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

Okay. Ladies and gentlemen, good afternoon and good morning, and welcome to the AKITA Drilling Annual General Meeting of Shareholders. This call and this stream will be recorded. For those of you who do have any technical issues and are unable to watch the entire meeting as well as the post meeting shareholder update. This meeting as well as the update will be provided online at site agmconnect.com/akita2023. That is the same site that you would have received the link that you would have gone to, to join this meeting in the first place. I just want to welcome everybody over here. We are going to begin shortly. So for all management that is going to be speaking, please unmute yourselves accordingly and turn your videos on. And once again, for those shareholders that are -- that would like to vote. You can go ahead and do so by using the AGM Connect platform, in which case, you will be able to vote on the major motions that are here happening at our Annual General Meeting. If you have any questions that are pertaining to the business of the meeting or questions in general, you can use the chat function of the Q&A function located in Zoom browser, and this will allow you to access and send the questions to management. Management will then approve those questions and bring them forth at the appropriate time of the meeting as necessary. Those shareholders that are unable to vote and are just here to watch the meeting. Again, [ palm ] means watch the meeting. And if you have any questions, do so in the same method. So Mr. Chair and appropriate AKITA Drilling management. It is now 12:00 p.m. Eastern Standard Time. We can begin when you're ready.

Thank you very much, Jonathan. Good morning. My name is Linda Southern-Heathcott, Chairman of AKITA Drilling and it is my pleasure to welcome you to the company's 30th Annual General Meeting. Wow, 30 years. We would like to acknowledge that we -- what we call Alberta is the traditional and ancestral territory of many people, presently subject to Treaty 6, 7 and 8, namely the Blackfoot Confederacy and the Métis peoples of Alberta. We acknowledge the many First Nations, Métis and Inuit who have lived in and cared for these lands for generations. We make this acknowledgment as an act of reconciliation and gratitude to those whose territory we reside on for our visiting. This year, again, we have chosen to host our AGM through a virtual meeting platform, which is accessible to all shareowners and guests. May I officially call the meeting to order and appoint the Odyssey Trust Company to act as scrutineer. The owners of Class A nonvoting shares and Class B common shares and the holders of valid 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. Please allow me to move on to the formal business of the meeting. The business of the meeting is as described in the Management Information Circular dated March 20, 2023. We will conduct all votes on the business matters before us by an electronic poll. On a poll, every Class B share owners is entitled to one 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. May I declare the polls open on all resolutions.

Ms Southern, sorry to interrupt you. Your script is right in front of the camera.

Can you just turn your camera off as we were screen sharing. We don't need cameras on. Jonathan will do it.

Carry on Ms Southern.

We will conduct the votes on the business matter before us by an electronic poll. On a poll, every Class B shareowners entitled to one 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, as I said already. I 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 chat box in the Ask a Question section of the platform. Time permitting, we will endeavor to answer all questions. Now continuing on with 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 have been advised that Mr. Colin Dease our President and CEO; and Mr. Darcy Reynolds, our CFO, both proxy holders in attendance today, that they would be prepared to second each of the motions I so move. Accordingly, unless there are any objections, I will take the motion as seconded with no further action required. I move that Loraine Charlton, Corporate Director; Doug Dafoe, Corporate Director; Harish Mohan, Corporate Director; Robert Peabody, Corporate Director; Nancy Southern, Chair, President and Chief Executive Officer of ATCO Limited and Canadian Utilities and Vice Chair of AKITA Drilling; Henry Wilmot, Corporate Director; Chuck Wilson from Boulder, Colorado, Corporate Director; and myself, Linda Southern-Heathcott, the 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 is to appoint our auditor of your corporation. As to Chair, I propose the following. The PricewaterhouseCoopers chartered accountants be reappointed as auditor of the corporation to hold office until the next Annual Meeting of Shareholders and that the directors be authorized to fix the auditor's remuneration.

I second the motion.

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

I have not, Chair.

As there are no further -- is there -- as there is no further business, I declare that the polls are closed. We shall now wait a few moments for the scrutineers to count the votes and declare the results. Mr. Reynolds, our CFO, have you received the scrutineers' preliminary report?

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

Thank you. I, therefore, declare the motion passed.

With respect to the motion of reappointment of PricewaterhouseCoopers as the company's auditor for the ensuing year, scrutineers have reported that shareowners voted 99% in favor of the resolution.

Thank you. 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. And now that the formal part of the meeting has concluded, I would like to call on Mr. Colin Dease, our newly appointed President and Chief Executive Officer, to update the shareowners on the state of the drilling industry on AKITA's operations over the last year and over the first quarter of 2023. He will also comment on the outlook going forward before calling on our CFO, Mr. Darcy Reynolds, to provide our financial update. Over to you, our President and CEO, Colin Dease.

Thank you, Linda, and thank you to everyone listening to the meeting this morning. In April of this year, I was appointed President and CEO of AKITA after being part of this company for more than 12 years in various capacities. In my new role, I've received tremendous support from Linda and the rest of our esteemed Board of Directors, and I rely on the support from our team every day as we attack challenges and explore opportunities for the company. It's my pleasure to provide the CEO update at this year's AGM. This morning, I'd like to highlight the accomplishments we achieved over the course of 2022, the objectives we set for 2023, the results of our first quarter and speak AKITA's strengths and why we are well positioned to thrive in the industry. Overall, 2022 was a successful year for AKITA. After a $21 million net loss in 2021, we returned to positive earnings of just over $4 million. The results of the year can be best illustrated with reference to 3 metrics: activity in terms of fleet utilization, day rate in terms of revenue per day and costs in terms of operating and maintenance cost per day. In other words, how active were our rigs, how well were we paid and how successful are we in managing our costs in an inflationary environment. As AKITA is comprised of 2 divisions: a Canadian division commanding a 20-rig fleet and a U.S. division managing a 15-rig fleet, I'd like to address each of the 3 metrics for both divisions. Starting with activity levels. In comparison to 2021, activity levels in both divisions materially improved in 2022. In our U.S. division, operating days were up 42% year-over-year. Our utilization averaged over 70% compared to U.S. industry average of 45%. In Canada, our operating days were up 58% over 2021. So we achieved an even greater increase in activity than in the U.S. However, Canada was coming off a prior year of lower activity, and we're still having to improve our Canadian utilization over the course of this year. Turning to day rates. Day rates are the second key metric expressed in terms of revenue per operating day. As one might expect, increased activity in 2022 allowed AKITA to command higher day rates for our services. Our U.S. fleet was in demand and very active over the course of the entire year, achieving over 70% utilization. In the second half of the year, we were able to significantly increase our day rates. Revenue per operating day in the U.S. increased 29% from the year prior from $25,000 per day to $32,000 per day. These day rate increases in the U.S. were the single biggest driver to improve results for the company in 2022. In Canada, although our activity improved materially from 2021, we still had a number of rigs that remained idle and we are not able to push rates to the same extent as we did in the U.S. We did manage, however, to increase revenue per operating day by 21% compared to the prior year. I would now like to address costs. Many industries faced challenges in 2022 with supply chain disruptions and labor shortages fueling inflationary pressures. Commodity prices were higher, which helped both our activity and day rates but also played a factor in increasing our cost of business. We recognize the pressures of the inflationary environment early and we did our best to mitigate its effects. In the U.S., our operating maintenance expenses per day rose 7% compared to 2021. While in Canada, our operating and maintenance expense rose 12%. I would now like to speak briefly about the corporate objectives we set for 2023. Our primary objective in 2023 is to meaningfully reduce our long-term debt. In addition to our debt reduction objective, we aim to capitalize on the torque in our Canadian division. And what I mean by this is to increase both our activity levels and our day rates in our Canadian fleet. And secondly, to maintain our high U.S. fleet utilization. Shifting now to the results of the first quarter. Over the first quarter of 2023, we were successful in maintaining our high U.S. fleet utilization, and we are moderately successful in increasing our Canadian day rates. We have not yet achieved our objective to increase our Canadian utilization, but we remain committed to achieving this objective over the balance of the year. In terms of activity, revenue per day and operating cost per day metrics over the first quarter of 2023. Starting with activity. Activity levels in both Canada and the U.S. were consistent with the activity levels we achieved in the first quarter of 2022. Revenue per operating day was where there was a big difference. Revenue per operating day was much higher in both divisions as the material day rate increases we secured over the back half of 2022, continued into the first quarter of 2023, starkly contrasting with the weak revenue per day numbers we worked for in the first quarter of 2022. Year-over-year, in the first quarter of 2023, our U.S. revenue per day was up 51%, while our Canadian revenue per day was up 26%. Per day operating costs over the same period were up 21% in the U.S. and 18% in Canada. In addition to activity rates and costs, I wanted to mention 2 other first quarter achievements, one relating to U.S. operations and the second to Canadian marketing. Regarding U.S. operations. In the first quarter, we consolidated our entire U.S. rig fleet to the Permian Basin. So today, all 14 rigs are operating in either West Texas or New Mexico. The 2 rigs that have been operating in Colorado's DJ Basin have been moved to the Permian, and we are closing our operations based in Evans, Colorado next month. We made the decision to concentrate our fleet in the Permian for 2 reasons. First, Colorado drilling programs were intermittent due to operators finding it increasingly difficult to obtain drilling licenses and sustain long-term programs. Today, there are only 17 rigs active in the entire Denver-Jules Colorado Basin. This compares to nearly 400 active rigs in the Permian. So we are concerned about the contraction in the Colorado Basin. Secondly, we recognize that if we were able to consolidate our operations and base the support exclusively in the Permian, we would eliminate redundancy and costs associated with maintaining a second operational base in the U.S. More importantly, we will benefit from ability to deploy key personnel who have been working out of our Evans office to bolster our support at our Midland, Texas operations base. A second first quarter achievement I wanted to mention occurred in our Canadian division when we secured 250 guaranteed day take-or-pay contracts for a major operator who selected AKITA for a 2-rig program commencing in July. It has been many years since we secured a guaranteed day contract in Canada. So finalizing the 2 contracts with favorable rates was a positive achievement for the company. I would now like to speak to AKITA's strengths and why I believe our company is well positioned to thrive. AKITA is a leading North American intermediate pure-play drilling company, the largest public pure-play driller in Canada. Our U.S. fleet is comprised of modern, high-spec AC triples and is now fully concentrated in the Permian, which is the most active basin in North America. In Canada, our fleet primarily operates in heavy oil and oil sands. However, we also have a deep gas presence, and this is a segment we are intent on growing. In addition to the heavy oil, oil sands and deep gas, we continue to be an industry leader in drilling transitional wells, including geothermal wells, carbon capture wells, potash wells and hydrogen storage wells. We have support from First Nations and Métis joint venture partners in 2 key Canadian basins, the Montney and the Fort McMurray oil sands. Saulteau First Nations, the largest First Nation living proximate to the deep gas Montney play in British Columbia owns an equity interest in one AKITA rig; and Fort McMurray First Nation, Chipewyan Prairie First Nation, Fort Chipewyan Métis, Conklin Métis and Fort McKay Métis, all living near the Fort McMurray oil sands, each own equity and 4 AKITA rigs. Among drillers, AKITA is a pioneer in establishing joint ventures with First Nations, Métis or Inuit Peoples. We are very proud of the relationships we have forged and we believe they make AKITA a stronger company than if we stood alone. We are now preparing for a robust drilling program for the balance of 2023. Our company is well positioned to thrive drilling oil and natural gas as well as continuing to drill transitional wells. All this wouldn't be possible without our people working diligently on the rigs in the field and in our offices. Every day I speak to operations in both Canada and the U.S. And over the course of the year, I've had many conversations with people at AKITA from all levels and backgrounds, discussing both our challenges and our opportunities. The morale at AKITA is high, we have great collaboration across our team. I am convinced that our workforce can be characterized as highly experienced, loyal and committed. After a number of extremely challenging years, 2023 is an exciting time for AKITA, and I'm proud to be part of this company. Thank you for the opportunity to provide an update this morning.

Thank you very much, Mr. Dease. It's now my pleasure to call upon our Vice President of Finance and CFO at AKITA Drilling, Mr. Darcy Reynolds, to provide our financial update.

Thank you, Linda, and thank you all for attending our AGM today. I would like to give a brief overview of AKITA's financial results for 2022 as well as the first quarter of 2023. For more information, please see our annual report and our first quarter report, both of which are available on our website as well as on SEDAR. 2022 was a year of [ reprisement ] for the company. We increased working capital by $24.6 million through the year, ending at $31.1 million. This 379% increase in working capital was essentially putting meat back on the company's bones after several lean years. The company returned to profitability in 2022 with net earnings of $4.3 million compared to a loss of $21 million in 2021. This was the first year with positive earnings since 2016, marking a significant milestone for the company. Funds flow from operations, which is cash from operations, less changes in working capital, increased to $35 million in 2022. This is the highest annual funds flow from operations since 2015 and 367% higher than 2021. As mentioned by Colin, the key drivers for a significant increase in net earnings and funds flow from operations was the increase in revenue per day in our U.S. operations, which increased 29% over the prior year, which in turn improved our U.S. operating margin by 86%. The other driver in 2022's for improved results was increased activity, which increased 48% year-over-year for the company as a whole. Capital spending in 2022 was $18 million, up 10% over the prior year. Capital was spent on routine items, including recertifications, drill pipe and spare equipment. Capital spending was weighted to the first quarter of 2022. Combining this with a significant capital spending in the fourth quarter of 2021, with limited cash from operations during that time, necessitated a draw on our credit facility, which increased to $95 million by the end of the first quarter of 2022, up from $87 million at the start of 2022. Moving now to the first quarter 2023, which we released on Thursday last week. The day rate increases that had a significant impact on the second quarter -- second half of 2022 had the same significant impact on the first quarter of 2023. Net earnings for the quarter was $9.5 million compared to a loss of $2.9 million in the same quarter of last year. Funds flow from operations tripled to $15 million in the quarter from $5 million in the first quarter of 2022. Activity in the quarter was consistent last year in Canada and up 27 days from last year in the U.S. In fact, the total activity only increased 1% in the first quarter of 2023 from the first quarter of 2022 highlights how impactful day rate increases were on the overall results. Capital expenditures were $2.5 million in the first quarter of 2023, which was spent on routine items, primarily recertifications of rig components. Also in the quarter, we sold one of our idle rigs in the U.S. for proceeds of $2 million, resulting in a gain of $1.5 million on the sale. Adding to Colin's list of first quarter achievements in March after the release of our 2022 annual results, we elected to end our covenant relief period on our credit facility. We had entered covenant relief in June of 2020 due to weak market conditions and stayed there for 11 quarters until market conditions improve. I'd thank the banks in our syndicate for their support during this challenging period. The facility has reverted back to its original covenants, which are EBITDA to interest ratio greater than 3:1, which at the end of the first quarter was 6.56 and debt-to-EBITDA ratio of less than 3:1, which was 1.63 at the end of the quarter. As stated by Colin, debt repayment is our focus this year. Although our working capital increased $9 million in the first quarter and now it's $40 million, we did repay $4 million in long-term debt in the quarter, decreasing our long-term debt balance to $90 million at the end of the quarter. We anticipate our debt repayment will accelerate through the year as working capital balances typically peak at the end of the first quarter. Lastly, I want to talk about this final slide, which highlights the financial results for the last 13 quarters. The impact of COVID-19, the pandemic is clear, starting in the second quarter of 2020 as well as the spike in our debt balances as we reactivated rigs and ramp up capital spending for increased activity in the fourth quarter of 2021 and the first quarter of 2022 as the industry began to improve. Now with strong funds flow from operations and modest capital spending, we are able to start paying down debt. We anticipate 2023 to be a strong year for the company with a focus on meaningful debt repayment by maintaining day rates, keeping costs low and a moderate capital program. As there are no current -- as there currently are no questions, I will turn it back to Linda to close the meeting.

Thank you very much, Mr. Reynolds. Before we conclude our meeting, are there any questions?

There are none.

Well, then that concludes the 30th Annual General Meeting of the corporation, and I sincerely thank you for taking the time to attend. And I want to say -- give my personal congratulations to all of our directors. I look forward to working with you. And congratulations to the team AKITA Drilling for the terrific job that they're doing. Thank you, and we look forward to seeing you next year.

Okay. Ladies and gentlemen, at this point in time, that concludes our formal portion as well as the investor update here for AKITA Drilling. The stream will now be ending.