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Trinidad Drilling Ltd. reports solid second quarter and year-to-date 2008 results; record revenue and EBITDA recorded
TSX SYMBOL: TDG and TDG.DB
CALGARY, Aug. 12 /CNW/ - Trinidad Drilling Ltd. ("Trinidad" or the
"Company") reported solid operating and financial results for the second
quarter and first six months of 2008 today. Revenue, net earnings before
interest, taxes, depreciation and gain or loss on sale of long-term assets
(EBITDA) and cash flow from operations before changes in non-cash working
capital all reached record levels in both the second quarter and year-to-date,
reflecting the Company's accretive growth per share and continued focus on
adding value for its shareholders.
"Trinidad has continued to perform strongly to date in 2008. We have
consistently recorded utilization rates in excess of the Canadian industry
average and by growing our US operations we have added a stable revenue stream
to our business," said Lyle Whitmarsh, Trinidad's President and Chief
Executive Officer. "We have strategically grown our business in areas where
demand for our deeper, more technologically advanced fleet is strong. This
value-adding strategy is paying off for Trinidad and is demonstrated in our
strong performance and record results. We are pleased with our results in the
first half of 2008 and with building momentum in the drilling industry, we are
cautiously optimistic for the remainder of 2008 and beyond," Whitmarsh said.SECOND QUARTER AND YEAR-TO-DATE HIGHLIGHTS
(Quarter-over-quarter and year-to-date comparatives all relate to the
comparable period in 2007)
- Revenue reached record levels of $141.2 million for the second
quarter of 2008 and $360.8 million year-to-date, up 22.2% and 12.2%
respectively, largely due to growth through acquisitions, internal
rig construction programs, higher utilization rates and our
successful expansion into the US.
- Trinidad's second quarter 2008 drilling utilization rate of 31% in
Canada exceeded the industry average of 20%. The US drilling
operations continued to report strong activity levels with
utilization of 87%. Year-to-date, Trinidad's Canadian drilling
utilization rate has been 52% compared to the industry average of 38%
while the US operation's utilization has averaged 87%.
- Cash flow from operations before changes in non-cash working capital
was $27.2 million ($0.31 per share (diluted)), in the second quarter
of 2008 and $97.7 million ($1.14 per share (diluted)) year-to-date,
up 16.5% and 1.6%, respectively. These record levels were achieved
primarily through the increased rig fleet, the expanded US operations
and a continued focus on maintaining gross margins.
- Net earnings in the second quarter of 2008 were $1.1 million
($0.01 per share (diluted)) and $40.1 million ($0.47 per share
(diluted)) year-to-date, down 75.4% and 14.0% respectively, largely
due to higher interest and depreciation costs.
- On June 10, 2008, Trinidad closed an equity financing deal where a
total of 12,132,353 shares were issued, including a 10%
overallotment, for gross proceeds of $165.0 million.
- During the second quarter of 2008, Trinidad continued its growth into
the US drilling market with the announcement of a construction
program for nine new drilling rigs. In July 2008, the Company
announced an additional seven new drilling rigs also bound for the
US. All 16 of these rigs are backed by long-term, take-or-pay
contracts and are expected to be completed by the end of 2009. In
addition, Trinidad plans to build six new service rigs to meet the
growing demand in the Canadian market. In total, the rig construction
programs are anticipated to cost $258.0 million, which is expected to
be financed with the net proceeds from the recent equity offering
($158.4 million), proceeds from the sale of its newly constructed
barge rig (US$53.5 million), cash flow from operations and funds
available under the Company's existing credit facility.The following is management's discussion and analysis ("MD&A") concerning
the operating and financial results for the three and six months ended
June 30, 2008, and its outlook based on information available as at August 1,
2008. The MD&A is based on the Trinidad Drilling Ltd. ("Trinidad" or the
"Company") unaudited interim consolidated financial statements for the period
ended June 30, 2008, which were prepared in accordance with Canadian Generally
Accepted Accounting Principles ("GAAP"). The MD&A should be read in
conjunction with the audited consolidated financial statements of Trinidad
Energy Services Income Trust (the "Trust") for the year ended December 31,
2007. Additional information is available on Trinidad's website
(www.trinidaddrilling.com) and all previous public filings, including the most
recently filed Annual Report and Annual Information Form, are available
through SEDAR (www.sedar.com). As a result of Trinidad's conversion from an
income trust to a corporation, effective March 10, 2008, references to the
"Company", "shares", the "Incentive Options Plan" and "options" should be read
as references to the "Trust", "units", "Unit Rights Incentive Plan" and
"rights", respectively, for the periods prior to March 10, 2008.-------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
($ thousands except share and per share data)
Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
Revenue 141,179 115,494 360,830 321,705
Gross margin(1) 53,765 42,539 152,193 135,556
EBITDA(1) 39,884 26,564 128,553 107,091
Per share (diluted)(1) 0.45 0.31 1.50 1.26
EBITDA before stock-based
compensation(1) 40,017 27,235 128,855 108,537
Per share (diluted)(1) 0.46 0.32 1.50 1.27
Cash flow from operations 83,977 28,549 131,949 74,062
Per share (diluted) 0.96 0.33 1.54 0.87
Cash flow from operations
before change in non-cash
working capital(1) 27,202 23,353 97,712 96,163
Per share (diluted)(1) 0.31 0.27 1.14 1.13
Net earnings 1,141 4,641 40,053 46,584
Per share (basic) 0.01 0.06 0.47 0.56
Per share (diluted) 0.01 0.05 0.47 0.55
Net earnings before stock-
based compensation(1) 1,274 5,312 40,355 48,030
Per share (diluted)(1) 0.01 0.06 0.47 0.56
Shares outstanding - basic
(weighted average)(2) 86,750,690 83,947,198 85,347,826 83,872,182
Shares outstanding -
diluted (weighted
average)(2) 87,825,214 85,711,891 85,916,240 85,294,628
-------------------------------------------------------------------------
(1) Readers are cautioned that gross margin, EBITDA, EBITDA before stock-
based compensation, cash flow from operations before change in non-
cash working capital and net earnings before stock-based compensation
and the related per share information do not have a standardized
meaning prescribed by GAAP - See "Non-GAAP Measures".
(2) Basic shares include the weighted average number of shares
outstanding over the period. Diluted shares include the weighted
average shares outstanding over the period and the dilutive impact,
if any, of the deemed conversion of convertible debentures and the
shares issuable pursuant to the Incentive Option Plan. Interest
expense incurred on the dilutive convertible debentures is added back
to net earnings, net earnings before stock-based compensation, cash
flow from operations and cash flow from operations before change in
non-cash working capital for the diluted per share calculation.
-------------------------------------------------------------------------
OPERATING HIGHLIGHTS
Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
Operating days - drilling
Canada 1,742 1,165 5,751 4,981
United States 3,783 2,944 7,458 5,408
Rate per drilling day (CDN $)
Canada 23,219 23,527 23,711 25,470
United States(1) 21,565 24,927 21,649 25,191
Utilization rate - drilling
Canada 31% 20% 52% 44%
United States 87% 88% 87% 87%
CAODC industry average 20% 17% 38% 38%
Number of drilling rigs
Canada 62 64 62 64
United States 48 38 48 38
Utilization rate for service
rigs 29% 23% 45% 47%
Number of service rigs 20 21 20 21
Number of coring and surface
casing rigs 20 17 20 17
Barge Drilling Market(2)
Operating days 361 - 633 -
Rate per drilling day (CDN$) 41,500 - 44,428 -
Utilization rate(3) 100% - 99% -
Number of barge drilling rigs 1 - 1 -
Number of barge drilling rigs
under Bareboat Charter
Agreements 3 - 3 -
-------------------------------------------------------------------------
(1) In US dollars, dayrates remained relatively static, declining from
$21,966 in the second quarter of 2007 to $21,449 in the second
quarter of 2008.
(2) Trinidad commenced its operations in the barge drilling market with
its acquisition of Axxis, effective July 5, 2007.
(3) During the first quarter of 2008, Trinidad completed significant work
to one of its barge rigs and as a result it was removed from service
and not included in the utilization calculation. This rig was fully
operational in the second quarter.FORWARD-LOOKING STATEMENTS
The MD&A contains certain forward-looking statements relating to
Trinidad'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.
Trinidad 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
Trinidad does not intend, and does not assume any obligation, to update these
forward-looking statements, subject to its obligations under appropriate
regulations.
NON-GAAP MEASURES
This MD&A contains references to the terms "cash flow from operations
before change in non-cash working capital" to provide information for
shareholders regarding Trinidad's liquidity and ability to generate cash to
finance operations and assists management in assessing Trinidad's ability to
finance operational and capital expenditures; "EBITDA" to refer to net
earnings before interest, taxes, depreciation and gain or loss on sale of
long-term assets; "EBITDA before stock-based compensation" to refer to EBITDA
plus stock-based compensation; "gross margin" to refer to revenue less
operating expenses; "net earnings before stock-based compensation" to refer to
net earnings plus stock-based compensation; and "net debt" to refer to
Trinidad's long-term debt less its working capital position which is
indicative of the overall indebtedness of the Company, all of which Trinidad
believes are measures followed by the investment community and therefore
provide useful information. The terms "cash flow from operations before change
in non-cash working capital", "EBITDA", "EBITDA before stock-based
compensation", "gross margin", "net earnings before stock-based compensation",
"net debt" and associated per share data are not measures recognized by GAAP
and do not have standardized meaning prescribed by GAAP and accordingly may
not be comparable to similar measures presented by other companies. However,
Trinidad computes "cash flow from operations before change in non-cash working
capital", "EBITDA", "EBITDA before stock-based compensation", "gross margin",
"net earnings before stock-based compensation" and "net debt" on a consistent
basis for each reporting period.
The following is a reconciliation of EBITDA to net earnings:Three months ended Six months ended
June 30, June 30,
($ thousands) 2008 2007 2008 2007
-------------------------------------------------------------------------
Net Earnings 1,141 4,641 40,053 46,584
Plus:
Interest on long-term debt 6,215 9,535 13,390 18,110
Interest on convertible
debentures 8,685 - 17,339 -
Income taxes 3,558 (2,606) 13,587 9,101
Depreciation 20,509 14,831 44,501 33,089
(Gain) loss on sale of
assets (224) 163 (317) 207
-----------------------------------------------
EBITDA 39,884 26,564 128,553 107,091
-----------------------------------------------OVERVIEW
Operations in the Canadian marketplace in the second quarter have
historically been hindered by wet weather conditions and road bans that were
put in place throughout the period. This year was no exception as the Western
Canadian drilling market experienced a long spring breakup with above average
rainfall which limited activity levels. However, given the deep drilling
capacity of Trinidad's Canadian rig fleet and its long-term, take-or-pay
contracts the second quarter exceeded the comparable quarter in the prior year
as both drilling days and utilization far exceeded those seen in the industry
over the same period. As in the past, during the second quarter of 2008,
Trinidad was able to mitigate its overall exposure to both the seasonal
conditions present throughout this period and the variability of the Canadian
market in recent periods through its continued expansion into the United
States ("US") marketplace. This expansion allowed for strong
quarter-over-quarter growth for the Company in revenue, gross margin, EBITDA
and cash flow from operations. The US operations have also provided stabilized
cash flows and net earnings through the long-term, take-or-pay contracts that
the Company has executed with its valued customers in the US and the
consistency that this market has provided in recent years. The significance of
Trinidad's expansion into the US is evident given that this segment continues
to contribute significantly to the overall operations of the Company,
producing 60.9% of overall revenue and 67.9% of gross margin for the second
quarter of 2008 and 47.2% of revenue and 48.9% of gross margin on a
year-to-date basis.
Trinidad's overall land rig count increased quarter-over-quarter, which
resulted in an increase to the number of drilling days by 34.5% in comparison
to the second quarter of 2007. The higher drilling days in the US resulted in
an increase in revenue of $25.7 million or 22.2% despite reductions in
Canadian denominated US dayrates as a result of weakening of the US dollar.
Furthermore, while the Canadian segment decreased by two drilling rigs
year-over-year, it demonstrated the inherent value of its contracts, customer
relationships and equipment versatility as both operating days and rig
utilization increased as compared to the same period of 2007. Customer pricing
in this segment was down 6.9% year-to-date and only 1.3% quarter-over-quarter
due to a more competitive bidding environment; however, dayrates appear to be
stabilizing as commodity prices increase and natural gas storage levels are
reduced.
Net earnings for the six months ended June 30, 2008 were $40.1 million or
$0.47 per share (diluted) in comparison to $46.6 million or $0.55 per share
(diluted) in the same period of 2007. Despite the revenue increases
year-to-date in 2008, overall net earnings declined mainly as a result of
increases in interest expense, depreciation, and reorganization costs. The
increase in interest expense was due to the issuance of convertible debentures
in connection with the Axxis acquisition in the second half of 2007 and
depreciation increased as a result of the deployment of new rigs. Furthermore,
one-time reorganization costs for Trinidad's conversion from an income trust
to a corporation were incurred throughout the first six months of 2008. These
increases were offset by an unrealized foreign exchange gain of $3.5 million
on US denominated intercompany balances in comparison to the loss of
$6.9 million in the prior year.
On June 10, 2008, Trinidad closed an equity financing deal where a total
of 12,132,353 shares were issued, including the overallotment of 1,102,941
shares, for gross proceeds of $165.0 million. Net proceeds from the equity
issuance were initially used to reduce debt, then additional funds available
under the credit facility will be used to construct nine high-horsepower
drilling rigs, all backed by long-term, take-or-pay contracts guaranteeing
utilization rates of 100% over their respective contract terms and six well
servicing rigs. The drilling rigs are currently planned to operate in Texas
and Louisiana, drilling in the Barnett Shale and the Haynesville areas, two of
the key natural gas plays in the US. The new rigs will feature
state-of-the-art technology with diesel electric drawworks and depth capacity
ratings ranging from 16,000 feet to 18,000 feet and will be delivered over a
10-month period starting in August 2008. The six service rigs will be built
using a new rig design which provides improved pressure control, better safety
features and lower anticipated operating costs and will have depth capacities
of 2,400 to 3,500 metres. The service rigs are being built to meet growing
demand in the Canadian market and are expected to remain in the Western
Canadian Sedimentary Basin. The first two rigs are expected to be completed by
the end of 2008 with the balance being delivered in the first three quarters
of 2009. In addition, on July 17, 2008, Trinidad announced the construction of
an additional seven rigs to the rig construction program previously announced
in May 2008 (see subsequent events). These rigs are also backed by long-term,
take-or-pay contracts guaranteeing utilization rates of 100% over their
respective terms. Trinidad intends to fund this rig construction program from
its operating cash flow and funds available under its existing credit
facility.
The drilling industry found some relief in the second quarter with higher
than expected overall rig activity. Nevertheless, as reported by the Canadian
Association of Oilwell Drilling Contractors ("CAODC") well completions in the
second quarter of 2008 were down 2.6% as compared to the same period of 2007
and 36.4% as compared to 2006. For the first six months of 2008, the CAODC
reported a total of 8,134 wells drilled, an active rig count in Western Canada
that averaged 334 rigs and utilization levels of 38%, as compared to
utilization levels of 38% in 2007 and 57% in 2006. Although the industry has
experienced declines, Trinidad has been able to maintain its market share and
grow its overall utilization in Western Canada, and will continue to focus on
value added client support and above average service to ensure continued
success during these slower industry periods.QUARTERLY ANALYSIS 2008 2007
($ millions except
per share and
operating data) Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Financial Highlights
Revenue 141.2 219.7 145.8 162.2 115.5 206.2
Gross margin 53.8 98.4 58.8 70.5 42.6 93.0
Net earnings 1.1 38.9 17.9 15.0 4.7 41.9
Depreciation 20.5 24.0 19.0 20.2 14.8 18.3
(Gain) loss on sale
of assets (0.2) (0.1) 0.2 - 0.1 0.1
Stock-based
compensation 0.1 0.2 0.4 0.5 0.7 0.8
Future income tax
expense (recovery) 2.5 9.4 (7.8) 3.3 (3.1) 10.2
Effective interest on
financing costs 1.1 1.1 1.1 1.1 0.4 0.3
Accretion on
convertible
debentures 1.2 1.1 1.2 1.0 - -
Unrealized foreign
exchange (gain) loss 0.9 (4.1) 0.2 5.3 5.8 1.2
Other - - - - - -
---------------------------------------------------
Cash flow from
operations before
change in non-cash
working capital 27.2 70.5 32.2 46.4 23.4 72.8
Net earnings per
share (diluted) 0.01 0.44 0.21 0.18 0.05 0.49
Cash flow from
operations before
change in non-cash
working capital per
share (diluted) 0.31 0.75 0.38 0.55 0.27 0.86
----------------------------------------------------
Operating Highlights
Operating days -
drilling
Canada 1,742 4,009 2,135 2,718 1,165 3,817
United States 3,783 3,675 3,399 3,305 2,944 2,464
Rate per drilling day
(CDN $)
Canada 23,219 24,517 23,631 21,746 23,527 26,063
United States(1) 21,565 21,735 21,404 23,265 24,927 25,506
Utilization rate -
drilling
Canada 31% 72% 37% 47% 20% 69%
United States 87% 87% 83% 85% 88% 85%
CAODC industry
average 20% 56% 37% 39% 17% 59%
Number of drilling
rigs
Canada 62 62 64 64 64 63
United States 48 48 46 43 38 37
Utilization for
service rigs 29% 62% 57% 46% 23% 73%
Number of service
rigs 20 20 20 20 21 20
Number of coring and
surface casing rigs 20 20 20 20 17 17
Barge Drilling
Market(2)
Operating days 361 272 352 352 - -
Rate per drilling
day (CDN$) 41,500 48,128 47,536 51,904 - -
Utilization rate 100% 98%(3) 96% 100% - -
Number of barge
drilling rigs 1 1 1 1 - -
Number of barge
drilling rigs under
Bareboat Charter
Agreements 3 3 3 3 - -
-------------------------------------------------------------------------
2006
($ millions except
per share and
operating data) Q4 Q3 Q2
----------------------------------------------
Financial Highlights
Revenue 161.9 150.6 104.5
Gross margin 74.9 66.9 43.1
Net earnings 31.3 31.6 20.8
Depreciation 15.4 14.0 9.7
(Gain) loss on sale
of assets 0.1 (2.0) -
Stock-based
compensation 1.8 0.7 0.8
Future income tax
expense (recovery) 6.2 4.6 (8.7)
Effective interest on
financing costs - - -
Accretion on
convertible
debentures - - -
Unrealized foreign
exchange (gain) loss (0.1) - 0.2
Other - 0.1 (0.3)
------------------------
Cash flow from
operations before
change in non-cash
working capital 54.7 49.0 22.5
Net earnings per
share (diluted) 0.37 0.38 0.24
Cash flow from
operations before
change in non-cash
working capital per
share (diluted) 0.65 0.57 0.26
------------------------
Operating Highlights
Operating days -
drilling
Canada 3,163 3,358 1,826
United States 2,105 1,891 1,603
Rate per drilling day
(CDN $)
Canada 26,328 23,083 23,927
United States(1) 24,621 24,042 24,089
Utilization rate -
drilling
Canada 61% 64% 36%
United States 85% 85% 82%
CAODC industry
average 47% 57% 34%
Number of drilling
rigs
Canada 60 59 57
United States 31 26 22
Utilization for
service rigs 64% 68% 31%
Number of service
rigs 18 18 17
Number of coring and
surface casing rigs 17 17 17
Barge Drilling
Market(2)
Operating days - - -
Rate per drilling
day (CDN$) - - -
Utilization rate - - -
Number of barge
drilling rigs - - -
Number of barge
drilling rigs under
Bareboat Charter
Agreements - - -
----------------------------------------------
(1) In US dollars, dayrates remained relatively static and declines are
the result of reductions in US currency rates.
(2) Trinidad commenced its operations in the barge drilling market with
its acquisition of Axxis, effective July 5, 2007.
(3) During the first quarter of 2008, Trinidad completed significant work
to one of its barge rigs and as a result it was removed from service
and not included in the utilization calculation. This rig was fully
operational in the second quarter.Trinidad's growth has been a result of strategic acquisitions, continued
deployment of rigs under the rig construction program, expansion into the US
market and the strong market conditions that were present throughout 2006 and
early 2007 and are apparent through quarter-over-quarter revenue growth. This
continued to be evident despite the Canadian drilling industry facing
declining market conditions in the last three quarters of 2007 as a result of
lower commodity prices, concerns over high natural gas storage levels and
royalty tax changes. Declining demand over this period ultimately lowered
Canadian dayrates and utilization levels from the second quarter of 2007
onwards. However, Trinidad's expansion into the US market, where considerable
growth occurred in the fourth quarter of 2005 through the acquisition of
Cheyenne Drilling, has resulted in the US rig fleet more than doubling since
that time allowing the Company to realize revenue growth despite the
curtailing market activities in Canada. This market has consistently provided
stable utilization levels and US dollar dayrates, which offset the reduced
Canadian activity and improved the overall operations of Trinidad. The first
quarter of 2008 showed signs of improvement in Western Canada as the market
outlook recovered and dayrates and utilization levels began increasing for the
first time since the second quarter of 2007. Although the second quarter of
2008 was slowed by a long spring breakup with above average rainfall, Trinidad
continued to grow revenues as a result of its focus on the deep drilling
segment and strong commodity prices, which helped to motivate producers to
maintain their drilling programs. The first two quarters of 2008 continued to
show the strength of the US segment and, with an increased fleet and overall
strong market, it continues to play a significant role in the Company's
overall portfolio.
Quarterly revenues continued to be impacted by the seasonal conditions
present in the Western Canadian drilling operations as a result of a
significant portion of the overall drilling fleet operating in this market.
This seasonality resulted in strong Canadian revenue in the first quarters as
oil and natural gas companies took advantage of frozen conditions, slower
second quarters due to spring break-up conditions and third and fourth
quarters which were more representative of normal operating conditions. The
expansion into the US market which has been ongoing since the end of 2005 has
partially mitigated the impact of the seasonal conditions on the overall
results of the Company.
Net earnings and per share data were strong throughout 2006 and the first
quarter of 2007 as the market activities, noted above, allowed for the Company
to realize its growth through expansion into new markets and rig
diversification. However, the market downturn in Canadian drilling during the
second quarter of 2007, as well as unrealized foreign exchange losses
throughout the period due to declines in the US currency, caused a reduction
in net income and the related per share data to the end of 2007. Upturn in
Trinidad's Canadian operations has been evident throughout 2008 as reflected
in the growth in the Company's EBITDA; however, higher interest expense and
future income taxes have continued to negatively impact earnings.RESULTS FROM OPERATIONS
Canadian Drilling Operations
($ thousands except
percentages and
operating data) Three months ended June 30, Six months ended June 30,
2008 2007 % Change 2008 2007 % Change
-------------------------------------------------------------------------
Revenue 44,341 31,250 41.9 176,445 166,335 6.1
Operating expense 30,389 29,180 4.1 102,651 101,112 1.5
-----------------------------------------------------
Gross margin 13,952 2,070 574.0 73,794 65,223 13.1
-----------------------------------------------------
Gross margin
percentage 31.5% 6.6% 41.8% 39.2%
Operating days -
drilling 1,742 1,165 49.5 5,751 4,981 15.5
Rate per drilling
day (CDN $) 23,219 23,527 (1.3) 23,711 25,470 (6.9)
Utilization rate -
drilling 31% 20% 55.0 52% 44% 18.2
CAODC industry average 20% 17% 17.6 38% 38% -
Number of drilling
rigs 62 64 (3.1) 62 64 (3.1)
Utilization rate -
well servicing 29% 23% 26.1 45% 47% (4.3)
Number of service rigs 20 21 (4.8) 20 21 (4.8)
Number of coring and
surface casing rigs 20 17 17.6 20 17 17.6Throughout the second quarter of 2008, 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 resulted in overall reductions in industry utilization as rates fell from
56% in the first quarter of 2008 to 20% for the three months ended June 30,
2008 and to 38% on a year-to-date basis. Overall, market activity was
relatively static with the comparable period in 2007. However, Trinidad's
continued focus on deep drilling and long-term contracts resulted in the
Company being rewarded by the market and increasing operating days and
utilization levels by 49.5% and 55.0%, respectively, over the comparable
quarter despite the static market conditions. Furthermore, as oil and natural
gas targets have become more challenging to extract, the requirement for more
precise and advanced technology has become critical to the overall success of
producers. Unquestionably, Trinidad's Canadian rig fleet continues to benefit
from this, as many producers require increased depth capacity and see the
intrinsic benefit of the more advanced technology available on Trinidad's deep
drilling rigs. As a result, Trinidad's Canadian drilling division continued to
exceed industry utilization by 55.0% realizing utilization of 31% for the
quarter as compared to an industry utilization level of 20% and achieved
utilization rates of 52% year-to-date, an 18.2% increase from prior year.
Slower market conditions in the quarter continued to produce intense
competition across the industry as drilling contractors competed for less
available work, which continued to place downward pressure on dayrates across
the market. This competition reduced dayrates for Trinidad by 1.3%
quarter-over-quarter and 6.9% on a year-to-date basis. Annual declines are
more prevalent given a much stronger first quarter in 2007 as the market
exited the intense drilling programs present in 2006.
Higher operating days and rig utilization in the second quarter increased
revenue by $13.1 million or 41.9% from $31.3 million in 2007 to $44.3 million
in 2008, despite the reduction in the number of rigs available and relatively
stable dayrates. The strong second quarter also increased revenue on a
year-to-date basis by $10.1 million or 6.1%, placing Trinidad's Canadian
operations ahead of where they were at the same point last year. Furthermore,
in addition to strong revenue growth over the quarter, operating costs
remained relatively consistent with the prior year at $30.4 million in 2008 as
compared to $29.2 million in 2007, significantly increasing gross margins.
This was the result of fewer recertifications required in the second quarter
of 2008, in comparison with the same period in 2007. Slower conditions in
2007, following the extremely busy 2006 fiscal year, provided an opportunity
to complete much of the maintenance required to ensure industry standards were
achieved. However, as a result of 2007 being a much slower period,
approximately half the number of recertifications performed in the prior year
were necessary in 2008, reducing operating costs and increasing gross margins.
The well servicing division also had a strong quarter with utilization
rates increasing to 29% from 23% in the prior year. Higher commodity prices
and increased activity in Canadian drilling facilitated stronger results in
this division; however, increased competition has also reduced rates resulting
in slight declines in revenue and margins in comparison with the prior year.
Overall, industry activity levels have remained moderately stable during the
period relative to the prior year and Trinidad remains bullish on prospects
for its well servicing division in light of increased completion, work-over
and abandonment activity expected over the next several years, coupled with
minor equipment expansion industry wide.
Although operating activity recorded by the Canadian drilling segment in
the first six months of 2008 exceeded earlier expectations, demand for
oilfield services continue to reflect a level of uncertainty in the Canadian
market as operators weighed the impact of a strong Canadian dollar and the
sustainability of strengthening commodity prices on their project economics.
However, the fundamentals of the Canadian oilfield services market have seen
improvements during the first half of 2008 which continues to instil producer
confidence and is expected to have positive implications on drilling programs.
Despite the drilling and well servicing sector being ranked as one of the most
competitive areas of the oil and natural gas business, Trinidad has proven
itself through strong customer relations, employee expertise, equipment
quality and drilling performance and continues to differentiate itself from
its competitors and be rewarded by its customers.United States Drilling Operations
($ thousands except
percentages and
operating data) Three months ended June 30, Six months ended June 30,
2008 2007 % Change 2008 2007 % Change
-------------------------------------------------------------------------
Revenue 85,970 73,394 17.1 170,283 136,234 25.0
Operating expense 49,439 35,200 40.5 95,881 69,361 38.2
-----------------------------------------------------
Gross margin 36,531 38,194 (4.4) 74,402 66,873 11.3
-----------------------------------------------------
Gross margin
percentage 42.5% 52.0% 43.7% 49.1%
Land Drilling Rigs
Operating days -
drilling 3,783 2,944 28.5 7,458 5,408 37.9
Rate per drilling
day (CDN $)(1) 21,565 24,927 (13.5) 21,649 25,191 (14.1)
Utilization rate -
drilling 87% 88% (1.1) 87% 87% -
Number of drilling
rigs 48 38 26.3 48 38 26.3
Barge Drilling Rigs(2)
Operating days -
drilling 361 - - 633 - -
Rate per drilling
day (CDN$) 41,500 - - 44,428 - -
Utilization rate -
drilling(3) 100% - - 99% - -
Number of barge
drilling rigs 1 - - 1 - -
Number of barge
drilling rigs
under Bareboat
Charter
Agreements 3 - - 3 - -
(1) In US dollars, dayrates remained relatively static, declining from
$21,966 in the second quarter of 2007 to $21,449 in the second
quarter of 2008.
(2) Trinidad commenced its operations in the barge drilling market with
its acquisition of Axxis, effective July 5, 2007.
(3) During the first quarter of 2008, Trinidad completed significant work
to one of its barge rigs and as a result it was removed from service
and not included in the utilization calculation. This rig was fully
operational in the second quarter.The US drilling market continues to show its strength as strong demand
fundamentals supported higher activity levels throughout the year. Revenue
quarter-over-quarter increased by 17.1% from $73.4 million in the second
quarter of 2007 to $86.0 million in 2008 and year-to-date increased
$34.0 million to $170.3 million in 2008. Growth in revenue resulted from the
expansion of the US fleet which contributed to an increase in the number of
operating days at relatively consistent US dollar dayrates in comparison to
the prior year. In addition, the deployment of more rigs committed under
long-term, take-or-pay contracts operating year-over-year added stability to
the overall operations. Average dayrates in Canadian dollars declined 13.5%
quarter-over-quarter and 14.1% year-to-date due entirely to foreign exchange
as a result of the declining strength of the US dollar. In US dollars, the
average dayrate for the first half of 2007 was US$21,935, in comparison with
US$21,541 in 2008, remaining relatively static year-over-year. In addition,
the barge drilling segment maintained utilization levels of 100% and with the
scheduled maintenance finalized in the latter part of the first quarter on one
of the Bareboat Charter rigs, all four rigs were working throughout the second
quarter. Dayrates declined by 13.8% as compared to the first quarter of 2008
due to some softening in the barge market over the past six months; however,
the decline in dayrates has allowed the Company to preserve market share and
maintain valuable relationships with key customers placing Trinidad in a
favourable position when market conditions improve. Despite reduced dayrates,
the barge market continues to command higher dayrates than the land drilling
market and as a result these rigs have provided exceptional dayrates of
$44,428 per day year-to-date with utilization levels of 99%. In addition, the
barge rigs have added asset and geographical diversification to Trinidad's
overall asset base, presenting significant opportunities to expand into other
jurisdictions. This coupled with the growth of the US drilling operations has
been instrumental in achieving stability of Trinidad's cash flow throughout
the year and increasing the capability of the Company to meet the needs of oil
and natural gas producers on a more comprehensive basis.
Operating expenses for the quarter increased from $35.2 million to
$49.4 million reducing overall margins from 52.0% to 42.5% and year-to-date
grew 38.2% to $95.9 million, reducing margins to 43.7%. The growth in
operating expenses was partially attributable to the growth in revenue
throughout the quarter, but overall increases in operating costs exceeded the
growth in revenue, reducing gross margins. This was partially a result of
increased property taxes on rigs due to the growth in the US rig fleet in
comparison with the prior year. Property taxes on US-based rigs are assessed
annually on January 1, therefore any rigs deployed later in the year would not
have been subject to these taxes in 2007. As Trinidad increased its US fleet
by fifteen rigs over 2007 it resulted in higher property taxes in 2008 in
comparison to the prior year. In addition, the US segment also performed more
footage and turnkey contracts with its rigs that were not under long-term
contract. These types of contracts result in more costs being incurred by
Trinidad as opposed to being paid for or passed on to the operator. Finally,
additional expenses related to employing additional field supervisors to
manage the growing US fleet and work with field staff on overall training also
increased overall operating expenses.
The US operations continue to provide stability to Trinidad's
consolidated results through not only its consistent year round cash flows,
but also the higher margins obtained in this segment of the business. Due to
the success that Trinidad has experienced in the US, the Company continues to
pursue additional opportunities to extend its presence in this market,
including the recently announced rig construction program to build and deploy
an additional sixteen rigs into the US. These rigs are all backed by
long-term, take-or-pay contracts with three major North American oil and
natural gas exploration and development companies, which will provide further
revenue stability and a guaranteed utilization rate of 100% over their
respective contract terms.Construction Operations
($ thousands except
percentage data) Three months ended June 30, Six months ended June 30,
2008 2007 % Change 2008 2007 % Change
-------------------------------------------------------------------------
Revenue(1) 29,541 26,585 11.1 41,132 57,193 (28.1)
Operating expense(1) 26,259 24,310 8.0 37,135 53,733 (30.9)
-----------------------------------------------------
Gross margin 3,282 2,275 44.3 3,997 3,460 15.5
-----------------------------------------------------
Gross margin
percentage 11.1% 8.6% 9.7% 6.0%
(1) Includes inter-segment revenue and operating expenses of
$18.7 million and $15.7 million for the three months ended June 30,
2008 and 2007, respectively and $27.0 million and $38.1 million for
the six months ended June 30, 2008 and 2007, respectively.Revenue from construction operations increased by 11.1% from
$26.6 million in the second quarter of 2007 to $29.5 million in 2008 due to
the completion of $18.7 million of inter-segment work performed on the
construction of six of the nine rigs announced as part of the current rig
construction program, as well as the completion of another rig for an
independent third party. Inter-segment revenue increased by $3.0 million from
$15.7 million in the prior year earned on recertification and repair work
completed during the quarter when the Company's rigs were less utilized due to
spring break-up and the construction of the rigs under the previous rig
construction program. Contributing to the increase quarter-over-quarter was
the transfer of partially completed rigs maintained in inventory at the end of
the first quarter to revenue, which will be used as part of the current
construction program. Additionally, inter-segment work was performed to
complete the construction of a barge rig for the Axxis division. Gross margin
percentage increased from 8.6% last year to 11.1% for the second quarter of
2008 due to the stronger margins earned on the completion of the third party
work that was performed over the period.
Revenue from Trinidad's construction operations over the first six months
of 2008 was $41.1 million, a 28.1% decrease from the $57.2 million generated
over the same time period of 2007. This was a result of the focus in the prior
year on the completion of the previous rig construction program, which Mastco
substantially completed in the first quarter of 2007 earning much higher
inter-segment revenue and operating costs of $38.1 million in comparison to
$27.0 million in 2008.
When Trinidad acquired Mastco in the first quarter of 2006, the Company's
intention was to utilize this division to facilitate rig construction programs
and enhance control over the delivery of the rigs to ensure customer demands
were being met. This will continue to be the focus as work commences on the
newly announced rig construction program where Mastco will construct thirteen
of the sixteen new drilling rigs, which are all expected to be delivered
before the end of 2009.GENERAL AND ADMINISTRATIVE EXPENSE
($ thousands except
percentage data) Three months ended June 30, Six months ended June 30,
2008 2007 % Change 2008 2007 % Change
-------------------------------------------------------------------------
General and
administrative
expenses 12,749 9,701 31.4 24,172 20,130 20.1
% of revenue 9.0% 8.4% 6.7% 6.3%General and administrative expenses increased 31.4% to $12.7 million in
the second quarter of 2008 from $9.7 million for the same period in 2007. The
expansion of Trinidad's business through the acquisition of Axxis in July
2007, and the higher overhead expenses in the US operations as a result of its
growth over the last year were the main reasons for the increase. As well, a
provision with respect to allowance for doubtful accounts was set up in the
quarter to ensure Trinidad had proper coverage on any potential bad debt
exposure. Despite the overall increase year-to-date in 2008 as compared to
2007, Trinidad continues to focus on maintaining conservative expenditure
levels which allowed the Company to maintain general and administrative
expenses as a percentage of revenue at relatively consistent levels with the
prior year despite the additional provision required for doubtful accounts.
Trinidad will continue to ensure growth for shareholders by creating internal
efficiencies, centralizing certain required functions and integrating its
management team.
Effective January 1, 2008, Trinidad reclassified several costs associated
with field management, equipment insurance and property taxes on the US rigs
into operating expenses from general and administrative expenses to better
align the Company with current industry standards and allow for increased
consistency amongst Trinidad's peer group. Comparative figures for 2007 have
also been reclassified.INTEREST
Three months ended June 30, Six months ended June 30,
($ thousands) 2008 2007 % Change 2008 2007 % Change
-------------------------------------------------------------------------
Interest on
long-term debt 5,793 9,132 (36.6) 12,550 17,358 (27.7)
Effective interest
on deferred
financing costs 422 403 4.7 840 752 11.7
-----------------------------------------------------
6,215 9,535 (34.8) 13,390 18,110 (26.1)
Interest on
convertible
debentures 6,830 - - 13,658 - -
Effective interest
on deferred
financing costs 660 - - 1,318 - -
Accretion on
convertible
debentures 1,195 - - 2,363 - -
-----------------------------------------------------
8,685 - - 17,339 - -During the first half of 2007, Trinidad had a large portion of its debt
facility drawn to fund its rig construction program, which required intensive
capital expenditures. As a result, at the end of the second quarter of 2007,
Trinidad's long-term debt reached $486.9 million, in comparison to
$252.9 million at the end of the second quarter of 2008. This decline in
long-term debt year-over-year was the result of utilizing the net proceeds
from the Company's equity financing completed June 10, 2008 and cash flow from
operations to reduce overall indebtedness. As additional funds beyond daily
cash flow are required to finance the completion of the rig construction
program it will be drawn from the revolving credit facility. The higher debt
levels in the prior year resulted in increased interest expense over the
current quarter. In addition, reductions in the BA and LIBOR rates in 2008 as
compared to 2007 reduced the effective interest on both the Canadian and US
term facilities, which in turn had a favourable impact on interest expense.
Effective July 5, 2007, Trinidad completed the issuance of $354.3 million
in convertible unsecured subordinated debentures in order to complete the
acquisition of Axxis. Proceeds in excess of the purchase price were used to
repay $187.8 million of the Canadian revolving facility, which further reduced
the debt drawn under the facility as at June 30, 2008. Interest on the
convertible debentures is paid semi-annually at a coupon rate of 7.75% and for
the three months ended June 30, 2008 Trinidad recorded associated interest
expense of $6.8 million. The fixed interest rate on the convertible debentures
has reduced Trinidad's exposure to interest rate fluctuations and further
enhances cash flow stability. Additionally, Trinidad has the option to redeem
the debentures in whole or in part at a redemption price of $1,000 after
December 31, 2010 and before their maturity date, but on redemption or
maturity, Trinidad may elect to satisfy its obligation to repay the principal
by issuing shares.STOCK-BASED COMPENSATION
Three months ended June 30, Six months ended June 30,
($ thousands) 2008 2007 % Change 2008 2007 % Change
-------------------------------------------------------------------------
Stock-based
compensation 133 671 (80.2) 302 1,446 (79.1)On March 10, 2008, Trinidad converted from a growth-oriented income trust
to a growth-oriented, dividend-paying corporation. As a result of this
arrangement, Trinidad's former Unit Rights Incentive Plan was rolled into the
Incentive Option Plan (the "Plan"), which is used to assist officers,
employees and consultants of Trinidad and its affiliates to participate in the
growth and development of the Company. Trinidad uses the fair value method to
calculate compensation expense associated with options granted under the Plan.
Compensation expense is then recognized in earnings over the vesting period of
the options granted with a corresponding increase in contributed surplus. As
of the fourth quarter of 2007, substantially all of the 2006 options had been
expensed and, as a result, stock-based compensation decreased from
$1.4 million in the first half of 2007 to $0.3 million in 2008. Total 2007
option issuances amounted to 63,486 in comparison to no issuances for the
first six months of 2008, further contributing to the decline
quarter-over-quarter.FOREIGN EXCHANGE (GAIN) LOSS
Three months ended June 30, Six months ended June 30,
($ thousands) 2008 2007 % Change 2008 2007 % Change
-------------------------------------------------------------------------
Foreign exchange
(gain) loss 859 5,603 (84.7) (3,523) 6,889 151.1Trinidad's US operations have continued to grow and contributed
significantly to the overall operations of the Company. As a result, upon
consolidation Trinidad's US operations are considered to be self-sustaining
and therefore, gains and losses due to fluctuations in the foreign currency
exchange rates are recorded in Other Comprehensive Income ("OCI") on the
balance sheet as a component of equity. However, gains and losses in the
Canadian entity on US denominated intercompany balances continue to be
recognized in the statement of operations. For the first six months of 2008,
Trinidad recognized a gain of $3.5 million in comparison with a loss of
$6.9 million in 2007. Slightly higher intercompany balances, coupled with the
increases in the value of the US dollar over the first half of 2008 in
comparison with declines over the comparable period in the prior year were the
main factors for the variance quarter-over-quarter. The $3.5 million gain
corresponds to an equal and offsetting unrealized loss in the US subsidiary
included in OCI.DEPRECIATION
Three months ended June 30, Six months ended June 30,
($ thousands) 2008 2007 % Change 2008 2007 % Change
-------------------------------------------------------------------------
Depreciation 20,509 14,831 38.3 44,501 33,089 34.5
(Gain) loss on
sale of assets (224) 163 237.4 (317) 207 253.1Depreciation increased 38.3% to $20.5 million in the second quarter of
2008 from $14.8 million in the same time period of 2007, and for the six
months ended June 30, 2008 was $44.5 million, an increase of $11.4 million or
34.5% as compared to the same time period in 2007. This increase was partially
a result of fluctuations in the depreciation rate per drilling day. The
Canadian drilling segment increased depreciation per day by $268 for the six
months ended to $3,077 in 2008 from $2,809 in 2007, while rates remained
relatively static quarter-over-quarter. Concurrently, the US segment also
increased rates per drilling day by approximately US$420 on both a quarterly
and year-to-date basis from the comparative period in 2007. However, the
increase in the rate per drilling day was offset almost entirely by declining
US foreign currency rates, resulting in relatively static rates per drilling
day in Canadian dollars for both periods. Increases in the Company's
depreciation rate per day resulted primarily from changes in the composition
of Trinidad's asset base over these periods as a result of the addition of
drilling rigs with increased drilling depth and more advanced technology,
which incrementally added to the capital cost of Trinidad's asset base.
Increases in the depreciation rate per drilling day, compounded by the
increase in drilling days over the comparable period, resulted in higher
depreciation for both the quarter and six months ended June 30, 2008 in
comparison with the same periods in 2007. For the three months ended June 30,
2008 relatively static rates per drilling day of approximately $3,900 in the
Canadian segment, coupled with an increase of 576 drilling days resulted in an
increase in Canadian depreciation expense of approximately $2.3 million.
Compounded with the US operations which had static US rates per drilling day
of $3,400 and a 28.5% increase in US drilling days from 2,944 in 2007 to 3,783
in 2008 plus the acquisition of Axxis increased US depreciation by
$3.4 million. On a year-to-date basis, higher drilling days at relatively
static dayrates also accounted for the $11.4 million increase in depreciation
from the prior year.
The gain on sale of assets for the three and six months ended June 30,
2008 was the result of the disposition of two properties owned by the Company
that were not fully utilized, thereby allowing operations to be consolidated
into other existing facilities. These gains were offset by smaller losses on
the disposition of assets that were no longer being utilized, consistent with
the prior period.REORGANIZATION COSTS
Three months ended June 30, Six months ended June 30,
($ thousands) 2008 2007 % Change 2008 2007 % Change
-------------------------------------------------------------------------
Reorganization costs 140 - - 2,689 - -On January 10, 2008, the Trust announced its intent to convert from a
growth-oriented income trust to a growth-oriented, dividend-paying
corporation, subject to unitholder and regulatory approval. On March 10, 2008,
unitholders and holders of the exchangeable shares voted, and overwhelmingly
approved, the conversion of the Trust into a public oil and natural gas
services corporation retaining the name "Trinidad Drilling Ltd.". As a result
of this reorganization Trinidad incurred one-time costs of $2.7 million
relating to this conversion which included charges for shareholder
communication, legal counsel, development and execution of fairness opinions
and charges in relation to revising and updating necessary legal documents for
Trinidad's new corporate structure. Trinidad believes it has incurred the
majority of the charges in relation to the above conversion.INCOME TAXES
Three months ended June 30, Six months ended June 30,
($ thousands) 2008 2007 % Change 2008 2007 % Change
-------------------------------------------------------------------------
Current tax expense 1,066 511 108.6 1,697 1,984 (14.5)
Future tax expense
(recovery) 2,492 (3,117) 179.9 11,890 7,117 67.1Year-to-date current income tax expense of $1.7 million decreased by
14.5% from the same period in the prior year as a result of the reorganization
completed at the beginning of 2008 to amalgamate the Company's surface casing
and coring division into its drilling division. This ultimately increased the
tax shield the Company had on earnings from this smaller division allowing
higher tax pools in the Canadian drilling division to shield earnings from
drilling activity in the oil sands. As a result, no current taxes were
recorded on these earnings in 2008, in comparison to approximately
$1.3 million recorded in the same period of 2007. These savings were partially
offset by increased revenues generated by a smaller manufacturing division,
not present in 2007, whose taxable earnings surpassed the allowable deductions
creating a tax liability. There was a marginal increase in the US as a result
of Texas Margins Tax; however, a substantial part of the increase was a direct
result of withholding tax on intercompany interest expense paid from the US
operations to Canada. This current tax is used to offset the taxability of the
Canadian operations through triggering a foreign tax credit; however, due to
the loss position in the current period this deduction has created a further
loss therefore triggering a future tax recovery. The increase of 108.6% in the
current quarter over the same period in the prior year is directly
attributable to this withholding tax and current tax expense on the smaller
manufacturing division, not present in the prior year.
Future income tax expense increased year-over-year by $4.8 million, or
67.1%, and quarter-over-quarter by $5.6 million or 179.9%. The increase in
future tax expenses is primarily as a result of the change from a income trust
structure to a corporation, which eliminated the deduction that the Company
previously had for distributions made to unitholders, subjecting the
consolidated earnings of Trinidad to greater future tax liabilities. These
increases were offset as a result of the decreasing future tax rates due to
changes in the Federal Budget between the second quarter of 2007 and the
current period.NET EARNINGS AND CASH FLOW
($ thousands except
per share data) Three months ended June 30, Six months ended June 30,
2008 2007 % Change 2008 2007 % Change
-------------------------------------------------------------------------
Net earnings 1,141 4,641 (75.4) 40,053 46,584 (14.0)
Per share (diluted) 0.01 0.05 (80.0) 0.47 0.55 (14.5)
Cash flow from
operations 83,977 28,549 194.2 131,949 74,062 78.2
Per share
(diluted) 0.96 0.33 190.9 1.54 0.87 77.0
Cash flow from
operations before
change in non-cash
working capital 27,202 23,353 16.5 97,712 96,163 1.6
Per share (diluted) 0.31 0.27 14.8 1.14 1.13 0.9For the three months ended June 30, 2008, Trinidad's consolidated net
earnings were $1.1 million, representing a decline of $3.5 million or 75.4%
from $4.6 million in 2007. Net earnings declined quarter-over-quarter as a
result of higher income taxes of $3.6 million in 2008, an increase of
$6.2 million or 236.5% as compared to the same period in 2007. Lower future
taxes in the prior year were the result of lower taxable income in the
Canadian market as a result of a more predominant spring break-up in 2007 and
the additional deductions on distributions claimed due to the income trust
structure, which was eliminated in the current year. Furthermore, the interest
on the convertible debentures, which was not present in 2007, and the increase
in depreciation negatively impacted net earnings. Partially offsetting this
was the incremental revenue and associated gross margins from the Canadian and
US operations.
Year-to-date the Company's consolidated net earnings fell $6.5 million or
14.0% from $46.6 million in 2007 to $40.1 million in the current year. These
declines were primarily the result of reduced dayrates in the Canadian
drilling segment in the first quarter of 2008 in comparison with 2007 as
dayrates in the first quarter of 2007 were a continuation of the stronger
drilling market present in 2006. Incremental interest expense on the
convertible debentures, higher depreciation and the incurrence of costs
associated with the reorganization of Trinidad into a new corporate structure
also contributed to the reduction year-over-year. However, these reductions
were partially offset through the overall growth in the Company's US
operations, as well as the unrealized foreign exchange gain due to
strengthening of the US dollar.
Cash flow from operations for the second quarter increased by 194.2% from
$28.5 million ($0.33 per share (diluted)) in 2007 to $84.0 million ($0.96 per
share (diluted)) in 2008 and cash flow from operations before changes in
non-cash working capital for the same period increased by 16.5% from $23.4
million ($0.27 per share (diluted)) in the second quarter of 2007 to $27.2
million ($0.31 per share (diluted)) in 2008. The growth in both cash flow from
operations and cash flow from operations before change in non-cash working
capital was primarily a result of increased revenue and gross margin given the
strong quarter the Company had with increased operating days and utilization
in Canada, along with increased operating days and drilling fleet in the US.
These increases were partially offset by incremental interest paid on the
convertible debentures.
Year-to-date cash flow from operations was $131.9 million ($1.54 per
share (diluted)), representing an increase of $57.9 million or 78.2% as
compared to $74.1 million ($0.87 per share (diluted)) for the same period of
2007. Cash flow from operations before changes in non-cash working capital
also increased by $1.5 million, or 1.6%, to $97.7 million ($1.14 per share
(diluted)) from $96.2 million ($1.13 per share (diluted)) for the same period
in 2007. This year-to-date growth was driven by stability achieved through the
strong results obtained in the US operations where higher revenues offset
slightly reduced margins.-------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES June 30, December 31,
($ thousands except percentages) 2008 2007
-------------------------------------------------------------------------
Working capital 109,600 84,101
Current portion of long-term debt 1,272 1,679
Convertible debentures(1) 319,617 315,991
Long-term debt(1) 251,611 402,489
------------------------
Total debt 572,500 720,159
------------------------
Total debt as a percentage of assets 36.8% 48.1%
Net debt 461,628 634,379
Net debt as a percentage of assets 29.7% 42.4%
Total assets 1,556,592 1,497,156
Total long-term liabilities 629,527 764,102
Total long-term liabilities as a percentage of
assets 40.4% 51.0%
Shareholders' equity 819,448 634,502
Total debt to shareholders' equity 69.9% 113.5%
Total debt to shareholders' equity - assuming
debenture conversion 22.2% 42.5%
Net debt to shareholders' equity 56.3% 100.0%
-------------------------------------------------------------------------
(1) Convertible debentures and long-term debt are reflected net of
associated transaction costs.In the current quarter, Trinidad's long-term debt decreased by
$151.3 million or 37.4% from $404.2 million at year-end to $252.9 million at
June 30, 2008. This reduction in debt is directly related to the closing of an
equity financing completed during the second quarter of 2008 whereby
12,132,353 shares were issued, including the overallotment of 1,102,941
shares, for gross proceeds of $165.0 million. Net proceeds from the equity
issuance were initially used to reduce debt and will subsequently be used to
construct nine high-horsepower drilling rigs, all backed by long-term,
take-or-pay contracts guaranteeing utilization of 100% over their respective
contract terms and six well servicing rigs. These contracts will provide
Trinidad with increased revenue stability and will feature state-of-the-art
technology. As financing is required under the rig construction program the
additional funds will be drawn from the current revolving credit facility. The
reduction in the Company's long-term debt during the quarter also reduced net
debt as a percentage of assets and long-term liabilities as a percentage of
assets. In addition, during the quarter advances were made on the facility
pertaining to the commencement of the drilling program and the final costs of
construction of the barge rig which, together with internally generated cash
flow, were used to fund capital expenditures of $27.5 million.
Working capital also increased by $25.5 million or 30.3% from the end of
the prior year, as a result of the Company's cash position increasing by
$51.4 million due to proceeds from the equity financing portion that were not
applied to debt, as well as the deposit received on the sale of the barge rig
(see subsequent events). This increase was offset by lower accounts receivable
balances which are typical after the completion of the slower second quarter
where receivables and payables tend to decrease at the completion of spring
break-up as a result of lower activity levels leading up to the end of the
quarter. Finally, a current future income tax asset on losses in the
manufacturing division was recorded at the end of the second quarter as a
result of Trinidad's conversion to a corporate structure.
In order to fund the acquisition of Axxis in the third quarter of 2007,
Trinidad completed the issuance of $354.3 million convertible debentures (see
below). The classification of the convertible debentures as debt on the face
of the balance sheet has resulted in the Company's leverage appearing much
higher than some of its peers. However, at maturity or redemption, to the
extent the convertible debentures have not previously been converted by the
holders, the Company may elect to satisfy its obligation to repay the
principal by issuing shares at a price equal to 95.0% of the weighted average
trading price of the shares. As a result, Trinidad has the ability, at its
option, to eliminate any cash requirements in respect of the principal amount
owing on the convertible debentures.
Shareholders' equity increased by $184.9 million from the prior year due
to the equity offering of $165.0 million as well as $21.4 million of net
earnings generated from operations throughout the period, net of dividends
declared to shareholders. Further, Trinidad distributed an additional
$8.4 million to unitholders prior to the conversion to a corporation which
also reduced shareholders' equity. Accumulated Other Comprehensive Income,
which is comprised of gains and losses on the translation of the Company's
foreign subsidiaries and the fair value of Trinidad's interest rate swaps,
increased shareholders' equity by $12.3 million over the period as a result of
strengthening of the US dollar and reductions in future expected interest
rates, respectively. The first half of 2008 exhibited signs of strengthening
in the Canadian market as demand for drilling increased utilization levels and
the US operations continued to maintain high utilization rates and drilling
activity. The acquisition of Axxis in the third quarter of 2007 has been
positive for the Company, adding diversification to the drilling fleet and
providing increased opportunities for expansion. These factors, along with the
recent equity financing, have allowed Trinidad to strengthen its capital
position throughout the quarter, reducing net debt levels by $172.8 million to
$461.6 million at June 30, 2008, down from $604.3 million at March 31, 2008.
In addition, net debt as a percentage of assets also declined to 29.7% from
42.4% at year end and total debt to shareholders' equity (assuming debenture
conversion) has also declined from 42.5% at year end to 22.2% at June 30,
2008.
Convertible debentures
In connection with the acquisition of Axxis, Trinidad issued
$354.3 million in unsecured subordinated convertible debentures, of which
$325.0 million was issued through a public offering and $29.3 million was
issued to the former owners of Axxis. The debentures are convertible into
shares of Trinidad at the option of the holder at any time prior to maturity
at a conversion price of $19.30 per share. They have a face value of $1,000, a
coupon rate of 7.75%, and mature July 31, 2012, with interest being paid
semi-annually on June 30 and December 31. Trinidad has the option to redeem
the debentures in whole or in part at a redemption price of $1,000 after
December 31, 2010 and before their maturity date. On redemption or maturity,
Trinidad may elect to satisfy its obligation to repay the principal by issuing
common shares. The value of the conversion feature at the time of issuance was
determined using the Black-Scholes pricing model to be $28.2 million and has
been recorded as equity with the remaining $326.1 million allocated to
long-term debt, net of $13.6 million of transaction costs. The debentures are
being accreted such that the liability at maturity will equal the face value
of the debt.
As at June 30, 2008, there had been a conversion of $60,000 convertible
debentures which equated to 3,108 common shares of Trinidad Drilling Ltd.-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY June 30, December 31,
($ thousands) 2008 2007
-------------------------------------------------------------------------
Shareholders' equity 837,646 -
Unitholders' capital - 675,728
Exchangeable shares - 2,477
-------------------------------------------------------------------------On January 10, 2008, the Trust announced its intent to convert from a
growth-oriented income trust to a growth-oriented, dividend-paying
corporation. On March 10, 2008, unitholders and holders of the exchangeable
shares voted, and overwhelmingly approved, the conversion of the Trust into a
public oil and natural gas services corporation retaining the name "Trinidad
Drilling Ltd.". As a result of this conversion unitholders and holders of the
exchangeable shares received shares in the newly created corporation on a 1:1
basis, after giving effect to the exchange ratio on the exchangeable shares at
the time of conversion. As a result, unitholders' capital was transferred into
shareholders' equity during the first quarter of 2008.
Shareholders' equity increased from $678.3 million at the time of
conversion to $837.6 million as at June 30, 2008. The increase was mainly
attributable to equity financing that was closed in the quarter at which time
a total of 12,132,353 common shares, which included the overallotment of
1,102,941 common shares, were issued for gross proceeds of $165.0 million.
This offering, in addition to the exercise of 109,763 options ($1.1 million)
since the time of conversion and the conversion of convertible debentures
representing 3,108 common shares ($0.1 million), resulted in the $159.3
million increase of shareholders' equity. Unitholders' capital also increased
prior to the conversion to a corporation by $2.6 million as a result of the
conversion of 253,430 Series A exchangeable shares ($2.0 million) to 352,328
trust units, the conversion of 47,169 Series C exchangeable shares ($0.5
million) to 59,905 trust units and 7,850 shares issued for options exercised
($0.1 million).
Shareholders' equity on August 1, 2008 was $837.7 million (96,290,881
shares).
SEASONALITY
Trinidad operates a substantial number of rigs 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
natural 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.
Trinidad'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 have more flexibility to work throughout the year.
This increased number of operating days throughout the year has allowed
Trinidad to better manage its business with more sustainable cash flow
throughout the annual cycle.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the unaudited interim 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
unaudited interim consolidated financial statements may change as future
events unfold, additional experience is acquired or Trinidad's operating
environment changes.
Depreciation
The accounting estimate that has the greatest impact on Trinidad's
financial results is depreciation. Depreciation of Trinidad'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 Trinidad's capital assets.
Stock-based compensation
Compensation expense associated with options at grant date are estimates
based on various assumptions such as volatility, annual dividend 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
Trinidad 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. Trinidad'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 natural gas industry, the credit risks can
change suddenly and without notice.
Goodwill
In accordance with Canadian GAAP, Trinidad performs an annual goodwill
impairment each fiscal year and sooner when changing circumstances indicate a
possible impairment exists. In accordance with this, Trinidad performed its
impairment test as at December 31, 2007, and no goodwill impairment existed.
As at June 30, 2008, no changes in circumstances indicate that this assessment
should be re-performed.
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. Trinidad receives the valuation from
the contract counterparty on a quarterly basis and records the associated
change in fair value at each reporting period.
Future Income Taxes
The recording of future income tax involves the use of various
assumptions to estimate the amounts and timing of the reversals of temporary
differences between assets and liabilities recognized for accounting and tax
purposes. It also involves the estimation of the effective tax rates for
future fiscal years. The assumptions used (which include, but are not limited
to, estimated results of operations, tax pool claims and accounting
deductions) are based on management's current estimates and will likely change
in future periods based on actual results and accordingly so will the
estimates.
CHANGES IN ACCOUNTING POLICY
Effective January 1, 2008, Trinidad adopted the following new accounting
standards issued by the Canadian Institute of Chartered Accountants ("CICA"),
as described further in note 2 of the notes to the unaudited interim
consolidated financial statements.
Capital Disclosures
CICA Section 1535 establishes both qualitative and quantitative
disclosure requirements about an entity's capital and how it is managed. As a
result of adopting this section, Trinidad is now required to disclose
qualitative information about its objectives, policies and processes for
managing capital, such that users of the financial statements will be able to
evaluate the Company's management of capital.
Inventories
CICA Section 3031 provides guidance on the measurement of inventory, by
providing several appropriate valuation techniques to be used in the
determination of the cost of inventory, based on the type of inventory held.
The adoption of this new standard had no impact on the measurement of
inventories; however, further disclosure was required, including the carrying
value of each classification of inventory, a reconciliation of the expenses
related to inventory used during the period and the disclosure of the amount
of any write-downs or reversals of previously written-down amounts, if any.
Financial Instruments
The CICA issued two new accounting standards with respect to financial
instruments: Section 3862 - Financial Instruments - Disclosure and Section
3863 - Financial Instruments - Presentation. Section 3862, adopted by Trinidad
in conjunction with Section 3863, emphasizes disclosures regarding the nature
and extent of the risks arising from financial instruments and how those risks
are managed. Following the requirements of Section 3855 - Financial
Instruments - Recognition and Measurement, adopted January 1, 2007; this new
section recommends additional disclosures, including qualitative analysis of
the financial instrument risks faced by Trinidad, as well as a quantitative
analysis of the effect of changes to these risks, based on market conditions,
and their potential impact on Trinidad.
Section 3863 establishes recommendations for the presentation of
financial instruments and non-financial derivatives in the financial
statements. There was no impact of the adoption of this section as it is
substantially similar to the previously adopted Section 3861 - Financial
Instruments - Disclosure and Presentation.
FUTURE CHANGES IN ACCOUNTING POLICIES
The CICA issued a new accounting standard, Section 3064 - Goodwill and
Intangible Assets, which replaces Sections 3062 - Goodwill and Other
Intangible Assets and 3450 - Research and Development Costs; and amended
Section 1000 - Financial Statement Concepts. These accounting standards
updates will be effective for fiscal years beginning on or after October 1,
2008 and Trinidad plans to adopt them effective January 1, 2009. Section 3064
recommends standards for the recognition, measurement and disclosure of
goodwill and intangible assets, including research and development costs, and
Section 1000 has been amended to clarify the criteria for recognition of an
asset. Trinidad is in the process of evaluating the impact of these standards.
DISCLOSURE CONTROLS & PROCEDURES
Disclosure controls and procedures are designed to provide reasonable
assurance that all information required to be disclosed by Trinidad 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.
Management of Trinidad has evaluated the effectiveness of the design 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. There have been no changes in the Company's internal controls
over financial reporting or disclosure controls and procedures that occurred
since the year ended December 31, 2007 and no material weaknesses or
significant deficiencies have been identified in the design of these controls,
except as noted below, that could materially affect or are reasonably likely
to affect the Company's internal controls over financial reporting.
Trinidad is continuing to complete an assessment of the business process
controls of Mastco and Axxis and has not concluded on the design effectiveness
as at June 30, 2008. As a result, Trinidad has relied on management's review
procedures to assess the accuracy of the financial statements at the reporting
date.
SUBSEQUENT EVENTS
Effective July 10, 2008, Trinidad announced the sale of its nearly
constructed barge drilling rig to an international third party for
US$53.5 million. Upon receipt of the signed purchase agreement, the Company
received a US$5.35 million non-refundable deposit and anticipates receipt of
the balance owed by the end of the third quarter. The construction of the
barge rig will continue to be managed by Trinidad and is expected to be
completed in the third quarter. Any modifications requested by the buyer from
the current rig design will be completed, but will be subject to a handling
fee and will be adjusted as part of the final purchase price. The proceeds
generated will be used for future expansion as Trinidad continues to see
strong opportunities in both the US land and barge drilling markets.
Effective July 17, 2008, Trinidad announced the construction of an
additional seven rigs to the rig construction program previously announced in
May 2008. These rigs are all backed by long-term, take-or-pay contracts with
two major North American oil and natural gas companies. Total costs of
construction are expected to be approximately $105.0 million and Trinidad
intends to fund the rig construction program from its operating cash flow and
funds available under its existing credit facility.
OUTLOOK
Exiting the first half of 2008, significantly higher commodity prices for
both oil and natural gas have signalled expectations for higher activity
levels for the remainder of this year and into 2009. While commodity prices
remain volatile, and the potential for softening in both oil and natural gas
pricing is still present, the higher commodity price levels over the last
several months, coupled with limited current supply and strengthening demand,
provide a strong catalyst for increased demand for oilfield services in the
coming quarters. As road bans have been lifted Trinidad's Canadian operations
have ramped up to normal activity levels moving into the third quarter and we
anticipate activity levels to increase moving forward as operators respond to
strong commodity prices and the backlog of proposed wells to be drilled. One
key issue that could still negatively impact well activity in Canada moving
forward is the potential burden that Alberta's New Royalty Framework could
bring in 2009. However, we are encouraged by the fact that some Canadian oil
and natural gas producers have increased their capital spending budgets, with
further increases looking probable and drilling continues in other
jurisdictions beyond Alberta. Increased capital spending boosts producers'
future production and reserve growth potential and has a positive impact on
field activity and cash flow for Trinidad.
The CAODC recently released a revised forecast of activity for the
balance of 2008. The revision confirms some renewed optimism within the
industry. In October 2007, the CAODC released a projection that identified a
drastic reduction in the number of wells that would be drilled in 2008,
compared with 2007 and 2006. In its revised forecast, the CAODC notes that we
are beginning to see the signs of an industry that is looking forward to
increasing activity based on renewed strength in commodity prices and positive
drilling results. The CAODC is now projecting approximately 18,000 well
completions for 2008, which represents a 28% increase from their October 2007
forecast and in terms of rig utilization, the revised CAODC forecast calls for
42% utilization in 2008 as compared to their original forecast of 34%.
We continue to see strong opportunities in both the US land drilling
market and the US Gulf Coast barge drilling market and expect overall rig
activity to continue to rise in the US moving forward. Trinidad continues to
follow an investment strategy designed to ensure growth for shareholders by
way of capital appreciation through the pursuit of opportunities including the
expansion into the US market as well as diversification of the overall asset
base. This strategy will further the Company's revenue diversification,
provide superior growth, and strengthen our overall equipment efficiency. The
two recently announced rig construction programs follow this strategy as they
will add to the current fleet further diversifying Trinidad's asset base to
include deep drilling rigs which typically obtain higher dayrates, utilization
levels and margins as compared with other rigs of shallower capabilities.
Trinidad has the competitive advantage of having an established operational
base in the US, complete with training programs and facilities, and will be
able to quickly and efficiently integrate this new equipment into its existing
operations. Trinidad's reputation for providing superior equipment and
performance continues to be recognized by our customers. The newer, more
efficient equipment we provide gives Trinidad a competitive advantage and is
reflected in the high utilization rates and solid profit margins we
consistently are able to generate and maintain. We expect the US segment to
continue to deliver strong results on an on-going basis as operations in this
region continue to be supported by strong customer demand.
The drilling and well servicing sector of the oil and natural gas
industry in North America ranks as one of the most competitive areas of
business. As a service industry, its activities are directly affected by its
customers' exploration and development efforts which, in turn, are dictated by
world energy prices and government policies. Historically, Trinidad has
generally exceeded industry average rig utilization as a result of customer
relations, employee expertise, equipment quality and drilling performance.
Trinidad remains well positioned to take advantage of opportunities with
state-of-the-art equipment and well-trained crews for deep natural gas and oil
drilling in both Canada and the US land and barge drilling markets.
Trinidad Drilling Ltd. is a growth-oriented, dividend-paying oil and
natural gas services provider based in Calgary, Alberta. Focusing on deep
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, the Company will have 126 land drilling rigs ranging in depth
capacities from 1,000 - 6,500 metres and four barge drilling rigs operating in
the Gulf of Mexico. In addition to its drilling rigs, Trinidad will have 26
well servicing rigs that have been completely retrofitted or were constructed
within the past five years and 20 pre-setting 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 highly capable, expertly designed, well-equipped, adaptable and
competitive in the industry."signed" Lyle C. Whitmarsh "signed" Brent J. Conway
------------------------------ -------------------------
President and Chief Executive Chief Financial Officer
OfficerThe Toronto Stock Exchange has neither approved nor disapproved the
information contained herein.
Trinidad will be holding a conference call and webcast to discuss its
second quarter 2008 results on August 12, 2008 beginning at 9:00 a.m. MT
(11:00 a.m. ET). To participate, please dial (800) 732-6179 (toll-free in
North America) or (416) 644-3417 approximately 10 minutes prior to the
conference call. An archived recording of the call will be available from
approximately 11:00 a.m. MT on August 12 until midnight August 19, 2008 by
dialling (877) 289-8525 or (416) 640-1917 and entering replay access code
21277788 followed by the number sign.
A live audio webcast of the conference call will also be available via
Trinidad's website, www.trinidaddrilling.com.-------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
($ thousands - Unaudited)
June 30, December 31,
2008 2007
-------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 69,417 18,021
Accounts receivable 125,602 143,522
Inventory (note 6) 15,909 18,231
Prepaid expenses 4,156 2,879
Future income taxes 2,133 -
------------------------
217,217 182,653
Deposit on capital assets 4,470 3,458
Capital assets 1,137,703 1,110,730
Goodwill 171,551 169,134
Other long-term assets 25,651 31,181
------------------------
1,556,592 1,497,156
------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 81,730 78,649
Dividends payable 14,442 -
Accrued trust distributions - 9,616
Current portion of deferred revenue 7,256 6,890
Current portion of long-term debt 1,272 1,679
Current portion of fair value of interest rate
swap 2,917 1,718
------------------------
107,617 98,552
Deferred revenue 2,285 4,038
Long-term debt 251,611 402,489
Convertible debentures, net of transaction costs 319,617 315,991
Fair value of interest rate swaps 3,382 4,211
Future income taxes 52,632 37,373
------------------------
737,144 862,654
Shareholders' equity
Shareholders' equity (note 7(a)) 837,646 -
Unitholders' capital (note 7(b)) - 675,728
Exchangeable shares (note 8) - 2,477
Convertible debentures 28,218 28,223
Contributed surplus (note 7(c)) 13,991 13,843
Accumulated other comprehensive loss (49,473) (61,788)
Retained earnings (deficit) (10,934) (23,981)
------------------------
819,448 634,502
------------------------
1,556,592 1,497,156
------------------------
(See notes to the unaudited interim consolidated financial statements)
Commitments (note 12)
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
($ thousands except share and per share data - Unaudited)
Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
Revenue
Oilfield services 141,859 115,215 362,876 321,148
Bareboat Charter loss
(note 12) (881) - (2,305) -
Other 201 279 259 557
---------------------------------------------------
141,179 115,494 360,830 321,705
---------------------------------------------------
Expenses
Operating 87,414 72,955 208,637 186,149
General and
administrative 12,749 9,701 24,172 20,130
Interest on long-term
debt (note 11) 6,215 9,535 13,390 18,110
Interest on
convertible
debentures (note 11) 8,685 - 17,339 -
Stock-based
compensation 133 671 302 1,446
Foreign exchange (gain)
loss 859 5,603 (3,523) 6,889
Depreciation 20,509 14,831 44,501 33,089
(Gain) loss on sale of
assets (224) 163 (317) 207
Reorganization costs 140 - 2,689 -
---------------------------------------------------
136,480 113,459 307,190 266,020
---------------------------------------------------
Earnings before income
taxes 4,699 2,035 53,640 55,685
Income taxes
Current tax expense 1,066 511 1,697 1,984
Future tax expense
(recovery) 2,492 (3,117) 11,890 7,117
---------------------------------------------------
3,558 (2,606) 13,587 9,101
---------------------------------------------------
Net earnings 1,141 4,641 40,053 46,584
Dividends (14,442) - (18,644) -
Trust distributions - (28,836) (8,362) (57,573)
Retained earnings
(deficit)
- beginning
of period 2,367 24,965 (23,981) 11,759
---------------------------------------------------
Retained earnings
(deficit) - end of
period (10,934) 770 (10,934) 770
---------------------------------------------------
Earnings per share
Basic 0.01 0.06 0.47 0.56
Diluted 0.01 0.05 0.47 0.55
Weighted average number
of shares
Basic 86,750,690 83,947,198 85,347,826 83,872,182
Diluted 87,825,214 85,711,891 85,916,240 85,294,628
(See notes to the unaudited interim consolidated financial statements)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
($ thousands - Unaudited)
Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
Net earnings 1,141 4,641 40,053 46,584
Other comprehensive
income
Change in fair value
of derivatives
designated as cash
flow hedges, net of
income tax
(note 11) 1,340 1,678 (245) 1,738
Foreign currency
translation
adjustment (2,902) (23,948) 12,560 (26,686)
---------------------------------------------------
Total other
comprehensive
income (loss) (1,562) (22,270) 12,315 (24,948)
---------------------------------------------------
Comprehensive income
(loss) (421) (17,629) 52,368 21,636
---------------------------------------------------
(See notes to the unaudited interim consolidated financial statements)
-------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
($ thousands - Unaudited)
Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
Accumulated other
comprehensive loss
- beginning of
period (47,911) (7,128) (61,788) (750)
Adjust opening balance
due to adoption of
new accounting
policies - - - (3,700)
Other comprehensive
income (loss) during
the period (1,562) (22,270) 12,315 (24,948)
---------------------------------------------------
Accumulated other
comprehensive loss
- end of period (49,473) (29,398) (49,473) (29,398)
---------------------------------------------------
(See notes to the unaudited interim consolidated financial statements)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands - Unaudited)
Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
Cash provided by
(used in)
Operating activities
Net earnings for the
period 1,141 4,641 40,053 46,584
Items not affecting
cash
Depreciation 20,509 14,831 44,501 33,089
(Gain) loss on sale
of assets (224) 163 (317) 207
Stock-based
compensation 133 671 302 1,446
Future income taxes
expense (recovery) 2,492 (3,117) 11,890 7,117
Effective interest
on financing costs
(note 11) 1,082 403 2,158 752
Accretion on
convertible
debentures (note 11) 1,195 - 2,363 -
Unrealized foreign
exchange loss (gain) 874 5,761 (3,238) 6,968
---------------------------------------------------
27,202 23,353 97,712 96,163
Net change in non-cash
operating working
capital 56,775 5,196 34,237 (22,101)
---------------------------------------------------
83,977 28,549 131,949 74,062
---------------------------------------------------
Investing activities
(Increase) decrease
in deposits on
capital assets (752) 8,794 (918) 36,964
Purchase of capital
assets (26,740) (55,701) (56,915) (189,255)
Proceeds from
dispositions 519 286 3,260 489
Change in non-cash
working capital 13,162 26,397 (11,483) 31,294
---------------------------------------------------
(13,811) (20,224) (66,056) (120,508)
---------------------------------------------------
Financing activities
Increase (decrease) in
long-term debt, net (164,816) 26,229 (149,553) 112,295
Proceeds from share
issuance (note 7) 158,038 - 158,038 -
Proceeds from exercise
of options (note 7) 1,071 1,109 1,189 2,302
Decrease in deferred
revenue (200) (3,216) (1,625) 1,501
Trust unit distribution - (28,815) (17,978) (57,503)
Dividends paid (4,202) - (4,202) -
Debt financing costs (600) (600) (600) (600)
---------------------------------------------------
(10,709) (5,293) (14,731) 57,995
---------------------------------------------------
Cash flow from
operating, investing
and financing
activities 59,457 3,032 51,162 11,549
Effect of translation
on foreign currency
cash 40 (2,735) 234 (3,858)
---------------------------------------------------
Increase in cash for
the period 59,497 297 51,396 7,691
Cash - beginning of
period 9,920 16,807 18,021 9,413
---------------------------------------------------
Cash - end of period 69,417 17,104 69,417 17,104
---------------------------------------------------
Interest paid 19,546 9,192 26,763 16,918
Taxes paid 2,052 61 2,100 147
(See notes to the unaudited interim consolidated financial statements)
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. STRUCTURE OF THE CORPORATION
Organization
Trinidad Drilling Ltd. ("Trinidad" or the "Company") is incorporated
under the laws of the Province of Alberta. The Company was formed by
way of an arrangement under the Business Corporations Act of Alberta
pursuant to an arrangement agreement dated January 9, 2008 between
the Company and Trinidad Energy Services Income Trust (the "Trust").
The Arrangement involved the exchange, on a one-for-one basis of
trust units and exchangeable shares, after accounting for the
conversion factor applicable to the exchangeable shares, for common
shares of Trinidad. The effective date of the Arrangement was
March 10, 2008 - see note 3.
2. ACCOUNTING POLICIES AND ESTIMATES
These unaudited interim consolidated 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, 2007, except as noted below, and
therefore do not contain all of the disclosures required for the
annual financial statements. As a result, the unaudited interim
consolidated financial statements should be read in conjunction with
the audited consolidated financial statements of the Trust contained
in the annual report for the year ended December 31, 2007.
Adoption of New Accounting Standards
Effective January 1, 2008, Trinidad adopted the following new
accounting standards issued by the Canadian Institute of Chartered
Accountants ("CICA"):
Capital Disclosures
CICA Section 1535 establishes both qualitative and quantitative
disclosure requirements about an entity's capital and how it is
managed. As a result of adopting this section, Trinidad is now
required to disclose qualitative information about its objectives,
policies and processes for managing capital, such that users of the
financial statements will be able to evaluate the Company's
management of capital - see note 10.
Inventories
CICA Section 3031 provides guidance on the measurement of inventory,
by providing several appropriate valuation techniques to be used in
the determination of the cost of inventory, based on the type of
inventory held. The adoption of this new standard had no impact on
the measurement of inventories; however, further disclosure was
required, including the carrying value of each classification of
inventory, a reconciliation of the expenses related to inventory used
during the period and the disclosure of the amount of any write-downs
or reversals of previously written-down amounts, if any - see note 6.
Financial Instruments
The CICA issued two new accounting standards with respect to
financial instruments: Section 3862 - Financial Instruments -
Disclosure and Section 3863 - Financial Instruments - Presentation.
Section 3862, adopted by Trinidad in conjunction with Section 3863,
emphasizes disclosures regarding the nature and extent of the risks
arising from financial instruments and how those risks are managed.
Following the requirements of Section 3855 - Financial Instruments -
Recognition and Measurement, adopted January 1, 2007; this new
section recommends additional disclosures, including qualitative
analysis of the financial instrument risks faced by Trinidad, as well
as a quantitative analysis of the effect of changes to these risks,
based on market conditions, and their potential impact on Trinidad -
see note 11.
Determination of Fair Market Value
The fair value of Trinidad's long-term debt was determined using
current market price indicators and the fair-value of the convertible
debentures was calculated at the quoted market price.
Section 3863 establishes recommendations for the presentation of
financial instruments and non-financial derivatives in the financial
statements. There was no impact of the adoption of this section as it
is substantially similar to the previously adopted Section 3861 -
Financial Instruments - Disclosure and Presentation.
There are no other material impacts on the unaudited interim
consolidated financial statements for the adoption of these new
standards.
FUTURE CHANGES IN ACCOUNTING POLICIES
The CICA issued a new accounting standard, Section 3064 - Goodwill
and Intangible Assets, which replaces Sections 3062 - Goodwill and
Other Intangible Assets and 3450 - Research and Development Costs;
and amended Section 1000 - Financial Statement Concepts. These
accounting standards updates will be effective for fiscal years
beginning on or after October 1, 2008 and Trinidad plans to adopt
them effective January 1, 2009. Section 3064 recommends standards for
the recognition, measurement and disclosure of goodwill and
intangible assets, including research and development costs, and
Section 1000 has been amended to clarify the criteria for recognition
of an asset. Trinidad is in the process of evaluating the impact of
these standards.
3. THE ARRANGEMENT
On March 10, 2008, unitholders of the Trust and holders of the
exchangeable shares (the "Securityholders") voted, and overwhelmingly
approved, reorganizing the Trust, by way of a plan of arrangement
under the Business Corporations Act (Alberta), into a corporation
(the "Arrangement") pursuant to an arrangement agreement dated
January 9, 2008 between Trinidad and the Trust. The purpose of the
Arrangement was to convert the Trust back into a corporate structure
that was better suited to its core business model of growth and
capital appreciation for its Securityholders. Management and the
Board of Directors believe that the best opportunity for creating
value is by reinvesting a significant portion of overall cash flow
back into the business and to focus on increasing overall per share
earnings, cash flow, net asset value, as well as overall debt
reduction and they believe that a corporate structure better
positions Trinidad to pursue these initiatives. For financial
reporting presentation purposes, these changes are being treated as
if they occurred on January 1, 2008.
The Arrangement resulted in: (i) unitholders receiving Trinidad
shares in exchange for their trust units on a one-for-one basis; and
(ii) exchangeable shareholders receiving Trinidad shares on the same
basis as unitholders based on the number of trust units into which
such shares were exchangeable into on the effective date of the
Arrangement.
Effective March 10, 2008, Trinidad established an Incentive Option
Plan under which incentive options will be granted to officers,
employees and consultants to provide an opportunity for these
individuals to participate in the growth and development of the
Company. The Incentive Option Plan was developed to replace the Unit
Rights Incentive Plan of the Trust and, in accordance with the
Arrangement, participants received incentive options on a one-for-one
basis for the incentive rights held at the time of conversion.
References to the "Incentive Options Plan" and "options" should be
read as references to "Unit Rights Incentive Plan" and "rights",
respectively, for periods prior to March 10, 2008.
4. SEASONALITY
Trinidad operates a substantial number of rigs 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 natural 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.
Trinidad'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 US operators have increased
flexibility to work throughout the year. This increased number of
operating days throughout the year has allowed Trinidad to better
manage its business with more sustainable cash flows throughout the
annual cycle.
5. ACQUISITION
Acquisition of assets of Axxis
Effective July 5, 2007, a subsidiary of Trinidad purchased
substantially all of the assets 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") for consideration of
$148.1 million. Additionally, Trinidad acquired a commitment to
construct an additional barge rig for approximately US$27.5 million,
of which $5.6 million had been spent at the time of acquisition and
was reimbursed to the former owners and included in the purchase
price. The acquisition was funded through the issuance of
$29.3 million of convertible debentures to the former shareholders of
Axxis and $124.4 million in cash proceeds raised through a public
issuance of 325,000 convertible debentures for gross proceeds of
$325.0 million. Earnings of Axxis have been included in consolidated
earnings since the closing date of July 5, 2007.
The consideration paid for this acquisition has been allocated under
the purchase method as follows:
($ thousands) 2007
---------------------------------------------------------------------
Purchase price allocated as follows:
Capital assets 96,488
Assets under construction 5,624
Intangible assets 39,569
Goodwill 51,636
Long-term liabilities (39,569)
------------
153,748
------------
Financed as follows:
Convertible debentures 29,337
Cash 124,411
------------
153,748
------------
As a result of the acquisition of Axxis, Trinidad is obligated to pay
US$12.5 million annually to the former shareholders of Axxis for the
next three years following the acquisition pertaining to provisions
under the Bareboat Charters, discussed further in note 12 -
Commitments. The consideration will be paid annually and is
contingent on the continued operation of three barge rigs currently
under contract. To the extent that these contracts are terminated
prior to the end of the three years no further payments will be
required. The amount paid under this commitment is considered a cost
of the purchase and has been included in the purchase price and will
be accrued and recorded against the associated revenue earned from
the rigs and reported net as Bareboat Charter income (loss).
6. INVENTORY
June 30, December 31,
($ thousands) 2008 2007
---------------------------------------------------------------------
Parts and materials 8,621 8,884
Work-in-progress 7,288 9,347
-------------------------
Total inventory 15,909 18,231
-------------------------
All inventory balances are carried at the lower of cost or net
realizable value. The construction operations regularly utilizes
inventory in the construction and recertification of rigs and rig
related equipment. For the three and six months ended June 30, 2008,
there were no material write-downs or reversals of previously
written-down amounts.
Throughout the period the amount of inventories recognized as an
expense were:
Three months Six months
ended June 30, ended June 30,
($ thousands) 2008 2007 2008 2007
---------------------------------------------------------------------
Raw materials and
consumables
purchased 17,121 22,084 27,287 48,901
Labour costs 3,991 3,938 7,308 7,064
Other costs 118 82 218 146
Net change in
inventory 5,029 (1,794) 2,322 (2,378)
---------------------------------------------------
Amount of
inventories
expensed in
period 26,259 24,310 37,135 53,733
---------------------------------------------------
7. SHAREHOLDERS' EQUITY AND CONTRIBUTED SURPLUS
a) Shareholders' equity
Authorized
Unlimited number of common shares, voting, participating
($ thousands except
share data) June 30, 2008 December 31, 2007
---------------------------------------------------------------------
Number Amount Number Amount
of Shares $ of Shares $
---------------------------------------------------
Shareholders'
equity - opening
balance - - - -
Shares issued
pursuant to the
Arrangement 84,035,873 678,282 - -
Shares issued for
cash, net of
transaction
costs 12,132,353 158,038 - -
Shares issued on
exercise of
options 109,763 1,122 - -
Shares issued on
conversion of
convertible
debentures 3,108 60 - -
Contributed
surplus
transferred on
exercised
options - 144 - -
---------------------------------------------------
Shareholders'
equity - closing
balance 96,281,097 837,646 - -
---------------------------------------------------
b) Unitholders' capital
($ thousands except
unit data) June 30, 2008 December 31, 2007
---------------------------------------------------------------------
Number Amount Number Amount
of Units $ of Units $
---------------------------------------------------
Unitholders'
capital -
opening balance 83,615,790 675,728 82,981,952 669,584
Trust units
issued on
conversion of
exchangeable
shares 412,233 2,477 356,404 3,300
Trust units
issued on
exercise of
rights 7,850 67 277,434 2,515
Contributed
surplus
transferred on
exercised rights - 10 - 329
Trust units
cancelled under
the Arrangement (84,035,873) (678,282) - -
---------------------------------------------------
Unitholders'
capital -
closing balance - - 83,615,790 675,728
---------------------------------------------------
c) Contributed surplus
June 30, December 31,
($ thousands) 2008 2007
---------------------------------------------------------------------
Contributed surplus - opening balance 13,843 11,722
Stock-based compensation expense 302 2,450
Contributed surplus transferred on exercise
of options (154) (329)
-------------------------
Contributed surplus - ending balance 13,991 13,843
-------------------------
8. EXCHANGEABLE SHARES
Trinidad has the following exchangeable shares outstanding:
($ thousands except
share data) June 30, 2008 December 31, 2007
---------------------------------------------------------------------
Number Amount Number Amount
of Shares $ of Shares $
---------------------------------------------------
Exchangeable
shares - opening
balance 300,599 2,477 611,966 5,777
Exchangeable
shares
exchanged,
Initial Series (253,430) (1,977) - -
Exchangeable
shares
exchanged,
Series C (47,169) (500) (311,367) (3,300)
---------------------------------------------------
Exchangeable
shares - ending
balance - - 300,599 2,477
---------------------------------------------------
Pursuant to the Arrangement all the exchangeable shares of Trinidad
were converted based on the exchange ratio in effect at the time of
conversion to trust units and subsequently exchanged on a one-for-one
basis for common shares. The initial series exchangeable shares were
exchanged at a ratio of 1.39024 providing for 352,328 trust units
upon conversion. The Series C exchangeable shares were exchanged at a
ratio of 1.27001 providing for 59,905 trust units upon conversion.
9. INCENTIVE OPTION PLAN
On May 2, 2003, the Trust established the Unit Rights Incentive Plan
and pursuant to the Arrangement on March 10, 2008, all outstanding
incentive rights were exchanged, on a one-for-one basis, for
incentive options under the new Incentive Option Plan. The Incentive
Option Plan was created to assist directors, officers, employees and
consultants of Trinidad and its affiliates to participate in the
growth and development of the Company. The Incentive Option Plan is
substantially identical to the Unit Rights Incentive Plan; however,
does not include an exercise price reduction mechanism.
The following table sets out options that are outstanding under
Trinidad's Incentive Option Plan:
June 30, 2008 December 31, 2007
---------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price ($) Rights Price ($)
---------------------------------------------------
Outstanding -
opening balance 7,965,670 12.55 8,246,839 12.43
Granted during
the period - - 63,486 13.44
Exercised during
the period (117,613) 10.11 (277,434) 9.06
Forfeited during
the period (88,555) 14.61 (67,221) 13.38
---------------------------------------------------
Outstanding -
ending balance 7,759,502 12.56 7,965,670 12.55
---------------------------------------------------
Trinidad uses the Black-Scholes option-pricing model to determine the
estimated fair value of options issued subsequent to January 1, 2003.
The per share weighted average fair value of options granted during
the period ended June 30, 2008 was nil as no options were granted
over this period (2007 - $1.49).
10. CAPITAL MANAGEMENT
Trinidad's capital is comprised of debt, convertible debentures and
shareholders' equity, less cash and cash equivalents. Management
regularly monitors total capitalization to ensure flexibility in the
pursuit of ongoing initiatives, while ensuring that shareholder
returns are being maximized. The overall capitalization of the
Company is outlined below:
June 30, December 31,
($ thousands) 2008 2007
---------------------------------------------------------------------
Long-term debt(1) 257,352 407,786
Convertible debentures(1) 330,589 328,281
-------------------------
Total debt 587,941 736,067
Shareholders' equity 819,448 634,502
Less: cash and cash equivalents (69,417) (18,021)
-------------------------
Total capitalization 1,337,972 1,352,548
(1) Balance outstanding without consideration of transaction costs.
Management is focused on several objectives while managing the
capital structure of the Company. Specifically:
i. Ensuring Trinidad has the financing capacity to continue to
execute on opportunities to increase overall market share
through strategic acquisitions and fleet construction programs
that add value for our shareholders;
ii. Maintaining a strong capital base to ensure that investor,
creditor and market confidence is secured;
iii. Maintaining balance sheet strength, ensuring Trinidad's
strategic objectives are met, while retaining an appropriate
amount of leverage;
iv. Providing shareholder return through dividends to ensure that
income-oriented investors are provided a cash yield; and
v. Safeguarding the entity's ability to continue as a going
concern, such that it continues to provide returns for
shareholders and benefits for other stakeholders.
Trinidad manages its capital structure based on current economic
conditions, the risk characteristics of the underlying assets, and
Trinidad's planned capital requirements, within guidelines approved
by its Board of Directors. Total capitalization is maintained or
adjusted by drawing on existing debt facilities, issuing new debt or
equity securities when opportunities are identified and through the
disposition of underperforming assets to reduce debt or equity when
required. On March 10, 2008, Trinidad converted from a growth-
oriented income trust to a growth-oriented, dividend-paying
corporation. As a result of this conversion the capital focus of the
Company was shifted to realign with prior objectives of aggressive
growth in its business and increasing returns to shareholders. Prior
to the conversion Trinidad was subject to the "Normal Growth"
provisions enacted under Bill C-52, which effectively limited the
growth the Company could pursue. No longer constrained by these
provisions, under the new corporate structure, management will be
better positioned to pursue identified growth opportunities.
The Company's syndicated loan facility is subject to five financial
covenants, which are reported to the bank on either a monthly or
quarterly basis. These covenants are used by management to monitor
capital, with increased focus on the Consolidated Leverage Ratio.
This ratio is calculated as the consolidated debt balance divided by
adjusted consolidated EBITDA for the rolling four quarters, and must
be maintained below 2.5:1. For the rolling four quarters ending June
30, 2008, this ratio was 1.15:1 (December 31, 2007 - 1.85:1), which
remains in compliance with all of the banking syndicate's financial
covenants.
11. FINANCIAL INSTRUMENTS
Carrying Value and Fair Value Disclosures on Financial Instruments
Trinidad's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities,
interest rate swaps, long-term debt, and the convertible debentures.
The carrying amounts of these financial instruments, reported on the
Company's unaudited interim consolidated balance sheets, approximates
their fair values due to their short-term nature, with the exception
of the long-term debt and the convertible debentures. The carrying
values of Trinidad's financial instruments are as follows:
June 30, 2008
Total
Held for Loans and Other Carrying
($ thousands) Trading Receivables Liabilities Value
---------------------------------------------------------------------
Cash and cash
equivalents 69,417 - - 69,417
Accounts
receivable - 125,602 - 125,602
Accounts payable
and accrued
liabilities - - 81,730 81,730
Interest rate
swaps - - 6,299 6,299
Long-term debt - - 227,380 227,380
Convertible
debentures - - 347,835 347,835
---------------------------------------------------
December 31, 2007
Total
Held for Loans and Other Carrying
($ thousands) Trading Receivables Liabilities Value
---------------------------------------------------------------------
Cash and cash
equivalents 18,021 - - 18,021
Accounts
receivable - 143,522 - 143,522
Accounts payable
and accrued
liabilities - - 78,649 78,649
Interest rate
swaps - - 5,929 5,929
Long-term debt - - 373,204 373,204
Convertible
debentures - - 344,214 344,214
---------------------------------------------------
The fair values and carrying values of Trinidad's financial
instruments are as follows:
June 30, 2008 December 31, 2007
Carrying Carrying
($ thousands) Fair Value Value Fair Value Value
---------------------------------------------------------------------
Interest rate
swaps 6,299 6,299 5,929 5,929
Credit
facilities(1)
Canadian
Revolving
Credit
Facility - - 148,744 148,000
Canadian Term
Facility 99,323 97,833 99,831 98,334
US Term
Facility 131,959 124,701 123,703 121,847
Convertible
debentures(1) 366,181 358,807 337,506 356,504
Other debt 8,382 8,257 8,773 8,641
---------------------------------------------------
612,144 595,897 724,486 739,255
---------------------------------------------------
(1) The convertible debentures and credit facilities are recorded
at their gross amounts and do not include transaction costs
incurred on their issuance and the convertible debentures
carrying value includes both the debt and equity components.
Trinidad has estimated the fair value amounts using appropriate
valuation methodologies and information available to management as of
the valuation dates. The following methods and assumptions were used
to estimate the fair value of each class of financial instrument for
which it was practicable to estimate that value:
- Cash and cash equivalents, accounts receivable and accounts
payable and accrued liabilities - The carrying amounts approximate
fair value because of the short maturity of these instruments.
- Interest rate swaps - The fair value of the interest rate swaps is
based on the quoted market prices at the date of valuation.
- Long-term debt - The fair value of the various pieces of long-term
debt are based on values quoted from third-party financial
institutions using current market price indicators.
- Convertible debentures - The fair value is based on the closing
market price on the date of valuation.
Interest rate swap
Trinidad entered into two cash flow hedges using interest rate swap
arrangements to hedge the floating interest rate 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
Company's unaudited interim consolidated financial statements. During
the three and six months ended June 30, 2008, Trinidad recorded a
gain of $1.3 million and a loss of $0.2 million, respectively, (2007
- $1.7 million gain for the three and six months ended June 30, 2007)
in Other Comprehensive Income ("OCI"), net of taxes of $1.6 million
and $0.8 million for each respective period (2007 - $0.8 million for
the three and six months ended June 30, 2007), due to the change in
fair value of the cash flow hedge. Trinidad has assessed 100% hedge
effectiveness; hence the entire change in fair value has been
recorded in OCI.
Financing costs
The carrying value of the long-term debt and convertible debentures
was recorded net of debt issuance costs. Under the effective interest
rate method Trinidad recorded interest expense of $0.4 million and
$0.8 million (2007 - $0.5 million and $0.8 million, respectively) for
the three and six months ended June 30, 2008 relating to costs under
the debt facility. In addition, Trinidad also recognized interest
expense of $0.6 million and $1.3 million (2007 - nil) relating to
costs associated with the convertible debentures for the same period
using the effective interest method.
Nature and Extent of Risks Arising from Financial Instruments
Trinidad is exposed to a number of market risks arising through the
use of financial instruments in the ordinary course of business.
Specifically, Trinidad is subject to credit risk, currency risk,
interest rate risk and liquidity risk.
Credit Risk
Trinidad is exposed to credit risk as a result of extending credit to
customers prior to receiving payment for services to be performed,
creating exposure on accounts receivable balances with trade
customers. This exposure to credit risk is managed through a
corporate credit policy whereby upfront evaluations are performed on
all customers and credit is granted based on payment history,
financial conditions and anticipated industry conditions. In the
instance that a customer does not meet initial credit evaluations,
work may be performed subject to a prepayment of services. Customer
payments are continuously monitored to ensure the creditworthiness of
all customers with outstanding balances and when collectability
becomes questionable a provision for doubtful accounts has been
established. The following is a reconciliation of the change in the
reserve balance:
Six months
ended Year ended
June 30, December 31,
($ thousands) 2008 2007
---------------------------------------------------------------------
Opening reserve balance 4,364 5,132
Increase in reserve recorded in the income
statement in the current period 1,559 3,929
Working capital adjustments relating to
acquisitions - (4,455)
Write-offs charged against the reserve (1,116) (149)
Recoveries of amounts previously written-off (844) (93)
-------------------------
Reserve allowance at period end 3,963 4,364
-------------------------
As at June 30, 2008, Trinidad had accounts receivable of $8.8 million
that were greater than 90 days for which no provision had been
established, as the Company believes that these amounts will be
collected.
Currency Risk
Trinidad's operations are affected by fluctuations in currency
exchange rates due to the Company's expansion into the US marketplace
and reliance on US suppliers to deliver components used by its
manufacturing subsidiaries. Over the last two years, the Canadian
dollar has experienced significant volatility, ranging from an
exchange low of $0.84 US/Canadian to an exchange high of
$1.09 US/Canadian. The exposure to realized foreign currency
fluctuations from its US subsidiaries is mitigated due to the
independence of the US operations from its Canadian parent company
for cash flow requirements to satisfy daily operations, creating a
natural hedge. However, upon consolidation, Trinidad is exposed to
unrealized fluctuations in the gains and losses on consolidation and
US dollar-denominated intercompany balances with the Canadian
entities. As at June 30, 2008, the Company did not have any foreign
currency hedges in place and does not intend to enter into any new
currency hedges. The Company may, however, hedge foreign currency
rates in the future, depending on the business environment and growth
opportunities.
As at June 30, 2008, portions of Trinidad's cash and cash
equivalents, accounts receivable, accounts payable and accrued
liabilities were denominated in US dollars. In addition, Trinidad's
US subsidiary is subject to translation gains and losses upon
consolidation. Based on these US dollar financial instrument closing
balances, net income for the three and six months ended June 30,
2008, would have fluctuated by approximately $0.1 million and
$0.2 million, respectively, and OCI would have fluctuated by
$3.4 million for the quarter ended June 30, 2008, for every $0.01
variation in the value of the US/Canadian exchange rate.
Interest Rate Risk
Trinidad is subject to risk exposure related to changes in interest
rates on borrowings under the credit facilities which are subject to
floating interest rates. In order to hedge this overall risk exposure
Trinidad entered into interest rate swaps on fifty percent of the
outstanding borrowings under the US and Canadian term credit
facilities, rendering them partially fixed. As at June 30, 2008,
Trinidad had $222.5 million outstanding under the credit facilities.
A change of one percent in the interest rates would cause a
$0.6 million and a $1.3 million change in the interest expense for
the three and six months ended June 30, 2008, respectively.
Liquidity Risk
Liquidity risk is the risk that Trinidad will not be able to meet its
financial obligations as they become due. The Company actively
manages its liquidity through daily, weekly and longer-term cash
outlook and debt management strategies. Trinidad's policy is to
ensure that sufficient resources are available either from cash
balances, cash flows or undrawn committed bank facilities, to ensure
all obligations are met as they fall due. To achieve this objective,
the Company:
- Maintains cash balances and liquid investments with highly-rated
counterparties;
- Limits the maturity of cash balances; and
- Borrows the bulk of its debt needs under committed bank lines or
other term financing.
The following maturity analysis shows the remaining contractual
maturities for Trinidad's financial liabilities:
There
As at June 30, 2008 2008 2009 2010 2011 2012 after
---------------------------------------------------------------------
Accounts payable and
accrued liabilities 81,730 - - - - -
Interest rate swaps 1,564 2,497 1,676 563 - -
Canadian term debt 500 1,000 1,000 95,333 - -
US term debt 637 1,275 1,275 121,514 - -
Other debt 334 486 489 6,948 - -
Convertible
debentures(1) - - - - - -
Interest payments on
contractual
obligations 20,557 41,091 41,061 30,785 13,731 -
------------------------------------------------
Total 105,322 46,349 45,501 255,177 13,731 -
------------------------------------------------
(1) At maturity or redemption, the Company may elect to satisfy its
obligation through the issuance of common shares and therefore
no commitment has been recorded.
12. COMMITMENTS
Rig Construction Program
In conjunction with the acquisition of the assets of Axxis in
July 2007, Trinidad assumed the remaining construction commitments of
a barge rig, of which $5.6 million had been spent as at the date of
the acquisition and was reimbursed to the former owners of Axxis.
Total costs of construction are expected to be US$27.5 million of
which US$22.9 million had been spent as of June 30, 2008. Effective
July 10, 2008, Trinidad entered into an agreement to sell this rig to
an international third party - see note 14. As part of the
arrangement Trinidad is obligated to complete the construction of the
barge rig and any further modifications required will be adjusted as
part of the final purchase price. The completion and sale of the
barge rig is expected in the third quarter of 2008.
In May 2008, Trinidad announced its intent to further expand its
existing drilling fleet through the construction of an additional
nine drilling rigs expected to be deployed in the United States.
These drilling rigs will have depth capacities ranging from
16,000 feet to 18,000 feet and are backed by long-term, take-or-pay
contracts with three major North American oil and natural gas
exploration and production companies which provides Trinidad with a
guaranteed utilization rate of 100 percent on these rigs over their
respective contract terms. The total construction costs for the nine
rigs are expected to be approximately $135.0 million. The rigs are
expected to be delivered over a 10-month period starting in August
2008.
Service Rig Construction Program
In conjunction with the drilling rig construction program, Trinidad
announced its intent to build six new service rigs following a new
rig design which provides improved pressure control, better safety
features and lower operating costs. The new rigs will have depth
capacities ranging from 2,400 to 3,500 metres. The capital cost of
this construction program is anticipated to be approximately
$18.0 million. The first two rigs are expected to be completed by the
end of 2008 with the remainder being delivered in the first three
quarters of 2009.
Bareboat Charters
As a part of the Axxis acquisition, Trinidad entered into an
Assignment Agreement in which the contracts to operate three barge
rigs (the "Bareboat Charters" or "Charter") were transferred to
Trinidad. Under the Bareboat Charters, Trinidad is committed to
operate the rigs on behalf of a third party. In turn, as the owners
of the rigs, this third party is entitled to receive 25% of the net
operating revenues (gross revenue minus $1,200 per day general and
administrative cost) and 50% of the net margin earned under each
charter. Under the original agreement any earnings in excess of this
payment were to be retained as compensation for the operation of the
barge rigs; however, as part of the purchase agreement Trinidad
committed to pay the former owners of Axxis US$12.5 million per year
for the next three consecutive years, of which one-third of the
payment, or US$4.2 million, shall be attributable to each of the
three Bareboat Charters.
This payment is contingent on the continued operation of the rigs and
to the extent that the contract is terminated by the rigs' owner, no
further payments will be required. This fixed payment was structured
to represent the residual earnings in excess of the payment to the
third party; hence Trinidad is exposed to minimal risk and rewards of
the arrangement. In the instance that dayrates or expenses fluctuate
from the original provisions in the Bareboat Charters, Trinidad is
exposed to the residual gain or loss; however, it was determined the
impact would not be significant. Trinidad has disclosed all
transactions pertaining to the Bareboat Charters on a net basis.
Trinidad does not bear the significant risks and rewards of the
arrangement nor does it absorb the associated credit risk or asset
risk.
13. SEGMENTED INFORMATION
Since Trinidad announced its intention to expand operations into the
US marketplace in 2005, its operations have been diversified from its
primary geographical focus in Western Canada to include various
locations in the United States, such that a significant proportion of
Trinidad's operations now occur in the US marketplace. The
acquisitions of Cheyenne Drilling and Axxis, as well as Trinidad's
rig construction programs have provided additional rigs of varying
depths and capabilities for the US operations, which complemented the
drilling fleet operating in the Canadian market and expanded
Trinidad's overall 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 Trinidad's
drilling performance on a geographically segmented basis. In
addition, the acquisition of Mastco in 2006 further broadened the
operations of Trinidad to include the capability to design,
manufacture, sell and refurbish drilling rigs and related equipment.
The unique characteristics of this subsidiary, which are different
from Trinidad'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 United Inter-
ended June 30, Canadian States Construc- segment
2008 Drilling Drilling tion Elimi-
($ thousands) Operations Operations Operations nations Total
---------------------------------------------------------------------
Revenue 44,341 85,970 29,541 (18,673) 141,179
Operating
expense 30,389 49,439 26,259 (18,673) 87,414
-------------------------------------------------------
Gross margin 13,952 36,531 3,282 - 53,765
Interest on
long-term
debt 3,820 2,363 32 - 6,215
Interest on
convertible
debentures 8,685 - - - 8,685
Depreciation 6,874 13,469 166 - 20,509
(Gain) loss
on sale of
assets (75) (177) 28 - (224)
-------------------------------------------------------
Income (loss)
before
corporate
items (5,352) 20,876 3,056 - 18,580
General and
administrative 12,749
Stock-based
compensation 133
Foreign
exchange
(gain) loss 859
Reorganization
costs 140
Income taxes 3,558
-------------------------------------------------------
Net earnings 1,141
-------------------------------------------------------
Capital
expenditures
(including
acquisitions
and deposits) 13,979 13,277 236 - 27,492
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months United Inter-
ended 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 29,180 35,200 24,310 (15,735) 72,955
-------------------------------------------------------
Gross margin 2,070 38,194 2,275 - 42,539
Interest on
long-term
debt 6,214 3,322 (1) - 9,535
Interest on
convertible
debentures - - - - -
Depreciation 4,562 10,109 160 - 14,831
(Gain) loss
on sale of
assets 163 - - - 163
-------------------------------------------------------
Income (loss)
before
corporate
items (8,869) 24,763 2,116 - 18,010
General and
administrative 9,701
Stock-based
compensation 671
Foreign
exchange
(gain) loss 5,603
Reorganization
costs -
Income taxes (2,606)
-------------------------------------------------------
Net earnings 4,641
-------------------------------------------------------
Capital
expenditures
(including
acquisitions
and deposits) 29,780 16,401 726 - 46,907
---------------------------------------------------------------------
---------------------------------------------------------------------
Six months United Inter-
ended June 30, Canadian States Construc- segment
2008 Drilling Drilling tion Elimi-
($ thousands) Operations Operations Operations nations Total
---------------------------------------------------------------------
Revenue 176,445 170,283 41,132 (27,030) 360,830
Operating
expense 102,651 95,881 37,135 (27,030) 208,637
-------------------------------------------------------
Gross margin 73,794 74,402 3,997 - 152,193
Interest on
long-term
debt 8,510 4,881 (1) - 13,390
Interest on
convertible
debentures 17,339 - - - 17,339
Depreciation 17,693 26,474 334 - 44,501
(Gain) loss
on sale of
assets (60) (14) (243) - (317)
-------------------------------------------------------
Income (loss)
before
corporate
items 30,312 43,061 3,907 - 77,280
General and
administrative 24,172
Stock-based
compensation 302
Foreign
exchange
(gain) loss (3,523)
Reorganization
costs 2,689
Income taxes 13,587
-------------------------------------------------------
Net earnings 40,053
-------------------------------------------------------
Capital
expenditures
(including
acquisitions
and deposits) 9,790 47,789 254 - 57,833
---------------------------------------------------------------------
---------------------------------------------------------------------
Six months United Inter-
ended 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 101,112 69,361 53,733 (38,057) 186,149
-------------------------------------------------------
Gross margin 65,223 66,873 3,460 - 135,556
Interest on
long-term
debt 11,508 6,576 26 - 18,110
Interest on
convertible
debentures - - - - -
Depreciation 13,994 18,784 311 - 33,089
(Gain) loss
on sale of
assets 177 30 - - 207
-------------------------------------------------------
Income (loss)
before
corporate
items 39,544 41,483 3,123 - 84,150
General and
administrative 20,130
Stock-based
compensation 1,446
Foreign
exchange
(gain) loss 6,889
Reorganization
costs -
Income taxes 9,101
-------------------------------------------------------
Net earnings 46,584
-------------------------------------------------------
Capital
expenditures
(including
acquisitions
and deposits) 60,378 91,871 42 - 152,291
---------------------------------------------------------------------
---------------------------------------------------------------------
United Inter-
As at Canadian States Construc- segment
June 30, 2008 Drilling Drilling tion Elimi-
($ thousands) Operations Operations Operations nations Total
---------------------------------------------------------------------
Total assets 685,362 847,368 23,862 - 1,556,592
Goodwill 38,154 86,777 46,620 - 171,551
Future income
tax asset
(liability) (3,937) (48,311) 1,749 - (50,499)
---------------------------------------------------------------------
---------------------------------------------------------------------
As at United Inter-
December 31, Canadian States Construc- segment
2007 Drilling Drilling tion Elimi-
($ thousands) Operations Operations Operations nations Total
---------------------------------------------------------------------
Total assets 679,390 786,982 30,784 - 1,497,156
Goodwill 38,154 84,360 46,620 - 169,134
Future income
tax asset
(liability) (3,525) (35,324) 1,476 - (37,373)
---------------------------------------------------------------------
14. SUBSEQUENT EVENTS
Effective July 10, 2008, Trinidad announced the sale of its nearly
constructed barge drilling rig to an international third party for
US$53.5 million. Upon receipt of the signed purchase agreement, the
Company received a US$5.35 million non-refundable deposit and
anticipates receipt of the balance owed by the end of the third
quarter. The construction of the barge rig will continue to be
managed by Trinidad and is expected to be completed in the third
quarter. Any modifications requested by the buyer from the current
rig design will be completed, but will be subject to a handling fee
and will be adjusted as part of the final purchase price. The
proceeds generated will be used for future expansion opportunities
and Trinidad continues to see strong opportunities in both the US
land and barge drilling markets.
Effective July 17, 2008, Trinidad announced the construction of an
additional seven rigs to the rig construction program previously
announced in May 2008. These rigs are all backed by long-term, take-
or-pay contracts with three major North American oil and natural gas
companies. Total costs of construction are expected to be
approximately $105.0 million and Trinidad intends to fund the rig
construction program from its operating cash flow and funds available
under its existing credit facility.
15. 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 earnings or retained earnings.
For further information:
For further information: Lyle Whitmarsh, President & Chief Executive Officer or Brent Conway, Chief Financial Officer or Lisa Ciulka, Director of Investor Relations at: Phone: (403) 265-6525, Fax: (403) 265-4168, E-mail: lciulka@trinidaddrilling.com