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TSX SYMBOL: TDG and TDG.DB
CALGARY, Aug. 11 /CNW/ - Trinidad Drilling Ltd. ("Trinidad" or the "Company") reported operating and financial results for the second quarter and first six months of 2010. Increasing activity levels across North America led to strong improvements in utilization levels over the same periods in 2009. Growing activity flowed through to higher quarterly revenue, while gains from asset sales and foreign exchange also helped contribute to strong improvements in net earnings and earnings per share.
"The improvements we saw beginning in the first quarter of the year have continued as we move further into 2010," said Lyle Whitmarsh, Trinidad's President and Chief Executive Officer. "Activity levels in both Canada and the US have shown strong increases and Trinidad has been able to capture this upside with its fleet of high quality, deep capacity equipment and its reputation for top performance. Industry sentiment is generally positive and we remain cautiously optimistic that improving industry demand will continue and flow through to increasing dayrates towards the end of 2010."
SECOND QUARTER 2010 AND YEAR-TO-DATE HIGHLIGHTS
- Revenue for the second quarter of 2010 was $128.8 million, up
$3.3 million or 2.6% from the same quarter last year, as a result of
increased utilization in both the Company's Canadian and US drilling
operations and a favourable lease settlement with regards to the
Chilean rig. These increases were partially offset by lower third-
party revenue in the construction operations segment and reduced
revenue in Mexico. Year to date, revenue totalled $298.9 million in
2010, down 5.7% from the first six months of 2009 due to lower
dayrates, a weaker US dollar and reduced third-party construction
revenue.
- Trinidad's Canadian operations achieved a seasonally strong
utilization rate of 34.0% in the second quarter of 2010, up 142.9%
from the same quarter last year. Year to date, Canadian utilization
was 50.0%, up significantly from utilization of 32.0% achieved in the
first half of 2009. Trinidad continued to record industry-leading
utilization levels, achieving a utilization level 14 percentage points
above the Canadian industry average in both the second quarter and
year to date in 2010. Activity levels in the US and international
drilling operations segment also increased in the second quarter,
reaching 66.0% compared to 61.0% in the same quarter last year. Year-
to-date utilization in the US and international drilling operations
was 65.0% compared to 63.0% for the first half of 2009.
- EBITDA(1) in the quarter was $40.1 million ($0.33 per share
(diluted)), up 38.1% from the second quarter last year due to
improving activity levels and foreign exchange gains. Year to date,
EBITDA was $83.8 million, down 14.8% from the same period last year
largely due to reduced dayrates and lower gross margins. Adjusted
EBITDA(1) in the second quarter of 2010 was $33.9 million down 15.6%
from the same quarter last year. Adjusted EBITDA for the first half of
2010 was $86.8 million, down 17.5% compared to the same period last
year. The lower levels of adjusted EBITDA were primarily caused by
lower dayrates and gross margins reflecting the changing rig mix as
activity levels increased.
- Trinidad recorded net earnings in the second quarter of 2010 of
$6.0 million ($0.05 per share (diluted)), compared to a net loss of
$8.6 million (a net loss of $0.09 per share (diluted)) in the second
quarter of 2009. Net earnings increased as a result of higher revenue
driven by increased operating days, foreign exchange gains and a gain
recorded on the sale of assets. The impact of these factors was partly
offset by reduced gross margin and increased depreciation and
amortization expenses. Year-to-date net earnings were $5.2 million
($0.04 per share (diluted)), compared to a net loss of $14.2 million
(a net loss of $0.15 per share (diluted)) for the same period last
year. In addition to the items affecting the quarter, year-to-date net
earnings were positively impacted by the absence of a $23.2 million
impairment charge recorded in the first quarter of 2009.
- During the second quarter, Trinidad continued its balanced approach
towards growth and debt reduction. Construction on two technically-
advanced, built-for-purpose rigs was completed during the quarter and
the rigs were delivered into operations in the Haynesville shale in
Louisiana. Both rigs are operating under five-year, take-or-pay
contracts. In addition to growing the Company's fleet, total debt(1)
was reduced by approximately 2.0% or $9.4 million from the first
quarter of 2010.
(1) Please see the Non-GAAP Measures Definitions section of this document
for further details.
All amounts are denominated in Canadian dollars (CDN$) unless otherwise
identified. All amounts are stated in thousands unless otherwise
identified.
FINANCIAL HIGHLIGHTS
($ thousands Three months ended June 30, Six months ended June 30,
except share,
per share and % %
percentage data) 2010 2009 change 2010 2009 change
-------------------------------------------------------------------------
Revenue 128,774 125,472 2.6 298,847 317,058 (5.7)
Gross
margin(1) 47,123 52,461 (10.2) 115,248 133,965 (14.0)
Gross margin
percentage(1) 36.6% 41.8% (12.4) 38.6% 42.3% (8.7)
Ebitda(1) 40,121 29,044 38.1 83,801 98,357 (14.8)
Per share
(diluted)(2) 0.33 0.31 6.5 0.69 1.04 (33.7)
Adjusted
EBITDA(1) 33,928 40,195 (15.6) 86,845 105,302 (17.5)
Per share
(diluted)(2) 0.28 0.42 (33.3) 0.72 1.11 (35.1)
Cash flow from
operations 38,890 79,234 (50.9) 66,592 116,536 (42.9)
Per share
(basic)(2) 0.32 0.83 (61.4) 0.55 1.23 (55.3)
Per share
(diluted)(2) 0.32 0.83 (61.4) 0.55 1.23 (55.3)
Cash flow from
operations before
change in
non-cash working
capital(1) 19,257 25,616 (24.8) 59,901 77,096 (22.3)
Per share
(diluted)(2) 0.16 0.27 (40.7) 0.50 0.81 (38.3)
Net earnings
(loss) 5,986 (8,590) 169.7 5,195 (14,239) 136.5
Per share
(basic)(2) 0.05 (0.09) 155.6 0.04 (0.15) 126.7
Per share
(diluted)(2) 0.05 (0.09) 155.6 0.04 (0.15) 126.7
Net earnings
(loss) before
impairment of
intangible
asset(1) 5,986 (8,590) 169.7 5,195 8,950 (42.0)
Per share
(basic)(2) 0.05 (0.09) 155.6 0.04 0.09 (55.6)
Per share
(diluted)(2) 0.05 (0.09) 155.6 0.04 0.09 (55.6)
Adjusted net
(loss)
earnings(1) (207) 2,561 (108.1) 8,239 15,895 (48.2)
Per share
(diluted)(2) 0.00 0.03 (100.0) 0.07 0.17 (58.8)
Capital
expenditures 35,485 35,622 (0.4) 70,451 101,614 (30.7)
Net debt(1) 465,783 465,519 0.1 465,783 465,519 0.1
Shares
outstanding -
basic
(weighted
average)(2) 120,840,962 95,150,116 27.0 120,840,962 94,774,982 27.5
Shares
outstanding -
diluted
(weighted
average)(2) 120,840,962 95,150,116 27.0 120,840,962 94,774,982 27.5
-------------------------------------------------------------------------
(1) Readers are cautioned that gross margin, gross margin percentage,
EBITDA, Adjusted EBITDA, cash flow from operations before change
in non-cash working capital, net earnings (loss) before impairment of
intangible assets, Adjusted net (loss) earnings, net debt and the
related per share information do not have standardized meanings
prescribed by GAAP. Please see Non-GAAP Measures Definitions section
of this document for further details.
(2) Basic shares include the weighted average number of shares
outstanding over the period. Diluted shares include the weighted
average number of shares outstanding over the period and the dilutive
impact, if any, of the deemed conversion of convertible debentures
and the number of shares issuable pursuant to the Incentive Option
Plan.
-------------------------------------------------------------------------
OPERATING HIGHLIGHTS
Three months ended Six months ended
June 30, June 30,
% %
2010 2009 change 2010 2009 change
-------------------------------------------------------------------------
Land Drilling Market
Operating days - drilling
Canada 1,616 692 133.5 4,786 3,237 47.9
United States and
International(1) 3,958 3,233 22.4 7,727 6,476 19.3
Rate per drilling day
Canada (CDN$) 23,590 23,564 0.1 22,449 24,796 (9.5)
United States and
International
(CDN$)(1) 18,504 23,747 (22.1) 19,822 25,438 (22.1)
United States and
International (US$)(1) 18,092 19,554 (7.5) 19,099 20,759 (8.0)
Utilization rate - drilling
Canada 34% 14% 142.9 50% 32% 56.3
United States and
International(1) 66% 61% 8.2 65% 63% 3.2
Caodc industry average 20% 11% 81.8 36% 23% 56.5
Number of drilling rigs
at quarter end
Canada 53 53 - 53 53 -
United States and
International(1) 67 64 4.7 67 64 4.7
Utilization rate
for service rigs 37% 19% 94.7 45% 30% 50.0
Number of service rigs
at quarter end 22 23 (4.3) 22 23 (4.3)
Number of coring and
surface casing rigs
at quarter end 20 20 - 20 20 -
Barge Drilling Market
Operating days 283 351 (19.4) 617 596 3.5
Rate per drilling day
(CDN$) 26,792 30,250 (11.4) 25,135 34,750 (27.7)
Rate per drilling day
(US$) 26,142 24,906 5.0 24,202 28,383 (14.7)
Utilization rate 78% 96% (18.8) 85% 82% 3.7
Number of barge drilling
rigs at quarter end 1 1 - 1 1 -
Number of barge drilling
rigs under Bareboat
Charter at quarter end 3 3 - 3 3 -
-------------------------------------------------------------------------
(1) Trinidad commenced its operations in Mexico effective November 2008
and expanded its international operations into Chile effective August
2009 until April 2010. Effective April 6, 2010, the rig located in
Chile was sold to a third party.
OVERVIEW
The improving market conditions present in the first three months of 2010 continued into the second quarter of the year. In Canada, activity levels were seasonally very strong; industry activity averaged nine percentage points higher than the same quarter last year and Trinidad recorded it highest second quarter utilization since 2006. In the US, industry activity levels continued to grow in the second quarter with the active rig count increasing to 1,624 rigs, up 74.3% from the same quarter in 2009. Industry activity was also higher than the previous quarter with an increase of 14.5% or 205 rigs from the first quarter of 2010. The trend established earlier in the year, showing an increased focus towards oil-directed or liquids-rich drilling, continued to be an important factor in the second quarter due to the relative stability of crude oil prices. Unconventional shale gas development also remained an area of strong drilling activity on both sides of the border. Trinidad's gross margins contracted in the quarter and first six months of the year compared to the same periods in 2009, reflecting the changing active rig mix. As utilization levels increased, Trinidad activated a growing proportion of conventional-style and smaller equipment which operated predominantly on the spot market. These rigs tend to generate lower dayrates and lower gross margins compared to the Company's technically-advanced, contracted rigs. As demand for drilling equipment grows, dayrates typically move higher. Assuming market conditions remain strong, Trinidad is cautiously optimistic that dayrates will begin to increase towards the end of 2010.
Trinidad's revenue for the quarter was $128.8 million, up 2.6% from $125.5 million in the same quarter of 2009. Increased revenue in the second quarter was driven by stronger activity levels in both Canada and the US drilling operations compared to the same quarter last year. Total operating days in the quarter grew to 5,574 days, up 42.0% from the second quarter of 2009. The increase in revenue was partly offset by lower third-party construction work and reduced activity levels in Mexico in the second quarter of 2010 as compared to 2009. Revenue for the first six months of 2010 totalled $298.8 million, down 5.7% from the previous comparative period due to lower dayrates, a weaker US dollar, and reduced third-party activity levels in the construction operations segment.
Gross margin as a percentage of revenue decreased in the second quarter of 2010 to 36.6% compared to 41.8% in the same quarter last year. Gross margin percentage contracted in the quarter largely due to lower dayrates and additional repairs and maintenance costs, particularly in the US and international segment. In the second quarter, as activity levels across the US grew, additional rigs were put back to work changing the active rig mix. As a number of these rigs had been inactive for a period of time, additional repairs and maintenance costs and health, safety and employee training costs were incurred. On a year-to-date basis, gross margin as a percentage of revenue decreased to 38.6% from 42.3% in the first half of 2009 as a result of the same factors impacting the second quarter.
EBITDA (as defined in the Non-GAAP Measures Definitions section) in the second quarter was $40.1 million, up 38.1% from the same quarter last year due to improving activity levels and foreign exchange gains. However, year to date, EBITDA was $83.8 million, down 14.8% from the same period last year largely due to reduced dayrates and lower gross margins. Adjusted EBITDA (as defined in the Non-GAAP Measures Definitions section) was $33.9 million, down 15.6% from the same quarter last year. Adjusted EBITDA for the first half of 2010 was $86.8 million, down 17.5% compared to the same period last year. The lower levels of Adjusted EBITDA were primarily caused by lower dayrates and gross margins, reflecting the changing rig mix as activity levels increased.
Net earnings in the second quarter of 2010 improved to $6.0 million ($0.05 per share (diluted)), compared to a net loss of $8.6 million (a net loss of $0.09 per share (diluted)) in the second quarter of 2009. Net earnings increased as a result of higher revenue driven by increased operating days, foreign exchange gains and a gain recorded on the sale of assets. The impact of these factors was partly offset by reduced gross margin and increased depreciation and amortization expenses. Year-to-date net earnings was $5.2 million ($0.04 per share (diluted)), compared to a net loss of $14.2 million (net loss of $0.15 per share (diluted)) for the same period last year. In addition to the items affecting the quarter, year-to-date net earnings were positively impacted by the absence of a $23.2 million impairment charge recorded in the first quarter of 2009.
Trinidad recorded a gain on sale of assets of $3.8 million in the second quarter relating to the sale of one rig to Trinidad's operating partner in Chile for $28.0 US million ($29.9 CDN million). This payment also included early contract termination revenue of $4.9 US million ($5.2 CDN million).
Adjusted net loss (as defined in the Non-GAAP Measures Definitions section) was $0.2 million or $0.00 per share (diluted) for the second quarter of 2010, in comparison to Adjusted net earnings of $2.6 million or $0.03 per share (diluted) in for the same quarter last year. Year to date, Adjusted net earnings was $8.2 million or $0.07 per share (diluted) compared to $15.9 million or $0.17 per share (diluted) for the previous comparative period.
During the second quarter Trinidad continued work on its 2010 rig construction program. In the quarter, two rigs were completed and delivered into operations in the Haynesville shale, Louisiana, where they are working under five-year, take-or-pay contracts. Earlier in 2010, Trinidad completed a new technically advanced rig for its Canadian operations; this rig is currently working under contract in the Montney shale in north-east British Columbia. The four remaining rigs in the construction program also remain under five-year, take-or-pay contracts and are expected to be delivered to the Haynesville shale throughout the balance of 2010.
Commodity prices for both crude oil and natural gas increased in the second quarter and first six months of 2010 compared to the same periods last year. West Texas Intermediate crude oil averaged US$77.92 per barrel in the second quarter, a 30.8% increase from US$59.55 per barrel for the same period of 2009. For the first six months of 2010, crude oil averaged US$78.33 per barrel compared to US$51.20 per barrel for the previous comparative period. Crude oil prices lowered slightly compared to the first quarter of the year but their relative stability and strength over the past nine months has led to a growing focus by producers on oil and liquids-rich plays. Natural gas prices pulled back in the second quarter, lowering to an average of $4.34 per mmBtu (Henry Hub), down 14.7% from the first three months of the year. Although natural gas prices were down from the first quarter, they remained stronger than the same periods in 2009. Average second quarter 2010 natural gas prices represented a 16.9% improvement over the same quarter last year. On a year-to-date basis, natural gas prices averaged US$4.71 per mmBtu in 2010, up 13.4% compared to the first half of 2009. North American storage levels for natural gas remain high and production levels continue to provide ample supply. Over the past 12 to 18 months, activity in North America has predominantly been focused on unconventional shale plays where project economics remain strong or lease expiries provide strategic rationales for drilling programs. Trinidad's growing activity levels in Canada and the US demonstrate how its high quality equipment, experienced crews and reputation for top performance have positioned the Company to participate actively in the areas of strength across North America, namely unconventional shale gas and oil and liquids-rich development.
RESULTS FROM OPERATIONS
United
States/
Three months Inter- Inter-
ended Canadian national Const- segment
June 30, 2010 Drilling Drilling ruction Elimin-
($ thousands) Operations Operations Operations ations Total
-------------------------------------------------------------------------
Revenue 42,833 82,361 27,890 (24,310) 128,774
Operating expense 30,389 49,494 26,078 (24,310) 81,651
-------------------------------------------------------
12,444 32,867 1,812 - 47,123
Interest on
long-term debt 3,019 2,738 2 - 5,759
Interest on
convertible
debentures 8,974 - - - 8,974
Depreciation and
amortization 6,517 15,924 520 - 22,961
Loss (gain) on
disposal or sale
of assets 30 (3,780) - - (3,750)
-------------------------------------------------------
Income before
corporate items (6,096) 17,985 1,290 - 13,179
General and
administrative 13,195
Stock-based
compensation
recovery (264)
Foreign exchange
gain (5,929)
Income tax recovery 191
-------------------------------------------------------
Net earnings - 5,986
-------------------------------------------------------
Capital
expenditures 4,438 30,943 104 - 35,485
-------------------------------------------------------
United
States/
Three months Inter- Inter-
ended Canadian national Const- segment
June 30, 2009 Drilling Drilling ruction Elimin-
($ thousands) Operations Operations Operations ations Total
-------------------------------------------------------------------------
Revenue 23,766 87,979 32,106 (18,379) 125,472
Operating expense 14,465 45,536 31,389 (18,379) 73,011
-------------------------------------------------------
9,301 42,443 717 - 52,461
Interest on
long-term debt 3,450 2,368 34 - 5,852
Interest on
convertible
debentures 8,835 - - - 8,835
Depreciation and
amortization 4,564 14,056 516 - 19,136
(Gain) loss on
disposal or sale
of assets (152) 5,794 - - 5,642
-------------------------------------------------------
Income before
corporate items (7,396) 20,225 167 - 12,996
General and
administrative 12,266
Stock-based
compensation 1,670
Foreign exchange
loss 9,481
Income taxes (1,831)
-------------------------------------------------------
Net loss (8,590)
-------------------------------------------------------
Capital
expenditures 19,664 14,792 1,166 - 35,622
-------------------------------------------------------
United
States/
Six months Inter- Inter-
ended Canadian national Const- segment
June 30, 2010 Drilling Drilling ruction Elimin-
($ thousands) Operations Operations Operations ations Total
-------------------------------------------------------------------------
Revenue 127,357 167,647 42,788 (38,945) 298,847
Operating expense 84,405 98,750 39,389 (38,945) 183,599
-------------------------------------------------------
42,952 68,897 3,399 - 115,248
Interest on
long-term debt 6,114 4,512 16 10,642
Interest on
convertible
debentures 17,911 - - 17,911
Depreciation and
amortization 15,727 31,588 1,067 48,382
Loss (gain) on
disposal or sale
of assets 41 (3,781) 46 (3,694)
-------------------------------------------------------
Income before
corporate items 3,159 36,578 2,270 42,007
General and
administrative 28,403
Stock-based
compensation 1,499
Foreign exchange
gain 1,545
Income taxes 5,365
-------------------------------------------------------
Net earnings 5,195
-------------------------------------------------------
Capital
expenditures 17,426 52,687 338 - 70,451
-------------------------------------------------------
United
States/
Six months Inter- Inter-
ended Canadian national Const- segment
June 30, 2009 Drilling Drilling ruction Elimin-
($ thousands) Operations Operations Operations ations Total
-------------------------------------------------------------------------
Revenue 101,994 182,223 70,360 (37,519) 317,058
Operating expense 61,295 96,264 63,053 (37,519) 183,093
-------------------------------------------------------
40,699 85,959 7,307 - 133,965
Interest on
long-term debt 6,198 4,685 40 - 10,923
Interest on
convertible
debentures 17,636 - - - 17,636
Depreciation and
amortization 12,996 29,163 955 - 43,114
(Gain) loss on
disposal or sale
of assets (133) 9,882 - - 9,749
Impairment of
intangible assets - 23,189 - - 23,189
-------------------------------------------------------
Income before
corporate items 4,002 19,040 6,312 - 29,354
General and
administrative 28,663
Stock-based
compensation 2,361
Foreign exchange
loss 4,584
Income taxes 7,985
-------------------------------------------------------
Net loss (14,239)
-------------------------------------------------------
Capital
expenditures 7,301 92,908 1,405 - 101,614
-------------------------------------------------------
Canadian Drilling Operations
In 2010, Trinidad's Canadian drilling operating segment reported the strongest second quarter utilization level since 2006. The second quarter is generally a less active period in Canada due to melting conditions which result in temporary road bans and limit the movement of drilling rigs. Although this remained a factor in the quarter, improving market sentiment, advancements in rig-moving technology and a fleet of in-demand modern, deep-capacity rigs contributed to seasonally strong activity levels in the quarter. Year to date in 2010, industry demand in Canada has increased from the previous year, with interest focused largely on unconventional shale and oil-directed drilling.
Higher rig utilization and increased operating days in the second quarter and first half of 2010 compared to the previous year, led to increased revenue levels for the Canadian drilling segment. In the second quarter, revenue was $42.8 million, up 80.2% from $23.8 million in 2009. For the first half of 2010, the segment generated revenue of $127.4 million, an increase of 24.9% from the same period in 2009. Operating days increased by 133.5% to 1,616 days in the second quarter compared to the same quarter last year, reflecting increasing activity levels in western Canada. For the first half of 2010, operating days were 4,786 days, up 47.9% from 2009. Trinidad continued its track record of outperforming industry activity levels and recorded an average utilization rate of 34.0% in the second quarter compared to an industry average of 20.0%. Trinidad's second quarter utilization represented an increase of 142.9% from a utilization rate of 14.0% in the second quarter of 2009. Year-to-date utilization averaged 50.0% in 2010 compared to an industry average of 36.0% and 32.0% for the same period in 2009. Activity levels increased in 2010 compared to 2009, as a result of improving market conditions. In addition, Trinidad's activity was positively impacted by the increasing use of pad-drilling techniques where rigs equipped with self-moving systems were placed on location before spring break-up and were able to continue working through break-up. Dayrates in the second quarter for the Canadian drilling segment were $23,590 per day, consistent with the dayrates recorded in the same quarter last year and up 7.9% from dayrates of $21,868 per day in the first quarter of 2010. Dayrates increased from the previous quarter due to a comparatively higher proportion of deep-capacity, contracted rigs working in the second quarter. Year to date, dayrates averaged $22,449 per day, down 9.5% from the first half of 2009, largely due to lower dayrates in the first quarter of 2010 reflecting a change in the active rig mix.
The trend of drilling deeper, more technically-challenging wells continued in 2010 with horizontal and directional wells accounting for 66.2% of wells drilled in Canada in the first half of the year compared to 52.1% in the first half of 2009. Oil-directed drilling also continued to be a growing area of focus, increasing from 26.2% of wells drilled in the first half of 2009 to 48.2% for the same period this year. Trinidad's fleet of deep-capacity, modern equipment is well suited for both these changes in the industry and the Company's industry-leading utilization reflects its strong reputation for top performance in these areas.
Trinidad's well servicing division also saw a strong improvement in activity in the second quarter. Utilization rates averaged 37.0% for the second quarter compared to 19.0% for the same quarter last year. Year-to-date activity levels were also higher, with average utilization for the first six months of 2010 averaging 45.0% compared to 30.0% for the same period in 2009. Activity rates for the well servicing division, like the drilling operations, increased due to strengthening market conditions. Activity for the Company's coring division remained relatively weak in the second quarter of 2010; a slower than expected return to work for oil sands projects and weather delays resulted in limited revenue generation for this division. Improving sentiment and an increasing amount of available work are providing a better outlook for the coring division moving into the second half of 2010.
In the second quarter, gross margin for the Canadian drilling segment was $12.4 million or 29.1% of revenue compared to $9.3 million or 39.1% of revenue in the second quarter of 2009. Early termination revenue of approximately $5.1 million relating to the coring and surface casing division was received in the second quarter of 2009. Excluding this revenue, gross margin percentage improved 6.7 percentage points in the second quarter of 2010, as a result of increased utilization and a larger revenue base over which to spread fixed costs. For the first half of 2010, gross margin was $43.0 million or 33.7% of revenue compared to $40.7 million or 39.9% for the same period last year. Lower dayrates in the first quarter of 2010 and the absence of early termination revenue resulted in a lower gross margin percentage year over year.
United States and International Drilling Operations
In the US, industry activity levels have increased strongly in the first half of 2010. The active rig count in the second quarter averaged 1,624 rigs, up 692 rigs or 74.2% from the second quarter of 2009 and up 205 rigs or 14.4% from the previous quarter. Year to date, the average active rig count is up 34.1% to 1,522 rigs from the previous year. The trends in Canada for strong activity in unconventional shale areas and oil-targeted drilling were mirrored in the US. In the first half of 2010, horizontal drilling accounted for 49.1% of wells drilled, up from 38.4% in the same period last year. In the first six months of 2010, the average number of rigs directed towards oil targets increased by 77.7% from the same period last year, while the remainder of the US active rig fleet increased 24.1% during the same time frame. Over the past year, Trinidad's US fleet has maintained relatively stable activity levels compared to the industry average. At the lowest industry activity level in the second quarter of 2009, the US active rig count was down 62.0% from its peak level in the fall of 2008. In contrast, over the same time frame, Trinidad's active US rig count was down only 24.0%. Trinidad's ability to maintain stability in its activity levels is a reflection of the Company's extensive long-term, take-or-pay contracts and its fleet of modern, deep capacity rigs. Including the rigs under construction in 2010, Trinidad has approximately 60.0% of its US and international fleet under long-term, take-or-pay contract.
Revenue for the US and international drilling operations segment decreased by 6.4% for the quarter to $82.4 million from $88.0 million in 2009. Lower revenue was driven largely by reduced dayrates and a weaker US dollar in the quarter. US dollar denominated dayrates in the quarter were US$18,092 per day, down 7.5% quarter over quarter, reflecting a change in rig mix. In the second quarter, as activity levels across the US grew, additional rigs were put back to work. These rigs tended to be conventional-style rigs working on the spot market, which generally earn lower dayrates than new, high-tech contracted rigs. The decrease in US dollar denominated dayrates was compounded by a weaker US dollar and, once translated into Canadian dollars, dayrates averaged $18,504 per day, down 22.1% from the second quarter of 2009. Revenue in the quarter was also negatively impacted by reduced revenue and operating days in Mexico. The impact of lower dayrates and reduced activity in Mexico in the quarter was partly offset by early termination revenue of $5.2 million received in the second quarter relating to the Chilean rig sold in April 2010. For the first half of 2010, revenue totalled $167.6 million, down 8.0% from the first six months in 2009, driven largely by lower dayrates and a weaker US dollar.
Operating days in the second quarter of 2010 increased 22.4% to 3,958 days compared to the same period last year. Utilization levels also reflected the growing activity levels, increasing to 66.0% compared to 61.0% in the second quarter of 2009. Year to date, operating days were up 19.3% to 7,727 days compared to the first six months last year and utilization grew from 63.0% to 65.0% over the same time period. The increase in operating days and utilization levels in the quarter and year to date demonstrates the improving market conditions in the US. In addition, the higher number of operating days reflects Trinidad's growing US and international fleet which expanded from 64 rigs in the second quarter of 2009 to 67 rigs in 2010. Since the end of the second quarter of 2009, Trinidad has added four newly constructed, built-for-purpose rigs to its US operations, all under long-term, take-or-pay contract and has sold one rig that had been operating in Chile.
Lower activity levels in Mexico in the second quarter of 2010 partly offset the strengthening utilization levels in the US. A change in focus by Petroleos Mexicanos (Pemex), Mexico's national oil company, led to reduced activity in the Chicontepec area where Trinidad's rigs had been operating. Following these changes by Pemex, four of Trinidad's seven Mexican rigs came off contract at the start of the quarter, and Trinidad moved three rigs to Villahermosa in southeastern Mexico where they are operating under contract with the original customer. Trinidad is investigating several opportunities for the four remaining non-contracted rigs. These rigs are of a size and style that is in high demand in Canada and the US and Trinidad expects that some or all of these rigs will return to work in Canada or the US before the fourth quarter of 2010. The original customer is responsible for the costs of moving the rigs back to Canada or the US.
Gross margin percentage decreased to 39.9% in the second quarter compared to 48.2% in the same quarter last year. Year to date in 2010, gross margin percentage was 41.1% compared to 47.2% for the first six months in 2009. Gross margin percentage in the quarter and year to date was negatively impacted by lower revenue largely driven by reduced dayrates. In addition, as activity levels increased in 2010 and rigs that had been inactive for a period of time returned to work, additional costs associated with repairs and maintenance, and health, safety and employee training were incurred, leading to reduced gross margins.
During the second quarter of 2010, the conditions in the barge drilling division continued to show signs of improvement with dayrates increasing from the first quarter. Dayrates have demonstrated an increasing trend since reaching a low in the fourth quarter of 2009. US dollar denominated dayrates in the quarter were US$26,142 per day, up 5.0% from the same quarter in 2009 and up 29.7% from the previous quarter. The weaker US dollar also impacted the barge division with Canadian dollar denominated dayrates averaging C$26,792 per day in the first quarter, down 11.4% from the second quarter of 2009. For the first half of 2010, dayrates have averaged US$24,202 per day, down 14.7% from the same period last year.
Trinidad's barge rigs operate in the shallow waters of the Gulf of Mexico. These waters fall under the jurisdiction of Louisiana State regulators and the Company's operations have not been directly impacted by the restrictions placed by federal regulators which have reduced drilling activity in the Gulf of Mexico recently. However, the barge drilling division was impacted by some logistical issues during the quarter indirectly associated with the Macondo oil spill and utilization was reduced to 78.0% in the quarter, down from 96.0% in the second quarter of 2009 and 93.0% in the previous quarter. Year-to-date utilization for the barge drilling division has averaged 85.0% in 2010 compared to 82.0% for the first half of 2009.
In the second quarter of 2010, Trinidad sold one rig with its related equipment and the remaining term of the contract to its operating partner in Chile for $28.0 US million ($29.9 CDN million). Although the operations in Chile were contributing strong margins to Trinidad's international operations, the Company felt that the benefit of receiving a lump sum payment for this operation and applying the funds against its outstanding debt levels provided better value for the Company. Trinidad believes in evaluating all opportunities objectively and in making business decisions that add the most incremental value for its investors, including selling assets if the right opportunity exists.
Construction Operations
Trinidad's construction operating segment provides complete drilling solutions including equipment sales, rig design and engineering, manufacturing and after-market support services through Trinidad's subsidiary, Victory Rig Equipment Corporation (Victory). This segment operates as a cost centre to Trinidad's other internal divisions. During 2010, the construction operations segment is manufacturing seven built-for-purpose rigs as part of Trinidad's internal rig build program. At the same time, Victory continues to provide service and recertification requirements for Trinidad and external third parties. As at June 30, 2010, three of the seven rigs were delivered with the remaining four expected to be completed and delivered into the Company's US operations by the end of 2010. All rigs built are backed by long-term, take-or-pay contracts.
The construction operations segment for the three months ended June 30, 2010, recorded revenue of $27.9 million versus $32.1 million for the same period in 2009. For the first two quarters of 2010, revenue was $42.8 million versus $70.4 million for the first half of 2009. Revenue declined in the quarter and year to date as a result of reduced third-party work reflecting the general economic downturn over the past twenty-four months. Third-party revenue in the second quarter was $3.6 million compared to $13.7 million in the second quarter of 2009. For the six months ended June 30, 2010, third-party revenue was $3.8 million compared to $32.9 million for the same period in 2009. As Victory enters into the second half of the year, interest in their services is increasing and may have a favourable impact on the operating results during the remainder of 2010. Management continues to aggressively pursue all third-party opportunities, but is guardedly optimistic on the success of these prospects in the present market environment.
Operating expenses declined by $5.3 million for the second quarter and $23.7 million for the first six months of 2010. For the three months ended June 30, 2010, gross margin increased by $1.1 million. Gross margin as a percent of revenue was 6.5% for the second quarter compared to 2.2% for the same quarter in 2009. Victory's gross margin percentages incorporate the work performed on Trinidad's internal rig build program which is billed at cost to Trinidad's other operating segments. During the second quarter and year to date in 2010, Victory has continued to agressively manage costs. Declines in both year-to-date revenues and operating expenses have affected the segment's gross margin percentage resulting in a decline of 24.0% for the first half of the year. The decline in margin percentage relates to the absence of comparable third-party work in 2010 versus the prior year in which Victory constructed three drilling rigs for a third-party customer with no similar activities completed in the first half of 2010.
Year-to-date inter-segment revenues for 2010 were $38.9 million, an increase of $1.4 million from the same period in 2009. Inter-segment revenue is expected to continue at above current levels for the remainder of 2010 as Victory continues to construct rigs in Trinidad's internal rig build program.
FINANCIAL SUMMARY June 30, December 31,
($ thousands except percentage data) 2010 2009
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Working capital(1) 79,449 90,673
Total debt(1)(2) 569,133 561,668
Total debt as a percentage of assets 34.6% 34.6%
Net debt(1)(2) 465,783 456,849
Net debt as a percentage of assets 28.3% 28.1%
Total assets 1,645,680 1,624,013
Total long-term liabilities 631,031 631,074
Total long-term liabilities as a
percentage of assets 38.3% 38.9%
Shareholders' equity 914,795 911,621
Total debt to shareholders' equity 62.2% 61.6%
Net debt to shareholders' equity 50.9% 50.1%
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(1) Readers are cautioned that working capital, total debt and net debt
do not have standardized meanings prescribed by GAAP - see the Non-
GAAP Measures Definitions section of this document for further
details.
(2) Amounts are reflected net of associated transaction costs and any
related equity component.
Working capital decreased by $11.2 million to $79.4 million at June 30, 2010, compared to $90.7 million as at December 31, 2009, as a result of decreased activity levels in the second quarter of 2010 compared to the fourth quarter of 2009. Trinidad's total debt increased by $7.5 million during the first six months of 2010 as a result of an $8.0 million increase in the revolving credit facility used to fund capital requirements on Trinidad's rig construction program. As at June 30, 2010, Trinidad had $63.0 CDN million outstanding on its revolving credit facility, leaving $87.0 CDN million and $100.0 US million unutilized.
On April 6, 2010, Trinidad amended its credit facilities, including extended terms and an additional US dollar denominated revolving facility. Trinidad's amended credit facilities now include a Canadian dollar revolving facility of $150.0 million and a US-based revolving facility of $100.0 US million. Additionally, the maturity dates of all revolving facilities and term debt facilities have been extended until April 1, 2012. The addition of a US dollar denominated facility better aligns the credit facilities with the Company's growing United States and international presence. As well, the extended maturity dates give Trinidad additional flexibility to consider refinancing, redemption and other alternatives, prior to the maturity of its convertible debentures in July 2012.
A total of $35.5 million of capital expenditures were incurred during the three months ended June 30, 2010 compared to $35.6 million for the three months ended June 30, 2009. For the six months ended June 30, 2010, total capital expenditures were $70.5 million compared to $101.6 million for the same period in 2009. Capital expenditures in the quarter and year to date were substantially related to the Company's ongoing rig build program and a number of capital upgrades made to Trinidad's rig fleet to improve the equipment's marketability. On April 6, 2010, Trinidad agreed to sell its rig operating in Chile and the remaining term of the contract to its operating partner for $28 US million ($29.9 CDN million). As a result of this sale, Trinidad recorded lease termination revenue of $4.9 US million ($5.2 CDN million) and a gain on disposal of assets of $3.8 million for the second quarter. Although the operations in Chile were contributing strong margins to Trinidad's international division, the Company felt that the benefit of receiving a lump sum payment for this operation and applying the funds against its outstanding debt levels provided better value for the Company. Trinidad believes in evaluating all opportunities objectively and in making business decisions that add the most incremental value for its investors, including selling assets if the right opportunity exists. The proceeds from this sale were used to reduce overall indebtedness.
Trinidad expects cash flow from operations and the Company's various sources of financing to be sufficient to meet its debt repayments, future obligations and to fund planned capital expenditures.
Trinidad's long-term strategy is to reduce the Company's overall debt levels. Trinidad anticipates that the additional cash flow from the rigs within the current rig construction program, which all remain under long-term, take-or-pay contracts, will add to the cash flow generated by its existing fleet and provide free cash flow and an ability to reduce indebtedness. Trinidad expects that the Company will have repaid a sufficient amount of debt to be in a position to refinance the convertible debentures before they mature in 2012.
OUTLOOK
Moving forward into the second half of 2010, the momentum that has been building in the first six months of the year appears to be continuing. Activity levels post spring break-up in Canada have been very robust and the active rig count in the US has continued to climb. As in the past, unconventional shale plays and oil-directed drilling remain the main areas of activity across North America. These signs are encouraging for the Company and the industry as a whole and Trinidad is cautiously optimistic that dayrates will increase as we move towards the end of 2010. While the Company anticipates improving conditions moving forward, it is also carefully monitoring natural gas supply and demand statistics given the high storage levels that persist in North America and their potential negative impact on natural gas prices. Trinidad expects that activity levels will stabilize over the coming months and that an increase in demand for natural gas, most likely driven by an improvement in the US economy, is necessary before natural gas prices improve.
The Company anticipates that producers will continue to direct their capital development plans towards oil-focused targets and unconventional shale plays. Trinidad's fleet of modern, deep capacity rigs is well suited to this style of drilling and, including the rigs under construction, the Company has approximately 50.0% of its fleet operating in the North American unconventional shale plays.
Trinidad is providing measured, organic growth through its 2010 rig construction program. To date, the Company has added two rigs to its fleet in the Haynesville shale, Louisiana and one rig to the Montney shale in north-east British Columbia. An additional four rigs are expected to be completed and delivered into operations in the Haynesville shale by the end of the year. All seven rigs are built-for-purpose, technically advanced rigs with long-term, take-or-pay contracts in place. In addition, Trinidad has upgraded several existing rigs to improve their marketability and efficiency and to allow a larger proportion of its fleet to participate easily in the improving market conditions.
Trinidad is committed to a balanced approach towards debt reduction and growth. While continuing to add to its industry-leading fleet of modern, deep capacity equipment, the Company has also reduced indebtedness significantly over the past two years. Total debt has come down from $720.2 million at the end of 2007 to $569.1 million at the end of the second quarter, a reduction of $151.1 million or 21.0%. While total debt has decreased, the size of the Company has also increased, leading to lower relative leverage. Since the end of 2007, total debt as a percentage of assets has moved down from 48.1% to 34.6% and total debt to shareholders' equity has lowered from 113.5% to 62.2%. Over the longer term, Trinidad intends to continue to reduce its debt levels. Following the extension of its credit facility to 2012 and its growing cash flow generation capacity, Trinidad expects that it will have additional flexibility available to repay or refinance its debt facilities, including its convertible debentures, prior to their maturity in 2012.
Trinidad has assembled a fleet of industry-leading equipment and established a reputation for top performance. The Company's customers have recognized these strengths and continue to return to Trinidad and to sign up new and existing equipment under multiple-year contracts. The strong relationships the Company has built with its customers and their ongoing loyalty have assisted Trinidad through one of the most severe downturns in the industry and positions it well to perform strongly as market conditions improve. Including its 2010 rig construction program, Trinidad is well positioned moving forward in 2010 with approximately 45.0% of its total land-based drilling fleet under long-term, take-or-pay contract and an average term remaining of two years. To date, industry conditions and Trinidad's performance in the first half of 2010 have surpassed the Company's expectations and, notwithstanding the impact a reduction in natural gas prices could cause, Trinidad is cautiously optimistic about the remainder of 2010.
CONFERENCE CALL
A conference call and webcast to discuss the results will be held for the investment community on Thursday August 12th beginning at 9:00 a.m. MT (11:00 a.m. ET). To participate, please dial (888) 231-8191 (toll-free in North America) or (647) 427-7450 approximately 10 minutes prior to the conference call. An archived recording of the call will be available from approximately 12:00 p.m. MT on August 12th until midnight August 19th, 2010 by dialing (800) 642-1687 or (416) 849-0833 and entering replay access code 89905984.
A live audio webcast of the conference call will also be available via the Investor Relations page of Trinidad's website www.trinidaddrilling.com
A full copy of Trinidad's second quarter report including Management's Discussion and Analysis, Consolidated Financial Statements and Notes to the Consolidated Financial Statements can be found on the Investor Relations page of Trinidad's website or at www.sedar.com
Trinidad Drilling Ltd.
Trinidad is a growth oriented corporation that trades on the Toronto Stock Exchange (TSX) under the symbols TDG and TDG.DB. Trinidad's divisions operate in the drilling, well servicing, coring and barge drilling sectors of the North American oil and natural gas industry. With the completion of the rig construction program, Trinidad will have 124 land drilling rigs ranging in depths from 1,000 - 6,500 metres and operations in Canada, the United States and Mexico. In addition to its land drilling rigs, Trinidad has 22 service rigs, 20 pre-set and coring rigs and 4 barge rigs operating in the Gulf of Mexico. Trinidad is focused on providing modern, reliable, expertly designed equipment operated by well-trained and experienced personnel. Trinidad's drilling fleet is one of the most adaptable, technologically advanced and competitive in the industry.
ADVISORY
NON-GAAP MEASURES DEFINITIONS
This document contains references to certain financial measures and associated per share data that do not have any standardized meaning prescribed by Canadian GAAP and may not be comparable to similar measures presented by other companies. These financial measures are computed on a consistent basis for each reporting period and include cash flow from operations before change in non-cash working capital, EBITDA, Adjusted EBITDA, gross margin, gross margin percentage, net earnings (loss) before impairment of intangible asset, Adjusted net (loss) earnings, net debt, total debt and working capital.
Additional information on the calculation of the above-mentioned, non-GAAP measures can be found in the Management's Discussion and Analysis section of Trinidad's second quarter 2010 report which is available on Trinidad's website at www.trinidaddrilling.com or from SEDAR at www.sedar.com
These Non-GAAP measures are identified as follows:
"Cash flow from operations before change in non-cash working capital" is used to assist management and investors in analyzing Trinidad's liquidity and ability to generate cash to finance investing and financing activities. Cash flow from operations before change in non-cash working capital is derived from the consolidated statements of cash flows and is defined as cash flow from operating activities plus or minus the change in non-cash operating working capital.
"EBITDA" is a measure of the Company's operating profitability. EBITDA provides an indication of the results generated by the Company's principal business activities prior to how these activities are financed, assets are depreciated, amortized and impaired, or how the results are taxed in various jurisdictions.
"Adjusted EBITDA" is used by management and investors to analyze EBITDA (as defined above) prior to the effect of foreign exchange loss (gain) and stock-based compensation, and is not intended to represent net earnings as calculated in accordance with Canadian GAAP.
"Gross margin" is used by management and investors to analyze overall and segmented operating performance. Gross margin is not intended to represent operating income nor should it be viewed as an alternative to net earnings or other measures of financial performance calculated in accordance with Canadian GAAP. Gross margin is calculated from the consolidated statements of operations and retained earnings (deficit) and from the segmented information contained in the notes to the consolidated financial statements, and is defined as revenue less operating expenses.
"Gross margin percentage" is used by management and investors to analyze overall and segmented operating performance. Gross margin percentage is calculated from the consolidated statements of operations and retained earnings (deficit) and from the segmented information in the notes to the consolidated financial statements, and is defined as gross margin divided by revenue.
"Net earnings (loss) before impairment of intangible assets" is derived from the consolidated statements of operations and deficit.
"Adjusted net (loss) earnings" is used by management and the investment community to analyze net earnings (loss) prior to the effect of foreign exchange loss (gain), stock-based compensation charges and impairment charges.
"Net debt" is used by management and the investment community to analyze the amount of debt less the working capital of the Company.
"Total debt" is used by management and the investment community to analyze the amount of debt of the Company.
"Working capital" is used by management and the investment community to analyze the operating liquidity available to the Company.
References to cash flow from operations before changes in non-cash working capital, EBITDA, Adjusted EBITDA, gross margin, gross margin percentage, net earnings (loss) before impairment of intangible assets, Adjusted net (loss) earnings, net debt, total debt and working capital throughout this document have the meanings set out above.
FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking statements relating to Trinidad's plans, strategies, objectives, expectations and intentions. The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "project", "should", "believe", "plans", "intends", "confident", "might" and similar expressions are intended to identify forward-looking information or statements. Various assumptions were used in drawing the conclusions or making the projections contained in the forward-looking statements throughout this document. The forward-looking information and statements included in this document are not guarantees of future performance and should not be unduly relied upon. Forward-looking statements are based on current expectations, estimates and projections that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated and described in the forward-looking statements. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements. In particular, but without limiting the foregoing, this document may contain forward-looking information and statements pertaining to the completion of announced rig construction programs on a timely basis and on economical terms; the assumption that Trinidad's customers will honour or renew their take-or-pay contracts; fluctuations in the demand for Trinidad's services; the ability for Trinidad to attract and retain qualified personnel, in particular field staff to crew the Company's rigs; the existence of competitors, technological changes and developments in the oilfield services industry; the existence of operating risks inherent in the oilfield services industry; assumptions respecting capital expenditure programs and other expenditures by oil and gas exploration and production companies; assumptions regarding commodity prices, in particular oil and natural gas; assumptions respecting supply and demand for commodities, in particular oil and natural gas; assumptions regarding foreign currency exchange rates and interest rates; the existence of regulatory and legislative uncertainties; the possibility of changes in tax laws; and general economic conditions including the capital and credit markets. Trinidad cautions that the foregoing list of assumptions, risks and uncertainties is not exhaustive. The forward-looking information and statements contained in this document speak only as of the date of this news release and Trinidad assumes no obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable securities laws.