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

Hello, and welcome to the 2024 Annual Meeting of Shareholders of AKITA Drilling Ltd. Please note that this meeting is being recorded. Registered shareholders and proxy holders of Class B voting shares may submit questions during the formal portion of the meeting via the message tab at the top left of your screen. [Operator Instructions] All other attendees will be able to submit questions after the formal portion of the meeting. It is my pleasure to introduce the Executive Chair of AKITA Drilling Limited, Ms. Linda Southern-Heathcott. Ms. Southern-Heathcott, the floor is yours.

Thank you very much. Good morning. My name is Linda Southern-Heathcott, and I'm the Chairman of AKITA Drilling, and it is my pleasure to welcome you to the company's 31st Annual General Meeting. If you'll allow me, our company has had joint ventures with the indigenous people starting in 1983. And we would like to acknowledge that -- 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, Kainai, Piikani, Siksika, Cree, Dene, Saulteaux, Nakoda Sioux, Stoney Nakoda and Tsuu T’ina Nation and the Métis people of Alberta. This includes the Metis settlements and the 6 regions of the Metis National of Alberta within the historical Northwest Metis homelands. We acknowledge the many First Nations and Metis and Inuit lived in and cared for these lands for generations. We are grateful for the traditional knowledge holders and elders who are still with us today and who have gone before us. We make this acknowledgment as an act of reconciliation and gratitude to those whose territory we reside, work and are visiting. Thank you. We are hosting our AGM through a virtual meeting platform, which is accessible to all share owners and guests. I officially call the meeting to order and appoint Odyssey Trust Company to act as our 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. Now to the formal part of our business. The business of the meeting is as described in the Management Information Circular dated March 21, 2024. We will conduct the votes on the business matter before you, before us by an electronic poll. On a poll, every Class B share owner 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. 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 chat box saying -- it has ask question section of the platform. Time permitting, we will endeavor to answer all of your questions. Now the formal part of our meeting. The first item of business is to proceed with the election of directors as proposed in the meeting proxy circular. As Chair, I will move each item, given that it's virtual, and I have been advised by Mr. Colin Dease and Mr. Darcy Reynolds, both proxy holders in attendance today, that they will second each of these motions. 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; Rob 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; Neil Yeates from Ottawa, Corporate Director; and myself, Linda Southern-Heathcott be individually elected as directors of the corporation until the next Annual General Meeting or unless 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 that PricewaterhouseCoopers chartered accountants be reappointed as auditor of the corporation to hold office until the next annual meeting of the share owners and that the directors be authorized to fix the auditor's remuneration.

I second the motion.

Thank you. With the formal part of our meeting concluded, I would like to call on Colin Dease, our President and Chief Executive Officer, to update the share owners on the drilling industry, AKITA's operations over the last year, and towards the end of the meeting, the first quarter of 2024. I'd like him to comment on the outlook going forward before introducing AKITA'S CFO, Darcy Reynolds, who will provide us with a financial update. Colin, over to you, please.

Thank you, Linda, and thank you to our shareholders, directors, staff, analysts and others for taking the time to attend our meeting this morning. It's my pleasure to provide the CEO update for AKITA Drilling 31st Annual General Meeting. This morning, as Linda mentioned, I'd like to provide an overview of AKITA and provide some context on the cyclicality our company has endured. I'll also speak to the accomplishments we achieved over the course of 2023, provide commentary on our first quarter results, and then I'll turn the meeting over to our CFO, Darcy Reynolds, to walk through the 2023 and Q1 financial results before providing a forecast of what we see for the balance of the year and speak to the objectives we set for 2024. AKITA is a pure-play drilling company comprised of 2 divisions: a Canadian division commanding a 17-rig fleet with operations in Western Canada, and a U.S. division managing a 14-rig fleet with operations concentrated in the Permian Basin. I'd like to provide some context for AKITA'S recent results and our outlook. Over the last 20 years from 2004 until today, AKITA's results can be clearly categorized into 3 periods. The first is a decade of strength from 2004 to 2014. That was followed by a period of weakness that persisted for 7 years from 2015 to 2021. And finally, a period of recovery, which began in 2022. The first 10-year period from 2004 until 2014 can be characterized by strong earnings results for AKITA. For most of 2014, the drilling industry was strong, WTI traded at close to $100 a barrel. The rig count peaked at 614 rigs in Canada and 1,876 rigs in the U.S. In November of 2014, the decade of positive results came to an end. WTI weakened from nearly $100 a barrel to trade around $50 a barrel. Meanwhile, the U.S. rig count dropped from 756 rigs at the start of 2015 to 673 by the end of the year. So roughly 1/3, Canadian activity followed suit. The 7-year period from 2015 to 2021 was challenging for the drilling industry and for AKITA. In 2021, we ended the year with a $21 million net loss. In 2022, after 7 challenging years, AKITA returned to modest positive earnings of $4 million. Last year, in 2023, we achieved $18.5 million in net earnings, which was our best financial results since 2014. We also achieved several corporate objectives over the course of the year. Last year, I articulated long-term debt reduction as our primary objective for 2023; $20 million was a debt reduction target, we achieved $24 million. We also aim to capitalize on available torque in our Canadian division by increasing both our activity level and our day rates. We were successful in raising day rates over the course of the year, but we did fail to achieve the increase in activity levels we had targeted. We also aim to maintain our high U.S. fleet utilization. Despite AKITA's U.S. activity dropping materially over the course of the year from 100% utilization at the start of the year to a low of 57% near the end of the year, we did outperform industry which dropped to about 40% utilization over the same period. We also consolidated our entire U.S. fleet to the Permian Basin, where roughly half of all U.S. drilling activity occurs, and we closed our operations office in Evans, Colorado. We upgraded one of our Canadian high-spec triples from its oil sands configuration to drill for gas and we secured work for an LNG operator with the long-term plans for the rig in the Montney. This gas upgrade was a first step to transition a portion of our triple fleet from oil sands to gas, and we have the capacity to convert additional oil sands rigs to -- high-spec gas rigs should conditions warrant. And finally, we improved our safety results in both divisions. We improved crew staffing and retention levels while reducing our turnover rate in a challenging labor market. Over to the first quarter of 2024, AKITA's operating days were reduced in both divisions compared to the prior year, but much more materially in the U.S. than in Canada. The U.S. market, which has been the strongest segment for AKITA over the past 3 years is currently facing headwinds we attribute to 5 factors. The capital discipline of operators who have committed to returning capital to shareholders and not increasing production through the drill bit, to [Indiscernible] strong WTI pricing, weak natural gas prices, extensive operator consolidation, limited takeaway capacity in the Permian Basin and production numbers staying consistent even with the reduced rig count as drilling efficiencies continue to improve and more footages achieved with fewer rigs. Some also consider U.S. election uncertainty to be a contributor to the current weakness in the U.S. drilling market. The culmination of these factors has resulted in U.S. activity falling from 750 active rigs a year ago to about 600 active rigs today. For AKITA, our rig count has fallen from 14 rigs a year ago to 8 today, but there are signs of the market improving over the back half of the year. I will now turn the meeting over to our CFO, Darcy Reynolds, to provide further commentary on both our 2023 and our Q1 financial results.

Thank you, Colin, and thank you, everyone, for attending our AGM today. I'd like to give a brief overview of AKITA's financial results for 2023 as well as the first quarter of 2024. 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. As Colin mentioned, 2023 was a strong year for AKITA. Our net income improved over 300% year-over-year for the second year in a row to $18 million -- $18.4 million in 2023 from $4.3 million in 2022. Funds flow from operations, which is cash from operations, less changes in working capital, increased to $45 million in 2023 from $35 million in 2022. 2023's net income and funds flow from operations were the highest since 2014. The success of 2023 was heavily weighted to the first half of the year, with our U.S. division running at full capacity at high day rates, which you can see displayed in these charts at the blue bars. Revenue per day peaked in Q2 of about $40,500 per day for our U.S. division and began to decrease alongside our activity in the U.S., ending the year at $38,600 per day. Meanwhile, in Canada, although we had a strong first quarter, the balance of the year was less active than in prior year due to several factors, including wildfires, conservation activities and operator budget reallocation. These factors, which reduced activity were partially offset by increased revenue per day, which increased through the year and ended at $40,000 per day. During 2023, we paid back $24 million in debt, which was 20% above our repayment target, ending the year at $70 million drawn on our $110 million credit facility. The balance of our free cash flow in 2023 was spent on capital expenditures, which were $25 million in the year, up from $18 million in 2022. Most of our capital spending in 2023 was for routine capital maintenance, but did include the gas upgrade on [rig 26]. Moving now into the first quarter of 2024, which was impacted by the continued weakness in the U.S. market. We achieved net income of $2.6 million, down from $9.5 million in the first quarter of the prior year. Funds flow from operations was $11.2 million in the quarter compared to $15.2 million in the first quarter of 2023. Activity in the U.S. was down materially from the first quarter of 2023, following 325 days to 719 days in the first quarter of 2024 from 1,044 days in the first quarter of 2023 due to the 5 factors discussed by Colin. Despite reduced activity, we did see improved margins in the U.S. as our efforts to reduce operating costs were reflected in results with our margin increasing from $7,700 per day in Q4 2023 to $10,500 in the first quarter of this year. In Canada, our activity was down 71 days from the prior year to 649 days in the first quarter of 2024. Lower activity in Canada was offset by higher day rates as well as contract cancellation revenue of $1.5 million received in the quarter. Capital spending was $3.9 million in the quarter compared to $2.5 million in the first quarter of 2023. In both quarters, capital spending was related to routine capital maintenance. I'll now turn it back to Colin to discuss the outlook for the year, along with our 2024 objectives.

Thank you, Darcy. Looking ahead to the balance of the year, we expect the reduced activity that characterized the first quarter in both divisions to persist over the second quarter before improving in both divisions over the second half of the year. The Canadian drilling market has been reinvigorated by the Trans Mountain expansion and the Coastal GasLink and advance of LNG Canada finally about to come online. We have strong activity booked in Canada over the second half of the year, and we continue to seek opportunities for our additional rigs that can be deployed. Similarly, in the U.S., we expect our activity to increase in July and improve over the balance of the year. Conversations with operators holding acreage in the Permian as well as in neighboring basins have increased over the past months, and we are confident our activity will improve over the back half of the year as operators pick up drilling programs to spend allocated budgets. I would now like to speak to our 2024 objectives. Our primary objective in 2024 remains debt reduction. We are targeting $15 million to $20 million in debt repayment with a midterm objective of reducing our debt levels below $50 million. Second, we are exploring all opportunities to secure work for our idle rigs in the U.S. while protecting our margins. Our objective is to increase our active rig count from 8 to 12 or more rigs before year's end. Third, we are looking for an additional opportunity in Canada that wants a second upgrade of one of our oil sands triple to gas. AKITA has proficiency in oil sands drilling. However, our objective is to deleverage one more rig from the oil sands to take advantage of the increased demand for gas rigs where they can thrive drilling for gas feedstock to supply LNG. And finally, what I'm most excited about is the opportunity to optimize AKITA's activities in both divisions. When we acquired Xtreme Drilling in 2018 to diversify into the U.S., the drilling industry was showing signs of recovery, especially in the Permian shale market before it weakened across North America. Then the weakened market was decimated in 2020 by increasing inventories and demand destruction precipitated by COVID-19 and further exasperated by the month-long Russia and Saudi oil price war. The U.S. drilling market recovered quicker than Canada, and over the last 3 years, our U.S. division has carried our company. As I mentioned earlier, however, Canada has expanded its tidewater access for both oil and natural gas, and AKITA is looking forward to its most active second half of the year since 2018. And while activity has been muted year-to-date in the U.S. market, signs point to increase U.S. activity by the third quarter, which should translate to the company optimizing its entire fleet. So for the first time, both AKITA divisions look to be firing by the fourth quarter and well into 2025. Now I would like to acknowledge the support AKITA receives from its First Nation and Métis joint venture partners in 2 key Canadian basins, the Montney and the Fort McMurray oil sands. Saulteau First Nations, the largest First Nations living near the deep gas Montney play in British Columbia [Indiscernible] 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. AKITA is a pioneer in establishing joint ventures with First Nation and Metis people along drillers. I'm very proud of the relationships AKITA has forged with our partners and believe they make AKITA stronger company than if we stood alone. I also want to recognize the support I have received from our Board Chair and our seasoned Board of Directors, acknowledge our great crews, staff and operations team across both divisions that are the backbone of our success. Thank you for the opportunity to provide an update this morning.

Thank you very much, Mr. Dease. Do you may have any questions prior to us concluding the meeting?

We do not, Linda.

Well, thank you very much, Mr. Reynolds. With that, then I would conclude the 31st Annual General Meeting of the corporation and congratulate our directors, and I look forward to working with you and the team at AKITA for the coming year. I thank you for taking the time to attend. Good day.