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Message: Trinidad Drilling earns $25.76-million in Q1
Trinidad Drilling earns $25.76-million in Q1
2014-05-07 18:07 ET - News Release
Mr. Lyle Whitmarsh reports
TRINIDAD DRILLING LTD. REPORTS SOLID FIRST QUARTER 2014 RESULTS; STABLE DAYRATES AND OPERATING MARGINS IN EXISTING BUSINESS, GROWING INTERNATIONAL MOMENTUM
Trinidad Drilling Ltd. had solid first quarter 2014 results, with stable day rates and operating margins in its Canadian and U.S. operations, and growing international joint venture momentum.
"The first quarter has been a solid start to what we believe will be an important year for Trinidad," said Lyle Whitmarsh, Trinidad's chief executive officer. "Our existing North American business continues to operate in line with our expectations and we are well positioned to benefit from the improving industry conditions we see happening in the U.S. and that we anticipate in Canada for the second half of 2014. This year is an important year as we transition from a solely North American drilling contractor to a growing international service provider. Our joint venture with Halliburton is progressing well with benefits being recognized by both partners already. We continue to evaluate future expansion opportunities for the joint venture and expect that this will be a significant area of growth for us over the coming years."
FINANCIAL HIGHLIGHTS (in thousands of dollars, except per-share amounts and as indicated) Three months ended March 31, 2014 2013 Revenue $ 251,505 $ 247,186 Revenue, net of third party costs 231,018 227,377 Operating income 95,192 98,359 Operating income, percentage 37.8% 39.8% Operating income, net percentage 41.1% 43.3% EBITDA 81,255 82,014 Per share (diluted) $ 0.58 $ 0.68 Adjusted EBITDA 79,441 84,836 Per share (diluted) $ 0.57 $ 0.70 Cash provided by operations 19,433 40,495 Per share (basic/diluted) $ 0.14 $ 0.34 Funds provided by operations 60,857 64,943 Per share (basic/diluted) $ 0.44 $ 0.54 Net earnings 25,762 32,748 Per share (basic/diluted) $ 0.19 $ 0.27 Adjusted net earnings 27,746 35,573 Per share (basic/diluted) $ 0.20 $ 0.29 Capital expenditures 31,206 17,337 Dividends declared 6,908 6,043
OPERATING HIGHLIGHTS Three months ended March 31, 2014 2013 Land drilling market Operating days Canada 4,077 4,198 United States and international 4,311 4,453 Rate per operating day Canada (Cdn$) 25,415 25,401 United States and international (Cdn$) 24,630 22,416 United States and international (US$) 22,641 22,487 Utilization rate, operating day Canada 74% 79% United States and international 76% 72% Number of drilling rigs at period-end Canada 61 60 United States and international 61 68 Coring and surface casing rigs - 15 Barge drilling market Operating days 244 415 Rate per operating day (Cdn$) 37,815 29,097 Rate per operating day (US$) 34,767 29,158 Utilization rate, operating day 54% 92% Number of barge drilling rigs at period-end 2 2 Number of barge drilling rigs under Bareboat charter agreements at period-end 3 3 Joint venture operations Number of drilling rigs at period-end 3 -
Trinidad recorded solid results in the first quarter of 2014, with stable day rates and operating margins in the company's drilling operations and growing momentum in its international joint venture, despite the absence of the coring rigs that were sold in 2013.
During the quarter, commodity prices increased from the same quarter in 2013 and the fourth quarter of 2013, improving sentiment within the industry, and increasing oil and gas producers' ability to generate higher cash flow. Crude oil prices improved for both the United States-based WTI benchmark and the Western Canadian Select benchmark prices, driving a continuing focus toward crude oil and natural gas liquids targets. Colder-than-usual weather across North America and lower storage levels led to strong gains in natural gas pricing from the previous quarter and the same period last year. Despite these significantly higher natural gas prices, the industry did not demonstrate a trend of increased natural gas drilling, choosing rather to stay with their existing targets and collect increased cash flow from associated natural gas production.
In the first quarter of 2014, Canadian industry activity levels averaged 58 per cent, unchanged from the same quarter last year and up from 43 per cent in the previous quarter due to seasonality. In the U.S., industry activity increased in the quarter, averaging 1,705 active rigs, up 1.1 per cent from the same quarter last year and 1.5 per cent from the previous quarter. The U.S. industry began to show signs of improvement with increased activity in the first quarter, a trend that has continued to date into the second quarter of 2014.
During the first quarter of 2014, the U.S. dollar strengthened against the Canadian dollar. U.S./Canadian-dollar exchange rates averaged 1.0882 in the quarter, compared with 0.9971 in the same quarter last year and 1.0400 in the previous quarter. Trinidad has a significant portion of its business that operates in U.S. dollars and the change in foreign exchange rates in the quarter had a noticeable, and largely positive impact on the company's results. The stronger U.S. dollar positively impacted EBITDA generated by Trinidad's U.S. and international division but also drove increased depreciation and interest expenses in the quarter. In addition, the value of the company's senior note increased solely as a result of the impact of foreign exchange in the quarter.
First quarter 2014 highlights
Trinidad generated revenue of $251.5-million in the first quarter of 2014, up $4.3-million and 1.7 per cent from the same quarter in 2013. Revenue increased in the current period as a result of a higher level of external rig manufacturing and a positive foreign currency translation from Trinidad's U.S. division, partly offset by the absence of the company's coring rigs, lower activity from the Mexican rigs and a weaker contribution from the barge operations.
Overall operating income, net percentage, decreased from 43.3 per cent in the first quarter of 2013, to 41.1 per cent in the current quarter. Profitability in Trinidad's drilling operations remained stable compared with the same quarter last year, with operating income, net percentage, for the company's Canadian, and U.S. and international operations, largely unchanged at 48.0 per cent and 38.2 per cent, respectively. Operating income, net percentage, for the manufacturing segment increased to 8.6 per cent in the current quarter, due to a higher level of external new builds in 2014. Over all, the manufacturing division typically generates lower margins than Trinidad's drilling operations as the external new builds are constructed for Trinidad's joint venture company and joint venture partner. An increased contribution from the manufacturing operations in 2014 caused overall profitability to decline.
Adjusted EBITDA was $79.4-million in the quarter, down 6.4 per cent from the same quarter last year. Adjusted EBITDA decreased in the quarter largely as a result of a decrease in operating income. This was partially offset by a favourable foreign exchange translation on Trinidad's U.S. and international operations, as the U.S. dollar strengthened against the Canadian dollar in the period.
Net earnings in the quarter were $25.8-million or 19 cents per share (diluted), down 21.3 per cent from the same quarter last year. Net earnings decreased largely as a result of a lower operating income in the current year, higher general and administration costs, a foreign exchange loss recorded in 2014, and larger deferred income taxes, offset slightly by a gain on sale in 2014, on three rigs sold to the joint venture.
Adjusted net earnings decreased by $7.8-million in the quarter, compared with the same quarter last year, with adjusted net earnings per share (diluted) decreasing nine cents per share. Adjusted net earnings decreased in the current year due to lower adjusted EBITDA and higher income tax expenses in the current period.
During the first quarter, Trinidad made progress on its joint venture with Halliburton, selling three upgraded U.S. rigs to the joint venture and transporting them to Saudi Arabia. In addition, Trinidad added a new area of operation for the joint venture during the quarter, agreeing to build four new rigs for operation in Mexico. All of the joint venture rigs will be operating under three-year, take-or-pay contracts, with a one-year optional extension by the customer.
Results from operations
In the first quarter of 2014, Trinidad's Canadian operations generated $11.8-million or 10.3 per cent less operating revenue, when compared with the same quarter last year. Operating revenue lowered largely as a result of the sale of Trinidad's preset and coring rigs in the third quarter of 2013; these rigs generated $8.8-million in operating revenue in the first quarter of 2013, compared with nil in the current period. The preset and coring rigs, including related inventory, were sold in the third quarter of 2013, for $12.0-million.
In addition, the segment's drilling rigs recorded 121 less operating days than the same quarter last year, negatively impacting operating revenue in the current period. The lower operating days were mainly driven by weaker customer demand in the oil sands sector, reducing activity for the company's lower specification equipment. While activity was lower quarter over quarter, Trinidad's high-performance, modern fleet continued to outperform industry activity levels, recording utilization levels that exceeded the industry average by 10 percentage points for 2014. This is a reflection of the company's strategic focus toward in-demand, high-performance equipment backed by a strong customer base and long-term contracts. Day rates in the current period were largely unchanged from the same quarter last year.
Operating income, net percentage, declined slightly in the current period when compared with the prior year, due to weaker customer demand in the oil sands sector, combined with increased labour costs related to a crew wage increase that occurred in the second half of 2013. The lower customer demand in the oil sands sector reduced activity levels and negatively impacted margins. In addition, the crew wage increase in the third quarter of the prior year, which is passed on to operators at cost, reduced profitability as a percentage of revenue in the quarter.
During the current quarter, Trinidad's active rig fleet increased by one rig when compared with March 31, 2013; one rig was delivered in the third quarter of 2013. This rig was constructed by the company's manufacturing operations and was put into service in the Duvernay shale under a long-term, take-or-pay contract.
First quarter of 2014, versus fourth quarter of 2013
Compared with the fourth quarter of 2013, revenue and operating income increased by $30.4-million and $16.7-million, respectively, in the first quarter of 2014. The increase is mainly due to the seasonal nature of the Canadian drilling division as the winter drilling season is typically a more active period. Additionally, day rates increased in the current period by $313 per day, mainly due to the demand for additional equipment on active rigs during the winter drilling season. Operating income, net percentage, also increased to 48.0 per cent, compared with 45.1 per cent in the fourth quarter of 2013, due to stronger revenue generation based on the increased number of operating days and the increased day rate in the current period.
U.S. and international operations
In the first quarter of 2014, Trinidad's U.S. and international segment recorded operating revenue of $114.8-million, up 2.9 per cent from the same quarter last year. Operating revenue increased in the quarter, due to improved day rates and a stronger U.S. dollar, partially offset by lower operating days and a weaker contribution from the company's barge operations.
Day rates in the current quarter increased by $154 (U.S.) per day, compared with the same quarter last year. Day rates increased as a result of early termination revenue and standby revenue received in the quarter. This standby and early termination revenue increased the day rate in the first quarter by $1,713 (U.S.) per day, compared with $665 (U.S.) per day in the same period in 2013. Early termination revenue was received on two rigs during the quarter. Both of these rigs have subsequently been put back to work with a new customer under long-term contracts. Higher U.S.-dollar day rates, combined with a stronger U.S./Canadian exchange rate in 2014, caused day rates, when converted to Canadian dollars, to increase by $2,214 (Canadian) per day, compared with the same quarter last year.
Operating days decreased by 142 days quarter over quarter as a result of three Mexican rigs that were idle in the current quarter. Excluding the impact of these rigs, the U.S. land drilling division recorded an increase in operating days in the quarter.
The three rigs Trinidad has in Mexico completed their contracts at the end of the second quarter of 2013, and were idle during most of the second half of 2013 and into 2014, negatively impacting utilization and revenue generation in the current year. Trinidad is currently pursuing future opportunities for these rigs and expects to redeploy them to Canada where they are expected to return to work in the second half of 2014.
For the three months ended March 31, 2014, Trinidad's active rig count decreased by seven rigs when compared with the prior year. Four rigs were removed from Trinidad's active rig count at Dec. 31, 2013, due to these rigs not meeting customer requirements in the current drilling environment. Additionally, three rigs were sold to Trinidad's joint venture in the first quarter of 2014.
Operating income, net percentage, remained consistent at 38.2 per cent quarter over quarter. Early termination and standby revenues in the U.S. land drilling division, offset by decreased profitability in the company's barge division and Mexico rigs led to overall stable profitability.
Trinidad's barge drilling rigs continued to demand a strong day rate in the current year, showing an increase of $5,609 (U.S.) per day in 2014, compared with the prior year. However, a decline in operating days in the current period caused overall revenue generation and profitability to decline. Drilling projects that were expected to take place in the first quarter were pushed back to later periods, causing downtime in the current quarter on these rigs. Trinidad anticipates that activity levels will return to previous levels in the coming quarters.
First quarter of 2014, versus fourth quarter of 2013
Compared with the fourth quarter of 2013, revenue and operating income decreased by $21.2-million and $21.6-million, respectively, in the first quarter of 2014. The decrease in the current period was due to lower early termination and standby revenues received in 2014, as well as a decrease in overall operating days in the current period. In the fourth quarter of 2013, Trinidad recorded $25.4-million (U.S.) of early termination and standby revenue, compared with $7.4-million (U.S.) received in 2014. Additionally, a decrease of 159 operating days in the current period has also negatively affected revenue generation in the period.
Operations in the current period were also negatively impacted by the decline in operations of Trinidad's barge drilling rigs, which had operating days and utilization of 244 days and 54 per cent, respectively, in the first quarter of 2014, compared with 394 days and 86 per cent in the fourth quarter of 2013.
Joint venture operations
During 2013, Trinidad signed a joint venture agreement with Halliburton with a right of first look at all drilling projects outside of Canada and the United States. The joint venture is expected to concentrate initially on Saudi Arabia and Mexico, with future growth opportunities in other international markets. The joint venture will conduct business under the name, Trinidad Drilling International (TDI), through separately incorporated entities.
Trinidad owns 60 per cent of the shares of TDI, and each of Trinidad and Halliburton have equal voting rights with respect to the operations of the company. TDI is accounted for using the equity method of accounting, whereby Trinidad takes 60 per cent of the net income recorded as loss (gain) from investment in joint venture.
During the three months ended March 31, 2014, TDI took ownership of the three upgraded rigs purchased from Trinidad's U.S. land drilling division. These rigs have not been put into service as of the quarter-end; however, they did collect standby revenue, which accounts for the entire revenue balance earned in the quarter. Drilling operations are expected to commence early in the second quarter in Saudi Arabia.
Rig purchase commitments
During 2013, TDI agreed to purchase four rigs from Trinidad for operations in Saudi Arabia, three upgraded rigs from Trinidad's U.S. operations and one new build rig constructed by Trinidad's manufacturing division. As of March 31, 2014, TDI has taken ownership of the three upgraded rigs, with the new build rig expected to be completed in the second half of 2014. All four rigs will be operating under three-year, take-or-pay contracts with an optional one year extension.
Additionally, early in 2014, TDI agreed to purchase four rigs from Trinidad's manufacturing division for operations in Mexico. Each of these rigs will be high-performance, 3,600-horsepower, AC walking rigs, operating under three-year, take-or-pay contracts with an optional one-year extension. These rigs are expected to be delivered toward the end of 2014 and early 2015.
Effective Jan. 1, 2014, Trinidad reviewed all existing operating segments in order to better present the company's operations based on geographic location, services provided and any material changes to operations. In the prior year, Trinidad's manufacturing operations mainly performed work internally; therefore, the prior-year operating income includes a loss based on costs incurred by the manufacturing division mainly related to raw materials consumed during construction of rigs for internal use. Toward the end of 2013 and early 2014, Trinidad's manufacturing division signed contracts to build rigs for external parties, including the company's joint venture partner and the joint venture company.
As the manufacturing operations begins to record operating revenues and costs, management believes that presenting this division as a separate operating segment from the company's drilling operations is more useful to users as it will provide a more accurate representation of the margins recorded on Trinidad's drilling operations. Prior-period segmented information has been reclassified to conform to the presentation for the current period.
The purpose of the manufacturing operations is to support rig builds and rig maintenance for all of Trinidad's divisions, including all associates and joint ventures. All contracts are based on a cost plus formula, which is calculated in order for Trinidad to break-even on rig builds when all costs, including general and administrative expenses, are factored in. Contracts are negotiated depending on the company's varying involvement, which can range from full scale design and manufacturing to project management with a large degree of outsourcing.
Towards the end of 2013 and into 2014, Trinidad signed five new build contracts. One rig for the joint venture to operate in Saudi Arabia and four rigs for the joint venture to operate in Mexico. Additionally, Trinidad has agreed to build a training rig for their joint venture partner. For the period ended March 31, 2014, Trinidad recognized revenues and expenses related to the one Saudi rig build and the training rig, compared with no external new build revenues or expenses recognized in 2013. Additionally, as of March 31, 2014, Trinidad is still early in the construction phase of the four Mexico rigs. Long-lead items have been ordered, but assembly has not occurred as yet. Therefore, there is no related revenue or expenses included in Trinidad's operating income related to the construction of these rigs.
Delivery of the Saudi rig is expected in the second half of 2014, the training rig is expected to be delivered toward the end of 2014, and delivery of the four Mexico rigs is expected toward the end of 2014 and early 2015.
Trinidad's total long-term debt balance increased by $19.2-million during the current year, when compared with Dec. 31, 2013. This increase was due to the increase in the senior notes at March 31, 2014, and is entirely a result of the increase in the U.S.- to Canadian-dollar exchange rate in 2014, versus the prior year, as these notes are held in U.S. funds. The senior notes are translated at each period-end, as such their value will fluctuate with variations in exchange rates. The senior notes are due January, 2019, and interest is payable semi-annually in arrears on Jan. 15 and July 15.
As of March 31, 2014, and Dec. 31, 2013, Trinidad's revolving debt facilities were completely paid off, leaving $200.0-million and $100.0-million (U.S.) unused in these facilities, respectively. The company continues to consider future capital commitments and, as such, the unused facilities are expected to be used in the future course of business. The Canadian and U.S. revolving facilities require quarterly interest payments that are based on Bankers Acceptance and LIBOR rates, and incorporate a tiered interest rate, which varies depending on the results of the consolidated-total-debt-to-bank-EBITDA ratio. The facility matures on Dec. 16, 2017, and is subject to annual extensions of an additional year on each anniversary.
During the three months ended March 31, 2014, a total of $31.2-million was spent on capital expenditures, compared with $17.3-million for the same period in the prior year. These capital expenditures were substantially related to the company's rig build program for its Canadian operations. As well, Trinidad continued to work on upgrading existing equipment, including moving systems, top drives and mud systems, to ensure the company's rigs remain competitive in the current market.
The costs associated with Trinidad's external new builds are not included in the company's capital expenditures shown above. These costs are accounted for using the percentage of completion method and are recorded as operating costs included in Trinidad's manufacturing operations.
In 2014, Trinidad expects to spend a total of approximately $315.0-million on capital projects. This total includes Trinidad's internal capital projects, Trinidad's portion of the joint venture capital projects and takes into account proceeds received for existing rigs sold into the joint venture. Trinidad's capital budget is further broken down as follows:
- Completion of one new rig and the upgrading of three existing rigs to be delivered to Saudi Arabia for the joint venture arrangement;
- Construction of four new rigs to be delivered to Mexico for the joint venture arrangement in late 2014 or early 2015;
- Upgrades to improve the efficiency and marketability of more than 30 existing rigs;
- Maintenance and infrastructure capital.
Excluding proceeds received from the sale of rigs into the joint venture, Trinidad spent $38.1-million on internal capital projects and its portion of the joint venture projects in the first quarter of 2014. Costs related to the joint venture rig build projects are accounted for as operating expenses in Trinidad's manufacturing operations.
As of March 31, 2014, the three upgraded rigs have been delivered to the joint venture and Trinidad continues work on the remaining new build rigs included in the 2014 capital program.
To date in 2014, activity levels have remained firm in North America, with Canadian conditions similar to last year and the U.S. beginning to show increasing activity and day rates.
In the past 12 months, the benefits of modern, high-performance equipment have become more widely acknowledged and customers are increasingly looking for efficient, technically advanced equipment that can drill deeper and longer-reach horizontal wells. This trend is continuing and expanding into new areas and Trinidad's reputation as a high-performance driller with modern, efficient rigs positions it well for these changing industry conditions.
Natural gas prices have remained stronger to date in 2014, and while they have not yet led to a significant increase in dry gas drilling, the improved pricing on associated gas production improves customers' cash flow and provides the ability to increase capital spending as the year progresses.
Industry conditions in Canada are stable, with upside momentum as oil and gas producers re-evaluate their capital programs under stronger commodity prices. In addition, LNG-related demand is expected to drive increasing activity levels as the projects and their timelines become clearer toward the end of 2014 and into 2015. In the U.S., conditions continue to improve with activity levels across the country growing and day rates moving up, particularly for high-performance equipment. On the international front, Trinidad's joint venture with Halliburton is progressing well. Trinidad is currently constructing five new rigs that will be sold into the joint venture to operate in Mexico and Saudi Arabia, bringing the total number of rigs in the joint venture to eight. The joint venture is continuing to assess opportunities for expansion and Trinidad expects this to be a strong area of growth in the coming years.
Trinidad has followed a strategic plan over the past few years, positioning the company well for sustainable growth in today's changing drilling industry. The next step in Trinidad's plan is to successfully transition from its historical North American operations to a growing international drilling contractor. The company is making good progress on this front while also remaining focused on its existing U.S. and Canadian operations. Trinidad expects to grow its international business at a measured pace, ensuring operations are well established and running smoothly before adding new operating areas. Trinidad is uniquely positioned with three distinct growth areas (Canada, the U.S. and international), while also having the cash flow and financial flexibility to finance its future growth.
A conference call and webcast to discuss the results will be held for the investment community on Thursday, May 8, 2014, beginning at 9 a.m. MT (11 a.m. ET). To participate, please dial 888-231-8191 (toll-free in North America) or 647-427-7450 approximately 10 minutes prior to the conference call. An archived recording of the call will be available from approximately 12:30 p.m. MT on May 8, 2014, until midnight, May 15, 2014, by dialling 855-859 2056 or 416-849-0833 and entering replay access code 25656531.
A live audio webcast of the conference call will also be available via the investor relations page of Trinidad's website.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (in thousands of dollars, except per-share amounts) Three months ended March 31, 2014 2013 Revenue Oil field service revenue $ 250,447 $ 247,120 Other revenue 1,058 66 251,505 247,186 Expenses Operating expense 156,313 148,827 General and administrative 21,191 16,314 Depreciation and amortization 30,255 29,859 Foreign exchange 3,154 (5) (Gain) loss on sale of property and equipment (10,539) 36 200,374 195,031 Loss from investment in joint venture 131 - Finance costs 9,959 9,970 Earnings before income taxes 41,041 42,185 Income taxes Current 290 1,071 Deferred 14,989 8,366 15,279 9,437 Net earnings 25,762 32,748 Other comprehensive income Foreign currency translation adjustment, net of income tax 24,843 6,683 24,843 6,683 Total comprehensive income 50,605 39,431 Earnings per share Net earnings Basic/diluted $ 0.19 $ 0.27
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