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

Hello, and welcome to the Annual Meeting of Stockholders of AKITA Drilling Annual Meeting of Shareowners of 2021 Conference Call. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to Linda Southern-Heathcott, Chairman of AKITA Drilling, the floor is yours.

Thank you very much. Good morning. It is now 10 a.m. My name is Linda Southern-Heathcott, Chairman of AKITA Drilling. And I would like to welcome you, and thank you for joining us at the company's 28th Annual General Meeting. Due to the ongoing pandemic for the second year in a row, we are hosting our AGM through this virtual meeting platform, which is accessible to all shareowners and guests. Boy, it has been quite a year. A year ago, I do not believe that anyone could have predicted the depth and breadth of this global pandemic. It has taken such a toll on the economies throughout the world at the loss of many lives, young and old, may I convey my sincere condolences to those who have lost loved ones this past year. I will officially call the meeting to order and appoint Colin Dease to act as Secretary of the meeting and representatives of AST Trust Company to act as Scrutineer. The owners of Class A non-voting shares and Class B common shares and the holders of ballot proxies are entitled to participate and ask questions 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, as described in the management information circular dated March 11, 2021, we will conduct the votes on the business matters before us by an electronic poll. On a poll, every Class B shareowner is entitled to -- sorry, to 1 vote for each Class B share held. After the poll is closed, the results of the votes cast and proxies received prior to the meeting will be visible and will be filed on SEDAR after the meeting. I now declare the polls open on all resolutions. [Voting]

[Operator Instructions] 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. As Chair, I will move each item, and I have been advised by Mr. Colin Dease and Mr. Darcy Reynolds, both proxy holders in attendance today, that they would be prepared to second each of the motions that I so 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; Nancy Southern, Chairman, President and Chief Executive Officer of ATCO Limited and Canadian Utility, and Vice Chair of AKITA Drilling; Henry Wilmot, Corporate Director; Chuck Wilson, from Boulder, 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.

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.

I second the motion.

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

I have not, Chair.

Thank you, Mr. Dease. As there are no further business, I declare that the polls are closed. We shall now wait for a few moments for the scrutineer to count the votes and declare the results. Mr. Dease, will you let me know when you receive the scrutineer's report?

I have the scrutineer's report here.

Thank you. Our Corporate Secretary has now received the scrutineer's preliminary report, and I would ask Mr. Colin Dease to read the results.

Thank you. With respect to the election of directors, the scrutineers have reported that shareholders have voted 98% or more in favor of the election of each nominee director.

I, therefore, declare the motion passed. And may I be the first to congratulate our directors. I very much look forward to working with you in the upcoming year.

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 100% in favor of the resolution.

I therefore declare the motion carried. Thank you. That concludes the formal business to be conducted at this year's annual meeting. May I declare the meeting closed. Now I believe that our shareowners are aware through our announcements earlier this year that in 2021, AKITA Drilling has a number of changes to your executive team. Your President and CEO since June 30, 2009, Karl Ruud will retire on May 15. Karl started his remarkable career with Thompson Drilling in May 1976 as contract manager. And for over 4 decades, increased his responsibilities and contributions to AKITA Drilling. He was appointed Vice President Operations in 1993, and was promoted to President and CEO in 2009. Karl actively contributed as a member of the Pension, Audit and Risk Committee. Karl was elected as a Director of AKITA Drilling in 2010 and have served on the Board ever since. AKITA Drilling, its directors, officers and employees, have been beneficiaries of his leadership, experience and commitment. Karl's extensive drilling experience and broad business acumen are well recognized in the drilling industry and on 2 occasions, he was elected by his industry peers to serve as President of CAODC, the Canadian Association of Drilling Contractors. First, in 1994, and then again in 2002. Under Karl's leadership, AKITA established itself as a leading custom rig builder with exacting standards, allowing it to work for the most discerning of operators. Established the company leading position in SAGD oil sands drilling and most recently, led the 2018 acquisition of Xtreme Drilling. A purchase designed to catalyze the initiative to diversify AKITA's operations into the U.S. Karl brought sound judgment, integrity, calmness and unwavering commitment to as many accomplishments from which have formed a legacy that has shaped AKITA Drilling. After 45 extraordinary years of service to AKITA Drilling and its credit sectors. Karl has exemplified the heart and mind of AKITA Drilling and personified Mr. Southern's definition of excellence by exceeding expectations, maintaining the highest standards, focusing on the smallest detail and going the extra mile. On behalf of our family, my mother, Mark and my sister Nancy and the Board of Directors of AKITA. May I express our sincere appreciation to Karl for his 45 years of loyal service and to his tremendous contribution to this company, AKITA Drilling. And Karl, we wish you and Sherry, many, many happy and healthy years in your retirement. Upon Karl's retirement, I will assume the role of Executive Chair and CEO of AKITA. Ray Coleman will continue to serve the company as President of the U.S. Division and Colin Dease will be appointed President of the Canadian Division. Darcy Reynolds will remain as Vice President of Finance and our Chief Financial Officer. As incoming CEO, allow me to give you a little bit of an update on a few of AKITA's operations over this past year and some of our -- much of our focus going forward prior to calling on Darcy Reynolds to provide our financial update. Last year was the most turbulent year for AKITA in our 27-year history. In 2020, the impact of COVID-19 on oil demand, coupled with the international oil price war, severely reduced activity and day rates in the U.S. and practically shut down all drilling activity in Canada. In response to low activity levels and low day rate, management initiated a corporate-wide cost reducing program to reduce expenses. We met every week to mitigate the expenses and to investigate any and all opportunities so that AKITA was poised to capitalize on the opportunities, and we focused on our balance sheet. While 2020 was in many ways, a devastating year, not just for AKITA, for so many companies around the world. Your company demonstrated resilience and has emerged strong and well positioned to respond to recovering demand. Commanding a fleet of 17 rigs in the U.S. and a fleet of 20 rigs in Canada. Because of the work we did in 2021, we are well balanced in the North American market and ready to take advantage of improving market condition. Your AKITA team has also focused on ESG. We must continue to take a leadership role in this area of our industry. AKITA's commitment to the environment. In recent years, as increased attention has been placed on carbon emissions and climate change, at AKITA, we take climate change seriously and acknowledge the role companies need to play to reduce the impact of our operations on the environment. And I am proud to say AKITA has implemented numerous environmental initiatives designed to reduce its impact on the environment and to reduce carbon emissions, including reducing our environmental footprint through the utilization of peer groups that are able to efficiently drill multilateral wells from a single environmental footprint. Utilizing bi-fuel in order to reduce diesel fuel consumption and consequent carbon emissions. Currently, 6 rigs in our fleet are equipped with bi-fuel. Utilizing high line electrification to eliminate the need for diesel fuel to power our engine. Half of our fleet is capable of running on highline. Designing our rigs to move in fewer loads to reduce both traffic congestion and carbon emissions. Implementing noise suppression technology to mitigate noise from our operations. And we are a corporate member of the Geothermal Canada Association, whose mission is to advance science and promote geothermal research and development in Canada. AKITA is currently engaged in a geothermal project near Fort Nelson and has been awarded work for a second geothermal project near Grande Prairie. We are very excited to participate in geothermal drilling, and we'll continue to look for more geothermal drilling opportunities, along with new opportunities involving carbon capture and hydrogen. AKITA's safety, culture, diversity, labor standards and ability to generate jobs in our province and across Canada, are all very important and I am especially proud of our continued commitment to indigenous joint ventures, which began in 1983. And our commitment to strong indigenous community relations. Since the inception of AKITA, we have looked to partner with indigenous people, moving near areas we operate in, to ensure our indigenous partners receive benefit from the resource development. Our 3 active indigenous joint ventures in Canada are: one, Akita Equtak Drilling Limited. Our oldest joint venture was established in 1983 between AKITA and Inuvialuit Development Corporation; and two, Akita Wood Buffalo Drilling Limited, our most active joint venture, which encompasses the regional municipality of Wood Buffalo, which includes the oil sands and involving Chipewyan Prairie First Nation Fort McMurray 468 First Nation, Fort McKay Métis Local, Fort Chipewyan Métis Local and Conklin Métis Local. And our newest joint venture, AKITA Mistiyapew Aski Drilling Limited. Our newest joint venture established in 2018 between AKITA and the Sauteau First Nations. Who reside near Chetwynd, BC on the Moberly Lake. Just a little sidebar, in case you're curious, the name Mistiyapew Aski is a key word that roughly translates to bull moose country. The name was chosen for the joint venture by the Sauteau First Nations. All indigenous partners in our 3 indigenous joint ventures holds equity interest in our rigs, and we are very proud of our indigenous relationship. AKITA's government, AKITA's business practices are well established. We have a solid reputation within industry, and I am proud of your Board's composition. All 8 directors on your Board are returning directors with extensive understanding of our nature -- of the nature of AKITA's operations. And further, I am proud that your Board is gender balanced, 50-50. I hope you understand how important ESG is to AKITA and to its future. It is now my sincere pleasure to call on AKITA's Vice President of Finance and Chief Financial Officer, Darcy Reynolds, to provide a financial update. Darcy.

Thank you, Linda. And thank you, ladies and gentlemen, for listening in today. I'd like to give you a brief overview of AKITA's financial results for 2020 and the first quarter of 2021. For more information, please see our annual report and our first quarter report, both of which are available on our website as well as SEDAR. To start, I would like to talk about 2020. The year started on a positive note with 10 rigs running in Canada and 15 rigs running in the U.S. by the end of March, conditions began to change rapidly. Drilling activity declined sharply as oil prices fell during the Saudi Arabia/Russian pricing war and the impact of COVID-19 began to increase. Reaching a low for the company in the third quarter of 2020 with 1 active rig in Canada and 4 in the U.S. Given the resulting level of uncertainty in the industry, the company calculated that the carrying amount of its fixed assets exceeded its recoverable amount. Consequently, we recorded an $80 million impairment to the company's fixed assets in 2020. This significant impairment influenced the net loss for the year, which was $93 million. Adjusting for the impairment, the total net loss for 2020 was $21 million compared to a net loss of $20 million in 2019. Our key focus in 2020 was to weather these unprecedented times. As mentioned by Linda, the company underwent a significant cost-cutting exercise in the first quarter of 2020. Reducing total G&A to $13 million for 2020 from $20 million in 2019. Despite the myriad of challenges presented in 2020, AKITA still managed to generate $23 million in cash from operating activities and paid down $10 million in debt, a 12% reduction in the company's total debt. Also during 2020, we amended our credit facility to provide a covenant relief period, which is currently extended out to the end of the first quarter of 2022. During that period, the company's debt-to-EBITDA covenant is replaced with funded debt to tangible net worth ratio, the EBITDA to interest expense ratio is lowered and a trailing 12-month EBITDA threshold is in place. We are currently well within parameters of our revised debt covenants. Moving now to more recent events. The first quarter of 2021. The impact of the COVID-19 pandemic on the demand for the company's services is still significant. Despite oil prices having improved considerably from the lows seen in 2020. Our net loss for the quarter was $3.6 million compared to adjusted earnings of $370,000 in the first quarter of 2020. EBITDA for the first quarter of 2021 was $4.5 million, down from $11.6 million in the same period of 2010. The primary drivers for lower results in the quarter was lower operating days, which decreased 31% compared to the first quarter of 2020 and lower day rates, which are still under pressure as there is an oversupply of drilling rigs in both Canada and the U.S. at the current demand levels. The company's debt increased by $5 million in the quarter due to the seasonal working capital increase during the winter drilling season, which typically reverses after the winter drilling season ends. Our focus for the balance of 2021 will remain on cost control and debt repayment, working to increase the company's financial flexibility as the industry recovers. Our capital budget for this year will be dictated by activity levels and will be scaled accordingly. Although, there are still challenges affecting the industry, activity has steadily increased from the lows seen in the third quarter of 2020 through the first quarter of 2021. The outlook for the rest of 2021 is that this improvement in activity should continue in both Canada and the U.S., albeit at a measured pace. We are optimistic that the second half of the year will be stronger than the first. I would like to thank everyone at AKITA that has put so much effort in over the past year to ensure AKITA remains a strong company, well positioned to capitalize on potential recovery in the industry and also our bankers for being very supportive during these challenging times. I'd also like to thank Karl for his support and mentorship he has provided me over my 10 years with AKITA. Thank you for listening. We will now be answering any questions you may have. Colin, have any questions come through.

No Darcy, I have not received any questions.

Linda, would you like to close the meeting?

Yes. Well, if there are any questions, please direct them to Investor Relations, and we would be more than happy to reach out to you and discuss your questions. So thank you again for joining us, and that does conclude the 28th Annual Meeting of the Corporation. I really do appreciate that you tuned in, and it is my sincere hope that we will be able to visit in-person next year. And once again, a sincere thank you to Karl Ruud and best wishes in your retirement. Thank you. See you next year.

This concludes the meeting. You may now disconnect.