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

Well, good morning. My name is Linda Southern-Heathcott, and I'm the Chair of AKITA Drilling. And it is my sincere pleasure to welcome you to the company's 32nd Annual General Meeting. Smooth courses are never assured, and the world certainly does have a great deal of turmoil in it, but I wanted to take a moment before we start our meeting to congratulate the AKITA team for their terrific safety record and great results in 2024. And I'm so pleased that the team able to pay down another $20 million of debt. So congratulations to the team. So for all of you joining us, we are hosting our AGM through our virtual meeting platform, which is accessible to all shareowners and guests. I officially call the meeting to order and appoint 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. So to the formal part of our business of the meeting. The business of the meeting is as described in the Management Information Circular dated March 5, 2025. We will conduct votes on the business matters before us by an electronic poll. Every Class B shareowner is entitled to 1 vote for each Class B share held. I think that goes without saying, but whatever. 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. 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 online through the messaging tab platform. Time permitting, we will endeavor to answer all your questions. The first item of business is to proceed with the election of directors as proposed in the management proxy circular. If you'll allow me as Chair, I will move each item, and I have been advised that Mr. Colin Dease and Mr. Darcy Reynolds, both proxy holders in attendance today, will be prepared to second each motion that I move. So 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; Robert Peabody, Corporate Director; Nancy Southern, Chair, President and Chief Executive Officer of ATCO and Executive Chair of Canadian Utilities and Vice Chair of AKITA Drilling; Henry Wilmot, 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 until their successors are elected or appointed.

I second the motion.

Thank you, Mr. Dease. The next item of business is to appoint our 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 Shareowners and that the directors be authorized to fix the auditor's remuneration.

I second the motion.

Thank you very much, Mr. Reynolds. Darcy, have you received any questions on any matters so far?

I have not chair.

Okay. Are there any questions in the room? If not, then there are no further business and no further questions or no questions, I declare that the polls are closed. We shall just have to wait for a few moments for the scrutineers to count the votes and to declare the results. Darcy? Mr. Reynolds, our CFO, has received the scrutineers' preliminary report, and I would ask Mr. Reynolds to read the results.

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.

I therefore declare the motion passed.

With respect to the motion of reappointing PricewaterhouseCoopers as the company's auditor for the ensuing year, the scrutineers have reported that shareholders voted 100% in favor of the resolution.

I declare the motion passed. As that concludes the formal part of our business at this year's annual meeting, I declare the meeting closed. I was remiss, and I apologize, I have it on a different page. But before we go into our presentation with our President and our CFO. I wanted to, in the spirit of respect and truth and reconciliation, acknowledge the traditional treaty lands that we reside on. Treaty 7 territory and the oral practices of the Blackfoot Confederacy, Siksika, Kainai, Piikani, Stoney Nakoda Nations, Chiniki, Bearspaw, Goodstoney and Tsuut'ina Nation. We acknowledge that this territory is home to the Otipemisiwak, Metis government of the Metis Nation and Alberta Districts 5 and 6. And finally, we acknowledge all nations, indigenous and non, who live, work and play on this land and who honor and celebrate this territory. This sacred gathering place provides us with the opportunity to engage in and demonstrate leadership on reconciliation. Thank you for your enthusiasm and commitment to join our team on the lands of Treaty 7 territory. And later in the presentation, you will hear about so many of our joint ventures that AKITA has with the First Nations people of Canada. Colin?

Thank you, Linda, and thank you to our shareowners, directors, analysts and others for taking the time to attend our AGM this morning. I'd also like to acknowledge and recognize the key staff members who are in attendance today, some of whom have traveled from Midland, Denver and Nisku. Their commitment, passion and expertise are the driving force behind our success. It's my pleasure to provide the CEO update for AKITA Drilling's 32nd Annual General Meeting. This morning, after providing a brief overview of what we do and setting some historical context for our company, I will speak to the accomplishments we achieved over the course of 2024, provide commentary on our 2025 first quarter results and then turn the meeting over to our CFO, Darcy Reynolds, to walk through the 2024 and Q1 financial results before providing a forecast of what we see over the balance of the year and speak to the objectives that we've set for 2025. AKITA Drilling is a pure-play drilling company with 2 primary divisions. Our Canadian division operates a fleet of 17 drilling rigs across Western Canada, while our U.S. division manages 15 rigs, primarily in the Permian Basin. We provide crew and operate drilling rigs on a day rate basis for clients engaged in drilling for oil, natural gas, potash, saltwater disposal, acid gas injection, carbon capture and storage, geothermal energy and helium. In 2018, our acquisition of Extreme Drilling brought significant benefits to AKITA, including 13 modern AC triple rigs and some great people. We recognize a challenge, however, as Extreme's fleet was dispersed across multiple states with operations in North Dakota, Colorado, Utah, Oklahoma, Ohio and Wyoming. This broad footprint led to high overhead costs and fragmented, inefficient operational support. Recognizing the need for consolidation, we set out to concentrate our U.S. operations to improve efficiencies and reduce cost. In 2019, we secured an opportunity to deploy the Extreme class of rigs we acquired into the Permian Basin, a basin that supports roughly half of the drilling in the U.S. And then we sought additional opportunities to further concentrate within that basin. By 2023, we completed our objective, and we closed our last non-Permian field office in Evans, Colorado and we fully relocated our fleet to the Permian Basin. The next phase of our optimization strategy was to high-grade our personnel. Over the past 18 months, we've made deliberate efforts to continue building a strong and high-performing team. With the right people in place, we've now turned to focus on improving our internal processes, and we've made meaningful improvements in our procurement, maintenance, safety, recruiting and downtime processes. Our Canadian division established more than 30 years ago is built on a foundation of experience with a strong leadership team, seasoned crews and well-established operational processes. For much of the past decade, however, due to weak market conditions in Canada, the Canadian division operated below full capacity. That all changed in the fourth quarter of 2024. With a notable increase in activity, working for some of the most discerning operators in the country, our Canadian division returned to near full capacity. This resurgence has reinvigorated our Canadian team and positioned us to take advantage of improving market fundamentals, led by the imminent launch of LNG Canada, the recent completion of the Trans Mountain pipeline expansion and an advantageous currency exchange, which benefits Canadian producers selling commodities priced in U.S. dollars. These factors are all contributing to more favorable operating environment. And with our team and fleet now fully engaged, AKITA's Canadian division is well positioned to capitalize on these opportunities. I would now like to speak about our achievements in 2024. We reached several milestones over the course of the year. Last year, I reaffirmed debt reduction as a primary objective. I'm pleased to report that we made substantial progress in 2024, further reducing our debt by $20 million over the year. This brought our total debt down from $90 million at the end of 2022 to $50 million today, and lowered our debt-to-EBITDA ratio to below 1x, a significant milestone in strengthening our financial position. For the first time since our acquisition of Extreme Drilling in 2018, the foundation of our U.S. fleet, we achieved strong activity levels in both our U.S. and Canadian divisions in the fourth quarter of the year. The inflection point for our company came in September of 2024 when Canadian operating days surged by 88% compared to the prior year quarter, while U.S. operating days rose 20%. The Canadian division's fourth quarter performance was its strongest of this decade underscoring the dedication of our operations team and the strength of our seasoned crews. In the U.S., increasing operating days during a period when the overall industry rig count was declining is an achievement I'm very proud of and a testament to the dedication of our U.S. team. In addition to increased activity, we improved our operating performance in both divisions as evidenced by a key metric we track, reduced downtime as a percentage of operating time. We also made improvements in our maintenance, safety, crew retention and staffing process over the year that have made AKITA a stronger company and have contributed to our improved utilization. Now switching from 2024 to the first quarter of 2025. We had a strong first quarter. We achieved our objective to maintain the strong levels of activity in both divisions that we achieved over the last quarter in 2024. AKITA's Canadian operating days were up 42% in the quarter, while U.S. operating days were up 28% over the prior year's quarter. Increased activity led to our net income increasing to $8.6 million from $2.6 million in the prior period. We cracked the top 10 active drillers list in the U.S. consistently over the first quarter despite our relatively small fleet size. We are punching well above our weight class. In Canada, we continue to strengthen the relationship we built with a major LNG player that we believe will serve us well in our intention to further diversify our fleet from the oil sands to the gas market. I will now turn the meeting over to our CFO, Darcy Reynolds, to provide further commentary on both our 2024 and Q1 2025 financial results.

Thank you, Colin, and thank you all for joining us today at our Annual General Meeting. I'm pleased to take a few moments to provide a brief overview of our 2024 results as well as our first quarter of 2025 results. For further detail, I encourage you to refer to our annual report and our first quarter report, both of which are available on SEDAR+ and our website. Let's begin with 2024. It was another relatively strong year for AKITA, though not quite to the same level as 2023. We reported net income of $13 million, down 30% year-over-year. This decrease in net income was primarily attributable to lower U.S. activity. While differences between 2024 and 2023 offset each other, the reduced interest expense in 2024 was counterbalanced by higher deferred tax and the insurance gain in 2024 was comparable to the gain on sale of assets in 2023. As a result, the decline in U.S. activity remained the key factor driving the decrease in net income in 2024. Funds flow from operations, which is our cash flow less working capital, decreased 2% to $45 million in 2024. One of the key differences between 2023 and 2024 was the timing of our performance, whereas 2023 was front-loaded with most of our earnings generated in the first half of the year and declining, 2024 saw the reverse trend. Activity and earnings built steadily through the year, culminating in a particularly strong fourth quarter. In fact, 75% of the net income for the whole year was generated in the fourth quarter. This was driven by a steady increase in operating days, which rose from 1,368 in Q1 to 1,869 in Q4, a clear indicator of our growing momentum. As Colin mentioned earlier, we made significant progress in strengthening our balance sheet. Over the course of 2024, we repaid $20 million in debt, bringing our total debt down to $50 million. As a result, we reduced our interest expense by $2 million and ended the year with a debt-to-EBITDA ratio of 0.94:1. We are very pleased to be under the onetime mark, a milestone we worked very hard to achieve. In terms of capital spending, we invested $28 million in 2024, an increase from $25 million in 2023. This capital spending was directed towards Level 4 inspections, equipment rebuild and recertifications and upgrades to enhance the quality and performance of our fleet. Turning now to the first quarter of 2025. I'm happy to report that the strong activity levels from the end of 2024 carried into the first quarter of 2025. As a result, net income surged 229% year-over-year, reaching $8.6 million compared to $2.6 million in the first quarter of the previous year. Funds flow from operations also saw significant growth, rising to $17 million in Q1 of 2025 from $11 million in Q1 of 2024. This performance was driven by increased rig activity in both Canada and the U.S. In Canada, we had 928 operating days, up 279 days for the same period of 2024. In the U.S., days increased 200, to 919 operating days. Importantly, this growth did not come at the expense of day rates after adjusting for onetime items, details of which are outlined in the Q1 report. Our revenue per day remains stable quarter-over-quarter. Capital expenditures for the first quarter came in at $7 million, focused on drill pipe and routine maintenance items such as Level 4 inspections. As expected, we experienced our usual working capital build in the first quarter and therefore, did not make any debt payments during that time. That said, we remain committed to our goal of reducing debt to under $30 million, and we plan to pay down an additional $15 million to $20 million this year. To our shareholders, I'd like to thank you for your continued patience and support of AKITA during this deleveraging phase. We understand that at our current share price, share repurchases through an NCIB or SIB offer significant return to our shareholders. However, a strong balance sheet remains a top priority, particularly given the ongoing uncertainty in the industry. We believe paying down debt is still the most prudent use of our excess capital. With that, I'll turn it back to Colin to speak to our broader objectives for 2025 before we address any questions that have come through the Lumi platform. Thank you.

Thank you, Darcy. We've reflected on the accomplishments in 2024, and we discussed the momentum that we've carried into the first quarter. And now I'd like to turn our attention to the outlook for the remainder of 2025. We're now in spring breakup in Canada, where our rig count, along with industries, is reduced, but this is as expected. Looking ahead, we anticipate our Canadian rig count will begin to ramp up again in June when spring breakup ends. We continue to expect strong activity throughout the back half of the year. Activity in the oil sands has strengthened and our deliberate efforts to expand our footprint in [Technical Difficulty] Canadian division for a strong second half in 2025. The outlook for our U.S. division over the remainder of the year is less clear. We are currently navigating a period of market volatility driven by several factors: Tariff uncertainty and recessionary concerns, which affect demand and OPEC+'s recent decision to increase supply. Together, these dynamics have contributed to a decline in WTI oil prices from an average of $76 per barrel in January to $63.50 in April. This downward pressure on pricing has prompted some U.S. operators to pause drilling programs or to demand rate concessions. As a result, we are anticipating a heightened level of rig churn to continue through at least the second quarter. Despite these challenges, our U.S. fleet has been extremely active and has been performing very well. This positions us to recover quickly if additional rigs are laid down due to turbulent market conditions. In contrast to the majority of the U.S. fleet over the last 2 years, we have maintained high utilization levels, and we've secured strong recognition from our customers, giving us a leg up on the competition when responding to opportunities for rig reactivations. We faced adversity before, and we are actively managing throughout this period of uncertainty. We remain confident in our team's ability to adapt, respond effectively and emerge stronger once market conditions stabilize. I would now like to address our 2025 objectives. As we move throughout 2025, we remain focused on 3 primary strategic objectives. Continuing the momentum from last year, our first priority is further debt reduction. We are targeting $15 million to $20 million in debt repayments this year with the goal of reducing our total debt to below $30 million. Achieving this milestone will further strengthen our balance sheet and will enhance our financial flexibility. Our second objective is to preserve our high activity levels in the Permian Basin despite the current market headwinds. We are taking proactive steps to navigate the uncertainty caused by commodity price pressures and geopolitical developments. Maintaining strong activity in the U.S. is critical to our success. And despite our efforts to concentrate our operations in the Permian, we have recently capitalized on 2 opportunities to work rigs in adjacent basins for lucrative day rates, and we'll continue to monitor opportunities outside the Permian provided they are compelling. Our third objective is to further align our Canadian fleet with the growing LNG or liquefied natural gas sector. While we continue to lead in oil sands drilling, an area of core strength for AKITA, we plan to redeploy rigs from the oil sands to capitalize on the increasing demand for natural gas drilling. These rigs will support LNG feedstock production, offering more stability and growth potential in a market less exposed to short-term commodity volatility. And in closing, I'd like to acknowledge the support AKITA receives from its First Nation and Metis joint venture partners in 2 key Canadian basins: The Montney and the Fort McMurray oil sands. The first First Nation is Saulteau First Nation, which owns equity in 1 AKITA rig. And then secondly, Fort McMurray First Nation, Chipewyan Prairie First Nation, Fort Chipewyan Metis, Conklin Metis and Fort McKay Metis who each own equity in 4 AKITA rigs. AKITA has long been a pioneer in establishing joint ventures with First Nation and Metis communities. I'm extremely proud of the relationships we've built with our indigenous partners, relationships that not only reflect mutual respect and our shared values, but also make AKITA a stronger and more resilient company than we would be on our own. And finally, I would like to take a moment to recognize the continued support of our Board Chair and our experienced Board of Directors. Their guidance is invaluable. And finally, I'd like to extend my sincere thanks to our dedicated crews, staff and operations teams across both our Canadian and our U.S. divisions. Your hard work drives our success every day. Thank you for the opportunity to provide an update this morning.

Thank you very much, Mr. Dease and Mr. Reynolds. Do we have any questions on the online platform?

We do not.

We did receive a question yesterday, which I would like to read and we should answer it, was from Mr. [indiscernible]. His question is, is the Board considering any other capital allocation to take advantage of this massive discount for the benefit of long-term investors once you reach your debt level targets? So the answer to the question is we -- as a Board, obviously, as Colin stated, the debt reduction is, first and foremost. And it has been a goal of AKITA and the team, first and foremost, and they've done a great job, and we'll continue to be focused on the debt reduction. The Board will continually look at once we get to the target that he stated below $30 million, whether it is a normal course issuer bid to buy back shares. But we won't discuss that until the point in time when we have the debt where we want it to be. So Mr. [indiscernible], I do want to say that we acknowledge your question, and we thank you for it. And we will continue to look at it as a strategic opportunities come forward for AKITA. But at the moment, right now, the focus will continue to be debt reduction. Anything else? Any other questions?

No further questions.

Okay. Well, thank you very much. That concludes our 32nd Annual General Meeting of the corporation, and I thank you very much for taking the time to join us. And we look forward to seeing you next year.