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Trinidad Energy Services Income Trust announces second quarter results - June 30, 2007
TSX SYMBOL: TDG.UN
CALGARY, Aug. 9 /CNW/ - The following is management's discussion and
analysis ("MD&A") concerning the operating and financial results for the three
and six months ended June 30, 2007, and its outlook based on information
available as at August 2, 2007. The MD&A is based on the Trinidad Energy
Services Income Trust (the "Trust" or "Trinidad") consolidated financial
statements for the period ended June 30, 2007 which were prepared in
accordance with Canadian Generally Accepted Accounting Principles ("GAAP").
The MD&A should be read in conjunction with the audited consolidated financial
statements and MD&A of the Trust for the year ended December 31, 2006.
Additional information is available on the Trust's website
(www.trinidaddrilling.com) and all previous public filings, including the most
recently filed Annual Report and Annual Information Form, are available
through SEDAR (www.sedar.com).-------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(thousands except unit
and per unit data
- Unaudited)
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Revenue 115,494 104,547 321,705 267,484
Gross margin(1) 46,461 42,978 142,404 127,667
EBITDA(1) 26,564 26,193 107,091 95,766
Per unit (diluted) 0.31 0.30 1.26 1.14
EBITDA before unit based
compensation(1) 27,235 26,923 108,537 100,349
Per unit (diluted) 0.32 0.31 1.27 1.19
Funds flow before change
in non-cash working
capital(1) 23,353 22,509 96,163 93,251
Per unit (diluted) 0.27 0.26 1.13 1.11
Distributions paid and
declared 28,836 26,836 57,573 48,206
Distributions paid and
declared per unit (basic) 0.34 0.32 0.69 0.59
Payout ratio(2) - - 60% 52%
Net earnings 4,641 20,812 46,584 60,796
Per unit (basic) 0.06 0.25 0.56 0.74
Per unit (diluted) 0.05 0.24 0.55 0.72
Net earnings before unit
based compensation 5,312 21,542 48,030 65,379
Per unit (diluted) 0.06 0.25 0.56 0.78
Units outstanding - basic
(weighted average)(3) 83,947,198 84,236,661 83,872,182 82,403,159
Units outstanding
- diluted (weighted
average)(3) 85,711,891 86,167,652 85,294,628 84,358,949
-------------------------------------------------------------------------
(1) Readers are cautioned that gross margin, EBITDA and funds flow before
change in non-cash working capital and the related per unit
information do not have a standardized meaning prescribed by GAAP and
therefore may not be comparable to similar measures presented by
other issuers; however, the Trust does compute gross margin, EBITDA
and funds flow before change in non-cash working capital on a
consistent basis for each reporting period. EBITDA refers to earnings
of the Trust before interest, taxes, depreciation and gain or loss on
investment in long-term assets; gross margin refers to revenue less
operating expenses; funds flow before change in non-cash working
capital refers to the amount of cash that is expected to be available
for distribution to unitholders.
(2) Payout ratio is calculated as distributions paid and declared divided
by funds flow before changes in non-cash working capital and is only
provided on a year-to-date basis.
(3) Basic and diluted units outstanding include trust units to be issued
upon conversion of exchangeable shares.
-------------------------------------------------------------------------
OPERATING HIGHLIGHTS
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Operating days - drilling
Canada 1,165 1,826 4,981 6,010
United States 2,944 1,603 5,408 3,050
Rate per drilling day
(CDN $)
Canada 23,527 23,927 25,470 23,685
United States 24,927 24,089 25,191 22,906
Utilization rate
- drilling
Canada 20% 36% 44% 60%
United States 88% 82% 87% 83%
CAODC industry average 17% 34% 38% 57%
Number of drilling rigs
Canada 64 57 64 57
United States 38 22 38 22
Utilization rate for
service rigs 23% 31% 47% 58%
Number of service rigs 21 17 21 17
Number of coring and
surface casing rigs 17 17 17 17
-------------------------------------------------------------------------FORWARD-LOOKING STATEMENTS
The MD&A contains certain forward-looking statements relating to the
Trust's plans, strategies, objectives, expectations and intentions.
Expressions such as "anticipate", "expect", "project", "believe", "estimate",
and "forecast" should be used to identify these forward-looking statements.
The Trust believes that the expressions reflected in those forward-looking
statements are reasonable; however, such statements are subject to a number of
known and unknown risks, uncertainties and other factors that may cause actual
results to differ materially from those anticipated in our forward-looking
statements. These statements speak only as of the date of the MD&A and the
Trust does not intend, and does not assume any obligation, to update these
forward-looking statements.
NON-GAAP MEASURES
This MD&A contains references to the term "funds flow before change in
non-cash working capital" to refer to the amount of cash that is expected to
be available for distribution to unitholders; the term "EBITDA" to refer to
earnings of the Trust before interest, taxes, depreciation and gain or loss on
investment in long-term assets; the term "gross margin" to refer to revenue
less operating expenses, which the Trust believes are measures followed by the
investment community and therefore provide useful information. The terms
"funds flow before change in non-cash working capital", "EBITDA", "gross
margin" and associated per unit data are not measures recognized by GAAP and
therefore do not have standardized meaning. Accordingly, these measures may
not be comparable to similar measures presented by other companies. However,
the Trust computes "funds flow before change in non-cash working capital",
"EBITDA" and "gross margin" on a consistent basis for each reporting period.
OVERVIEW
The continued slowdown of drilling activity within the Canadian market
adversely impacted operations throughout the quarter and an early onset of wet
weather conditions further intensified the overall reduction in drilling
activity in comparison with 2006. Commodity price reductions that began in the
latter part of the prior year continued throughout the current quarter, which
when coupled with high storage levels, continued to encourage oil and gas
producers to delay drilling initiatives, further reducing activity levels
throughout the Canadian market. Maintenance programs on the Trust's drilling
fleet were completed throughout the period, increasing operating costs and
causing an overall reduction in margins. Despite the market reductions
Trinidad continued to exceed the industry through its continued focus on the
deeper drilling market and the security provided through the Trust's long-term
take-or-pay contracts. The Trust's Canadian rig construction program drew to a
close with the release of the final rig committed under the take-or-pay
contracts, which was released in the second quarter of 2007, enhancing the
stability of funds flow.
Despite the declines seen in the Canadian drilling markets, the Trust has
positioned itself favourably with its strategic entry into the US marketplace
through its rig construction program and the acquisition of Cheyenne Drilling
in December 2005 which has diversified its funds flow. The US drilling market
continues to show strength due to favourable pricing and strong demand
fundamentals, which continue to support higher activity levels. Since the end
of the second quarter of 2006 Trinidad has deployed an additional 16 drilling
rigs, all backed by take-or-pay contracts guaranteeing utilization levels and
day rates, which more than doubled revenue on both a quarter and year-to-date
basis from the comparative period in 2006. The strategic decision to expand
operations into the US provided increased revenue at stable utilization rates
throughout the period, significantly increasing US revenue and stabilizing the
overall performance of the Trust. Furthermore, the increased revenue generated
in the United States will continue to add stability to the Trust's funds flow.
The Trust continued its expansion into the US market through the
acquisition of US-based Drilling Productivity Realized, L.L.C., P.C. Axxis,
L.L.C., DPR International, L.L.C. and DPR Rentals, L.L.C. (collectively,
"Axxis") effective July 5, 2007. The assets acquired include four land based
drilling rigs and one barge drilling rig, together with related inventory,
crew boats and spare parts. Furthermore, the Trust will also take on the
remaining construction commitments of a second barge drilling rig currently
under construction. Concurrent with the Axxis acquisition, the Trust closed a
$325.0 million aggregate principal amount of 7.75% convertible unsecured
subordinated debenture offering which was used to fund the cash portion of the
purchase price of the Axxis acquisition, to repay outstanding debt of the
Trust and its affiliates and for general working capital purposes.2007 2006
QUARTERLY ANALYSIS Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Financial Highlights
(millions except per
unit data - Unaudited)
Revenue 115.5 206.2 161.9 150.6 104.5 162.9
Gross margin(1) 46.5 95.9 74.9 66.9 43.1 84.7
Net earnings (loss) 4.7 41.9 31.3 31.6 20.8 40.0
Depreciation and
amortization 14.8 18.3 15.4 14.0 9.7 13.1
(Gain) loss on sale
of assets 0.1 0.1 0.1 (2.0) - -
Unit based compensation 0.7 0.8 1.8 0.7 0.8 3.8
Future income tax
expense (recovery) (3.1) 10.2 6.2 4.6 (8.7) 13.9
Effective interest on
financing costs 0.4 0.3 - - - -
Unrealized foreign
exchange loss (gain) 5.8 1.2 (0.1) - 0.2 (0.2)
Other - - - 0.1 (0.3) 0.1
------------------------------------------------
Funds flow before
change in non-cash
working capital(1) 23.4 72.8 54.7 49.0 22.5 70.7
Earnings (loss) per
unit (diluted) 0.05 0.49 0.37 0.38 0.24 0.48
Funds flow before
change in non-cash
working capital per
unit (diluted)(1) 0.27 0.86 0.65 0.57 0.26 0.84
-------------------------------------------------------------------------
2005
QUARTERLY ANALYSIS Q4 Q3 Q2
-------------------------------------------------
Financial Highlights
(millions except per
unit data - Unaudited)
Revenue 106.4 75.3 32.5
Gross margin(1) 46.4 31.8 7.8
Net earnings (loss) 19.4 13.8 (1.8)
Depreciation and
amortization 9.3 8.0 3.4
(Gain) loss on sale
of assets 0.2 0.1 -
Unit based compensation 0.6 0.5 2.0
Future income tax
expense (recovery) 5.5 1.7 (4.0)
Effective interest on
financing costs - - -
Unrealized foreign
exchange loss (gain) - - -
Other - - -
------------------------
Funds flow before
change in non-cash
working capital(1) 35.0 24.1 (0.4)
Earnings (loss) per
unit (diluted) 0.29 0.21 (0.03)
Funds flow before
change in non-cash
working capital per
unit (diluted)(1) 0.51 0.37 (0.01)
-------------------------------------------------
(1) Readers are cautioned that gross margin and funds flow before change
in non-cash working capital and per unit information do not have a
standardized meaning prescribed by GAAP; however, the Trust does
compute gross margin and funds flow before change in non-cash working
capital and the per unit information on a consistent basis for each
reporting period.
2007 2006
Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Operating Highlights
(Unaudited)
Operating days
- drilling
Canada 1,165 3,817 3,163 3,358 1,826 4,184
United States 2,944 2,464 2,105 1,891 1,603 1,447
Rate per drilling
day (CDN $)
Canada 23,527 26,063 26,328 23,083 23,927 23,579
United States 24,927 25,506 24,621 24,042 24,089 21,596
Utilization rate
- drilling
Canada 20% 69% 61% 64% 36% 86%
United States 88% 85% 85% 85% 82% 85%
CAODC industry average 17% 59% 47% 57% 34% 81%
Number of drilling rigs
Canada 64 63 60 59 57 56
United States 38 37 31 26 22 21
Utilization for service
rigs 23% 73% 64% 68% 31% 85%
Number of service rigs 21 20 18 18 17 17
Number of coring and
surface casing rigs 17 17 17 17 17 17
-------------------------------------------------------------------------
2005
Q4 Q3 Q2
-------------------------------------------------
Operating Highlights
(Unaudited)
Operating days
- drilling
Canada 3,795 3,487 1,472
United States 235 37 -
Rate per drilling
day (CDN $)
Canada 23,280 19,196 19,448
United States 19,245 20,122 -
Utilization rate
- drilling
Canada 78% 73% 31%
United States 83% 100% -
CAODC industry average 71% 63% 32%
Number of drilling rigs
Canada 54 52 52
United States 17 1 -
Utilization for service
rigs 67% 61% 41%
Number of service rigs 16 16 9
Number of coring and
surface casing rigs 17 18 18
-------------------------------------------------
RESULTS FROM OPERATIONS
Canadian Drilling Operations
(thousands except
percent data and Three months ended June 30, Six months ended June 30,
operating data % %
- Unaudited) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Revenue 31,250 49,885 (37.4) 166,335 180,017 (7.6)
Operating expense 27,665 32,899 (15.9) 98,071 96,410 1.7
------------------------------------------------------
Gross margin 3,585 16,986 (78.9) 68,264 83,607 (18.4)
------------------------------------------------------
Gross margin
percentage 11.5% 34.1% (66.3) 41.0% 46.4% (11.6)
Operating days
- drilling 1,165 1,826 (36.2) 4,981 6,010 (17.1)
Rate per drilling
day (CDN $) 23,527 23,927 (1.7) 25,470 23,685 7.5
Utilization rate
- drilling 20% 36% (44.4) 44% 60% (26.7)
CAODC industry
average 17% 34% (50.0) 38% 57% (33.3)
Number of drilling
rigs 64 57 12.3 64 57 12.3
Utilization rate
- well servicing 23% 31% (25.8) 47% 58% (19.0)
Number of service
rigs 21 17 23.5 21 17 23.5
Number of coring
and surface casing
rigs 17 17 - 17 17 -Throughout the second quarter of 2007 the Canadian drilling market was
impacted by the seasonal conditions typically present during the period as
road bans and wet weather conditions prohibited the movement of drilling rigs.
This reduced market activity was further intensified by curtailments in the
Canadian drilling market as demand for drilling services were cutback due to
weaker commodity prices and increased storage levels, reducing the demand for
natural gas. As industry fundamentals weakened, industry utilization rates
declined by 71.2% from the first quarter of 2007, reducing utilization to 17%
for the three months ended June 30, 2007 and 38% year-to-date. The Trust's
Canadian drilling operations were impacted by this downward trend; however,
its focus on the deeper drilling market and long-term contracts did shelter
operations from the full reduction experienced in the drilling market,
allowing Trinidad to continue to exceed industry utilization by 17.6% for the
quarter and 15.8% year-to-date. Growth in the Trust's drilling fleet from 57
rigs at June 30, 2006 to 64 rigs at June 30, 2007 provided an increased asset
base slightly offsetting the impact that the reduced utilization rates had on
operating days, however quarter-over-quarter and on a year-to-date basis these
reductions were still prevalent. The slower market conditions intensified
competition across the industry as drilling contractors competed for less
available work which triggered industry wide reductions in drilling day rates
in order to secure contracts with oil and gas producers. The reduced day rates
and declining activity levels adversely impacted revenue throughout the second
quarter causing a reduction of 37.4% quarter-over-quarter, from $49.9 million
in 2006 to $31.3 million in 2007, and on a year-to-date basis contributed to a
7.6% decline to $166.3 million.
Reduced day rates and increased labour costs year-over-year adversely
impacted the margins in the Trust's Canadian drilling operations.
Additionally, the reduced activity levels provided Trinidad with the
opportunity to complete much of the repair and recertification work required
on the drilling fleet, further increasing operating costs throughout the
quarter. As a result, despite a reduction in operating expenses of $5.2
million quarter-over-quarter from $32.9 million in 2006 to $27.7 million in
2007 and a slight increase of 1.7% year-to-date to $98.1 million, gross
margins declined as the reduction in revenue throughout the period was more
prevalent.United States Drilling Operations
(thousands except
percent and Three months ended June 30, Six months ended June 30,
operating data % %
- Unaudited) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Revenue 73,394 38,848 88.9 136,234 69,864 95.0
Operating expense 32,793 17,019 92.7 65,554 29,950 118.9
------------------------------------------------------
Gross margin 40,601 21,829 86.0 70,680 39,914 77.1
------------------------------------------------------
Gross margin
percentage 55.3% 56.2% (1.6) 51.9% 57.1% (9.1)
Operating days
- drilling 2,944 1,603 83.7 5,408 3,050 77.3
Rate per drilling
day (CDN $) 24,927 24,089 3.5 25,191 22,906 10.0
Utilization rate
- drilling 88% 82% 7.3 87% 83% 4.8
Number of drilling
rigs 38 22 72.7 38 22 72.7The drilling operations in the United States continued to add strength
and stability to the operations of the Trust throughout the period. The second
quarter was uninterrupted by the spring break-up present in Canada, providing
stability to the overall funds flow of the Trust and increasing revenue
quarter-over-quarter. The continued execution of the Trust's rig construction
program also resulted in the deployment of 16 drilling rigs since June 30,
2006, all backed by take-or-pay contracts producing significant growth in the
overall operations of the US segment. Consequently, over fifty percent of the
US drilling fleet is currently secured by take-or-pay contracts ensuring that
the US operations continue to strengthen the Trust's financial position.
Revenue quarter-over-quarter increased by 88.9% from $38.8 million in the
second quarter of 2006 to $73.4 million in 2007. The growth in revenue was a
result of higher utilization levels on a growing fleet which contributed to an
increased number of operating days at relatively consistent day rates in
comparison to the second quarter of 2006. Year-to-date revenue increased $66.4
million from $69.9 million in 2006 to $136.2 million in 2007 due to more rigs
committed under take-or-pay contracts operating year-over-year. Growth of the
US drilling operations has been instrumental in achieving stability of the
Trust's funds flow throughout the year and increasing the capability of the
Trust to meet the needs of oil and gas producers on a more comprehensive
basis.
Operating expenses grew as a result of the overall growth in revenue
throughout the quarter from $17.0 million in 2006 to $32.8 million in 2007;
however, overall margins declined from 56.2% to 55.3%. An increase in
year-to-date operating expenses also produced declining margins from 57.1% in
2006 to 51.9% in 2007. These declining margins resulted from additional rigs
being deployed throughout the year and the associated incremental costs
incurred to prepare them for the field as well as additional training costs
for the crews required once the rigs were fully operational. As the number of
new rigs being deployed declines and the rig construction program is
completed, margin levels should increase to levels comparable with 2006.Construction Operations
(thousands except Three months ended June 30, Six months ended June 30,
percent data % %
- Unaudited) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Revenue(1) 26,585 40,591 (34.5) 57,193 44,895 27.4
Operating
expense(1) 24,310 36,428 (33.3) 53,733 40,749 31.9
------------------------------------------------------
Gross margin 2,275 4,163 (45.4) 3,460 4,146 (16.5)
------------------------------------------------------
Gross margin
percentage 8.6% 10.3% (16.5) 6.0% 9.2% (34.8)
(1) Includes inter-segment revenue and operating expenses of $15.7
million and $24.8 million for the three months ended June 30, 2007
and 2006, respectively and $38.1 million and $27.3 million for the
six months ended June 30, 2007 and 2006, respectively.
On March 16, 2006 the Trust acquired Mastco Derrick Service to facilitate
the construction of the 10 rigs committed by the Canadian drilling operations
under the take-or-pay contracts, which enhanced control over the timing and
construction of these rigs. This allowed the Trust to ensure that customer
demands were being met and that the Canadian drilling operations were
fulfilling their obligations under the contract. Throughout 2006 and the first
half of 2007, Mastco concentrated its operations on completing this rig
construction program and supported the deployment of nine Canadian rigs, of
which four were released in 2007. Additionally, as the construction program
has neared completion much of Mastco's capacity has continued to be utilized
for the completion of inter-segment recertification and repair work. This
focus on supporting the Trust's drilling operations resulted in Mastco
recognizing inter-segment revenue and operating expenses of $38.1 million and
$27.3 million for the six months ended June 30, 2007 and 2006, respectively
and second quarter revenue and operating expenses of $15.7 million for 2007
and $24.8 million for 2006.
Furthermore, additional capacity in Mastco's operations has been used on
the completion of third party work identified both prior and subsequent to the
acquisition. Additional revenue on third party work of $19.1 million for the
six months ended June 30, 2007 generated margins of 18.1% in comparison to the
prior year of $17.6 million at a 23.6% margin. Reduction in margin levels was
a result of additional capacity becoming available due to slower activity
levels resulting in lower margins being obtained on third party work.
GENERAL AND ADMINISTRATIVE EXPENSE
(thousands except Three months ended June 30, Six months ended June 30,
percent data % %
- Unaudited) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
General and
administrative
expenses 13,623 14,752 (7.7) 26,978 26,228 2.9
% of revenue 11.8% 14.1% 8.4% 9.8%
General and administrative expenses increased by 2.9% on a year-to-date
basis; however, as a percentage of revenue, general and administrative
expenses improved over the comparable period in 2006. Changes in the
composition of the Trust's business through the acquisition of Mastco and
expansion of the US operations increased overhead expenses throughout the 2006
fiscal year. Towards the end of the prior year, as resource requirements
stabilized for the current operations, general and administrative expenses
levelled accordingly. As the decrease in quarter-over-quarter expenses shows,
the Trust is currently experiencing the benefits of internal changes that took
place in early 2006 and continues to focus on maintaining conservative
expenditure levels to ensure accretive growth for unitholders by creating
internal efficiencies, centralizing certain required functions and integrating
its management team.
INTEREST
Three months ended June 30, Six months ended June 30,
(thousands % %
- Unaudited) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Interest 9,535 5,025 89.8 18,110 7,352 146.3In April 2006, the Trust closed a new debt agreement which increased the
principal available from $250.0 million to a debt facility with total Canadian
dollar equivalent capacity of approximately $483.2 million. The debt facility
encompasses both US and Canadian term and revolving facilities which bear
interest at the LIBOR and Bankers Acceptance ("BA") rates, respectively, plus
a spread. Effective June 18, 2007, Trinidad amended its current Canadian
revolving credit facility to provide a temporary increase of $35.0 million,
increasing the principal available from $250.0 million to $285.0 million. The
overall facility has been utilized throughout the year to fund the execution
of the Trust's commitment to construct an additional 34 drilling rigs, of
which 30 had been released by the end of the second quarter of 2007.
Additionally, the Trust has funded approximately $50.6 million of the capital
requirements on the remaining four rigs expected to be released in the third
quarter of 2007, with $14.9 million of costs remaining until completion. Since
June 30, 2006, the completion of 11 rigs under the construction program and
three well servicing rigs has increased the Trust's long-term debt from $284.1
million at June 30, 2006 to $486.9 million at June 30, 2007 which subsequently
increased interest expense quarter-over-quarter. Furthermore, until April 2006
the Trust paid interest at a fixed borrowing rate, further reducing the
year-to-date interest expense for the prior year. With the inception of the
new debt facility Trinidad is obligated to pay interest at a floating BA or
LIBOR rate for both the Canadian and US facilities, respectively, increasing
the Trust's overall exposure to fluctuations in the floating rate.
Effective July 5, 2007, the Trust fully repaid the $35.0 million
temporary increase to the Canadian revolving facility, as well as a
significant portion of the remaining outstanding balance with a portion of the
proceeds from the issuance of $325.0 million convertible unsecured
subordinated debentures. The debentures have a face value of $1,000 per
Debenture, a coupon of 7.75%, a maturity date of July 31, 2012, and are
convertible at any time prior to maturity or the date fixed for redemption at
the option of the holder at a conversion price of $19.30, into trust units of
the Trust. Fixed interest rates on the convertible debentures will reduce the
Trusts' exposure to interest rate fluctuations and further enhance funds flow
stability.
In order to mitigate the risk of fluctuations in floating interest rates
Trinidad entered into an interest rate swap at the beginning of the third
quarter of 2006 on 50% of the outstanding Canadian and US term facilities. The
net settlement of the interest rate swaps increased interest expense for the
quarter and on a year-to-date basis by $0.2 million and $0.5 million,
respectively.
Furthermore, the Trust's adoption of CICA 3855 Financial Instruments -
Recognition and Measurement, requires the amortization of transaction costs
that were previously classified as amortization expense to be recorded as part
of interest expense under the effective interest method. The application of
this method resulted in a $0.3 million and $0.7 million increase in interest
expense for the three and six months ended June 30, 2007, respectively.UNIT BASED COMPENSATION
Three months ended June 30, Six months ended June 30,
(thousands % %
- Unaudited) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Unit based
compensation 671 730 (8.1) 1,446 4,583 (68.4)
The Trust has established a Trust Unit Rights Incentive Plan to assist
directors, officers, employees and consultants of the Trust and its affiliates
to participate in the growth and development of the Trust and uses the fair
value method to calculate compensation expense associated with rights granted
under the Plan. This compensation expense is recognized into earnings over the
vesting period of the rights granted with a corresponding increase in
contributed surplus. Unit based compensation for the six months ended June 30,
2007 decreased by $3.1 million from the comparable period in 2006 due to the
granting of 2.3 million options in the first quarter of 2006 in comparison
with 0.6 million options in 2007. Unit based compensation for the three months
ended June 30, 2007 remained consistent with the comparable prior quarter, as
no option grants took place in either the second quarter of 2006 or 2007.
FOREIGN EXCHANGE (GAIN) LOSS
Three months ended June 30, Six months ended June 30,
(thousands % %
- Unaudited) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Foreign exchange
loss 5,603 1,303 330.0 6,889 1,090 532.0
Foreign exchange loss increased significantly both quarter-over-quarter
and year-to-date primarily due to unrealized losses in the Canadian entity on
US denominated intercompany balances. These balances were minimal at the end
of the prior quarter; however, the balance at the end of June 30, 2007 was
significant primarily due to a large portion of the US rig construction
program being funded through the Canadian debt facility. This increased the
Trust's exposure to currency fluctuations from the comparative quarter in 2006
which, when coupled with the significant fluctuation in the Canadian/US
currency rates, created a significant loss in the current period.
DEPRECIATION AND AMORTIZATION
Three months ended June 30, Six months ended June 30,
(thousands % %
- Unaudited) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Depreciation 14,831 9,375 58.2 33,089 22,156 49.3
Amortization - 330 (100.0) - 655 (100.0)
Loss on sale of
assets 163 29 462.1 207 30 590.0
Depreciation increased 49.3% from $22.2 million to $33.1 million for the
six months ended June 30, 2006 and 2007, respectively and increased 58.2%
quarter-over-quarter. Changes in the composition of Trinidad's asset base
through the current rig construction program have resulted in the addition of
drilling rigs with increased drilling depth which has incrementally added to
the capital cost of the Trust's asset base. The US division is the primary
driver of the increase in depreciation expense since the capital base is
largely comprised of new rigs built under the rig construction program. Rates
per drilling day in the US division increased from $2,749 to $3,473 on a
year-to-date basis and from $2,805 to $3,433 quarter-over-quarter as a result
of 16 newly constructed US rigs since the end of the second quarter of 2006.
Higher per day depreciation rates and a 77.3% increase in US drilling days
from 3,050 as at June 30, 2006 to 5,408 at the end of June 30, 2007
substantially increased overall depreciation expense in the US division.
Depreciation expense in the Canadian division remained relatively stable with
an 18.4% year-to-date increase and 10.0% quarter-over-quarter increase in
depreciation rates offset by a reduction in drilling days of 17.1% and 36.2%
respectively.
Due to the adoption of CICA 3855, transaction costs that were previously
classified as amortization expense are now recorded as part of interest
expense under the effective interest method. The application of this method
resulted in a $0.3 million and $0.7 million decrease in amortization for the
three and six months ended June 30, 2007, respectively.
INCOME TAXES
Three months ended June 30, Six months ended June 30,
(thousands % %
- Unaudited) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Current tax expense
(recovery) 511 (698) 173.2 1,984 (425) 566.8
Future tax expense
(recovery) (3,117) (8,680) 64.1 7,117 5,202 36.8Effective June 12, 2007, the Canadian government substantively enacted
Bill C-52 which enacts among other measures, the October 31, 2006 proposals to
impose a new "Distribution Tax" of 13% on distributions of publicly traded
income trusts and limited partnerships (specified investment flow-through
entities, or "SIFTs") plus the "provincial SIFT tax factor" of 13% and reduces
the general corporate tax rate to 18.5% starting in 2011. Under Canadian GAAP,
the SIFT legislation, now substantively enacted will trigger the recognition
of future income tax assets and liabilities based on temporary differences
expected to reverse after the date that the changes take effect. The Trust
assessed the impact of the SIFT legislation and did not note any additional
temporary differences that will reverse on or after 2011, hence there was no
impact for the current quarter.
Year-to-date future income tax expense increased by 36.8% primarily due
to exceptional earnings in the US division, offset by recoveries in the
Canadian divisions. The Canadian drilling operations experienced a weaker
second quarter in 2007 due to industry fundamentals and seasonality; hence, a
future income tax recovery was recorded in the Canadian operations. Bill C-52
also contributed to the recovery, due to a slight reduction in the effective
tax rate in accordance with the substantively enacted general rate reduction
to 18.5% for 2011 and beyond. Furthermore, the construction segment recognized
a future income tax recovery in the current period which was higher than that
of the comparable period due to the additional four months of incremental
earnings. In the current quarter, the Trust recognized a future income tax
recovery of $3.1 million representing a 64.1% decrease from the recovery in
the comparable quarter of 2006. The current quarter recovery was less than
that of 2006 due to substantial decreases in the federal and provincial tax
rates that were enacted in the second quarter of 2006.
On May 19, 2006, the Texas government implemented a significant change to
Texas tax for all corporations. As a result, corporations including limited
liability partnerships, which previously had limited exposure to Texas
franchise tax, are now, effective January 1, 2007, subject to "Margins Tax".
This new law results in the application of a 1% tax rate to the taxable margin
of the US operations which resulted in the Trust recording $0.7 million to
current income tax expense for the six month period ended June 30, 2007. In
addition, current income tax expense increased due to current federal and
provincial tax of $1.3 million on the earnings of the pre-set and coring
operations of the Trust due to taxable earnings surpassing the available
cumulative cost allowance claim resulting in current tax expense in the
current quarter.NET EARNINGS AND FUNDS FLOW
(thousands except Three months ended June 30, Six months ended June 30,
per unit data % %
- Unaudited) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Net earnings 4,641 20,812 (77.7) 46,584 60,796 (23.4)
Per unit (diluted) 0.05 0.24 (79.2) 0.55 0.72 (23.6)
Funds flow from
operations 23,353 22,509 3.7 93,163 93,251 (0.1)
Per unit (diluted) 0.27 0.26 3.8 1.09 1.11 (1.8)Net earnings experienced an overall decline of 77.7% quarter-over-quarter
and 23.4% year-to-date. Year-to-date and quarterly earnings have been mainly
influenced by the volatile Canadian drilling market. While overall revenues
increased by 20.7% net earnings did not follow suit due to higher costs to
operate in the Canadian industry and lower day rates which significantly
reduced operating margins from June 30, 2006. Furthermore, the Trust took
advantage of downtime in the current quarter to complete regular
recertification and repairs and maintenance work on the Canadian rigs. This
was offset by the pre-set and coring division which contributed positively to
net earnings through higher revenue rates at stable operating costs. The US
operations continued to stabilize net earnings by contributing largely to the
increase in revenues and maintaining stable gross margins.
Higher gross margins on both a quarterly and year-to-date basis has been
offset by an increase in interest expense due to higher borrowings on the
Trust's debt facility used to fund the rig construction program. With the
addition of these new rigs, the capital cost of the Trust's asset base has
also increased resulting in higher per day depreciation rates and increased
overall depreciation expense. Furthermore, fluctuations in the Canadian dollar
since 2006 and the higher balance of US dollar denominated intercompany
balances resulted in the Trust recognizing a significant unrealized foreign
exchange loss in the second quarter of 2007. Higher future income tax expense
associated with exceptional earnings in the US division contributed to the
decline in earnings both on a year-to-date and quarterly basis.
Funds flow from operations before change in non-cash working capital
remained relatively stable at $93.2 million year-to-date and increased
slightly on a quarterly basis by $0.8 million. Stability was achieved through
the strong results in the US operations where higher revenues in the US
segment offset lower margins in the Canadian segment and increased interest
expense on long-term debt. The Trust continues to follow an investment
strategy designed to ensure accretive growth for unitholders, including the
expansion into the US market as well as diversification of the Trust's asset
base which enabled the Trust to maintain funds flow for the period despite the
reduced market condition in the Canadian market.-------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES June 30, December 31,
(thousands except percent data - Unaudited) 2007 2006
-------------------------------------------------------------------------
Working capital 62,786 58,246
Current portion of long-term debt 1,446 3,232
Long-term debt 485,430 388,276
--------------------------
Total debt 486,876 391,508
--------------------------
Total debt as a percentage of assets 37.8% 31.4%
Net debt(1) 422,644 330,030
Net debt as a percentage of assets(1) 32.8% 26.5%
Total assets 1,288,655 1,245,633
Total long-term liabilities 540,758 434,065
Total long-term liabilities as a percentage
of assets 42.0% 34.8%
Unitholders' equity 662,203 698,092
Total debt to unitholders' equity 73.5% 56.1%
Net debt to unitholders' equity(1) 63.8% 47.3%
-------------------------------------------------------------------------
(1) Readers are cautioned that net debt does not have a standardized
meaning prescribed by GAAP and therefore may not be comparable to
similar measures presented by other issuers; however, the Trust does
compute net debt on a consistent basis for each reporting period. Net
debt refers to the Trust's long-term debt less its working capital
position and is indicative of the Trust's overall indebtedness.On January 16, 2007, the Trust announced an additional five rigs to be
constructed under the customer backed rig construction program which
significantly increased the Trust's committed capital in 2007. Furthermore, as
these additional five rigs were not anticipated under the original debt
facility negotiated in early 2006 Trinidad reached the limit of the facility
in the second quarter of 2007. With the convertible debenture offering
expected to close early in the third quarter, providing the Trust additional
incremental capital, Trinidad amended its current Canadian Revolving Credit
Facility (the "Revolver") to provide a temporary increase of $35.0 million,
effective June 18, 2007. This temporary increase improved the Trust's ability
to continue its expansion into the US market and increased the principal
available from $250.0 million to $285.0 million. With this incremental
borrowing capacity and internally generated funds flow Trinidad funded $152.3
million of capital expenditures for the six months ended June 30, 2007 of
which $46.9 million was spent in the current quarter. These capital
expenditures, primarily as a result of the rig construction program, increased
long-term debt by $95.4 million from December 31, 2006 and by $13.7 million in
the current quarter. As the rig construction program nears completion with the
deployment of four Canadian drilling rigs, seven US drilling rigs and three
well servicing rigs during the six months ended June 30, 2007 the Trust's
capital requirements should decline moving forward. The remaining four US
drilling rigs are expected to cost $65.5 million to fully complete and deploy
in the third quarter of 2007 of which $50.6 million was spent as at June 30,
2007.
Subsequent to June 30, 2007, the Trust utilized $188.0 million of the
proceeds from the issuance of the $325.0 million convertible unsecured
subordinated debentures issued on July 5, 2007 to pay the outstanding balance
of the $35.0 million temporary increase to the Canadian revolving facility, as
well as a significant portion of the original Revolver. The debentures have a
face value of $1,000 each, a coupon of 7.75%, a maturity date of July 31,
2012, and are convertible at any time prior to maturity or the date fixed for
redemption at the option of the holder at a conversion price of $19.30, into
trust units of the Trust. The fixed interest rate secured on the convertible
debentures will enhance cash flow stability and unitholder value. In order to
mitigate exposure to foreign currency rate fluctuations on the acquisition of
Axxis the Trust entered into a forward contract to purchase US currency on
June 29, 2007. As this contract was entered into on the last business day of
the quarter the fair value of the hedge was nil and no gain or loss was
recorded for the quarter.
Due to the adoption of CICA 3855, Financial Instruments - Recognition and
Measurement, the increase in long-term debt was slightly offset by the
reclassification of deferred financing costs to long-term debt. This resulted
in the balance of long-term debt being offset by $4.6 million of deferred
financing costs.
Working capital increased by 7.8% from $58.2 million at year-end to $62.8
million as at June 30, 2007. Accounts receivable and accounts payable
decreased by 21.7% and 26.7%, respectively from December 31, 2006 as a result
of a slower Canadian market reducing revenues and operating expenses. Cash and
cash equivalents increased from $9.4 million to $17.1 million due to advances
made on the current debt facility to fund the cash requirements of the current
rig build program. Excess cash on hand throughout the quarter was invested in
short-term money markets to minimize the cost of borrowing. Inventory also
increased by $2.4 million due to spare equipment and parts purchased to
facilitate construction and recertification programs. The current future
income tax liability decreased by $3.5 million as current future income tax
assets rose in the current quarter due to weaker earnings.
Unitholders' equity decreased $35.9 million from year-end primarily due
to an increasingly favourable Canadian dollar creating a significant
cumulative translation adjustment as at June 30, 2007. This factor was
slightly offset by $1.7 million pertaining to the fair value of the Trust's
interest rate swap hedge resulting in an overall decrease of $28.6 million in
accumulated other comprehensive income. The Trust also distributed $57.6
million in distributions for the six months ended June 30, 2007, which was
offset by $46.6 million in earnings and an increase in unitholders' capital
due to the exercise of employee rights under the Trust Unit Rights Incentive
Plan.-------------------------------------------------------------------------
UNITHOLDERS' CAPITAL June 30, December 31,
(thousands - Unaudited) 2007 2006
-------------------------------------------------------------------------
Unitholders' capital 675,487 669,584
Exchangeable shares 2,477 5,777
-------------------------------------------------------------------------
Unitholders' capital increased from the 2006 year-end by $5.9 million,
with the conversion of 311,367 Series C exchangeable shares ($3.3 million) to
356,404 trust units and the exercise of 253,229 rights ($2.3 million) into
trust units. Unitholders' capital on August 2, 2007 was $675.6 million
(83,597,955 units).
-------------------------------------------------------------------------
DISTRIBUTIONS Three months ended Six months ended
(thousands except June 30, June 30,
unit and per
unit data
- Unaudited) 2007 2006 2007 2006
-------------------------------------------------------------------------
Cash flow from
operating
activities 28,549 51,287 74,062 117,528
Net change in non-
cash operating
working capital 5,196 28,778 (22,101) 24,277
------------------------------------------------------
Funds flow before
change in non-cash
working capital 23,353 22,509 96,163 100% 93,251 100%
Distributions paid
& declared (28,836) (26,836) (57,573) 60% (48,206) 52%
------------------------------------------------------
Funds retained for
growth, debt
reduction & future
distribution (5,483) (4,327) 38,590 40% 45,045 48%
Funds flow before
change in non-cash
working capital
per unit
(basic)(1) 0.28 0.27 1.15 1.13
Distributions paid
& declared per
unit (0.34) (0.32) (0.69) (0.59)
------------------------------------------------------
Funds retained per
unit (0.06) (0.05) 0.46 0.54
Quarter ending
annualized
distribution per
unit 1.38 1.38 1.38 1.38
-------------------------------------------------------------------------
(1) Includes trust units to be issued upon conversion of exchangeable
shares.During the three and six months ended June 30, 2007, Trinidad distributed
$28.8 million and $57.6 million, respectively to unitholders. Distributions
per unit have remained stable from the comparative periods; however, increases
in the number of units outstanding have resulted in an increase in
distributions paid and declared by $2.0 million and $9.4 million for the three
and six months ended June 30, 2007. Despite distribution reductions across the
sector, the Trust has sustained annualized distributions per unit at $1.38
throughout the current period and maintained a conservative payout ratio of
60% for the six months ended June 30, 2007. The Trust has maintained stable
funds flow through its significant presence in the US which has been
uninterrupted by seasonality or fluctuations in commodity prices. Low industry
fundamentals in conjunction with spring break-up have resulted in an 8%
increase in the payout ratio in comparison to the six months ended June 30,
2006; however, this will improve as the Canadian segment enters a stronger
third and fourth quarter and the US segment capitalizes on additional rig
deployments. The Trust manages its distributions based on a payout ratio goal
of up to 75%, and the remainder is retained for future growth opportunities,
debt repayment, or incremental distributions to unitholders.
SEASONALITY
The Trust operates the majority of its fleet in Western Canada and
therefore operations are heavily dependent upon the seasons. The winter
season, which incorporates the first quarter, is a busy period as oil and gas
companies take advantage of frozen conditions to move drilling rigs into
regions which might otherwise be inaccessible to heavy equipment due to swampy
conditions. The second quarter normally encompasses a slow period referred to
as spring break-up. During this period melting conditions result in temporary
municipal road bans that effectively prohibit the movement of drilling rigs.
The third and fourth quarters are usually representative of average activity
levels.
The Trust's expansion to the US market has reduced its overall exposure
to the seasonal factors that are present in its Canadian operations. These
seasonal conditions typically limit Canadian drilling activity, whereas in the
United States operators can work throughout the year. This increased number of
operating days throughout the year will allow the Trust to better manage its
business with more sustainable funds flow throughout the annual cycle.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the consolidated financial statements requires that
certain estimates and judgements be made with regard to the reported amount of
revenues and expenses and the carrying values of assets and liabilities. These
estimates are based on historical experience and management judgement.
Anticipating future events involves uncertainty and consequently the estimates
used by management in the preparation of the consolidated financial statements
may change as future events unfold, additional experience is acquired or the
Trust's operating environment changes.
Depreciation
The accounting estimate that has the greatest impact on the Trust's
financial results is depreciation. Depreciation of the Trust's property and
equipment incorporates estimates of useful lives and residual values. These
estimates may change as more experience is obtained or as general market
conditions change, impacting the operation of the Trust's capital assets.
Unit based compensation
Compensation expense associated with rights at grant date are estimates
based on various assumptions such as volatility, annual distribution yield,
risk free interest rate and expected life using the Black-Scholes methodology
to produce an estimate of the fair value of such compensation.
Allowance for doubtful accounts receivable
The Trust performs credit evaluations of its customers and grants credit
based on past payment history, financial conditions and anticipated industry
conditions. Customer payments are regularly monitored and a provision for
doubtful accounts is established based on specific situations and overall
industry conditions. The Trust's history of bad debt losses has been minimal
and generally limited to specific customer circumstances; however, given the
cyclical nature of the oil and gas industry, the credit risks can change
suddenly and without notice.
Goodwill
In accordance with Canadian Generally Accepted Accounting Principles, the
Trust performs an annual goodwill impairment test each fiscal year. This test
was performed based on current industry factors and no goodwill impairment
exists.
Fair value of interest rate swaps
The fair value of the interest rate swaps are estimated based on future
projected interest rates and adjusted on a quarterly basis for monthly
settlements and changes in projections. The Trust receives the valuation from
the contract counterparty on a quarterly basis and records the associated
change in fair value at each reporting period.
CHANGES IN ACCOUNTING POLICY
Effective January 1, 2007, the Trust adopted the following new accounting
standards issued by the Canadian Institute of Chartered Accountants ("CICA"),
as described further in note 1 of the Notes to the Consolidated Financial
Statements.
Section 1530, Comprehensive Income
Section 1530 introduces a new Statement of Comprehensive Income, which
reflects changes in the fair value of financial instruments designated as cash
flow hedges, to the extent that they are effective, and changes in the foreign
currency translation of self-sustaining subsidiaries of the Trust. These
cumulative changes are reflected in equity as part of accumulated other
comprehensive income and the Trust's Consolidated Financial Statements now
include a Consolidated Statement of Comprehensive Income and Consolidated
Statement of Accumulated Other Comprehensive Income ("AOCI").
Previously, the accumulated gains and losses arising from translation of
$0.8 million were deferred and included in the foreign currency translation
adjustment as part of unitholders' equity. In accordance with the transitional
provisions, this prior year balance was reclassified into AOCI. In addition,
the foreign currency translation adjustment for the three and six months ended
June 30, 2007 of $23.9 million and $26.7 million, respectively, has been
recognized into OCI.
Section 3855, Financial Instruments - Recognition and Measurement
Section 3855 establishes standards for recognizing and measuring
financial instruments, including financial assets, financial liabilities and
derivatives. All financial instruments are required to be measured at fair
value upon initial recognition of the transaction and measurement in
subsequent periods is dependant on whether the instrument is classified as
"held-for-trading", "available-for-sale", or "held-to-maturity" based on the
standard. Financial instruments classified as "held-for-trading" are
subsequently re-valued to fair market value with changes in the fair value
being recognized into earnings; financial instruments classified as
"available-for-sale" are subsequently re-valued to fair market value with
changes in the fair value being recognized to OCI and financial instruments
designated as "held-to-maturity" are valued at amortized cost using the
effective interest method of amortization.
Upon initial adoption of the financial instrument standard, long-term
debt is recognized at fair value net of transaction costs directly
attributable to the issuance of the debt. Accordingly, at January 1, 2007,
previously deferred costs of $5.7 million that were separately presented as a
component of other assets on the Consolidated Balance Sheet and amortized into
income using the straight-line method over the life of the debt were
reclassified to long-term debt. The cost capitalized as a portion of long-term
debt will be amortized using the effective interest method. The change in
amortization methodology was immaterial for adjustment to opening retained
earnings and the reclassification of transactions costs resulted in a net
decrease in other assets and long-term debt by $4.9 million.
Section 3865, Hedges
Section 3865 establishes how hedge accounting may be applied. For cash
flow hedges the fair value of the hedged instrument is recognized on the
balance sheet and changes in the fair value, to the extent that the hedge is
effective, are recognized into OCI and any ineffectiveness is recognized into
income in the period. In accordance with transitional provisions, the
cumulative prior period effect of $5.6 million has been recognized into OCI
without restatement of prior period amounts, net of $1.9 million to reflect
the future income tax asset that would have arisen in the prior year in
accordance with the new standards.
There are no other material impacts on the Consolidated Financial
Statements for the adoption of these new standards.
DISCLOSURE CONTROLS & PROCEDURES
Disclosure controls and procedures are designed to provide reasonable
assurance that all information required to be disclosed by the Trust is
recorded, processed, summarized and reported to senior management, including
the CEO and CFO, in an appropriate manner to allow timely decisions regarding
required disclosure as defined under Multilateral Instrument 52-109,
Certification of Disclosures in Annual and Interim Filings.
The Trust has evaluated the effectiveness of the design and operation of
disclosure controls and procedures, under the supervision of the CEO and the
CFO. Internal controls over financial reporting are designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
Canadian GAAP.
The Trust is currently completing an assessment of the business process
controls of Mastco, which was acquired on March 16, 2006, and has not
concluded on the design effectiveness as at June 30, 2007. As a result, the
Trust has relied on management review to assess the accuracy of the financial
statements at the reporting date.
OUTLOOK
The Trust has effectively minimized the impact of the currently lower
activity levels in the Canadian market through strategic activity in the US
marketplace. Prior acquisitions of US drillings rigs in conjunction with the
deployment of 18 US based rigs under the rig construction program has resulted
in exceptional results with utilization rates ranging from 82% to 100% since
the deployment of the first US based rig in 2005. Activity in this market is
expected to remain stable as the US drilling industry is not affected by
seasonal conditions and has been less impacted by fluctuations in commodity
prices. All rigs deployed in the US under the rig construction program are
secured by long-term take-or-pay contracts, further reinforcing the Trust's
strong market position. Future cash flows will be further enhanced with the
deployment of four remaining US drilling rigs in the third quarter of 2007.
Effective July 5, 2007, the Trust closed the acquisition of the assets
from certain US based corporations, collectively defined as "Axxis". The
assets acquired include four land based drilling rigs and one barge drilling
rig, together with related inventory, crew boats and spare parts. Trinidad
will also assume the remaining construction commitments of a second barge
drilling rig currently under construction and will also operate an additional
three barge rigs under Bare-Boat Charter agreements. All barge and drilling
rigs acquired are secured under long-term contracts with strong day rates.
This acquisition has added a fleet of recently built high quality assets, an
experienced management team and an opportunity to further diversify the
services of the Trust into a lucrative niche market. Unlike jack-up rigs that
operate in the deeper waters of the Gulf of Mexico, the barge rigs acquired
from Axxis are tailored to shallower waters which is more cost effective for
the operators and less impacted by the poor weather conditions experienced in
the Gulf of Mexico in recent years. The barge drilling market is an expanding
niche market with opportunities for growth both in the United States and other
international regions. The combination of Trinidad's technology construction
expertise and the experienced management of Axxis will allow this division to
grow and add value for investors.
With the current rig construction program nearing completion, the Trust's
rig fleet is equipped with modern, high quality, deeper drilling rigs. In
conjunction with competitive day rates and high quality equipment, the Trust
has managed to secure long-term take-or-pay contracts on all of the rigs
committed under the construction program. The outlook for the Canadian
industry is expected to recover with improving fundamentals in the latter half
of 2007. While the CAODC is projecting 16,339 well completions in 2007,
representing a significant decline from 2006, the majority of the anticipated
decline is focused on shallow gas and coal bed methane. Approximately 80% of
Trinidad's drilling rigs, including the current rig construction program, are
tailored to the medium and deeper drilling market with depths in excess of
2,000 metres. These factors have allowed the Trust to successfully mitigate
decreasing industry fundamentals resulting in utilization levels that surpass
the Canadian industry average by 17.6%. The Trust has also mitigated pricing
uncertainty by securing fixed day rates within the take-or-pay contracts.
We are focused on continuing to add to our distribution capabilities by
accretively growing our business and focusing on being the market leader. All
future capital investments will continue to be evaluated based on return on
capital with a focus on low risk operating environments.
Trinidad Energy Services Income Trust is a growth-oriented oil and
natural gas services provider based in Calgary, Alberta. Focusing on deeper
drilling, modern rig fleets, in-house design and technology-based advancement,
Trinidad has positioned itself as a premium service provider. Trinidad's
growth is driven by chasing and capturing new horizons - advancing
technologies, offering new services, entering new markets and performing
strategic acquisitions. With the completion of the current rig construction
programs and the acquisition of Axxis, the Trust will have 110 drilling rigs
ranging in depths from 1,000 - 6,500 metres and two barge drilling rigs. In
addition to its drilling rigs, Trinidad has 20 service rigs that have been
completely retrofitted or are new within the past five years and 20 pre-set
and coring rigs. Trinidad is focused on providing modern, reliable, expertly
designed equipment operated by well-trained and experienced personnel.
Trinidad's drilling fleet is one of the most adaptable and competitive in the
industry."signed" Michael E. Heier "signed" Brent J. Conway
----------------------------- -----------------------------
Chairman of the Board Chief Financial Officer
Chief Executive Officer
The Toronto Stock Exchange has neither approved nor disapproved the
information contained herein.
-------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(thousands - Unaudited)
June 30, December 31,
2007 2006
-------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 17,104 9,413
Accounts receivable 118,952 151,990
Inventory 9,829 7,451
Prepaid expenses 2,595 2,868
--------------------------
148,480 171,722
Deposit on capital assets 4,264 42,172
Capital assets 1,014,418 903,111
Goodwill 121,215 123,483
Other long-term assets 278 5,145
--------------------------
1,288,655 1,245,633
--------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 64,540 88,083
Accrued trust distributions 9,613 9,543
Current portion of deferred revenue 9,269 9,090
Current portion of long-term debt 1,446 3,232
Current portion of fair value of interest
rate swap (note 1 and 7) 826 -
Future income taxes - 3,528
--------------------------
85,694 113,476
Deferred revenue 7,181 7,070
Long-term debt (note 1, 7 and 8) 485,430 388,276
Fair value of interest rate swaps
(note 1 and 7) 1,871 -
Future income taxes 46,276 38,719
--------------------------
626,452 547,541
Unitholders' equity
Unitholders' capital (note 4) 675,487 669,584
Exchangeable shares (note 5) 2,477 5,777
Contributed surplus (note 4) 12,867 11,722
Accumulated other comprehensive income
(note 1) (29,398) (750)
Accumulated trust distributions (247,557) (189,984)
Accumulated earnings 248,327 201,743
--------------------------
662,203 698,092
--------------------------
1,288,655 1,245,633
--------------------------
(See Notes to the Consolidated Financial Statements)
Commitments (note 9)
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED EARNINGS
(thousands except unit and per unit data - Unaudited)
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Revenue
Oilfield services 115,215 103,238 321,148 266,117
Other 279 1,309 557 1,367
-----------------------------------------------
115,494 104,547 321,705 267,484
-----------------------------------------------
Expenses
Operating 69,033 61,569 179,301 139,817
General and administrative 13,623 14,752 26,978 26,228
Interest 9,535 5,025 18,110 7,352
Unit based compensation 671 730 1,446 4,583
Foreign exchange loss 5,603 1,303 6,889 1,090
Depreciation and
amortization 14,831 9,705 33,089 22,811
Loss on sale of assets 163 29 207 30
-----------------------------------------------
113,459 93,113 266,020 201,911
-----------------------------------------------
Earnings before income
taxes 2,035 11,434 55,685 65,573
Income taxes
Current tax expense
(recovery) 511 (698) 1,984 (425)
Future tax expense
(recovery) (3,117) (8,680) 7,117 5,202
-----------------------------------------------
(2,606) (9,378) 9,101 4,777
-----------------------------------------------
Net earnings 4,641 20,812 46,584 60,796
Accumulated earnings -
beginning of period 243,686 118,400 201,743 78,416
-----------------------------------------------
Accumulated earnings -
end of period 248,327 139,212 248,327 139,212
-----------------------------------------------
Earnings per unit
Basic 0.06 0.25 0.56 0.74
Diluted 0.05 0.24 0.55 0.72
Weighted average number
of trust units
Basic 83,947,198 84,236,661 83,872,182 82,403,159
Diluted 85,711,891 86,167,652 85,294,628 84,358,949
(See Notes to the Consolidated Financial Statements)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(thousands - Unaudited)
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Net earnings 4,641 20,812 46,584 60,796
Other comprehensive income
Change in fair value of
derivatives designated
as cash flow hedges,
net of income tax 1,678 - 1,738 -
Foreign currency
translation adjustment (23,948) (12,020) (26,686) (12,996)
-----------------------------------------------
Total other comprehensive
income (loss) (22,270) (12,020) (24,948) (12,996)
Comprehensive income
(loss) (17,629) 8,792 21,636 47,800
-------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE INCOME
(thousands - Unaudited)
June 30, June 30,
2007 2006
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
- beginning of year (750) -
Adjust opening balance due to adoption of new
accounting policies (3,700) -
Other comprehensive income (loss) during the
period (24,948) (12,996)
--------------------------
Accumulated other comprehensive income (loss)
- end of period (29,398) (12,996)
--------------------------
(See Notes to the Consolidated Financial Statements)
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands - Unaudited)
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Cash provided by (used in)
Operating activities
Net earnings for the period 4,641 20,812 46,584 60,796
Items not affecting cash
Depreciation and
amortization 14,831 9,705 33,089 22,811
Loss on sale of assets 163 29 207 30
Unit based compensation 671 730 1,446 4,583
Future income taxes
(recovery) (3,117) (8,680) 7,117 5,202
Effective interest on
financing costs (note 7) 403 - 752 -
Unrealized foreign
exchange loss (gain) 5,761 (87) 6,968 (171)
-----------------------------------------------
Funds flow from operations
before change in non-cash
working capital 23,353 22,509 96,163 93,251
Net change in non-cash
operating working capital 5,196 28,778 (22,101) 24,277
-----------------------------------------------
28,549 51,287 74,062 117,528
-----------------------------------------------
Investing activities
(Increase) decrease in
deposits on capital assets 8,794 (20,098) 36,964 (28,013)
Acquisition of Mastco
Derrick Service Ltd.
(note 3) - (1,160) - (38,240)
Purchase of capital
assets (55,701) (80,995) (189,255) (134,528)
Proceeds from dispositions 286 611 489 1,006
Change in non-cash working
capital item - accounts
payable and accrued
liabilities 26,397 10,182 31,294 (1,293)
-----------------------------------------------
(20,224) (91,460) (120,508) (201,068)
-----------------------------------------------
Financing activities
Decrease in line of credit - (25,000) - -
Increase in long-term debt
- net 26,229 153,660 112,295 178,666
Net proceeds from unit
issues (note 4) 1,109 3,928 2,302 6,197
Increase (decrease) in
deferred revenue (3,216) - 1,501 -
Trust unit distribution (28,836) (26,836) (57,573) (48,206)
Debt financing costs (600) (5,032) (600) (5,093)
Change in non-cash
working capital item
- accrued distributions 21 1,750 70 2,817
-----------------------------------------------
(5,293) 102,470 57,995 134,381
-----------------------------------------------
Cash flow from operating,
investing and financing
activities 3,032 62,297 11,549 50,841
Effect of translation on
foreign currency cash (2,735) (772) (3,858) (720)
-----------------------------------------------
Increase in cash for the
period 297 61,525 7,691 50,121
Cash - beginning of period 16,807 345 9,413 11,749
-----------------------------------------------
Cash - end of period 17,104 61,870 17,104 61,870
-----------------------------------------------
Interest paid 9,192 3,764 16,918 5,873
Taxes paid 61 1,028 147 2,629
(See Notes to the Consolidated Financial Statements)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ACCOUNTING POLICIES AND ESTIMATES
These consolidated interim financial statements are prepared by
management, in accordance with Canadian Generally Accepted Accounting
Principles, and follow the same accounting policies and methods as
the audited consolidated financial statements for the year ended
December 31, 2006, except as noted below, and therefore do not
contain all of the disclosures required for the annual financial
statements. As a result, the unaudited consolidated interim financial
statements should be read in conjunction with the consolidated
financial statements contained in the annual report for the year
ended December 31, 2006.
Financial Instruments and Hedge Accounting
Effective January 1, 2007, the Trust adopted the following new
accounting standards issued by the Canadian Institute of Chartered
Accountants (CICA):
Section 1530, Comprehensive Income, introduces a new Statement of
Comprehensive Income, which reflects changes in the fair value of
financial instruments designated as cash flow hedges, to the
extent that they are effective, and changes in the foreign
currency translation of self-sustaining subsidiaries of the Trust.
These cumulative changes are reflected in equity as part of
accumulated other comprehensive income and the Trust's
Consolidated Financial Statements now include a Consolidated
Statement of Comprehensive Income and Consolidated Statement of
Accumulated Other Comprehensive Income ("AOCI").
Section 3855, Financial Instruments - Recognition and Measurement,
establishes standards for recognizing and measuring financial
instruments, including financial assets, financial liabilities and
derivatives. All financial instruments are required to be measured
at fair value upon initial recognition of the transaction and
measurement in subsequent periods is dependant on whether the
instrument is classified as "held-for-trading", "available-for-
sale", or "held-to-maturity" based on the standard.
Financial instruments classified as "held-for-trading" are
subsequently re-valued to fair market value with changes in the
fair value being recognized into earnings; financial instruments
classified as "available-for-sale" are subsequently re-valued to
fair market value with changes in the fair value being recognized
to other comprehensive income ("OCI") and financial instruments
designated as "held-to-maturity" are valued at amortized cost
using the effective interest method of amortization.
Section 3865, Hedges, establishes how hedge accounting may be
applied. For cash flow hedges any change in the fair value of a
financial instrument designated as a cash flow hedge is recognized
into income in the same period as the hedged item. Any fair value
change in the financial instrument is recognized on the balance
sheet and changes in the fair value, to the extent that the hedge
is effective, are recognized into OCI and any ineffectiveness is
recognized into income in the period.
Translation of self-sustaining foreign operations
As a result of adopting CICA Section 1530, a new Consolidated
Statement of Comprehensive Income forms part of the Trust's
consolidated financial statements. Gains and losses resulting from
the translation of the assets and liabilities of the Trust's self-
sustaining foreign operations into Canadian dollars are included in
the Consolidated Statement of Comprehensive Income as a separate
component of OCI. Previously, the accumulated gains and losses
arising from translation of $0.8 million were deferred and included
in the foreign currency translation adjustment as part of
unitholders' equity. In accordance with the transitional provisions,
this prior year balance was reclassified into AOCI. In addition, the
foreign currency translation adjustment for the three and six months
ended June 30, 2007 of $23.9 million and $26.7 million, respectively,
has been recognized into OCI.
Cash flow hedge
The application of hedge accounting to the Trust's interest rate
swaps and forward foreign exchange contract has resulted in the
designation of cash flow hedges whereby gains and losses resulting
from changes in the fair value of the hedge are included in the
Consolidated Statement of Comprehensive Income, to the extent that
the hedge is effective. In accordance with transitional provisions,
the cumulative prior period effect of $5.6 million pertaining to the
interest rate swaps has been recognized into OCI without restatement
of prior period amounts, net of $1.9 million to reflect the future
income tax asset that would have arisen in the prior year in
accordance with the new standards. The forward foreign exchange
contract was entered into in the current quarter; hence, there is no
impact on prior year figures.
Long-term debt
Upon initial adoption of the financial instrument standard, long-term
debt is recognized at fair value net of transaction costs directly
attributable to the issuance of the debt. Accordingly, at January 1,
2007, previously deferred costs of $5.7 million that were separately
presented as a component of other assets on the Consolidated Balance
Sheet and amortized into income using the straight-line method over
the life of the debt were reclassified to long-term debt. The cost
capitalized as a portion of long-term debt will be amortized using
the effective interest method. The change in amortization methodology
was immaterial for restatement and the reclassification of
transaction costs resulted in a net decrease in other assets and
long-term debt by $4.9 million.
There are no other material impacts on the Consolidated Financial
Statements for the adoption of these new standards.
2. SEASONALITY
The Trust operates the majority of its fleet in Western Canada and
therefore operations are heavily dependent upon the seasons. The
winter season, which incorporates the first quarter, is a busy period
as oil and gas companies take advantage of frozen conditions to move
drilling rigs into regions which might otherwise be inaccessible to
heavy equipment due to swampy conditions. The second quarter normally
encompasses a slow period referred to as spring break-up. During this
period melting conditions result in temporary municipal road bans
that effectively prohibit the movement of drilling rigs. The third
and fourth quarters are usually representative of average activity
levels.
The Trust's expansion to the US market has reduced its overall
exposure to the seasonal factors that are present in its Canadian
operations. These seasonal conditions typically limit Canadian
drilling activity, whereas in the United States operators can work
throughout the year. This increased number of operating days
throughout the year will allow the Trust to better manage its
business with more sustainable cash flows throughout the annual
cycle.
3. ACQUISITION
Amalgamation of Mastco Derrick Service Ltd.
Effective March 16, 2006, the Trust amalgamated one of its wholly-
owned subsidiaries with Mastco Derrick Service Ltd. ("Mastco") for
consideration of $62.4 million, less outstanding debts adjusted for
net working capital. Mastco's purchase price was subject to a working
capital adjustment which has been finalized as of March 31, 2007.
The acquisition was funded through internal funds flow of $14.7
million and the issuance of 1,494,557 trust units with a value of
$24.7 million.
The consideration paid for this acquisition has been allocated under
the purchase method as follows:
(thousands) 2006
---------------------------------------------------------------------
Purchase price allocated as follows:
Working capital, net (22,943)
Other assets 329
Goodwill 42,837
Capital assets 17,148
Future income taxes 2,018
------------
39,389
------------
Financed as follows:
Trust units 24,720
Cash, net of working capital adjustment 14,669
------------
39,389
------------
Goodwill from this acquisition is not tax deductible.
4. UNITHOLDERS' CAPITAL AND CONTRIBUTED SURPLUS
a) Unitholders' capital
Authorized
Unlimited number of trust units, voting, participating
(thousands except
unit data) June 30, 2007 December 31, 2006
---------------------------------------------------------------------
Number Amount Number Amount
of Units $ of Units $
-----------------------------------------------
Unitholders' capital
- opening balance 82,981,952 669,584 78,909,976 621,972
Trust units issued
on acquisitions - - 1,494,557 24,720
Trust units issued
on conversion of
exchangeable shares 356,404 3,300 1,505,630 13,825
Trust units issued
on exercise of
options and rights 253,229 2,302 1,138,289 8,272
Trust units
repurchased under
normal course
issuer bid - - (66,500) (537)
Contributed surplus
transferred on
exercised options
and rights - 301 - 1,332
-----------------------------------------------
Unitholders' capital
- ending balance 83,591,585 675,487 82,981,952 669,584
-----------------------------------------------
b) Contributed surplus
June 30, December 31,
(thousands) 2007 2006
---------------------------------------------------------------------
Contributed surplus - opening balance 11,722 5,949
Unit based compensation expense 1,446 7,105
Contributed surplus transferred on
exercise of rights (301) (1,332)
--------------------------
Contributed surplus - ending balance 12,867 11,722
--------------------------
5. EXCHANGEABLE SHARES
A subsidiary of the Trust has issued the following exchangeable
shares:
(thousands except
unit data) June 30, 2007 December 31, 2006
---------------------------------------------------------------------
Number Amount Number Amount
of Shares $ of Shares $
-----------------------------------------------
Exchangeable shares
- opening balance 611,966 5,777 2,007,883 19,602
Exchangeable shares
exchanged, Initial
Series - - (347,100) (2,707)
Exchangeable shares
exchanged, Series C (311,367) (3,300) (1,048,817) (11,118)
-----------------------------------------------
Exchangeable shares
- ending balance 300,599 2,477 611,966 5,777
-----------------------------------------------
The exchange ratio for the 253,430 initial series exchangeable shares
is 1.28707 at June 30, 2007 and the trust units issuable upon
conversion are 326,182. The exchange ratio for the 47,169 Series C
exchangeable shares is 1.17578 at June 30, 2007 and the trust units
issuable upon conversion are 55,460.
6. UNIT OPTION AND RIGHTS PLAN
Trust Unit Rights Incentive Plan
On May 2, 2003, the Trust established the Trust Unit Rights Incentive
Plan to assist directors, officers, employees and consultants of the
Trust and its affiliates to participate in the growth and development
of the Trust. The following table sets out unit options that are
outstanding under the Trust Unit Rights Incentive Plan:
---------------------------------------------------------------------
June 30, 2007 December 31, 2006
---------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Rights Price ($) Rights Price ($)
-----------------------------------------------
Outstanding - opening
balance 8,246,839 12.43 5,746,326 9.64
Granted during the
period 63,486 13.44 3,890,818 15.13
Exercised during the
period (253,229) 9.09 (1,118,437) 7.36
Forfeited during the
period (21,178) 13.62 (271,868) 13.09
-----------------------------------------------
Outstanding - ending
balance 8,035,918 12.54 8,246,839 12.43
-----------------------------------------------
The Trust uses the Black-Scholes option-pricing model to determine
the estimated fair value of the unit rights issued subsequent to
January 1, 2003. The per unit weighted average fair value of stock
options granted during the period ended June 30, 2007 was $1.49
(2006 - $2.66).
7. FINANCIAL INSTRUMENTS
Interest rate swap
The Trust entered into cash flow hedges using interest rate swap
arrangements to hedge the floating rate interest on fifty percent of
the outstanding balance of the US and Canadian term debt facilities.
These contracts have been recorded at their fair value on the Trust's
consolidated financial statements. The Trust recorded a gain of $1.7
million in OCI for the three and six months ended June 30, 2007 due
to the change in fair value of the cash flow hedge. The Trust has
assessed 100% hedge effectiveness; hence the entire change in fair
value has been recorded in OCI.
Debt financing costs
The carrying value of long-term debt has been adjusted in accordance
with CICA Section 3855 on financial instruments. Debt issuance costs
which were previously classified as a component of other assets have
been reclassified to long-term debt. The Trust recorded interest
expense of $0.5 million and $0.8 million for the three and six months
ended June 30, 2007 under the effective interest method.
Foreign exchange forward contract
On June 29, 2007 the Trust entered into a forward contract to
purchase US currency to fund the acquisition of the assets of
Drilling Productivity Realized, L.L.C., P.C. Axxis, L.L.C., DPR
International, L.L.C. and DPR Rentals, L.L.C. (collectively, "Axxis")
- see note 11. This future commitment of $111.2 million USD exposed
the Trust to foreign currency risk which was mitigated by a forward
contract to purchase US currency at a rate of 1.0631 on the date of
closing. The Trust has designated the contract as a cash flow hedge
and has assessed 100% effectiveness as at June 30, 2007. The contract
was entered into on the last business day of the reporting period;
hence the fair value of the contract is nil and no gain or loss has
been recorded in the current quarter.
8. LONG-TERM DEBT
Effective June 18, 2007, Trinidad amended its current Canadian
Revolving Credit Facility (the "First Amending Agreement") to provide
a temporary increase of $35.0 million, increasing the principal
available from $250.0 million to $285.0 million. This increase was
underwritten by GE Energy Financial Services, as agent for the Credit
Facilities and is subject to similar terms and conditions as the
original Revolving Credit Facility. This increase was made available
to the Trust for six months subsequent to the execution of the First
Amending Agreement and any repayments will be first applied to the
$35.0 million increase prior to any other reductions in the original
Revolving Credit Facility.
This temporary increase was fully repaid and retired on July 5, 2007
with a portion of the proceeds from the issuance of the convertible
unsecured subordinated debentures issued on this same date (see note
11).
9. COMMITMENTS
Trinidad has continued to focus on the expansion of its existing
drilling fleet through its commitment to construct 34 new diesel
electric drilling rigs which will be deployed in both Canada and the
US. This construction program has enabled the Trust to actively
pursue growth opportunities in the market and provide accretive
growth to its unitholders. All of the rigs are backed by take-or-pay
contracts which provide for committed drilling days and drilling
rates over the next three to five years. Furthermore, the costs of
construction on seven of these rigs have been partially financed
through customer contributions, to be returned in equal payments over
the term of the take-or-pay contract commencing upon the delivery of
each rig. As of June 30, 2007, 30 of these rigs were completed, with
the remaining scheduled to be completed and deployed in the third
quarter of 2007. Total capital costs of construction are expected to
be $50.6 million for the four rigs remaining, of which $65.5 million
was paid as of June 30, 2007.
10. SEGMENTED INFORMATION
The acquisition of Cheyenne Drilling in 2005 and the current rig
construction program have diversified the Trust's operations from its
primary geographic focus in Western Canada to include locations in
the United States, including the Rocky Mountain region, Mid Continent
region, and the Texas and Oklahoma regions. These factors have added
additional rigs of varying depths and capabilities to the current
drilling fleet operating in the Canadian market complementing the
current drilling operations. Despite the similarities in the assets
acquired, the increased management depth in the United States and the
varying conditions between the Canadian and United States market have
resulted in management evaluating the Trust's drilling operations
performance on a geographically segmented basis. In addition, the
acquisition of Mastco further broadened the operations of the Trust
to include the capability to design, manufacture, sell and refurbish
drilling rigs, and related equipment. The unique characteristics of
this subsidiary from the Trust's core drilling operations have
resulted in management's separate evaluation of its results.
Transactions between the segments are recorded at cost and have been
eliminated upon consolidation.
---------------------------------------------------------------------
Three months
ended United Inter-
June 30, Canadian States Construc- segment
2007 Drilling Drilling tion Elimi-
(thousands) Operations Operations Operations nations Total
---------------------------------------------------------------------
Revenue 31,250 73,394 26,585 (15,735) 115,494
Operating
expense 27,665 32,793 24,310 (15,735) 69,033
-------------------------------------------------------
Gross margin 3,585 40,601 2,275 - 46,461
Interest 6,214 3,322 (1) - 9,535
Depreciation
and
amortization 4,562 10,109 160 - 14,831
Loss on sale
of assets 163 - - - 163
-------------------------------------------------------
Income before
corporate
items (7,354) 27,170 2,116 - 21,932
General and
administrative 13,623
Unit based
compensation 671
Foreign
exchange loss 5,603
Income taxes (2,606)
-------------------------------------------------------
Net earnings 4,641
-------------------------------------------------------
Capital
expenditures
(including
acquisitions
and deposits) 29,780 16,401 726 - 46,907
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months
ended United Inter-
June 30, Canadian States Construc- segment
2006 Drilling Drilling tion Elimi-
(thousands) Operations Operations Operations nations Total
---------------------------------------------------------------------
Revenue 49,885 38,848 40,591 (24,777) 104,547
Operating
expense 32,899 17,019 36,428 (24,777) 61,569
-------------------------------------------------------
Gross margin 16,986 21,829 4,163 - 42,978
Interest 2,572 2,319 134 - 5,025
Depreciation
and
amortization 5,071 4,496 138 - 9,705
(Gain) loss
on sale of
assets 38 (9) - - 29
-------------------------------------------------------
Income before
corporate
items 9,305 15,023 3,891 - 28,219
General and
administrative 14,752
Unit based
compensation 730
Foreign
exchange loss 1,303
Income taxes (9,378)
-------------------------------------------------------
Net earnings 20,812
-------------------------------------------------------
Capital
expenditures
(including
acquisitions
and deposits) 38,463 63,464 48 - 101,975
---------------------------------------------------------------------
---------------------------------------------------------------------
Six months
ended United Inter-
June 30, Canadian States Construc- segment
2007 Drilling Drilling tion Elimi-
(thousands) Operations Operations Operations nations Total
---------------------------------------------------------------------
Revenue 166,335 136,234 57,193 (38,057) 321,705
Operating
expense 98,071 65,554 53,733 (38,057) 179,301
-------------------------------------------------------
Gross margin 68,264 70,680 3,460 - 142,404
Interest 11,508 6,576 26 - 18,110
Depreciation
and
amortization 13,994 18,784 311 - 33,089
Loss on sale
of assets 177 30 - - 207
-------------------------------------------------------
Income before
corporate
items 42,585 45,290 3,123 - 90,998
General and
administrative 26,978
Unit based
compensation 1,446
Foreign
exchange loss 6,889
Income taxes 9,101
-------------------------------------------------------
Net earnings 46,584
-------------------------------------------------------
Capital
expenditures
(including
acquisitions
and deposits) 60,378 91,871 42 - 152,291
---------------------------------------------------------------------
---------------------------------------------------------------------
Six months
ended United Inter-
June 30, Canadian States Construc- segment
2006 Drilling Drilling tion Elimi-
(thousands) Operations Operations Operations nations Total
---------------------------------------------------------------------
Revenue 180,017 69,864 44,895 (27,292) 267,484
Operating
expense 96,410 29,950 40,749 (27,292) 139,817
-------------------------------------------------------
Gross margin 83,607 39,914 4,146 - 127,667
Interest 4,894 2,320 138 - 7,352
Depreciation
and
amortization 14,263 8,384 164 - 22,811
(Gain) loss
on sale of
assets 48 (18) - - 30
-------------------------------------------------------
Income before
corporate
items 64,402 29,228 3,844 - 97,474
General and
administrative 26,228
Unit based
compensation 4,583
Foreign
exchange loss 1,090
Income taxes 4,777
-------------------------------------------------------
Net earnings 60,796
-------------------------------------------------------
Capital
expenditures
(including
acquisitions
and deposits) 136,921 88,532 48 - 225,501
---------------------------------------------------------------------
---------------------------------------------------------------------
As at United Inter-
June 30, Canadian States Construc- segment
2007 Drilling Drilling tion Elimi-
(thousands) Operations Operations Operations nations Total
-------------------------------------------------------
Total assets 719,616 564,348 4,691 - 1,288,655
Goodwill 38,154 38,845 44,216 - 121,215
---------------------------------------------------------------------
---------------------------------------------------------------------
As at United Inter-
December 30, Canadian States Construc- segment
2006 Drilling Drilling tion Elimi-
(thousands) Operations Operations Operations nations Total
-------------------------------------------------------
Total assets 680,591 528,872 36,170 - 1,245,633
Goodwill 38,155 42,491 42,837 - 123,483
---------------------------------------------------------------------
11. SUBSEQUENT EVENTS
Effective July 5, 2007 the Trust, through an indirect, wholly owned
subsidiary closed the acquisition of the assets of Axxis. The assets
acquired include four land based drilling rigs and one barge drilling
rig, together with related inventory, crew boats and spare parts (the
"Axxis Acquisition"). Under the acquisition agreement, the Trust will
also assume the remaining construction commitments of a second barge
drilling rig currently under construction, and will reimburse Axxis
for construction costs undertaken to the closing date. The purchase
price for the Axxis Acquisition was $147.6 million plus total
estimated construction commitments of approximately $27.5 million.
The Axxis Acquisition was financed with $118.3 million of cash and
$29.3 million of convertible debentures of the Trust to be issued to
Axxis on the same terms as the Financing (as described below).
In connection with the Axxis Acquisition, Trinidad entered into an
agreement (the "Financing") with a syndicate of underwriters co-led
by TD Securities Inc. and Raymond James Ltd., to sell, on a bought
deal basis, $325.0 million aggregate principal amount of 7.75%
convertible unsecured subordinated debentures ("debentures"). The net
proceeds of the Financing were used to fund the cash portion of the
purchase price of the Axxis Acquisition, to repay outstanding debt of
the Trust and its affiliates and for general working capital
purposes.
The debentures have a face value of $1,000 per Debenture, a coupon of
7.75%, a maturity date of July 31, 2012, and are convertible at any
time prior to maturity or the date fixed for redemption at the option
of the holder, into trust units of Trinidad at a price of $19.30 per
trust unit. The Debentures pay interest semi-annually on June 30 and
December 31, with the initial interest payment to be made on December
31, 2007.
12. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform
to current year's presentation. Such reclassification did not impact
previously reported net income or retained earnings.
For further information:
For further information: Michael Heier, Chairman & Chief Executive Officer or Brent Conway, Chief Financial Officer at: Phone: (403) 265-6525, Fax: (403) 265-4168, E-mail: mbentley@trinidaddrilling.com