (“VIU”) and fair value less costs of disposal (“FVLCOD”). VIU is estimated as the
present value of the future cash flows expected to arise from the continuing use of a ROU asset. FVLCOD is determined by estimating
the discounted after-tax future net cash flows.
If the recoverable amount of the ROU asset is less than the carrying amount, an impairment loss is recognized.
56
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Continuity of ROU Assets
$Thousands
Land and
property
Rig
equipment
Office
equipment
and software
Vehicles
Total
Balance as at December 31, 2018
$ -
$ -
$ -
$ -
$ -
January 1, 2019 additions
1,786
934
833
362
Additions
1,781
-
40
-
ROU asset writedown and impairment loss
(859)
-
-
-
Amortization expense
Balance as at December 31, 2019
Additions
Amortization expense
(965)
1,743
(448)
486
187
-
(474)
(210)
(325)
548
204
(317)
(188)
174
-
(142)
(1,143)
3,915
1,821
(859)
(1,926)
2,951
391
Balance as at December 31, 2020
$ 1,456
$ 276
$ 435
$ 32
$ 2,199
Lease Obligations
The Company recorded $198,000 in interest expense related to its lease obligations for the year ended December 31, 2020 (2019 -
$183,000).
Continuity of Lease Obligations
$Thousands
Land and
property
Rig
equipment
Office
equipment
and software
Vehicles
Total
Balance as at December 31, 2018
$ -
$ -
$ -
$ -
$ -
January 1, 2019 additions
Change in lease obligations
Lease additions
Balance as at December 31, 2019
Change in lease obligations
Lease additions
Lease terminations
1,786
(1,028)
934
(433)
833
(260)
362
(181)
1,805
-
40
-
2,563
(635)
501
(162)
613
(244)
181
(146)
187
-
219
-
-
-
(109)
-
3,915
(1,902)
1,845
3,858
(1,187)
406
(109)
Balance as at December 31, 2020
$ 2,115
$ 339
$ 479
$ 35
$ 2,968
$Thousands
Current portion
Long-term portion
Land and
property
Rig
equipment
Office
equipment
and software
Vehicles
Total
$ 611
$ 339
$ 68
$ 35
$ 1,053
1,504
-
411
-
1,915
Balance as at December 31, 2020
$ 2,115
$ 339
$ 479
$ 35
$ 2,968
57
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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).
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.
10. Property, Plant and Equipment
Accounting Policies
Property, plant and equipment ("PP&E") are recognized at cost less accumulated depreciation and impairment.
Cost includes expenditures directly attributable to the acquisition of the asset. 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 PP&E are capitalized. Costs incurred to repair or maintain PP&E are charged to expense as incurred.
The carrying amount of a replaced asset is derecognized when replaced.
The PP&E cash generating units (“CGUs”) are reviewed for internal and external indicators of impairment at each reporting date or
when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. If indicators of impairment exist,
the recoverable amount of the CGU is estimated as the greater of VIU and FVLCOD. VIU is estimated as the present value of the future
cash flows expected to arise from the continuing use of a CGU. FVLCOD is determined by estimating the discounted after-tax future
net cash flows or through the use of external equipment appraisals obtained from independent third party valuation experts, less an
estimated cost to sell.
If the recoverable amount of the CGU is less than the carrying amount, an impairment loss is recognized. An impairment loss is
allocated to the CGU and then to reduce the carrying amounts of the assets in the CGU.
Impairment losses recognized in prior periods are assessed at each reporting date for any indicators that the impairment losses may
no longer exist or may have decreased. In the event that an impairment loss reverses, the carrying amount of the asset is increased
to the revised estimate of its recoverable amount, but only to the extent that the carrying amount does not exceed the amount that
would have been determined had no impairment loss been recognized on the asset in prior periods. The amount of the reversal is
recognized in net earnings.
Significant Estimates and Judgments
Useful Lives of Drilling Rigs
Depreciation is recognized on PP&E 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.
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.
58
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Future Cash Flows
Impairment testing involves the use of estimates and judgments in the calculation of future cash flows which include future revenue
projections, discount rates, probabilities of cash flow variability, future capital and operating costs, salvage values and income taxes
and may consider the report of an external appraiser.
Depreciation Methods
A summary of depreciation methodologies for the Company’s major PP&E classes as at December 31, 2020, 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.
Impairment of Assets
During the year ended December 31, 2020, the Company determined that two external indicators of impairment existed: the uncertainty
and volatility of oil prices, which impacts the future earnings potential of the Company’s CGUs, and the Company’s book value of its
net assets exceeding its market capitalization were external indicators of impairment and therefore, the Company tested its CGUs for
asset impairment.
In the first quarter of 2020, the Company recorded an impairment loss of $30,000,000 in each of its Canadian and US CGUs
respectively. In the fourth quarter of 2020, both CGUs were tested again for impairment and the Company's US CGUs carrying amount
exceeded the recoverable amount resulting in an additional impairment of $20,000,000. The total impairment loss for the year ended
December 31, 2020 was $80,000,000.
The recoverable amounts of these CGUs were determined using a discounted cash flow model. Assumptions used in the discounted
cash flow models include the Company’s Board of Directors approved budgets and an average revenue growth rate ranging from 5% to
15% over a 10 year period depending on the CGU being analyzed. In forecasting its projected cash flows the Company assumed a slow
recovery commencing in 2021 for both Canada and the US with improvements in activity and revenue per day over the forecast period.
Discounted future cash flows are determined by applying a discount rate of 14.5%. This valuation has an IFRS fair value hierarchy of
Level 3. Additionally, in the fourth quarter, management also obtained external equipment appraisals from independent third party
experts which supported the fair value less cost to sell.
Asset impairment testing is subject to numerous assumptions, inherent risks and uncertainties, both general and specific, and the
risk that the predictions will not be realized. As a result, the following sensitivity analysis has been performed over the significant
assumptions to recognize that additional outcomes are possible:
• Changed future revenue assumptions by 5% resulting in increases to the Company’s CGUs from $15 million to $35 million per CGU
and reductions ranging from $15 million to $35 million per CGU; and
59
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS • Changed the Company’s pre-tax discount rate by 1% resulting in reductions between $4 million and $11 million per CGU and
increases from $4 million to $10 million per CGU.
As drilling rigs are long lived assets, no sensitivity adjustment was made for the projected forecast period.
As the base case test represented management’s best estimates, these sensitivity reductions were not included in the asset impairment
loss reported.
Property, Plant and Equipment Continuity
Cost
$Thousands
Balance as at December 31, 2018
IFRS 16, "Leases" reclass to ROU assets
Additions
Disposals
Balance as at December 31, 2019
Additions
Disposals
Land and
Buildings
Drilling Rigs
Other
Total
$ 9,449
$ 558,397
$ 10,208
$ 578,054
-
-
138
14,986
(1,285)
(11,667)
(546)
114
(366)
(546)
15,238
(13,318)
8,302
561,716
9,410
579,428
94
7,230
(1,261)
(8,786)
269
(574)
7,593
(10,621)
Balance as at December 31, 2020
$ 7,135
$ 560,160
$ 9,105
$ 576,400
Accumulated Depreciation
$Thousands
Balance as at December 31, 2018
IFRS 16, "Leases" reclass to ROU assets
Disposals
Depreciation expense
Balance as at December 31, 2019
Disposals
Depreciation expense
Asset write-downs and impairment loss
Balance as at December 31, 2020
Net Book Value
$Thousands
As at December 31, 2018
As at December 31, 2019
As at December 31, 2020
Land and
Buildings
Drilling Rigs
Other
Total
$ 1,547
$ 218,645
$ 7,514
$ 227,706
-
-
(118)
445
(10,607)
33,368
(46)
(295)
648
(46)
(11,020)
34,461
1,874
241,406
7,821
251,101
(72)
316
(7,834)
30,123
(417)
600
-
80,000
-
(8,323)
31,039
80,000
$ 2,118
$ 343,695
$ 8,004
$ 353,817
Land and
Buildings
Drilling Rigs
Other
Total
$ 7,902
$ 339,752
$ 2,694
$ 350,348
$ 6,428
$ 320,310
$ 1,589
$ 328,327
$ 5,017
$ 216,465
$ 1,101
$ 222,583
At December 31, 2020 the Company had $468,000 in PP&E that was not being depreciated, as these assets were under construction
(December 31, 2019 – $74,000).
60
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS In addition to depreciation on its PP&E, the Company had amortization expense of $1,642,000 for the year ended December 31, 2020
(2019 - $2,302,000).
11. 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 drilling rigs.
These equity investments are facilitated through joint venture agreements. Each joint venture operates the drilling rig with the joint
venture partners’ owning a share of each drilling rig directly. The equity ownership of the drilling rigs 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 as an equity income from investments in joint ventures on the consolidated Statements of Net Income and Comprehensive
Income.
The following table lists the Company’s active joint ventures. All joint ventures operate in Canada.
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
AKITA
Ownership Interest
85%
85%
85%
70%
90%
50%
61
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Continuity of Investments in Joint Ventures
$Thousands
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
Net income for the year ended December 31, 2020
Distributions for the year ended December 31, 2020
Balance as at December 31, 2020
Summarized Joint Venture Financial Information
Investments in
Joint Ventures
$ 4,456
1,129
(3,937)
1,648
650
(1,411)
$ 887
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
Current liabilities
Net assets
$Thousands
Revenue
Net income and
comprehensive income
December 31, 2020
December 31, 2019
AKITA % JV Partner %
Total
AKITA %
JV Partner %
Total
$ 231
$ 68
$ 299
$ 220
$ 70
$ 290
915
159
1,074
2,610
437
3,047
55
-
1,201
(314)
227
(103)
55
1,428
(417)
55
-
2,885
(1,237)
507
(215)
55
3,392
(1,452)
$ 887
$ 124
$ 1,011
$ 1,648
$ 292
$ 1,940
Year Ended December 31, 2020
Year Ended December 31, 2019
AKITA % JV Partner %
Total
AKITA %
JV Partner %
Total
$ 5,094
$ 769
$ 5,863
$ 5,289
$ 1,120
$ 6,409
$ 650
$ 67
$ 717
$ 1,129
$ 245
$ 1,374
62
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
WORKING CAPITAL
12. 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
The Company classifies its financial instruments in the following measurements categories depending on the Company's business
model for managing financial assets on the contractual terms of the cash flows:
(i) Financial assets at amortized cost:
Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest
are measured at amortized cost. Interest income from these financial assets is included in finance income using the effective interest
rate method. Any gain or loss arising on derecognition is recognized directly in profit or loss and presented in other gains (losses),
together with foreign exchange gains and losses. As at December 31, 2020, the Company’s financial assets in this category include
cash and accounts receivable.
(ii) Financial liabilities at amortized cost:
Financial liabilities that are measured at amortized cost are initially recognized at the amount required to be paid less, when material,
a discount to reduce the payables and accrued liabilities to fair value. Subsequently, financial liabilities are measured at amortized
cost using the effective interest rate method. As at December 31, 2020, 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 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, 2020, the Company held no financial instruments in this category.
63
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (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, 2020, 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 greater than 180 days past
due.
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
64
December 31, 2020
December 31, 2019
$ 11,934
$ 23,566
2,078
-
1,791
(675)
6,868
1,989
285
(600)
$ 15,128
$ 32,108
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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, 2020, this risk was limited by positive cash flows from operations, $8.7 million in a
positive working capital balance and $35.0 million available in the Company’s undrawn banking facility.
If future results do not meet the Company’s expectations there is a risk that the Company could be offside with its financial covenants in
its banking facility and lose the ability to draw on the facility to meet its financial obligations or have to repay the amounts outstanding
on the facility. The Company maintains a positive working relationship with the banks in its syndicated facility and on July 17, 2020,
entered into an amending agreement with its lenders in the syndicate to provide a five quarter covenant relief period. This covenant
relief period has been extended until December 31, 2021 (Note 14).
Maturity information regarding the Company’s long-term debt is as follows:
$Thousands
Less than 1 Year
1-4 Years
Total
Bank credit facility - principal
Bank credit facility - interest
Total
$ -
$ 74,303
$ 74,303
3,708
7,416
11,124
$ 3,708
$ 81,719
$ 85,427
Maturity information regarding the Company’s long-term lease obligations is as follows:
$Thousands
Lease obligations
Less than 1 Year
2-3 years
4-5 Years
Total
$ 1,049
$ 1,561
$ 358
$ 2,968
Lease obligations - interest
138
109
10
257
Total
$ 1,187
$ 1,670
$ 368
$ 3,225
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
65
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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.
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, 2020
December 31, 2019
$ 7,415
$ 3,516
504
5,907
90
923
14,413
90
Total accounts payable and accrued liabilities
$ 13,916
$ 18,942
66
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13. Change in Non-Cash Working Capital
$Thousands
December 31, 2020
December 31, 2019
Year Ended
Change in non-cash working capital:
Accounts receivable
Inventory
Prepaid expenses and other
Accounts payable and accrued liabilities
Deferred revenue
Change in non-cash working capital
Pertaining to:
Operating activities
Investing activities
$ 16,980
$ 10,625
-
130
(5,026)
(39)
394
482
(4,375)
94
$ 12,045
$ 7,220
$ 12,975
$ 9,307
(930)
(2,087)
Change in non-cash working capital
$ 12,045
$ 7,220
DEBT AND EQUITY
14. Debt
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 Canadian banks in the syndication. The operating loan facility totals $110,000,000 with the term ending in 2023. The credit
agreement was amended on July 17, 2020, to include a covenant relief period that extended to June 30, 2021. The facility was further
amended two more times to add additional quarters of covenant relief, September 30, 2021 and December 31, 2021. The interest
rate during the covenant relief period ranges from 225 to 350 basis points over prime interest rates depending on the Funded Debt(1) to
Tangible Net Worth(1) Ratio. Security for this facility includes all present and after-acquired personal property and a first floating charge
over all other present and after-acquired property including real property. The financial covenants are:
1. The Funded Debt(1) to Tangible Net Worth(1) Ratio: the Company shall ensure that for the fiscal quarters ended December 31, 2020
to December 31, 2021, the Funded Debt(1) to Tangible Net Worth(1) Ratio shall not be more than 0.75:1.00.
The Funded Debt(1) to Tangible Net Worth(1) Ratio shall be calculated quarterly on the last day of each Fiscal Quarter on a rolling four
quarter basis; and
67
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. The EBITDA(1) to Interest Expense(1) Ratio: the Company shall ensure that:
(i)
For the fiscal quarter ended December 31, 2020, the EBITDA(1) to Interest Expense(1) Ratio shall not be less than 1.25:1.00;
(ii)
For the fiscal quarters ended March 31, 2021, and June 30, 2021, the EBITDA(1) to Interest Expense(1) Ratio is waived;
(iii) For the fiscal quarter ended September 30, 2021, the EBITDA(1) to Interest Expense(1) Ratio shall not be less than 0.75:1.00;
and
(iv) For the fiscal quarter ended December 31, 2021, the EBITDA(1) to Interest Expense(1) Ratio shall not be less than 1.25:1.00.
The EBITDA(1) to Interest Expense(1) Ratio shall be calculated quarterly on the last day of each Fiscal Quarter on a rolling four quarter
basis; and
3. A minimum trailing twelve month EBITDA(1) test will be required quarterly during the Covenant Relief Period, with EBITDA(1) varying
each period in line with agreed upon forecasts.
Upon the end of the Covenant Relief Period the Company’s covenants revert back to:
(i)
Funded Debt(1) to EBITDA(1) Ratio of not more than 3.00:1.00; and
(ii) EBITDA(1) to Interest Expense(1) Ratio of not less than 3.00:1.00.
At December 31, 2020, the Company was in compliance with its covenants with a Funded Debt(1) to Tangible Net Worth(1) Ratio of
0.38:1.00, an EBITDA(1) to Interest Expense(1) Ratio of 3.94:1.00 and a trailing twelve month EBITDA(1) in excess of the $17,612,000
minimum threshold.
The facility also includes a borrowing base calculation which is the sum of:
(i)
75% of Eligible Accounts Receivable(1); plus
(ii) 50% of the orderly liquidation value of all Eligible Rig Assets(1); less
(iii) Priority Payables(1) of the Loan Parties.
At December 31, 2020, the Company’s borrowing base totalled $116,796,000.
The Company borrowed $75,000,000 from this facility as at December 31, 2020 (December 31, 2019 - $77,535,000).
(1) Funded Debt, Tangible Net Worth, EBITDA, Interest Expense, Eligible Accounts Receivable, Eligible Rig Assets and Priority
Payables are all defined terms in the Company’s credit agreement.
68
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Continuity of Debt
$Thousands
Balance at December 31, 2019
Drawn on credit facility
Repayment of debt
Unamoritized deferred loan fees
Balance as at December 31, 2020
$Thousands
Current portion
Long-term portion
Balance as at December 31, 2020
15. Capital Management
Debt
$ 84,019
9,000
(18,953)
237
$ 74,303
Debt
$ -
74,303
$ 74,303
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.
69
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16. Share Capital
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
The shares outstanding at December 31, 2020 and December 31, 2019 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.
The holders of Class A Non-Voting shares have no right to participate if a takeover bid is made for Class B Common shares unless:
• an offer to purchase Class B Common shares is made to all or substantially all holders of Class B Common shares;
• at the same time, an offer to purchase Class A Non-Voting shares on the same terms and conditions is not made to the holders of
Class A Non-Voting shares; and
• holders 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.
If these three pre-conditions are met, then the holders 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 shares pursuant to the terms of the
takeover bid.
The Class A Non-Voting shares and Class B Common 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.
70
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS PERSONNEL
17. Share-Based Compensation Plans
The Company has three share-based compensation plans. Stock options qualify as an equity-settled share-based compensation plan
while deferred share units (“DSUs”) and share appreciation rights (“SARs”) qualify as cash-settled share-based compensation plans.
For all three of the share-based compensation plans, associated services received are measured at fair value and are calculated by
multiplying the number of options, DSUs or SARs expected to vest with the fair value of one option, DSU or SAR as of the grant date.
Stock Options
Subject to the approval of the Company’s Board of Directors, the Company’s Corporate Governance, Nomination, Compensation and
Succession Committee may designate directors, officers, employees and other persons providing services to the Company to be granted
options to purchase Class A Non-Voting shares.
The vesting provisions and exercise period (which cannot exceed 10 years) are determined at the time of the grant. Each tranche is
considered a separate award with its own vesting period and grant date fair value. The fair value of each tranche is measured at the
date of grant using either the Binomial or the Black Scholes option pricing model. The number of awards expected to vest is reviewed
at least annually, with any impact being recognized immediately.
The following table summarizes stock options reserved, granted and available for future issuance:
Number of options
Reserved under the current stock option plan
Balance at beginning of year
Expired
Cancelled
Granted
Available for future issuance
December 31,
2020
3,100,000
292,000
130,000
746,000
(355,000)
813,000
December 31,
2019
3,100,000
644,500
-
-
(352,500)
292,000
71
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS A summary of the Company’s stock options is presented below:
2020
2019
Number of
Options
Weighted
Average
Exercise Price
Number of
Options
Weighted
Average
Exercise Price
Options outstanding at January 1
1,406,000
$
8.20
1,053,500
$ 9.63
Granted
Cancelled
Expired
355,000
$ 0.44
352,500
$ 3.03
(746,000)
$ 10.55
(172,500)
$ 8.50
-
-
$ -
$ -
Options outstanding at December 31
842,500
$ 2.80
1,406,000
$ 8.20
Options exercisable at December 31
249,000
$ 3.60
914,000
$ 9.99
The following table summarizes outstanding stock options at December 31:
Vesting
Period
(Years)
Exercise
Price
Number
Outstanding
2020
Remaining
Contractual
Life (Years)
Number
Exercisable
Number
Outstanding
2019
Remaining
Contractual
Life (Years)
5
5
5
5
5
5
5
5
5
5
5
$ 9.87
$ 10.32
$ 10.86
$ 13.81
$ 16.02
$ 10.28
$ 7.13
$ 8.26
$ 5.62
$ 3.93
$ 0.44
Weighted Average
Contractual Life
130,000
76,000
82,500
87,500
115,000
90,000
197,500
97,500
177,500
352,500
0.2
1.2
2.2
3.7
4.7
5.3
6.3
7.3
8.7
9.2
6.0
162,500
327,500
352,500
97,500
81,000
70,500
7.7
8.2
7.5
7.8
Number
Exercisable
130,000
76,000
82,500
87,500
115,000
90,000
158,000
58,500
71,000
45,500
Deferred Share Units
The Company has a cash-settled share-based long-term incentive compensation plan for certain employees. Each DSU granted equates
to one Class A Non-Voting share and entitles the holder to receive a cash payment equal to the Company’s share price on the payment
date. DSU holders are entitled to share in dividends, which are credited as additional DSUs, at each dividend payment date. DSUs vest
immediately but are not exercisable until resignation or retirement from management and/or the Board of Directors.
Units issued under the Company’s DSU plan are measured at fair value using the intrinsic value method when granted and subsequently
re-measured at each reporting date using the Company’s Class A Non-Voting share price at the reporting date with the associated
expense recognized in selling and administrative expense. The Company assumes a zero forfeiture rate.
72
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company’s DSU plan is presented below:
DSUs outstanding at January 1
Granted
Redeemed
Issued in lieu of dividends
Change in fair value
DSUs outstanding at December 31
159,882
2020
2019
DSUs
(#)
187,011
Fair
Value
($000's)
$222
-
-
DSUs
(#)
102,370
71,711
Fair
Value
($000's)
$417
273
(27,129)
(14)
-
-
-
-
12,930
(131)
$77
187,011
39
(507)
$222
Share Appreciation Rights
SARs may be granted to directors, officers and key employees of the Company. The vesting provisions (which range from three to eight
years) and exercise period (which cannot exceed 10 years) are determined at the time of grant. The holder is entitled on exercise to
receive a cash payment from the Company equal to any increase in the market price of the Class A Non-Voting shares over the base
value of the SAR exercised. The base value is equal to the closing price of the Class A Non-Voting shares on the day before the grant.
Share-Based Compensation Expense
The fair value of the services received is recognized as selling and administrative expense. In the case of equity-settled share-based
payment plans, the selling and administrative expense results in a corresponding increase in contributed surplus over the vesting
period of the respective plan. When stock options are exercised, shares are issued and the amount of the proceeds, together with the
amount recorded in contributed surplus, is recognized in share capital. For cash-settled share-based payment plans, a corresponding
liability is recognized. The fair value of the cash-settled share-based payment plans is remeasured at each Statement of Financial
Position date through the Statement of Net Income and Comprehensive Income until settlement.
Share-based compensation expense consists of the following:
$Thousands
Stock option expense
DSUs recovery
Total share-based compensation expense
Year Ended
December 31, 2020
December 31, 2019
$ 182
(131)
$ 51
$ 314
(194)
$ 120
73
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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
2020
0.72%
72.00%
0.00%
5.4 years
$ 0.44
0.00%
2019
1.70%
40.00%
6.50%
5.4 years
$ 3.93
0.00%
$ 0.27
$ 0.96
18. 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, Canadian 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.
The Company has a 401(k) plan, registered under the Employment Retirement Income Security Act of 1974, which covers all
of its United States employees. Under the provisions of the plan, the Company contributes 3% of regular earnings for eligible
employees on a current basis.
Contributions to the Company’s defined contribution pension plan, group RRSP and the 401(k) plan are recognized as employee
benefit expense when they are due.
The Company has 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 12, 2021, and was utilized in measuring the
December 31, 2020 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
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.
74
AKITA DRILLING | 2020 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$Thousands
2020
2019
Actuarial present value of defined benefit obligation at January 1
$ 5,298
$ 4,802
Interest cost
Current service cost
Benefits paid
Unrealized actuarial loss
158
19
(90)
415
173
37
(90)
376
Actuarial present value of defined benefit obligation at December 31
$ 5,800
$ 5,298
$Thousands
Pension liability allocated to:
2020
2019
Accounts payable and accrued liabilities
$ 90
$ 90
Non-current liabilities
5,710
5,208
Pension liability outstanding at December 31
$ 5,800
$ 5,298
Key Assumptions
Year Ended
December 31, 2020
December 31, 2019
Discount rate at beginning of the year
3.0%
3.6%
Anticipated retirement age of plan members
65 to 67 years
63 to 67 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 pension plan
Expense for defined contribution pension plans
Year Ended
December 31, 2020
December 31, 2019
$ 158
$ 173
19
177
1,893
37
210
3,156
Total expense
$ 2,070
$ 3,366
75
AKITA DRILLING | 2020 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 $5,710,000 at December 31, 2020 (December
31, 2019 - $5,208,000). 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, 2020, a key assumption is the discount rate of 2.3% (2019 – 3.0%). From the
perspective of a sensitivity analysis, a 1% decrease in the discount rate would result in a $781,000 increase in the defined benefit
obligation while a 1% increase in the discount rate would result in a $646,000 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 $127,000.
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
19. Commitments and Contingencies
From time to time, the Company enters into drilling contracts with its customers that are for extended periods. At December 31, 2020,
the Company had four drilling rigs with multi-year contracts. Of these contracts, four are due to expire 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, 2020, the Company had capital expenditure commitments of $422,000 (2019 – $1,406,000).
20. 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
Property, plant and equipment (wellsite trailers)
Sponsorship and advertising (Note 19)
Selling and administrative
Operating
Year-end accounts payable
76
Year Ended
December 31, 2020
December 31, 2019
$
$
$
$
$
$
85
57
175
49
570
31
$
$
$
$
$
$
84
-
365
53
458
70
AKITA DRILLING | 2020 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 costs
Selling and administrative costs
$Thousands
Due to AKITA from joint venture partners
Due to AKITA from joint ventures
Year Ended
December 31, 2020
December 31, 2019
$
837
$
115
$
$
773
103
Year Ended
December 31, 2020
December 31, 2019
$
991
$
123
$
$
1,031
885
c)
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
Long-service retiring allowance
Post-employment benefits
Share-based payments
Long-service retiring allowance payable
Year Ended
December 31, 2020
December 31, 2019
$
$
$
$
$
1,431
3,177
78
132
1,500
$
$
$
$
$
2,344
-
141
765
-
77
AKITA DRILLING | 2020 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
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
6
10
$
119,664
$ (102,701)
(9,427)
(15,939)
(10.5%)
(2.03)
10,321
6.8%
$
$
$
$
$
$
175,890
(24,679)
(4,804)
(19,875)
(8.1%)
(0.50)
12,925
5.3%
$
$
$
$
$
$
118,361
(12,228)
3,651
(15,939)
(5.9%)
(0.65)
14,306
5.3%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
71,198
(53,230)
(14,053)
(39,177)
(22.5%)
(2.18)
6,607
3.8%
15,528
2.02:1
207,497
174,455
9.72
20,348
27,126
6,100
0.34
$
$
$
$
$
$
$
$
$
$
$
$
$
$
61,061 $
112,488
165,274
168,111
203,440
199,934
7,535 $
(44,544)
2,206 $
(10,579)
5,329 $
(33,965)
2.4%
(14.2%)
0.30 $
(1.89)
28,121
7,042
21,079
8.3%
1.17
34,500 $
38,510
56,195
15.7%
16.0%
22.2%
35,682
9,167
26,515
11.3%
1.48
57,619
24.6%
38,413
9,658
28,755
13.5%
1.60
59,474
28.0%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
31,762
8,409
23,353
12.1%
1.29
42,895
22.3%
2.37:1
247,130
201,104
11.15
54,509
20,933
5,066
0.28
$
$
$
$
$
$
$
$
$
$
$
$
$
8,683
1.56:1
$
4,032
$ 11,166
1.14:1
1.31:1
251,521
$ 369,116
$ 403,641
152,266
$ 245,134
$ 271,728
34,907 $
16,002
$
(5,028)
40,645
$
31,214
$
44,265
4.49:1
2.45:1
0.90:1
2.93:1
1.70:1
257,907 $
254,516
340,926
291,748
292,994
219,646 $
220,200
259,841
245,288
223,998
3.84
7,593
32,681
-
-
$
$
$
$
$
6.19
$
6.86
12.24 $
12.27
14.48
13.65
12.49
15,238
36,763
10,101
0.17
$
$
$
$
17,546
26,614
7,942
0.34
13,193 $
17,960
103,949
23,959 $
36,748
30,200
6,100 $
0.34 $
6,101
0.34
6,015
0.34
35,113
26,825
5,567
0.32
65,356
24,342
5,038
0.28
8
6
8
9
9
7
8
7
8
10
10
10
3
10
10
$
$
$
$
$
$
$
$
$
$
$
$
Note: Readers should be aware that these revenue amounts reported for 2012 through 2020 include revenue
solely generated by the Company from its wholly-owned operations.
78
AKITA DRILLING | 2020 Annual Report10 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
6
10
$
119,664
$ (102,701)
175,890
(24,679)
(4,804)
(19,875)
(8.1%)
(0.50)
118,361
(12,228)
3,651
(15,939)
(5.9%)
(0.65)
12,925
14,306
5.3%
5.3%
(9,427)
(15,939)
(10.5%)
(2.03)
10,321
6.8%
8,683
1.56:1
$
4,032
$ 11,166
1.14:1
1.31:1
251,521
$ 369,116
$ 403,641
152,266
$ 245,134
$ 271,728
3.84
6.19
$
6.86
7,593
32,681
-
-
15,238
36,763
10,101
0.17
17,546
26,614
7,942
0.34
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
8
6
8
9
9
7
8
7
8
10
10
10
3
10
10
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
$
$
$
$
$
$
$
$
$
$
$
$
$
$
71,198
(53,230)
(14,053)
(39,177)
(22.5%)
(2.18)
6,607
3.8%
15,528
2.02:1
207,497
174,455
9.72
20,348
27,126
6,100
0.34
$
$
$
$
$
$
$
$
$
$
$
$
$
$
61,061 $
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%
40,645
$
31,214
$
44,265
2.93:1
291,748
245,288
13.65
35,113
26,825
5,567
0.32
$
$
$
$
$
$
$
1.70:1
292,994
223,998
12.49
65,356
24,342
5,038
0.28
$
$
$
$
$
$
$
2.37:1
247,130
201,104
11.15
54,509
20,933
5,066
0.28
79
AKITA DRILLING | 2020 Annual Report10 YEAR FINANCIAL REVIEW CORPORATE INFORMATION
Henry G. Wilmot
Corporate Director
Calgary, Alberta
Charles W. Wilson
Corporate Director
Boulder, Colorado
Officers
Raymond T. Coleman
President, USA Division
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
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
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
81
AKITA DRILLING | 2020 Annual Report A
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HEAD OFFICE
AKITA Drilling Ltd., 1000, 333 - 7th Ave SW
Calgary, Alberta T2P 2Z1 Canada
www.akita-drilling.com