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TSX SYMBOL: TDG and TDG.DB
CALGARY, Nov. 9 /CNW/ - Trinidad Drilling Ltd. ("Trinidad" or the "Company") reported operating and financial results for the third quarter and first nine months of 2010. Results for both periods reflected the strengthening conditions in the drilling industry with Trinidad recording increased levels of revenue, EBITDA (1) and net earnings over both prior comparative periods. 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 revenue which was partly offset by lower gross margins as more rigs returned to work, changing the active rig mix and incurring additional repairs and maintenance costs.
"Market conditions have improved strongly from the third quarter of last year," said Lyle Whitmarsh, Trinidad's President and Chief Executive Officer. "We are seeing higher utilization levels in both Canada and the US and we are beginning to see upward momentum in dayrates. Trinidad continues to see strong demand for its high quality, modern equipment and while our extensive contract coverage mitigates the impact of a downturn, we expect to be able to participate meaningfully in the improving industry conditions."
THIRD QUARTER 2010 AND YEAR-TO-DATE HIGHLIGHTS
- Revenue for the third quarter of 2010 was $161.9 million, up $35.8
million or 28.4% from the same quarter last year, as a result of
increased utilization in both the Company's Canadian and US drilling
operations. These increases were partially offset by reduced revenue
in Mexico. Year to date, revenue totalled $460.8 million in 2010, up
6.1% from the first nine months of 2009 due to increased activity
levels but partly offset by lower dayrates, a weaker US dollar and
reduced third-party construction revenue.
- Utilization levels increased across the Company in the third quarter
and year to date. Trinidad's Canadian operations achieved a
utilization rate of 56.0% in the third quarter, up 55.6% from the
same quarter last year. Year to date, utilization for the Canadian
operations was 52.0%, up significantly from utilization of 33.0%
achieved in the first nine months of 2009. Trinidad continued to
record industry-leading utilization levels, achieving a utilization
level 17 percentage points above the Canadian industry average in the
third quarter and 15 percentage points year to date in 2010. Activity
levels in the US and international drilling operations segment also
increased in the third quarter, reaching 72.0% compared to 61.0% in
the same quarter last year. Year-to-date utilization in the US and
international drilling operations was 67.0% compared to 62.0% for the
same period in 2009.
- Adjusted EBITDA (1) in the third quarter of 2010 was $47.9 million up
17.4% from the same quarter last year due to improving activity
levels and partly offset by lower gross margins reflecting increased
repairs and maintenance costs and a change in the active rig mix.
Adjusted EBITDA for the nine months ended 2010 was $134.7 million,
down 7.8% compared to the same period last year. The lower levels of
year-to-date 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 third quarter of 2010 of $0.3
million ($0.00 per share (diluted)), compared to a net loss of $12.1
million (a net loss of $0.10 per share (diluted)) in the third
quarter of 2009. Net earnings increased as a result of higher revenue
driven by increased operating days, lower stock-based compensation
expense, lower foreign exchange losses and lower income taxes.
Year-to-date net earnings were $5.5 million ($0.05 per share
(diluted)), compared to a net loss of $26.4 million (a net loss of
$0.25 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 a gain on the sale of assets of
$3.7 million compared to a loss of $10.1 million in 2009 and the
absence of a $23.2 million impairment charge recorded in the first
quarter of 2009.
- Construction of one technically-advanced, built-for-purpose rig was
completed during the quarter and delivered into operations where it
is working under long-term contract in the Haynesville shale in
Louisiana. In addition, the Company added a barge drilling rig to its
fleet. The rig was purchased earlier in the year. After some
enhancements and with the use of internal inventory, it is now
operating in the Gulf of Mexico.
(1) Please see the Non-GAAP Measures Definitions section of this document
(as defined herein) for further details.
All amounts are denominated in Canadian dollars (CDN$) unless otherwise identified. All amounts are stated in thousands unless otherwise identified.
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FINANCIAL HIGHLIGHTS
($ thousands except share, Three months ended September 30,
per share and percentage data) 2010 2009 % change
-------------------------------------------------------------------------
Revenue 161,917 126,142 28.4
Gross margin(1) 60,440 52,983 14.1
Gross margin percentage(1) 37.3% 42.0% (11.2)
EBITDA(1) 42,078 27,261 54.4
Per share (diluted)(2) 0.35 0.23 52.2
Adjusted EBITDA(1) 47,889 40,778 17.4
Per share (diluted)(2) 0.40 0.34 17.6
Cash flow from operations 31,929 (3,302) 1,067.0
Per share (basic)(2) 0.26 (0.03) 966.7
Per share (diluted)(2) 0.26 (0.03) 966.7
Cash flow from operations before
change in non-cash working
capital(1) 34,201 26,975 26.8
Per share (diluted)(2) 0.28 0.22 27.3
Net earnings (loss) 330 (12,143) 102.7
Per share (basic)(2) 0.00 (0.10) 100.0
Per share (diluted)(2) 0.00 (0.10) 100.0
Net earnings (loss) before
impairment of intangible asset(1) 632 (12,143) 105.2
Per share (basic)(2) 0.01 (0.10) 110.0
Per share (diluted)(2) 0.01 (0.10) 110.0
Adjusted net earnings(1) 6,443 1,374 368.9
Per share (diluted)(2) 0.05 0.01 400.0
Capital expenditures 33,967 37,833 (10.2)
Net debt(1) 472,894 479,585 (1.4)
Shares outstanding - basic
(weighted average)(2) 120,840,962 120,840,962 -
Shares outstanding - diluted
(weighted average)(2) 120,840,962 120,840,962 -
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($ thousands except share, Nine months ended September 30,
per share and percentage data) 2010 2009 % change
-------------------------------------------------------------------------
Revenue 460,764 434,411 6.1
Gross margin(1) 175,688 186,948 (6.0)
Gross margin percentage(1) 38.1% 43.0% (11.4)
EBITDA(1) 125,879 125,618 0.2
Per share (diluted)(2) 1.04 1.21 (14.0)
Adjusted EBITDA(1) 134,734 146,080 (7.8)
Per share (diluted)(2) 1.11 1.41 (21.3)
Cash flow from operations 98,521 126,564 (22.2)
Per share (basic)(2) 0.82 1.22 (32.8)
Per share (diluted)(2) 0.82 1.22 (32.8)
Cash flow from operations before
change in non-cash working
capital(1) 94,102 106,144 (11.3)
Per share (diluted)(2) 0.78 1.02 (23.5)
Net earnings (loss) 5,525 (26,382) 120.9
Per share (basic)(2) 0.05 (0.25) 120.0
Per share (diluted)(2) 0.05 (0.25) 120.0
Net earnings (loss) before
impairment of intangible asset(1) 5,827 (3,193) 282.5
Per share (basic)(2) 0.05 (0.03) 266.7
Per share (diluted)(2) 0.05 (0.03) 266.7
Adjusted net earnings(1) 14,682 17,269 (15.0)
Per share (diluted)(2) 0.12 0.17 (29.4)
Capital expenditures 104,418 139,447 (25.1)
Net debt(1) 472,894 479,585 (1.4)
Shares outstanding - basic
(weighted average)(2) 120,840,962 103,559,122 16.7
Shares outstanding - diluted
(weighted average)(2) 120,840,962 103,559,122 16.7
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(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 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.
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OPERATING HIGHLIGHTS
Three months ended Nine months ended
September 30, September 30,
2010 2009 % change 2010 2009 % change
-------------------------------------------------------------------------
Land Drilling Market
Operating days -
drilling
Canada 2,786 1,739 60.2 7,572 4,976 52.2
United States and
International(1) 4,424 3,419 29.4 12,151 9,895 22.8
Rate per drilling
day Canada (CDN$) 21,477 21,486 - 22,091 23,639 (6.5)
United States and
International
(CDN$)(1) 19,910 21,819 (8.7) 19,854 24,187 (17.9)
United States and
International
(US$)(1) 19,117 19,632 (2.6) 19,106 20,370 (6.2)
Utilization rate -
drilling
Canada 56% 36% 55.6 52% 33% 57.6
United States and
International(1) 72% 61% 18.0 67% 62% 8.1
CAODC industry
average 39% 21% 85.7 37% 22% 68.2
Number of drilling
rigs at quarter end
Canada 55 53 3.8 55 53 3.8
United States and
International(1) 66 66 - 66 66 -
Utilization rate for
service rigs 41% 27% 51.9 44% 30% 46.7
Number of service rigs
at quarter end 22 23 (4.3) 22 23 (4.3)
Number of coring and
surface casing rigs
at quarter end 20 20 - 20 20 -
Barge Drilling Market
Operating days 368 266 38.3 986 862 14.4
Rate per drilling
day (CDN$) 24,738 28,805 (14.1) 24,115 32,915 (26.7)
Rate per drilling
day (US$) 23,757 25,736 (7.7) 23,199 27,566 (15.8)
Utilization rate 88% 72% 22.2 86% 79% 8.9
Number of barge
drilling rigs at
quarter end 2 1 100.0 2 1 100.0
Number of barge
drilling rigs under
Bareboat Charter at
quarter end 3 3 - 3 3 -
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(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
Activity levels across North America continued to show improvement in the third quarter of 2010. In Canada, activity levels improved, and despite wet weather towards the end of the quarter, utilization levels were considerably higher than the previous year. Trinidad's utilization rate in the quarter averaged 20 percentage points higher than the same quarter last year and industry activity was up 18 percentage points in the same time period. In the US, industry activity levels also increased in the third quarter with the active rig count increasing to 1,786 rigs, up 75.8% from the same quarter in 2009. Industry activity was also higher than the previous quarter with an increase of 10.0% or 162 rigs from the second quarter of 2010. The trend established earlier in the year in Canada and the US, showing an increased focus towards oil-directed or natural gas liquids drilling, continued to be an important factor in the third 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 nine months of the year compared to the same periods in 2009, reflecting the changing active rig mix and increasing repairs and maintenance costs. 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. Despite the improving industry conditions, Trinidad has not lost focus on the need to control costs. The Company continues to closely monitor operating costs, capital expenditures and general and administrative expenses to ensure cash flow is spent wisely and with the most benefit for the Company and its investors. Following the increasing demand for drilling equipment over the past year, dayrates have begun to trend upwards and assuming market conditions remain strong, Trinidad anticipates that these positive market changes will result in increased dayrates for its fleet, particularly the rigs not under long-term contract.
Trinidad's revenue for the quarter was $161.9 million, up 28.4% from $126.1 million in the same quarter of 2009. Increased revenue in the third 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 7,210 days, up 39.8% from the third quarter of 2009. The increase in revenue was partly offset by reduced activity levels in Mexico in the third quarter of 2010 as compared to 2009. Revenue for the nine months of 2010 totalled $460.8 million, up 6.1% from the previous comparative period due to increased activity levels but partly offset by 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 third quarter of 2010 to 37.3% compared to 42.0% in the same quarter last year. Gross margin percentage contracted in the quarter as additional rigs were put back to work changing the active rig mix. In addition, increased repairs and maintenance costs were incurred, as activity levels across North America grew. On a year-to-date basis, gross margin as a percentage of revenue decreased to 38.1% from 43.0% in the first three quarters of 2009 as a result of the same factors impacting the quarter.
EBITDA (as defined in the Non-GAAP Measures Definitions section) in the third quarter was $42.1 million, up 54.4% from the same quarter last year due to improving activity levels and partly offset by lower gross margin percentages. Year to date, EBITDA was $125.9 million, consistent with the $125.6 million recorded for the same period last year. Adjusted EBITDA (as defined in the Non-GAAP Measures Definitions section) was $47.9 million, up 17.4% from the same quarter last year. Adjusted EBITDA for the nine months ended was $134.7 million, down 7.8% compared to the same period last year, primarily caused by lower dayrates and gross margins reflecting the changing rig mix as activity levels increased.
Net earnings in the third quarter of 2010 improved to $0.3 million ($0.00 per share (diluted)), compared to a net loss of $12.1 million (a net loss of $0.10 per share (diluted)) in the third quarter of 2009. Net earnings increased as a result of higher revenue driven by increased operating days and lower stock-based compensation expense, lower foreign exchange losses and lower income taxes. The impact of these factors was partly offset by a reduced gross margin percentage and increased depreciation and amortization expenses. Year-to-date net earnings were $5.5 million ($0.05 per share (diluted)), compared to a net loss of $26.4 million (a net loss of $0.25 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 a gain on the sale of assets of $3.7 million compared to a loss of $10.1 million in 2009 and the absence of a $23.2 million impairment charge recorded in the first quarter of 2009.
Adjusted net earnings (as defined in the Non-GAAP Measures Definitions section) was $6.4 million or $0.05 per share (diluted) for the third quarter of 2010, in comparison to Adjusted net earnings of $1.4 million or $0.01 per share (diluted) for the same quarter last year. Year to date, Adjusted net earnings was $14.7 million or $0.12 per share (diluted) compared to $17.3 million or $0.17 per share (diluted) for the previous comparative period.
During the third quarter Trinidad continued work on its 2010 rig construction program. In the quarter, one rig was completed and delivered into operations in the Haynesville shale, Louisiana, where it is working under a five-year, take-or-pay contract. The three 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. In addition, Trinidad added one barge drilling rig to its fleet earlier in the year, bringing the Company's total number of barge rigs to five. After some enhancements and with the use of internal inventory, it began operating in the third quarter.
Commodity prices for both crude oil and natural gas increased in the third quarter and first nine months of 2010 compared to the same periods last year. West Texas Intermediate crude oil averaged US$76.17 per barrel in the third quarter, an 11.7% increase from US$68.21 per barrel for the same period of 2009. For the first nine months of 2010, crude oil averaged US$77.61 per barrel compared to US$56.87 per barrel for the previous comparative period. Crude oil prices lowered slightly compared to the second 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 natural gas liquids plays. Natural gas prices remained relatively steady in the third quarter, recording an average of $4.28 per mmBtu (Henry Hub), down 1.4% from the average in the previous quarter. Although natural gas prices remain relatively weak compared to crude oil prices, they are stronger than the same periods in 2009. Average third quarter 2010 natural gas prices represented a 34.8% improvement over the same quarter last year. On a year-to-date basis, natural gas prices averaged US$4.56 per mmBtu in 2010, up 19.4% compared to the first nine months of 2009. North American storage levels for natural gas remain high and production levels continue to provide ample supply. Trinidad expects that activity levels will stabilize over the coming months and that an increase in demand for natural gas, most likely driven by an improvement in the US economy, is necessary before natural gas prices improve.
Overall, the third quarter of 2010 showed a strong improvement in a number of areas compared to the same time last year and although the Company maintains a guarded outlook for natural gas prices, activity levels remain strong and dayrates are beginning to increase. The Company's improving results reflect the positive momentum in the industry and demonstrate its ability to capture upside in the market as conditions improve.
RESULTS FROM OPERATIONS
United
States/
Inter-
Canadian national Const- Inter-
Three months ended Drilling Drilling ruction segment
September 30, 2010 Opera- Opera- Opera- Elimi-
($ thousands) tions tions tions nations Total
-------------------------------------------------------------------------
Revenue 67,886 93,024 30,212 (29,205) 161,917
Operating expense 44,030 56,210 30,442 (29,205) 101,477
-----------------------------------------------------
23,856 36,814 (230) - 60,440
Interest on
long-term debt 3,360 2,844 6 - 6,210
Interest on
convertible
debentures 9,010 - - - 9,010
Depreciation and
amortization 8,443 17,903 604 - 26,950
(Gain) loss on
disposal or sale
of assets (25) - - - (25)
Impairment of
intangible assets - - 302 - 302
-----------------------------------------------------
Income before
corporate items 3,068 16,067 (1,142) - 17,993
General and
administrative 12,551
Stock-based compensation
recovery 744
Foreign exchange gain 5,067
Income taxes (699)
-----------------------------------------------------
Net earnings 330
-----------------------------------------------------
Capital expenditures 7,675 25,652 640 - 33,967
-----------------------------------------------------
United
States/
Inter-
Canadian national Const- Inter-
Three months ended Drilling Drilling ruction segment
September 30, 2009 Opera- Opera- Opera- Elimi-
($ thousands) tions tions tions nations Total
-------------------------------------------------------------------------
Revenue 40,979 83,494 29,502 (27,833) 126,142
Operating expense 25,430 45,623 29,939 (27,833) 73,159
-----------------------------------------------------
15,549 37,871 (437) - 52,983
Interest on
long-term debt 2,999 2,348 17 - 5,364
Interest on
convertible
debentures 8,868 - - - 8,868
Depreciation and
amortization 6,728 13,342 531 - 20,601
Loss on disposal or
sale of assets 258 58 4 - 320
-----------------------------------------------------
Income before
corporate items (3,304) 22,123 (989) - 17,830
General and
administrative 12,205
Stock-based
compensation 2,087
Foreign exchange loss 11,430
Income taxes 4,251
-----------------------------------------------------
Net loss (12,143)
-----------------------------------------------------
Capital expenditures 16,730 21,883 196 - 38,809
-----------------------------------------------------
United
States/
Inter-
Canadian national Const- Inter-
Nine months ended Drilling Drilling ruction segment
September 30, 2010 Opera- Opera- Opera- Elimi-
($ thousands) tions tions tions nations Total
-------------------------------------------------------------------------
Revenue 195,243 260,671 73,000 (68,150) 460,764
Operating expense 128,435 154,960 69,831 (68,150) 285,076
-----------------------------------------------------
66,808 105,711 3,169 - 175,688
Interest on
long-term debt 9,474 7,356 22 - 16,852
Interest on
convertible
debentures 26,921 - - - 26,921
Depreciation and
amortization 24,170 49,491 1,671 - 75,332
Loss (gain) on
disposal or sale
of assets 16 (3,781) 46 - (3,719)
Impairment of
intangible assets - - 302 - 302
-----------------------------------------------------
Income before
corporate items 6,227 52,645 1,128 - 60,000
General and
administrative 40,954
Stock-based
compensation 2,243
Foreign exchange gain 6,612
Income taxes 4,666
-----------------------------------------------------
Net earnings 5,525
-----------------------------------------------------
Capital expenditures 25,101 78,339 978 - 104,418
-----------------------------------------------------
United
States/
Inter-
Canadian national Const- Inter-
Nine months ended Drilling Drilling ruction segment
September 30, 2009 Opera- Opera- Opera- Elimi-
($ thousands) tions tions tions nations Total
-------------------------------------------------------------------------
Revenue 142,973 265,717 99,862 (74,141) 434,411
Operating expense 86,725 141,887 92,992 (74,141) 247,463
-----------------------------------------------------
56,248 123,830 6,870 - 186,948
Interest on
long-term debt 9,197 7,033 57 - 16,287
Interest on
convertible
debentures 26,504 - - - 26,504
Depreciation and
amortization 19,724 42,505 1,486 - 63,715
Loss on disposal or
sale of assets 125 9,940 4 - 10,069
Impairment of
intangible assets - 23,189 - - 23,189
-----------------------------------------------------
Income before
corporate items 698 41,163 5,323 - 47,184
General and
administrative 40,868
Stock-based
compensation 4,448
Foreign exchange loss 16,014
Income taxes 12,236
-----------------------------------------------------
Net loss (26,382)
-----------------------------------------------------
Capital expenditures 23,213 106,202 792 - 130,207
-----------------------------------------------------
Canadian Drilling Operations
Results from the Canadian drilling operations for the third quarter and year to date this year reflect the strengthening conditions present in the Canadian drilling industry. In the third quarter, activity levels increased strongly from the previous year and while dayrates remained consistent with the same quarter last year, the segment's gross margin percentage was negatively impacted as more shallow and non-contracted rigs returned to operation.
Higher rig utilization and increased operating days in the third quarter and first nine months of 2010 compared to the previous year led to increased revenue levels for the Canadian drilling segment. In the third quarter, revenue was $67.9 million, up 65.7% from $41.0 million in the same quarter last year. Year to date in 2010 the segment generated revenue of $195.2 million, an increase of 36.6% from the same period in 2009. Operating days increased by 60.2% to 2,786 days in the third quarter compared to the same quarter last year, reflecting increasing activity levels in western Canada and additional rigs returned to Canada from the Company's Mexican operations. During the quarter, the Company agreed to move three rigs that had been working in its Mexican operations, back to Canada where they will be working in the Cardium play. One rig began operations during the quarter, one arrived in Canada during the quarter but began operating in early October and the third rig is expected to begin operating later in the fourth quarter. For the first nine months of 2010, operating days were 7,572 days, up 52.2% from the same period in 2009. Trinidad continued its track record of outperforming industry activity levels and recorded an average utilization rate of 56.0% in the third quarter compared to an industry average of 39.0%. Trinidad's third quarter utilization represented an increase of 55.6% from a utilization rate of 36.0% in the same quarter of 2009. Year-to-date utilization averaged 52.0% in 2010 compared to an industry average of 37.0% and 33.0% for the same period in 2009. Activity levels have increased in 2010 compared to 2009 as a result of improving market conditions. Wet weather towards the end of the third quarter reduced activity for several weeks while rigs were unable to move due to road conditions. These conditions dried up in early October and activity levels have quickly recovered. Dayrates in the third quarter for the Canadian drilling segment were $21,477 per day, consistent with the dayrates recorded in the same quarter last year but down 9.0% from dayrates of $23,590 per day in the second quarter of 2010. The overall average dayrate has decreased from the previous quarter due to a change in the active rig mix. As additional rigs returned to work, the Company had a higher number of shallow and non-contracted rigs operating. These rigs tend to generate lower dayrates than the deeper, contracted rigs that were more predominantly working in the second quarter. Year to date, dayrates averaged $22,091 per day, down 6.5% from the first nine months 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 throughout 2010 with horizontal and directional wells accounting for 67.7% of wells drilled in Canada in the first nine months of the year compared to 56.8% in the same period in 2009. The most recent year-to-date information shows oil-directed drilling also continued to be a growing area of focus, increasing from 31.4% of wells drilled in 2009 to 52.8% 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 saw a strong improvement in activity in the third quarter. Utilization rates averaged 41.0% for the third quarter compared to 27.0% for the same quarter last year. Year-to-date activity levels were also higher, with average utilization for the first nine months of 2010 averaging 44.0% 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 and the growing focus on oil-directed developments. Activity for the Company's coring division also saw some improvement in the quarter with work beginning to resume in oil sands projects. The Company is encouraged by the growing interest and activity levels in the oil sands and anticipates that it will show increasing activity in this division towards the end of 2010 and into 2011. In addition, Trinidad is pursuing alternative opportunities for its coring rigs that may help to reduce the cyclicality of this business line.
In the third quarter, gross margin for the Canadian drilling segment was $23.9 million or 35.1% of revenue compared to $15.5 million or 37.9% of revenue in the third quarter of 2009. Gross margin percentage decreased in the third quarter of 2010, as a result of a change in the active rig mix and increased repairs and maintenance costs incurred to prepare a large number of rigs to return to operations. For the first nine months of 2010, gross margin was $66.8 million or 34.2% of revenue compared to $56.2 million or 39.3% for the same period last year. Lower dayrates in the first quarter of 2010, a change in the active rig mix and higher repairs and maintenance costs resulted in a lower gross margin percentage year over year. In addition, year-to-date gross margin percentage was lower than the previous year due to the absence of early termination revenue received in 2009.
United States and International Drilling Operations
In the US, industry activity levels have increased strongly throughout the first nine months of 2010. The active rig count in the third quarter averaged 1,785 rigs, up 768 rigs or 75.5% from the third quarter of 2009 and up 160 rigs or 9.8% from the previous quarter. Year to date, the average active rig count is up 46.9% to 1,608 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 nine months of 2010, horizontal drilling accounted for 50.0% of wells drilled, up from 39.4% in the same period last year. In the first nine months of 2010, the average number of rigs directed towards oil targets increased by 77.9% from the same period last year, while the remainder of the US active rig fleet increased 38.7% during the same time frame.
Third quarter revenue for the US and international drilling operations segment increased by 11.4% to $93.0 million compared to $83.5 million in 2009. Higher revenue was driven largely by increased utilization and operating days which was partly offset by marginally lower dayrates and a weaker US dollar in the quarter. US dollar denominated dayrates in the quarter were US$19,117 per day, down 2.6% quarter over quarter, reflecting a change in rig mix. Similar to the Canadian drilling industry, 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-technology contracted rigs. While day rates were slightly lower compared to the same quarter last year, the Company saw positive momentum in dayrates and recorded an improvement of 5.7% in dayrates compared to the previous quarter. Canadian dollar denominated dayrates in the third quarter were $19,910 per day, down 8.7% compared to the previous year, largely due to a weaker US dollar. Revenue in the quarter was also negatively impacted by reduced revenue and operating days in Mexico. For the first nine months of 2010, revenue totalled $260.7 million, down 1.9% from the same period in 2009, as a result of lower dayrates and a weaker US dollar.
Operating days in the third quarter of 2010 increased to 4,424 days, up 29.4% compared to the same period last year. Utilization levels also reflected the growing activity levels, increasing to 72.0% compared to 61.0% in the third quarter of 2009. Year to date, operating days were up 22.8% to 12,151 days compared to the first nine months last year and utilization grew from 62.0% to 67.0% 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. During the third quarter, operating days and utilization levels in the US and international division were negatively impacted by the demobilization of four rigs out of the Company's Mexican operations. As these rigs were moving to their new locations, three rigs were moved to Canada and one rig to the US, they recorded minimal operating days during the quarter. By quarter end, two rigs had arrived in Canada, one rig was enroute to Canada and one rig had arrived in the US. During the quarter, Trinidad delivered one rig from its 2010 construction program to its US operations. To date this year, the Company has delivered three newly constructed rigs to its US operations and has three rigs remaining to be delivered. All six rigs remain under long-term, take-or-pay contracts.
A change in focus earlier in 2010 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 in the second quarter. Trinidad has since moved three rigs to Villahermosa in southeastern Mexico where they are operating under contract with the original customer. The four rigs that were not re-contracted were demobilized out of the country during the third quarter and the costs incurred in moving the rigs were covered by the Mexican customer.
Gross margin percentage decreased to 39.6% in the third quarter compared to 45.4% in the same quarter last year. Year to date in 2010, gross margin percentage was 40.6% compared to 46.6% for the first nine months in 2009. Gross margin percentage in the quarter and year to date was negatively impacted by a change in the active rig mix. 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.
In the Company's barge drilling division, activity levels improved in the third quarter as operators became less concerned with factors associated with the Macondo oil spill affecting drilling in the Gulf of Mexico. The division also saw a continuation of the trend occurring earlier in the year which has shown operators moving their development plans to oil and natural gas liquids related drilling and away from natural gas. Dayrates in the third quarter were US$23,757 per day, down 7.7% compared to the same quarter last year. Dayrates have lowered from the higher levels reached in 2008 and early 2009, reflecting overall industry conditions. The division is now beginning to demonstrate stability in its dayrates with minimal fluctuations to date in 2010. The weaker US dollar also impacted the barge division with Canadian dollar denominated dayrates averaging CDN$24,738 per day in the third quarter, down 14.1% from the same quarter of 2009. For the first nine months of 2010, dayrates have averaged CDN$24,115 per day, down 26.7% 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 over the past few months. In the quarter utilization increased to 88.0%, up from 72.0% in the third quarter last year and up from 78.0% in the previous quarter. Year-to-date utilization for the barge drilling division has averaged 86.0% in 2010 compared to 79.0% for the first nine months of 2009.
Earlier in 2010, Trinidad added an additional barge drilling rig to its fleet, bringing the Company's total number of barge rigs to five. After some enhancements and with the use of internal inventory, it began operating in the third quarter. Market conditions in the barge drilling sector have been impacted by the economic slowdown over the past two years; however, the industry is beginning to show signs of improvement. Trinidad believes that by adding to its barge fleet at an opportune time in the market, the Company can grow its market share and be well positioned for when market conditions improve.
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 September 30, 2010, four of the seven rigs have been delivered with the remaining three 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 September 30, 2010 recorded revenue of $30.2 million versus $29.5 million for the same period in 2009. Year to date, revenue showed a decline of $26.9 million to $73.0 million in 2010 from $99.9 million in 2009. Declines in revenue are as a result of reduced third-party work which totalled $4.9 million compared to $25.8 million for the same period in 2009. Throughout 2010, management has continued to aggressively pursue all third-party opportunities and in turn, has experienced increased interest in their offerings. The rig construction market has rebounded more slowly than management had expected; however, they still remain guardedly optimistic on the success of these prospects.
Operating expenses increased slightly by 1.7% in the third quarter of 2010 but declined by 24.9 % year to date in 2010. For the three months ended September 30, 2010 and 2009, Victory's gross margin was approximately nil as a result of work performed on Trinidad's internal rig build program which is billed at cost to Trinidad's other operating segments. Victory's work was substantially all related party transactions with year-to-date inter-segment revenues for 2010 of $68.2 million, representing 93.4% of total revenues. Inter-segment revenue is expected to continue at current levels for the remainder of 2010 as Victory continues to construct rigs in Trinidad's internal rig build program.
FINANCIAL SUMMARY September 30, December 31,
($ thousands except percentage data) 2010 2009
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Working capital (1) 95,482 90,673
Total debt (1)(2) 578,696 561,668
Total debt as a percentage of assets 35.5% 34.6%
Net debt (1)(2) 472,894 456,849
Net debt as a percentage of assets 29.0% 28.1%
Total assets 1,631,244 1,624,013
Total long-term liabilities 649,977 631,074
Total long-term liabilities as a
percentage of assets 39.8% 38.9%
Shareholders' equity 887,392 911,621
Total debt to shareholders' equity 65.2% 61.6%
Net debt to shareholders' equity 53.3% 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 increased by $4.8 million to $95.5 million at September 30, 2010, compared to $90.7 million as at December 31, 2009. The movement relates to a $19.7 million increase in current assets over a lower increase of $14.9 million in current liabilities at September 30, 2010 from December 31, 2009. The significant increase in current assets is attributable to an increase in cash and cash equivalents of $12.7 million and an increase of inventory of $6.6 million from December 31, 2009. Included in current liabilities is a decline in the current portion of long-term debt of $8.9 million offset by the increase of accounts payable and accrued liabilities of $22.6 million. A significant driver of most of these changes relates to increased activity levels at the end of the third quarter of 2010 compared to the end of the fourth quarter of 2009. With respect to the decline on the current portion of long-term debt, it was partially related to the final purchase agreement payment made in the third quarter of 2010 to the former owners of the US subsidiary, Axxis, in relation to the Bareboat Charters agreement. This decline is offset by an increase of other long-term debt reclassed to current as it will be due within twelve months from the particular date in 2010.
For the nine months ended September 30, 2010, Trinidad's total debt increased by $17.3 million. This increase is partially due to a $31.4 million increase in the Company's revolving credit facilities which the Company uses to fund capital requirements on Trinidad's rig construction program. Offsetting this amount is a decline of $13.1 million (US$12.5 million) relating to the final purchase agreement payment in July 2010 to the former owners of the US subsidiary, Axxis, in relation to the Bareboat Charters agreement. As at September 30, 2010, Trinidad had CDN$71.0 million and US$15.0 million outstanding on its Canadian and US revolving credit facilities, leaving CDN$79.0 million and US$85.0 million unutilized, respectively.
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 US$100.0 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 $34.0 million of capital expenditures were incurred during the three months ended September 30, 2010 compared to $37.8 million for the three months ended September 30, 2009. For the nine months ended September 30, 2010, total capital expenditures were $104.4 million compared to $139.5 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 US$28 million (CDN$29.9 million). As a result of this sale, Trinidad recorded lease termination revenue of US$4.9 million (CDN$5.2 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
As the Company moves into the final quarter of the year, the trends experienced earlier in 2010, showing a growing demand for deep, modern equipment and a more pronounced focus on oil or natural gas liquids drilling have continued. Trinidad has remained a key player in the unconventional shale plays where stronger project economics, long-term development plans and other strategic factors allow exploration and production companies to continue drilling at the relatively low natural gas prices we have experienced to date in 2010. Including the rigs under construction, Trinidad has approximately 50% of its fleet drilling in these plays, of which 80% are under long-term, take-or-pay contracts. The unconventional drilling and completion techniques used in these typically more complex drilling programs are now being applied to crude oil and natural gas liquids targets where drilling was previously considered conventional. Trinidad's extensive experience in technical, unconventional style drilling has made it a natural drilling contractor for these areas and the Company has a growing number of rigs operating in these types of plays, such as the Cardium in Alberta and the Wolfberry in Texas.
Early in the fourth quarter, weather related delays in Canada cleared up and activity levels rebounded strongly. Demand for high quality, modern equipment such as Trinidad's has been growing and Trinidad is anticipating that activity rates will reach peak levels for the year in the fourth quarter. With demand for equipment increasing across North America, crew attraction and retention is becoming more challenging. Wage increases have been occurring throughout Trinidad's operations and the Company expects that it will be able to pass these cost increases through to its customers and that there will be no impact on gross margins. In addition to the pass through of higher labour costs, Trinidad has seen positive momentum in dayrates and anticipates seeing increased dayrates for the end of 2010 and into 2011. While the Company expects conditions to remain fairly strong 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 first three quarters of 2010 have shown a marked improvement over the previous year and Trinidad expects that full year 2010 will continue to reflect the improving market conditions and show year-over-year increases in many key areas. The Company's strategy has been to assemble a deep, technically advanced fleet and to create a reputation for top performance. This strategy has paid off for Trinidad and is reflected in the Company's ongoing ability to record industry leading utilization for its equipment while maintaining strong dayrates. Trinidad will continue to pursue its proven strategy moving forward, adding only high quality equipment and continually enhancing existing equipment to ensure it maintains its position as a leader in the industry and the "driller of choice" for a number of key operators. In 2010, Trinidad expects to add seven new high-tech rigs to its fleet through its internal rig construction program. To date, the Company has added three rigs to its fleet in the Haynesville shale, Louisiana and one rig to the Montney shale in north-east British Columbia. The remaining three 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. These activities have paid off as these rigs are now operating and receiving stronger dayrates than they might otherwise have achieved.
In addition to growing and enhancing its fleet, Trinidad remains committed to reducing debt levels. The additional rigs added and the enhancements made in 2010 will increase the Company's ability to generate free cash flow and its ability to reduce indebtedness. The Company's long term debt facilities and convertible debentures mature in 2012 and Trinidad anticipates that it will be able to apply a portion of its free cash flow towards these facilities and be in a good position to repay or refinance the facilities prior to their maturity.
The past two years have presented a number of challenges for Trinidad, the industry and the global economy as a whole. Overall, Trinidad is pleased with the way it has progressed through this period. The Company has grown its fleet by adding high quality equipment that remains in demand while also reducing its debt levels and continuing to pay a dividend to its shareholders. The Company's long-term, take-or-pay contracts have shown their strength and continue to provide good visibility to a significant portion of its revenue stream. Including the rigs under construction, Trinidad has more than 45.0% of the fleet under this style of contract with an average remaining term of approximately two years. While Trinidad does not believe that the impact of the downturn is completely behind it, the Company is confident that its business strategy has demonstrated an ability to withstand the tough times and that it is well positioned to excel in stronger market conditions.
CONFERENCE CALL
A conference call and webcast to discuss the results will be held for the investment community on Wednesday November 10th 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 November 10th until midnight November 17th, 2010 by dialing (800) 642-1687 or (416) 849-0833 and entering replay access code 18357428.
A live audio webcast of the conference call will also be available via the Investor Relations page of Trinidad's website.
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 operations in Canada, the United States and 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 earnings (loss), 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 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 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 document 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.