AKITA Drilling Ltd. (AKTA) Earnings Call Transcript & Summary

Hello, and welcome to the AKITA Drilling Ltd. meeting 2020. It is now my pleasure to turn the meeting over to Chair of the meeting, Linda Southern-Heathcott. The floor is yours.

Thank you. Good morning. It is now 10 a.m. My name is Linda Southern-Heathcott, Chairman of AKITA Drilling, and I will be chairing the business of today's meeting. I welcome you to the company's 27th Annual General Meeting of the shareowners. Before we start, I would like to take a moment to recognize that as the world moves to contain the corona, COVID-19 virus, we are witnessing a remarkable collaboration of nations, provinces, communities, public health and medical professionals and governments around the globe. They are all working together to try to contain, test and treat COVID-19. And on behalf of the Board, our sincere thank you to the frontline workers for all that they are doing to keep us safe. These are truly trying times and truly without precedent. Therefore, due to COVID-19 -- the COVID-19 pandemic, we are pleased to host our AGM through this virtual meeting platform, which is accessible to all shareowners, regardless of physical location to participate, submit questions and vote. I officially call the meeting to order and appoint Colin Dease to act as Secretary of the meeting and representatives of the AST Trust Company to act as scrutineer of the meeting. The owners of Class A nonvoting shares and Class B common shares and the holders of valid proxies are entitled to participate in discussions at this annual meeting. However, only the owners of Class B common shares and the holders of valid proxies of those shares are entitled to vote on the election of directors and the appointment of the auditor. I will now commence the formal business of the meeting. The business of the meeting is described in the management information circular dated March 4, 2020, which accompany the notice of the meeting. I will take the notice of the meeting as read. We will conduct the votes on the business matters before us by a poll. On a poll, every Class B shareowner has one vote in respect of each share entitled to be voted on the matter and held by that shareowner. Voting on the applicable items of business to come before today's meeting is being conducted by a single electronic ballot. That is now available and voting will close approximately 1 minute following the conclusion of the formal discussion and question-and-answer session. Once voting closes, the scrutineers will tabulate the results of the vote for each matter. The results of the meeting will also be filed on SEDAR. The scrutineers have advised there is a quorum present, and therefore, I declare this meeting regularly called and properly constituted for the transaction of business. I now declare the polls open on all resolutions. If you have any questions regarding the presentation this morning, I encourage you to submit your questions through the online box -- the chat box in the -- on the screen and ask the question in the Ask The Question section of the platform. Time permitting, we will endeavor to answer all questions. If you would like to ask a question, select the messaging icon. Messages can be submitted at that time during the question-and-answer session up until the -- until I close the session. Before I begin the formal part of our meeting, I would like to take a moment to thank our Director, Perry Spitznagel, who will not be standing for election today. Perry Spitznagel Q.C., Vice Chairman of Bennett Jones LLP, has had a distinguished career spanning several decades as a senior corporate lawyer with extensive national and cross-border experience in a broad range of matters, and he is the former long-standing managing partner of the Calgary office. Perry has been a Director with AKITA right from day 1, 27 years. Perry has been a member of the Audit Committee since 1993 and has contributed significantly to the Board of Directors' deliberations. His knowledge, sage advice and integrity have brought good governance to your AKITA Board. A sincere thank you, Perry, to you, for your important contributions and commitment to AKITA Drilling, the Southern family, my late father, Ron; my mother Marge; my sister, Nancy; and myself, we wish you and Geneva all the very best. Thank you so much. I will now lead us through the formal part of our meeting. The first item of business is to proceed with the election of directors as proposed in the management proxy circular. The meeting is now open for nomination. As Chair, I will move each item and have been advised that Mr. Colin Dease and Mr. Darcy Reynolds, both proxy holders in attendance today, that they would be prepared to second each of the motion I shall move. Accordingly, unless there are any objections, I will take such motions as seconded with no further action needed. I move that, Loraine Charlton, Corporate Director; Doug Dafoe, Corporate Director; Harish Mohan, Corporate Director; Dale Richardson, Vice President, Sentgraf Enterprises; Karl Ruud, President and Chief Executive Officer, AKITA Drilling; Nancy Southern, Chair, President and Chief Executive Officer, ATCO Limited, and Chair, CEO, Canadian Utilities, and Vice Chair of AKITA Drilling; Henry Wilmot, Corporate Director; Chuck Wilson from Colorado, Corporate Director; and myself, Linda Southern-Heathcott, be individually elected as directors of the corporation until the next Annual General Meeting or until their successors are elected or appointed.

Madam Chair, I second the motion.

Thank you, Mr. Dease. The next item of business is to appoint the auditor of the corporation. As Chair, I propose the following motion. The PricewaterhouseCoopers chartered accountants be reappointed as auditor of the corporation to hold office until the next annual meeting of shareowners, and that the directors be authorized to fix the auditor's remuneration.

Madam Chair, I second the motion.

Thank you, Mr. Reynolds. Colin, have you received questions on any matters of business before the polls are closed?

Madam Chair, I have not.

Thank you. As there are no further -- as there is no further business, I declare that the polls are closed. We shall now wait for a few moments for the scrutineers to count the vote and declare the results. Our corporate secretary will let us know when these results are in.

Madam Chair, with respect to the election of directors, the scrutineers have reported that shareholders have voted 99% or more in favor of the election of each director nominee.

Thank you, Mr. Dease. I therefore declare the motion passed. May I be the first to congratulate the members of the Board of AKITA. I look very much forward to working with you this year. We have a lot of work to do, and I also look very much forward to seeing everybody in person very soon.

Madam Chair, with respect to the motion to reappoint PricewaterhouseCoopers as the company's auditor for the ensuing year, the scrutineers have reported that shareholders have voted 99% in favor of the resolution.

Thank you, Mr. Dease. I, therefore, declare the motion carried. As that concludes the formal business to be conducted at this year's annual meeting, I declare the meeting closed. It is now my pleasure to call on Mr. Karl Ruud, our President and Chief Executive Officer, who will lead our presentation and summary of results. AKITA's Vice President of Finance and CFO, Darcy Reynolds, will follow Karl's presentation with a financial update. Over to you, Karl.

Good morning. Can everybody hear me? I assume so. Thank you, Chair, and thanks, everybody, for tuning in and listening. Obviously, I echo the Chair that it'd be way better to be in person, and obviously, a lot of friends out there. So I just have a few comments to go through. Obviously, a great deal has changed since our last AGM. A year ago, oil was trading at $60-plus a barrel and everyone knows it's trading in the mid- $20s right now, albeit it is getting a little strength. The response to the COVID-19 pandemic and then, of course, the oil price war that we had with Saudi and Russia, that resulted in an absolute oil price collapse and subsequent rig activity in both Canada and the U.S. demolish. So very difficult. In over 40 years in the business, I've never seen challenges facing the industry we have today. PSAC, for example, in Canada, revised its forecast for wells to be drilled in 2020 from 4,500 to 3,100 wells as a result of the pandemic and the oil prices. And every day, we hear operators reducing capital budgets, both large companies and small. So we expect the activity levels in the balance of 2020 to be extremely low. And we are preparing and have prepared the company for weak market conditions that are going to persist at least this year and likely at least into the first half of 2021. That's a lot of negatives for sure. But there are some positives I can speak to as well. First, last year, we talked about that AKITA executed its U.S. division consolidation plan that we spoke about last year. We have got it finished now, the consolidation. We have our operations out of Midland, Texas, in the heart of the Permian Basin for the -- that area and then we exited Ohio, North Dakota, sold the properties in North Dakota and Wyoming and terminated an office lease in Greeley, Colorado. These initiatives have reduced corporate overhead and facilitated a more efficient and streamlined operation. After only 2 years of operating in the U.S., AKITA has established itself as a top drilling contractor, and we did buy a bunch of good rigs, which we're very glad we did that, evidenced right now by our utilization rates are 30% to 40% versus sub-20% per industry and likely going lower. Our strategy that we had of moving to working for large companies or majors with the capability to keep drilling has paid off. So that's our customer base right now. And so other positives, I think, need to be mentioned are Alberta's investment in the Keystone XL Pipeline, should eventually lead to increased drilling activity in Western Canada. And if low oil prices are cure for low oil prices, it's probable that the world oil production is going to be cut by about 20 million barrels a day. And even today, the Saudis announced additional cut. So that should help wipe out the massive excess global supply at this point. So let's be hopeful. Natural gas prices in Canada may be a bright spot. Many believe vehicle gas prices will benefit from the oil production slowdown. Associated natural gas production, for example, in the Permian Basin was equal to the mount of gas produced in Western Canada. So with the reduced oil demand, most of the Permian Basin associated gas should be shut in, it will be shut in, and that will translate to higher Canadian natural gas prices. We're monitoring all opportunities to drill for gas in Canada this fall and winter. So while the challenges faced in AKITA must not be understated, I did want to mention a few positives that should help with the recovery. During this time of great uncertainty and low activity, AKITA has been working hard to weather the storm. Staffing levels, unfortunately, in both Canada and the U.S. are going to be materially reduced to align with demand. We are lean but capable and ready to perform with an experienced committed core of employees. With the level of financial stress on the producers and oilfield services, I do expect to see some consolidation in the industry. It's uncertain how that's going to play out, but I believe that we will have some consolidation bankruptcies that are imminent. Uncertainty seems like the only sure thing right now. Cash is sacred, and we're watching every expenditure very closely. Our priority is to continue to reduce corporate debt and maintain liquidity. As most know, AKITA has been around for 27 years. When some normality returns and when oil prices recover, we plan to be ready. I would like to close by thanking our shareowners and their patience and our veteran-experienced Board for the sport and all of our employees, past and present, for their dedication efforts. I'd like to now turn this meeting over to Darcy Reynolds, our CFO, for some brief comments. Thanks.

Thanks, Karl, and thank you, ladies and gentlemen, for logging in today and listening to what we had to -- have to say. This year, I'll keep my comments fairly brief. It's hard to talk numbers without slides, et cetera. So I want to talk about 2019, some comments about Q1 of 2020 and then our focus for the balance of the year. So let's start with what seems like the very distant path now, 2019. Operating margin increased to $54 million from $32 million in 2018. This 71% increase is attributable to company's U.S. operations, where the operating margin increased to $44 million, in 2019 from $50 million in 2018. The acquisition of Xtreme Drilling in September of 2018 drove the majority of this increase. The increased operating margin in the U.S. in 2019 was offset by a decreased operating margin in Canada, which fell to $15 million in 2019 from $23 million in 2018. Continued infrastructure uncertainty and general lack of confidence in the Canadian energy sector caused this decrease in margin. EBITDA increased to $19 million in 2019 from $16 million in 2018. The increase in EBITDA was impacted -- was slightly impacted by higher selling and admin cost, which were the result of the consolidation plan, Karl mentioned. The company's net loss in 2019 increased to $20 million from $16 million in 2018 as a result of higher depreciation and interest expense in 2019. Net debt increased to $84 million at the end of 2019 from $81 million in 2018. Now looking to the first quarter of this year. Results for the first quarter of 2020 when compared to the first quarter of 2019 were very similar from an activity perspective in both Canada and the U.S. despite the collapse in oil prices in March of this year. Q1 EBITDA increased to $12 million this year from $9 million last year. Similar to the first quarter of 2019, results in the first quarter of 2020 were driven primarily by the company's U.S. operating segment, which generated 68% of AKITA's revenue. Adjusted earnings increased to $371,000, up from a loss of $1.4 million in 2019. Adjusted earnings excludes the impairment expense of $60 million that was recorded in Q1 of this year. With the collapse of oil prices and the uncertainty around future oil prices, the company concluded that an asset impairment of both the U.S. and Canadian CGUs was required. We recorded an impairment of $30 million in Canada and $30 million in the U.S. At the end of the quarter, net debt decreased to $82 million, down from $84 million at year-end and $89 million at the end of the first quarter of last year. The impairment aside, which is forward-looking, the quarter was strong -- was a strong one considering that both the Canadian and U.S. markets saw a continuation of the decrease in demand that began in 2019. The results in the U.S. were especially promising. We started the quarter with 15 of our 18 rigs working, which is in line with the prior year. We feel this is a strong sign of our success in the U.S. as the U.S. active rig count fell 26% from the first week in January 2019 to the first week of January 2020. Increasing our activity despite steady decline in the U.S. active rig count over the last 15 months demonstrates the success of our U.S. strategy. If only oil prices hadn't crashed in mid-March, we were anticipating a very strong year. Looking forward to the rest of the year and into 2021, as Karl mentioned, our priority for the balance of the year is to maintain liquidity. We have reduced staffing levels in Canada and the U.S. We have cut salaries from 5% to 50%. We are actively working with all of our suppliers to reduce costs, and we are ensuring every dollar spent is a need, not a want. As the market continues to deteriorate, we will continue to reduce costs. At the end of March, the company had $19.5 million in positive working capital and $44 million undrawn on our line of credit. We believe this is sufficient capital to maintain the company through the upcoming challenging times and come out the other side ready to participate in the industry's recovery. Cost cutting and capital discipline will remain top priority for the balance of 2020 and into 2021. With that, I'll turn it back to Chairman for closing comments and open the floor for any questions that you may have.

Thank you, Karl. Thank you, Darcy. Colin do -- are there any questions?

Madam Chair, I have not received any questions.

Shall we give it just one more moment then?

Sure.

Are there any questions from the people that have logged in? Colin, no more -- no questions?

Madam Chair, no. There is no questions.

All right. Well, then I would say that, that concludes the 27th annual meeting of the corporation. I thank you for taking the time to attend. It is my very sincere hope that we will be together next year, as I look forward to having the opportunity to visit in person next year. Please, everyone, online, stay safe, and thank you very much for joining us today.

And this concludes the meeting. You may now disconnect.