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TSX SYMBOL: TDG
CALGARY, March 2 /CNW/ - Trinidad Drilling Ltd. ("Trinidad" or the "Company") reported operating and financial results for 2010 reflecting growing revenue, EBITDA(1) and adjusted net earnings before refinancing costs (1) and a record number of operating days.
"This past year has shown a strong turnaround in industry conditions," said Lyle Whitmarsh, Trinidad's President and Chief Executive Officer. "We ramped up activity levels significantly during the year, surpassing our own expectations and ending the year with almost all our equipment working. Over the course of the year, we have seen dayrates react positively to the high activity levels and with ongoing customer demand and relatively strong crude oil prices, we feel optimistic that these conditions will continue well into 2011. Our fleet of modern, in-demand equipment and our strong customer relationships position us well to continue to achieve industry leading utilization and improving financial results."
The fourth quarter of 2010 is the first quarter of the year that has begun to show the full impact of the industry turnaround. Activity levels have been growing steadily throughout the year; however, as is typical, dayrates have taken time to reflect the increase in demand. In addition, the costs incurred in reactivating equipment have partially masked the improving conditions. By the fourth quarter of 2010, activity levels remained high, dayrates were improving and, as most reactivation costs were completed, gross margins were increasing. The first quarter of 2011 has seen a continuation of these conditions and we expect that 2011 will represent an improvement over the past two years.
FULL YEAR AND FOURTH QUARTER 2010 OPERATING HIGHLIGHTS
(Quarter-over-quarter and full-year comparatives all relate to the comparable period in 2009)
- Trinidad's average Canadian drilling utilization rate in 2010 was
55%, up from 35% in the previous year due to improving industry
conditions. The Company continued its track record of substantially
exceeding Canadian industry utilization which averaged 40% in 2010.
In the fourth quarter, Trinidad's average Canadian drilling
utilization rate was 65%, up from 44% in the fourth quarter of 2009
and above Canadian industry utilization of 49% for the fourth quarter
of 2010.
- The US and international drilling operations averaged utilization
levels of 68% in 2010 compared to 63% in 2009, reflecting the
improvement in drilling activity in the US during 2010. Similar to
Canada, utilization levels improved in the fourth quarter, averaging
73% compared to 63% in the fourth quarter of 2009.
- Dayrates in Canada and the US and international operations averaged
2.7% and 4.2% lower, respectively in 2010 compared to 2009, in their
originating currency, as a result of a change in Trinidad's active
rig mix. Dayrates improved throughout the year as demand for high
quality equipment continued to grow. Improvements began to be
particularly evident in the fourth quarter with dayrates increasing
in the Canadian and the US and international drilling divisions by
12.1% and 4.4%, respectively from the third quarter in their
originating currency.
- During 2010, Trinidad added five new high-tech, deep-capacity
drilling rigs to its fleet. The rigs are all under five-year, take-
or-pay contracts and are operating in the US and Canadian
unconventional shale plays.
FULL YEAR AND FOURTH QUARTER 2010 FINANCIAL HIGHLIGHTS
- Revenue for the full year in 2010 was $646.7 million compared to
$582.6 million in 2009, an increase of 11.0%. Higher revenue levels
were largely driven by increased operating days and partly offset by
slightly lower dayrates. In addition, a weaker US dollar in 2010
negatively impacted revenue levels compared to the previous year. In
the fourth quarter of 2010, growing activity levels and increasing
dayrates were reflected in the revenue total of $185.9 million, an
increase of 25.4% from the same period in 2009.
- In 2010, Trinidad's gross margin percentage(1) decreased to 39.0%
from 42.4% in 2009 due to slightly lower dayrates and increased
repairs and maintenance, safety and training costs associated with
reactivating a large portion of the fleet. By the fourth quarter of
2010, these costs were largely complete and dayrates, gross margins
and utilization levels were improving steadily. By the fourth
quarter, gross margin percentage had improved to 41.2% compared to
37.3% in the previous quarter.
- EBITDA(1) was $187.1 million for the full year in 2010 and $61.2
million in the fourth quarter, up 13.7% and 57.3%, respectively.
Increased EBITDA was driven by higher revenues and lower foreign
exchange losses partly offset by increased operating costs in the
full year. In the fourth quarter, expanding gross margins also led to
increased EBITDA levels.
- Adjusted net earnings before refinancing costs(1) were $31.8 million
in 2010 compared to $29.8 million in 2009 or $0.26 and $0.28 per
share (diluted), respectively. Refinancing costs of $19.6 million
represents previous deferred financing charges related to the
Company's former long-term debt and convertible debentures. This
improvement was largely a result of higher EBITDA levels and partly
offset by increased depreciation and amortization which was
reflective of the higher operating days in the year. For the fourth
quarter, adjusted net earnings before refinancing costs were $17.1
million or $0.14 per share, (diluted), up 36.8% from the same quarter
last year.
- Net earnings (loss) were a loss of $82.1 million or $0.68 per share
(diluted) in 2010 compared to a net loss of $22.4 million or $0.21
per share (diluted) in 2009. In addition to the factors mentioned
above, net earnings were negatively impacted by several non-cash
charges including an impairment of goodwill recorded on the Company's
construction division and an impairment of capital assets recorded on
four land drilling rigs in 2010. Partly offsetting these factors was
a gain on sale of assets in 2010 of $3.3 million compared to a loss
of $10.5 million in 2009, a lower charge for impairment of intangible
assets of $0.9 million in 2010 compared to $23.2 million in 2009,
smaller foreign exchange loss of $7.1 million compared to $24.6
million in 2009 and a decline in taxes of $3.3 million.
- During 2010, Trinidad made several significant changes to its capital
structure that improved its financial flexibility. The Company raised
US$450 million in senior unsecured notes (due 2019); the proceeds
were used to redeem its $354 million in convertible debentures (due
2012). Before refinancing, the Company had approximately $150 million
outstanding on its term debt facility. The remainder of the long-term
debt was repaid using the Company's newly expanded revolving
facility. The new credit facility includes a C$200 million and a US
$100 million tranche (now due 2014). These changes simplify the
Company's capital structure, allow for penalty-free debt repayment,
extend the debt maturities and better allocate the Company's
indebtedness between U.S. and Canadian dollars.
(1) Please see the Non-GAAP Measures Definitions section of this document
for further details.
All amounts are denominated in Canadian dollars (CDN$) unless otherwise
identified. All amounts are stated in thousands unless otherwise
identified.
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FINANCIAL HIGHLIGHTS
For the years ended December 31,
($ thousands except share and
per share data) 2010 2009 % Change*
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Revenue 646,658 582,591 11.0
Gross margin(1) 252,095 246,742 2.2
Gross margin percentage(1) 39.0% 42.4% (8.0)
EBITDA(1) 187,107 164,507 13.7
Per share (diluted)(2) 1.55 1.52 2.0
Adjusted EBITDA(1) 198,146 193,511 2.4
Per share (diluted)(2) 1.64 1.79 (8.4)
Cash flow from operations 119,420 107,080 11.5
Per share (basic)(2) 0.99 0.99 -
Per share (diluted)(2) 0.99 0.99 -
Cash flow from operations
before change in non-cash
working capital(1) 146,581 144,526 1.4
Per share (diluted)(2) 1.21 1.34 (9.7)
Net earnings (loss) (82,133) (22,439) (266.0)
Per share (basic)(2) (0.68) (0.21) (223.8)
Per share (diluted)(2) (0.68) (0.21) (223.8)
Adjusted net earnings(1) 12,193 29,754 (59.0)
Per share (diluted)(2) 0.10 0.28 (64.3)
Adjusted net earnings
before refinancing costs(1) 31,795 29,754 6.9
Per share (diluted)(2) 0.26 0.28 (7.1)
Capital expenditures
(including acquisitions) 139,640 162,563 (14.1)
Net debt(1) 479,343 456,849 4.9
Shares outstanding - basic
(weighted average)(2) 120,840,962 107,915,093 12.0
Shares outstanding - diluted
(weighted average)(2) 120,840,962 107,915,093 12.0
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FINANCIAL HIGHLIGHTS
For the years ended December 31,
($ thousands except share and
per share data) 2008 % Change*
-------------------------------------------------------------
Revenue 757,900 (14.7)
Gross margin(1) 309,495 (18.5)
Gross margin percentage(1) 40.8% (4.4)
EBITDA(1) 287,470 (34.9)
Per share (diluted)(2) 3.16 (50.9)
Adjusted EBITDA(1) 256,457 (22.7)
Per share (diluted)(2) 2.82 (41.8)
Cash flow from operations 210,782 (42.7)
Per share (basic)(2) 2.32 (56.9)
Per share (diluted)(2) 2.32 (56.9)
Cash flow from operations
before change in non-cash
working capital(1) 207,121 (29.2)
Per share (diluted)(2) 2.28 (46.9)
Net earnings (loss) 82,174 (200.0)
Per share (basic)(2) 0.90 (175.6)
Per share (diluted)(2) 0.90 (175.6)
Adjusted net earnings(1) 89,315 (86.3)
Per share (diluted)(2) 0.98 (89.8)
Adjusted net earnings
before refinancing costs(1) 89,315 (64.4)
Per share (diluted)(2) 0.98 (73.5)
Capital expenditures
(including acquisitions) 277,901 (49.8)
Net debt(1) 559,360 (14.3)
Shares outstanding - basic
(weighted average)(2) 90,804,564 33.1
Shares outstanding - diluted
(weighted average)(2) 91,003,946 32.8
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* Represents the change from 2010.
(1) Readers are cautioned that gross margin, gross margin percentage,
EBITDA, Adjusted EBITDA, cash flow from operations before change in
non-cash working capital, Adjusted net earnings, Adjusted net
earnings before refinancing costs and net debt and the related per
share information do not have standardized meanings prescribed by
GAAP - see "Non-GAAP Measures".
(2) Basic shares include the weighted average number of shares
outstanding over the period. Diluted shares include the weighted
average 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
For the years ended % %
December 31, 2010 2009 Change* 2008 Change*
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Land Drilling Market
Operating days - drilling
Canada 10,842 7,066 53.4 12,196 (11.1)
United States and
International(1) 16,581 13,889 19.4 15,076 10.0
Rate per drilling day
Canada (CDN$) 22,693 23,315 (2.7) 23,827 (4.8)
United States and
International (CDN$)(1) 19,996 23,336 (14.3) 23,098 (13.4)
United States and
International (US$)(1) 19,333 20,189 (4.2) 22,006 (12.1)
Utilization rate - drilling
Canada 55% 35% 57.1 57% (3.5)
United States and
International 68% 63% 7.9 85% (20.0)
CAODC industry average 40% 24% 66.7 42% (4.8)
Number of drilling rigs
at year end
Canada 55 52 5.8 57 (3.5)
United States and
International 62 66 (6.1) 56 10.7
Utilization rate for
service rigs 47% 30% 56.7 46% 2.2
Number of service rigs
at year end 22 22 - 23 (4.3)
Number of coring and surface
casing rigs at year end 20 20 - 20 -
Barge Drilling Market
Operating days 1,442 1,136 26.9 1,285 12.2
Rate per drilling day (CDN$) 24,206 29,971 (19.2) 44,387 (45.5)
Rate per drilling day (US$) 23,413 25,614 (8.6) 42,358 (44.7)
Utilization rate(2) 90% 78% 15.4 93% (3.2)
Number of barge drilling
rigs at year end 2 1 100.0 1 100.0
Number of barge drilling
rigs under Bareboat Charter
Agreements at year end 3 3 - 3 -
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* Represents the change from 2010.
(1) Trinidad commenced its operations in Mexico effective November 2008
and expanded its international operations into Chile effective August
2009.
(2) During the first quarter of 2008, Trinidad completed significant work
to one of its barge rigs and as a result it was removed from service
and not included in the utilization calculation for that quarter.
OVERVIEW
In 2010, Trinidad recorded strong results as a result of increased customer demand and improving industry conditions during 2010. During the year, operating days reached record levels and revenue, EBITDA (as defined in the Non-GAAP measures definitions section) and adjusted net earnings before refinancing costs (as defined in the Non-GAAP measures definitions section) showed improvements over the levels recorded in the previous year. A relatively weaker start to 2010 followed by a ramp up in activity throughout the year, led to results that while predominantly an improvement over the previous year, do not accurately reflect the strong position in which the Company finished the year.
During 2010, Trinidad saw a number of important trends, some of which, such as the demand for deep, technically advanced equipment were a continuation of trends the Company has seen in previous years. Other trends, meanwhile, such as the growing focus on crude oil and natural gas liquids targets, reflected the strong prices for crude oil and related products. During 2010, crude oil prices improved 28.9% from 2009 to average $79.48 per barrel compared to an improvement of 10.4% and an average price of $4.37 per mmBtu for natural gas. Trinidad participated in this shift to oil with approximately 40% more rigs drilling for oil or natural gas liquids in 2010 compared to 2009. The Company continued to achieve industry-leading utilization; demonstrating customer satisfaction with its equipment, the strong performance its rigs and crews consistently provide and the ease in which its rigs can move between plays and commodities.
Trinidad's revenue for the year increased by 11.0% to $646.7 million compared to 2009, largely driven by increased operating days and partly offset by slightly lower dayrates. Trinidad's total operating days increased by 30.9% in 2010 to a record level of 27,423 days compared to 20,955 days in 2009. Operating days were up in both Canada and the US and international divisions due to increased customer demand and the addition of five new rigs. The Company completed the construction of these new rigs during the year, one of which was added to the Canadian operations and the remaining four were added to the US operations. The rigs were all constructed at Trinidad's in-house manufacturing facility and are backed by long-term, take-or-pay contracts.
The Company's strategy of maintaining a blend of long-term contracts and spot market exposure over its fleet continued to pay off. During the downturn, Trinidad's long-term, take-or-pay contracts held fast and reduced the impact of the weak industry conditions on almost half its equipment. As conditions improved, the Company was also able to participate in the upside by extending contracts at higher prices as they expired and by operating the remainder of the fleet on shorter-term contracts. Compared to 2009, average dayrates in 2010 in Canadian and US and international drilling divisions were down 2.7% and 4.2%, respectively, in their originating currency, as the benefit of participating in improved dayrates on the spot market wasn't realized until the later part of the year. As the active rig count increased in 2010, a higher proportion of shallower rigs and rigs working on the spot market were put back into operation; these rigs tend to generate lower dayrates than the deeper, largely contracted rigs that worked more exclusively throughout 2009 and lower the overall average dayrate. In addition, a weaker US dollar in 2010 negatively impacted revenue levels compared to the previous year. On average in 2010, the US/CAD exchange rate was $1.030 compared to $1.142 in 2009.
In 2010, Trinidad's gross margin percentage (as defined in the Non-GAAP measures definitions section) decreased to 39.0% from 42.4% in 2009. This decrease was largely driven by slightly lower dayrates due to a change in Trinidad's active rig mix, as well as increased repairs and maintenance, safety and training costs associated with reactivating a large portion of the fleet. By the fourth quarter of 2010, these costs were largely complete and dayrates, gross margins and utilization levels had improved substantially.
Adjusted net earnings (as defined in the Non-GAAP measures definitions section) were $12.2 million or $0.10 per share (diluted) for 2010 in comparison to $29.8 million or $0.28 per share (diluted) in 2009, driven largely by higher depreciation and amortization expenses and additional interest costs associated with the refinancing of the Company's debt facility. Depreciation and amortization costs increased as a result of the higher number of operating days in 2010 compared to 2009. Excluding the non-recurring refinancing costs of $19.6 million that were incurred in the year, adjusted net earnings before refinancing costs were $31.8 million compared to $29.8 in 2009 or $0.26 and $0.28 per share (diluted), respectively.
Trinidad recorded a net loss of $82.1 million or $0.68 per share (diluted) in 2010 compared to a net loss of $22.4 million or $0.21 per share (diluted) in 2009. In addition to the factors mentioned above, net earnings were negatively impacted by several non-cash charges including an impairment of goodwill recorded on the Company's construction division and an impairment of capital assets recorded on four land drilling rigs in 2010. Given the decision to narrow the focus of the Company's rig construction division to internal rig building for all future construction, Trinidad recognized an impairment charge of $58.5 million on the goodwill associated with this division. Trinidad also recorded a $23.8 million impairment charge relating to the value of four land drilling rigs that the Company felt were no longer marketable for operations. The rigs were written down to an estimated recoverable amount. Partly offsetting these factors was a gain on sale of assets in 2010 of $3.3 million compared to a loss of $10.5 million in 2009, a lower charge for impairment of intangible assets of $0.9 million in 2010 compared to $23.2 million in 2009, and a smaller foreign exchange loss of $7.1 million compared to $24.6 million in 2009 and a decline in taxes of $3.3 million.
During 2010, Trinidad made several significant changes to its capital structure that improved its financial flexibility. The Company raised US$450 million in senior unsecured notes, due in 2019 and used the proceeds to redeem its $354 million in convertible debentures that were due in 2012. Before refinancing, the Company has approximately $150 million outstanding on its term debt facility. The remainder of the long-term debt was repaid using the Company's newly expanded revolving facility. The new credit facility includes a C$200 million and a US$100 million tranche (now due 2014). These changes simplify the Company's capital structure, allow for penalty-free debt repayment, extend the debt maturities and better allocate the Company's indebtedness between U.S. and Canadian dollars.
The past 12 to 18 months have clearly demonstrated the ever-changing environment of the oil and gas industry and Trinidad's ability to outperform throughout its cycles. In 2009, the industry saw one of the sharpest contractions in activity levels in its history followed by a strong rebound in 2010. The positive industry momentum appears to be continuing into 2011 and with a fleet of high quality equipment; a reputation for top performance and improved financial flexibility, Trinidad is well positioned to perform well in the improved market conditions.
RESULTS FROM OPERATIONS
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United
States/
Inter-
Canadian national Const- Inter-
For the year ended Drilling Drilling ruction segment
December 31, 2010 Opera- Opera- Opera- Elimi-
($ thousands) tions tions tions nations Total
-------------------------------------------------------------------------
Revenue 284,254 357,352 85,139 (80,087) 646,658
Operating expense 181,949 209,910 82,791 (80,087) 394,563
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102,305 147,442 2,348 - 252,095
Interest on
long-term debt 15,961 13,553 22 - 29,536
Interest on
convertible
debentures 51,629 - - - 51,629
Depreciation and
amortization 33,401 66,171 2,216 - 101,788
Loss on sale of
assets - (3,380) 65 - (3,315)
Impairment of capital
assets - 23,853 - - 23,853
Impairment of
intangible assets - - 912 - 912
Impairment of goodwill - - 58,522 - 58,522
------------------------------------------------------
Income before
corporate items 1,314 47,245 (59,389) - (10,830)
General and
administrative 53,949
Stock-based
compensation 3,971
Foreign exchange loss 7,068
Income taxes 6,315
------------------------------------------------------
Net earnings (loss) (82,133)
Capital expenditures 29,721 108,678 1,241 - 139,640
Capital assets 418,674 817,978 17,483 - 1,254,135
Goodwill - 84,641 - - 84,641
Net future income
tax liability (7,104) (74,242) (1,642) - (82,988)
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United
States/
Inter-
Canadian national Const- Inter-
For the year ended Drilling Drilling ruction segment
December 31, 2009 Opera- Opera- Opera- Elimi-
($ thousands) tions tions tions nations Total
-------------------------------------------------------------------------
Revenue 196,505 350,454 115,406 (79,774) 582,591
Operating expense 120,322 188,945 106,356 (79,774) 335,849
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76,183 161,509 9,050 - 246,742
Interest on
long-term debt 12,135 8,968 60 - 21,163
Interest on
convertible
debentures 35,406 - - - 35,406
Depreciation and
amortization 27,282 57,718 2,032 - 87,032
Loss on sale
of assets 246 10,294 4 - 10,544
Impairment of
intangible assets - 23,189 - - 23,189
------------------------------------------------------
Income before
corporate items 1,114 61,340 6,954 - 69,408
General and
administrative 53,117
Stock-based
compensation 4,366
Foreign exchange loss 24,638
Income taxes 9,612
Non-controlling
interest 114
------------------------------------------------------
Net earnings (loss) (22,439)
------------------------------------------------------
Capital expenditures
(including
acquisitions) 10,950 150,653 960 - 162,563
Capital assets 409,964 874,673 17,954 - 1,302,591
Goodwill - 89,441 58,521 - 147,962
Net future income
tax liability (8,831) (70,729) (2,106) - (81,666)
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Canadian Drilling Operations
In 2010, Trinidad's Canadian drilling segment achieved higher utilization, revenue and gross margin as activity levels increased throughout the year. Demand for drilling equipment grew as the year progressed, particularly for crude oil or natural-gas-liquids rich directed drilling. During 2010, according to the Canadian Association of Oilwell Drilling Contractors (CAODC) the number of wells drilled in western Canada in the year increased to 13,575 wells, up 45.2% from the number of wells completed in 2009. Of these wells, 48.0% were oil-directed, a significant increase over the 38.0% recorded in 2009, reflecting the relatively stronger and more stable oil prices in 2010. Drilling in the unconventional shale plays in north eastern British Columbia and north western Alberta also remained active during 2010. Technological advancements in drilling and completion practices, as well as growing experience levels have led to improved efficiencies in these areas and assist in making these plays economic, even at lower natural gas prices. Trinidad's modern, high quality equipment and reputation for top performance in all facets of the drilling industry is reflected in the Company's improving results and industry-leading utilization in 2010.
Revenue in 2010 totalled $284.3 million compared to $196.5 million in 2009, an increase of 44.7%. The strong increase in revenue in 2010 was largely driven by higher operating days and partly offset by slightly lower dayrates. In 2010, operating days grew to 10,842 days, up 53.4% from 2009, a reflection of the improving activity levels in the industry throughout the year. In addition, Trinidad's Canadian drilling segment increased its rig count from 52 rigs at the end of 2009 to 55 rigs at the end of 2010. During the year, three rigs were redeployed from the Company's Mexican operations to Canada, one rig was removed from service at year end and one newly constructed rig was added in the first quarter of the year. Utilization levels increased significantly year over year; Trinidad recorded average utilization of 55.0% during 2010, up 20 percentage points from the previous year and 15 percentage points higher than the industry average of 40% in 2010. Trinidad has a long history of outperforming the industry activity levels. Over the past ten years, Trinidad's utilization has exceeded the industry average every year and during that period has averaged nine percentage points higher than the industry. This gap has expanded over the past few years as the industry demand for modern, deep capacity equipment has increased.
With increased activity levels in 2010, Trinidad's active rig mix changed, causing a slight decrease in dayrates and gross margins. In 2010, a higher proportion of shallower rigs and rigs working on the spot market were put back into operation. These rigs tend to generate lower dayrates than the deeper, largely contracted rigs that generated a large portion of the Company's revenue throughout 2009. In 2010, dayrates averaged $22,693 per day, compared to $23,315 per day in 2009, a reduction of 2.7%. Although dayrates were marginally lower year over year, the trend as the year progressed, demonstrated increasing dayrates as activity levels grew and demand for drilling equipment increased. In the first quarter of 2010, dayrates were $21,868 per day, 13.0% lower than the same period in 2009; however, by the fourth quarter of 2010, dayrates had increased to $24,086 per day, 6.8% higher than those recorded in the same quarter of 2009.
Operating costs in 2010 increased to $181.9 million from $120.3 million in 2009 as a result of increased activity levels in 2010 and additional repairs and maintenance costs incurred as rigs were put back into operation. These additional costs and slightly lower dayrates reduced the gross margin percentage to 36.0% in 2010 from 38.8% in 2009. With the majority of reactivation costs incurred by the end of the third quarter and the trend for improving dayrates towards the end of the year, gross margin percentage increased to 39.9% in the fourth quarter, up from 37.2% recorded in the same quarter of 2009.
Trinidad's well service rig division also benefited from the improving activity levels in 2010. The Company's service rig utilization rate averaged 47.0% in 2010, up from 30.0% in 2009. Hourly rates in the service rig division have begun to increase, particularly towards the end of the year; however, given the large volume of available equipment and competition for this style of work these increases have been slower to materialize than in the drilling division.
In the coring and surface casing services division, Trinidad also experienced improved market conditions over the previous year. Stronger and more stable crude oil prices led to increased activity for the Company's coring equipment, which operates primarily in the oil sands projects. As with the other divisions of the Canadian drilling operations, the improvement was most noticeable in the fourth quarter of 2010. Activity levels showed improvement in 2010; however, revenue and gross margin for this division were negatively impacted when compared to the previous year due to the absence of early-termination revenue of $5.0 million received in 2009. Activity in the coring industry is generally strongest in the first quarter of each year when winter conditions allow equipment to move more easily on frozen ground. Trinidad is encouraged by the ramp up in activity in the fourth quarter of 2010 and anticipates stronger activity early in 2011.
United States and International Drilling Operations
During 2010, the US drilling industry has shown similar trends to those seen in Canada. Throughout the year, the active rig count averaged 1,670 rigs, up 49.4% from 2009. While overall drilling activity has improved, the number of rigs targeting oil has shown the strongest increase with an average of 84.1% more rigs than 2009. Natural gas directed drilling has shown an increase of 46.6% rigs over the same time frame. As in Canada, the growth in crude oil drilling is directly related to the relative strength of crude oil prices over the past year. Activity in unconventional drilling, particularly in shale plays, continued during 2010 and the growing use of horizontal drilling is an ongoing theme in the industry. Trinidad has existing operations and experience in many of the unconventional shale and crude oil plays in the US and is well positioned to continue to perform strongly in these areas.
Revenue in 2010 increased to $357.4 million compared to $350.5 million in 2009, an increase of 2.0%. During the year, revenue was impacted by several factors that largely offset each other when reviewed over the full year. Increased activity levels in the US led to average utilization of 68.0% for the US and international drilling operations compared to 63.0% in 2009. Furthermore, operating days grew 19.4% over the same period reflecting the improving activity levels and the operation of four newly constructed rigs delivered throughout the year. During 2010, three rigs were redeployed from the Company's Mexican operations to its Canadian operations and one rig, previously operating in Chile, was sold. In addition, four rigs were removed from service at year end. The net impact of these changes left the rig count for this division with four fewer rigs at the end of 2010 compared to the same time in 2009. Lower dayrates and a weaker US dollar compared to 2009 largely offset the positive impact of the improved activity levels in 2010. Dayrates in 2010 averaged US$19,333 per day, down 4.2% compared to the dayrates recorded in 2009. The reduction in dayrates largely reflects the changing active rig mix in 2010 compared to the previous year. As activity levels increased, Trinidad was able to put existing equipment back into operation. These rigs tended to be conventional-style rigs working on the spot market, which generally earn lower dayrates than new, high-technology contracted rigs. Canadian dollar denominated dayrates were negatively impacted by the weaker US dollar and averaged $19,996 per day in 2010 compared to $23,336 per day in 2009, a reduction of 14.3%.
Operating expenses increased in 2010 to $209.9 million from $188.9 million in 2009, reflecting the increased activity levels and the additional repairs and maintenance, training and safety related costs of putting rigs that had been inactive for a period of time back into operation. Gross margin percentage in the year was negatively impacted by the additional costs and lower average dayrates as a result of a change in the rig mix and therefore contracted to 41.3% from 46.1% in 2009. As in the Canadian operations, the trend during the year demonstrated improving dayrates and gross margin percentages as the year has progressed. By the fourth quarter of 2010, dayrates had improved to average US$19,955 per day in the quarter and gross margin percentage had increased to 43.2%.
During 2010, Trinidad's Mexican operations reduced in size from seven rigs to three rigs. 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, in the second quarter of 2010, four of Trinidad's seven Mexican rigs came off contract. Trinidad has since moved the remaining three rigs to Villahermosa in south eastern 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 put into operation in the US and Canada. The costs incurred in moving the rigs were covered by the Mexican customer. The remaining three rigs continue to perform strongly and activity levels stabilized in the second half of the year.
In addition, during 2010, Trinidad sold one rig with its related equipment and the remaining term of the contract, to its operating partner in Chile for US$28.0 million (CDN$29.9 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.
During 2010, Trinidad's barge drilling operations also showed signs of improving market conditions. Activity levels have increased with utilization averaging 90.0% in 2010 compared to 78.0% in 2009. Dayrates have stabilized over the year and averaged US$23,413 per day, 8.6% below the average dayrate in 2009. Canadian dollar denominated dayrates were also impacted by the weaker US dollar and averaged CDN$24,206 per day, down 19.2% compared to the previous year.
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 as 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 center to Trinidad's other internal divisions. During 2010, the construction operations segment was manufacturing seven built-for-purpose rigs as a 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. At December 31, 2010, five of the seven rigs have been delivered with the remaining two expected to be completed and delivered in early 2011. All rigs built are backed by long-term, take-or-pay contracts.
For the year ended December 31, 2010, the segment reported revenue of $85.1 million versus $115.4 million in 2009, a reduction of 26.2%. Lower revenue in 2010 was a result of reduced third-party work which totalled $5.1 million in the year compared to $35.6 million in 2009. When compared to the prior year, inter-segment revenues remained stable in 2010 at $80.1 million, due to the Company's ongoing internal rig build program.
Operating expenses in 2010 reduced by 22.2% from 2009, consistent with the decline in the segment's revenue in 2010, also due to decline in third party work. As the segment's activities focused on work performed on Trinidad's internal rig build program in 2010, Victory's gross margin declined to $2.3 million or 2.8% as a result of internal work billed at cost to Trinidad's other operating segments. In 2009, gross margin of $9.1 million or 7.8% was largely related to third-party work performed in the first and fourth quarter. Inter-segment revenue is expected to continue as Victory constructs additional rigs for Trinidad's drilling divisions.
In December 2010, the Company made the decision to narrow the focus of its Construction operations to internal rig building for all future construction. Therefore, when Trinidad was performing its annual impairment review of its carrying value of goodwill, the Company concluded, on a divisional basis, it was greater than its fair value. Fair value is determined, through the use of industry standard valuation methods, such as discounted cash flows. The erosion of the segment's value was also a result of poor third party sales during 2010 that were expected to continue in future years. As a result, Trinidad recorded an impairment charge on the entire goodwill value within the Construction operations of $58.5 million. In addition, the Company recorded an intangible impairment or $0.9 million in 2010 as it was concluded the carrying value of customer relations, trade name and one of their patents exceeded their fair value.
FOURTH QUARTER AND QUARTER BY QUARTER ANALYSIS
---------------------------------------------------------------
2010
($ millions except
per share data and
operating data) Q4 Q3 Q2 Q1
---------------------------------------------------------------
Financial Highlights
Revenue 185.9 161.9 128.8 170.1
Gross margin 76.5 60.4 47.1 68.1
Gross margin percentage 41.2 37.3 36.6 40.0
Net earnings (87.6)(2) 0.3 6.0 (0.8)
Effective interest on
financing costs 11.2 1.7 1.6 1.6
Accretion on convertible
debentures 11.6 1.5 1.4 1.4
Stock-based compensation 1.8 0.7 (0.3) 1.8
Unrealized foreign
exchange loss (gain) 1.9 4.9 (5.7) 6.4
Depreciation and
amortization 26.5 26.9 23.0 25.4
Loss (gain) on sale
of assets 0.4 - (3.7) -
Impairment of capital
assets 23.9 - - -
Impairment of intangible
assets 0.6 0.3 - -
Impairment of goodwill 58.5 - - -
Future income tax expense
(recovery) 3.7 (2.1) (3.0) 4.8
---------------------------------------
Cash flow from operations
before change in
non-cash working capital 52.5 34.2 19.3 40.6
Net earnings (loss) per
share (diluted) (0.73) - 0.05 (0.01)
Cash flow from operations
before change in non-cash
working capital per share
(diluted) 0.43 0.28 0.16 0.34
---------------------------------------------------------------
-------------------------------------------------------------------------
2009 2008
($ millions except
per share data and
operating data) Q4 Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Financial Highlights
Revenue 148.2 126.1 116.7(1) 191.6 205.3
Gross margin 59.7 53.0 52.5 81.5 84.2
Gross margin percentage 40.3 42.0 50.0 42.5 41.0
Net earnings 3.9 (12.1) (8.6) (5.6)(2) 21.8(3)
Effective interest on
financing costs 1.6 1.6 1.6 1.1 1.1
Accretion on convertible
debentures 1.5 1.3 1.3 1.2 1.2
Stock-based compensation (0.1) 2.1 1.7 0.7 0.9
Unrealized foreign
exchange loss (gain) 6.5 11.4 9.9 (5.0) (22.0)
Depreciation and
amortization 23.3 20.6 19.1 24.0 25.8
Loss (gain) on sale
of assets 0.6 0.3 5.6 4.1 (29.0)
Impairment of capital
assets - - - - -
Impairment of intangible
assets - - - 23.2 -
Impairment of goodwill - - - - 38.2
Future income tax expense
(recovery) 1.1 1.7 (2.9) 7.8 19.8
-----------------------------------------------
Cash flow from operations
before change in
non-cash working capital 38.4 26.9 27.7 51.5 57.8
Net earnings (loss) per
share (diluted) 0.03 (0.10) (0.09) (0.06) 0.23
Cash flow from operations
before change in non-cash
working capital per share
(diluted) 0.32 0.22 0.29 0.55 0.60
-------------------------------------------------------------------------
(1) Previously reported revenue and operating costs were both reduced by
$8.8 million to more properly reflect the characterization of certain
activities as inter-segment. There were no changes to previously
reported gross margin, net earnings (loss) and other related amounts.
(2) Includes impairment of capital assets charge of $23.9 million,
impairment of intangible assets charge of $0.9 million and impairment
of goodwill charge of $58.5 million.
(3) Includes impairment of intangible asset charge of $23.2 million.
(4) Includes impairment of goodwill charge of $38.2 million.
FOURTH QUARTER AND QUARTER BY QUARTER ANALYSIS
---------------------------------------------------------------
2010
($ millions except
per share data and
operating data) Q4 Q3 Q2 Q1
---------------------------------------------------------------
Financial Highlights
EBITDA(1) 61.2 42.1 40.1 43.9
Per share (diluted)(2) 0.51 0.35 0.33 0.36
Adjusted EBITDA(1) 63.4 47.9 33.9 52.9
Per share (diluted)(2) 0.52 0.40 0.28 0.44
Adjusted net earnings(1) (2.5) 6.4 (0.2) 8.4
Per share (diluted)(2) (0.02) 0.05 - 0.07
Adjusted net earnings
before refinancing
costs(1) 17.1 6.4 (0.2) 8.4
Per share (diluted)(2) 0.14 0.05 - 0.07
---------------------------------------------------------------
-------------------------------------------------------------------------
2009 2008
($ millions except
per share data and
operating data) Q4 Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Financial Highlights
EBITDA(1) 38.9 27.3 29.0 69.3 38.9
Per share (diluted)(2) 0.32 0.23 0.31 0.73 0.40
Adjusted EBITDA(1) 47.4 40.8 40.2 65.1 47.4
Per share (diluted)(2) 0.39 0.34 0.42 0.69 0.49
Adjusted net earnings(1) 12.5 1.4 2.6 13.3 12.5
Per share (diluted)(2) 0.10 0.01 0.03 0.14 0.13
Adjusted net earnings
before refinancing
costs(1) 12.5 1.4 2.6 13.3 12.5
Per share (diluted)(2) 0.10 0.01 0.03 0.14 0.13
-------------------------------------------------------------------------
(1) Readers are cautioned that gross margin, gross margin percentage,
EBITDA, Adjusted EBITDA, cash flow from operations before change in
non-cash working capital, Adjusted net earnings, Adjusted net
earnings before refinancing costs and the related per share
information do not have standardized meanings prescribed by GAAP -
see "Non-GAAP Measures".
(2) Basic shares include the weighted average number of shares
outstanding over the period. Diluted shares include the weighted
average 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.
---------------------------------------------------------------
QUARTERLY ANALYSIS 2010
($ millions except
per share data and
operating data) Q4 Q3 Q2 Q1
---------------------------------------------------------------
Operating Highlights
Land Drilling Market
Operating days - drilling
Canada 3,270 2,786 1,616 3,170
United States and
International(1) 4,430 4,424 3,958 3,769
Rate per drilling day
Canada (CDN$) 24,086 21,477 23,590 21,868
United States and
International
(CDN$)(1) 20,384 19,910 18,504 21,206
United States and
International
(US$)(1) 19,955 19,117 18,092 20,157
Utilization rate
- drilling
Canada 65% 56% 34% 67%
United States and
International(1) 73% 72% 66% 63%
CAODC industry average 49% 39% 20% 52%
Number of drilling rigs
at quarter end
Canada 55 55 53 53
United States and
International(1) 62 66 67 66
Utilization for
service rigs 57% 41% 37% 54%
Number of service rigs
at quarter end 22 22 22 22
Number of coring and
surface casing rigs
at quarter end 20 20 20 20
Barge Drilling Market
Operating days 456 368 283 334
Rate per drilling
day (CDN$) 24,402 24,738 25,013(2) 23,732
Rate per drilling
day (US$) 23,878 23,757 24,406(2) 22,559
Utilization rate 99% 88% 78% 93%
Number of drilling rigs
at quarter end 2 2 1 1
Number of drilling rigs
under Bareboat Charter
Agreements at quarter end 3 3 3 3
---------------------------------------------------------------
-------------------------------------------------------------------------
QUARTERLY ANALYSIS 2009 2008
($ millions except
per share data and
operating data) Q4 Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Operating Highlights
Land Drilling Market
Operating days - drilling
Canada 2,090 1,739 692 2,545 3,034
United States and
International(1) 3,994 3,419 3,233 3,243 3,757
Rate per drilling day
Canada (CDN$) 22,543 21,486 23,564 25,132 26,358
United States and
International
(CDN$)(1) 21,887 21,819 23,747 27,124 26,418
United States and
International
(US$)(1) 20,355 19,632 19,554 21,961 22,882
Utilization rate
- drilling
Canada 44% 36% 14% 51% 61%
United States and
International(1) 63% 61% 61% 64% 80%
CAODC industry average 32% 21% 11% 36% 43%
Number of drilling rigs
at quarter end
Canada 52 53 53 57 57
United States and
International(1) 66 66 64 58 56
Utilization for
service rigs 32% 27% 19% 41% 45%
Number of service rigs
at quarter end 22 23 23 23 23
Number of coring and
surface casing rigs
at quarter end 20 20 20 20 20
Barge Drilling Market
Operating days 274 266 351 245 347
Rate per drilling
day (CDN$) 20,275 28,805 30,250 41,183 47,583
Rate per drilling
day (US$) 19,482 25,736 24,906 33,353 41,401
Utilization rate 75% 72% 96% 68% 94%
Number of drilling rigs
at quarter end 1 1 1 1 1
Number of drilling rigs
under Bareboat Charter
Agreements at quarter end 3 3 3 3 3
-------------------------------------------------------------------------
(1) Trinidad commenced its operations in Mexico effective November 2008
and expanded its international operations into Chile effective August
2009. Effective April 6, 2010, the rig located in Chile was sold to a
third party.
(2) Other revenue associated with equipment repairs was removed from the
dayrate calculation in the second quarter to comply with corporate
dayrate calculation practices.
The following tables outline revenue, operating expenses, gross margin and gross margin as a percentage of revenue for each of Trinidad's reporting segments for the three month period ending December 31, 2010, with comparable information for the same time period of 2009:
Canadian Drilling Operations
Three Three
months months
ended ended
($ thousands except December 31, December 31,
percentage data) 2010 2009 % Change
-------------------------------------------------------------------------
Revenue 89,011 53,532 66.3
Operating expense 53,514 33,597 59.3
--------------------------------------
Gross margin 35,497 19,935 78.1
--------------------------------------
Gross margin percentage 39.9% 37.2%
United States and International Operations
Three Three
months months
ended ended
($ thousands except December 31, December 31,
percentage data) 2010 2009 % Change
-------------------------------------------------------------------------
Revenue 96,681 84,737 14.1
Operating expense 54,950 47,058 16.8
--------------------------------------
Gross margin 41,731 37,679 10.8
--------------------------------------
Gross margin percentage 43.2% 44.5%
Construction Operations
Three Three
months months
ended ended
($ thousands except December 31, December 31,
percentage data) 2010 2009 % Change
-------------------------------------------------------------------------
Revenue(1) 12,139 15,544 (21.9)
Operating expense(1) 12,960 13,364 (3.0)
--------------------------------------
Gross margin (821) 2,180 (137.7)
--------------------------------------
Gross margin percentage -6.8% 14.0%
(1) Includes inter-segment revenue and operating expenses of $11.9
million and $5.6 million for the three months ended December 31, 2010
and 2009, respectively.
Fourth Quarter Analysis
An overview of the quarter-by-quarter analysis above shows results have been improving consistently as the year has progressed. Revenue in the Canadian drilling operations segment was significantly higher in the fourth quarter of 2010 at $89.0 million, representing an increase of 66.3% from the fourth quarter of 2009. The strong growth in revenue in the quarter was driven by increased drilling days and higher dayrates compared to the previous year. During the fourth quarter, the Company achieved drilling days of 3,270 days compared to 2,090 days in the same period of 2009, an increase of 56.5%. This equates to a utilization rate of 65.0% in the fourth quarter of 2010 compared to a utilization rate of 44.0% in the same quarter of 2009. Furthermore, the Canadian drilling rig count increased to 55 drilling rigs at the end of 2010 versus 52 rigs at the end of 2009. During the year, three rigs were redeployed from the Company's Mexican operations to Canada, one rig was removed from service at year end and one newly constructed rig was added in the first quarter of the year. The average rate per drilling day was $24,086 in the fourth quarter of 2010 in comparison to the average rate per drilling day of $22,543 in fourth quarter 2009. Year over year, gross margin percentage was 39.9% in the final quarter of 2010 versus 37.2% in the final quarter of 2009. The higher gross margin percentage quarter over quarter is representative of the improving dayrates which continue to strengthen as customer demand remains robust.
For the fourth quarter of 2010, revenue in the US and international drilling segment totalled $96.7 million, while in the fourth quarter of 2009 revenue was $84.7 million, an increase of 14.1%. Revenue increased in the fourth quarter as a direct result of increased activity levels. Utilization in the fourth quarter of 2010 was 73.0% compared to 63.0% in the same quarter in 2009. Dayrates in the US and international drilling segment have shown an increasing trend, particularly compared to the corresponding quarter in the previous year. In the fourth quarter of 2010 dayrates were US$19,955 versus US$20,355 in 2009 with a rig count of 62 rigs in the quarter compared to 66 rigs in the same quarter of 2009. During 2010, the Company added four newly constructed rigs to its US operations, redeployed three rigs from its Mexican operations to its Canadian operations and sold one rig which had previously been operating in Chile. In addition, four rigs were removed from service at year end. A weaker US dollar in the fourth quarter of 2010 reduced the impact of improving dayrates following their conversion to Canadian dollars. Gross margin percentage decreased slightly year over year in the fourth quarter to 43.2% compared to 44.5% in 2009. The lower gross margin percentage was reflective of the changing rig mix which, following the ramp up in activity, included more conventional style equipment than was working at the same time in 2009. Gross margin percentage in the fourth quarter showed signs of the improved market conditions over the third quarter of 2010, when gross margin percentage was 39.6%. The stronger gross margin percentage in the fourth quarter reflected improving dayrates and reduced reactivation costs from the prior quarter.
For the barge rig drilling division, in the US and international drilling operations segment, utilization, operating days and dayrates all showed signs of improvement in the fourth quarter of 2010 compared to the same quarter of 2009. Utilization increased to 99.0% in the fourth quarter compared to 75.0% in the same quarter of the previous year while operating days increased to 456 days from 274 days. In addition to improved activity levels, Trinidad added a barge drilling rig to its fleet which began operating in the third quarter of 2010. Dayrates in the fourth quarter of 2010 averaged US$23,878 per day compared to US$19,482 per day in 2009, reflecting a stabilization of dayrates in this division and growing customer demand. The weaker US dollar also negatively impacted revenue in the barge drilling division in the quarter when compared to the same quarter in 2009.
The Construction segment generated lower revenues in the final quarter of 2010 of $12.1 million, in comparison to $15.5 million generated in the same quarter of 2009. Revenue was lower as a result of reduced third-party work in the fourth quarter; however, this was partially offset by higher inter-segment revenues in 2010. Third-party work was $0.2 million in the fourth quarter of 2010 versus $9.9 million in the fourth quarter of 2009. Inter-segment revenue increased from $5.6 million in 2009 to $11.9 million in 2010 due to work performed in the fourth quarter of 2010 on the internal rig construction program. Victory delivered one additional rig prior to the end of the year and worked towards the completion of the remaining two rigs in the 2010 program during the fourth quarter of 2010. In 2009, inter-segment activity levels were lower in the fourth quarter due to a delay in the internal rig construction program until early 2010. Victory continues to work on the remaining two rigs of the program with expected delivery in early 2011. The negative gross margin in the fourth quarter of 2010 was due to the majority of work performed being intercompany which is recorded at cost between the segments. In the fourth quarter of 2009, the construction segment performed a project of approximately $9.0 million in revenues for a third-party customer delivering higher than historical margins to bring the segment's margin to 14.0% in that quarter.
In December 2010, the Company made the decision to narrow the focus of its Construction operations to internal rig building for all future construction. As a result, Trinidad recorded an impairment charge on the entire goodwill value within the Construction operations of $58.5 million. In addition, the Company recorded an intangible impairment or $0.9 million in 2010 as it was concluded the carrying value of customer relations, trade name and one of their patents exceeded their fair value.
FINANCIAL SUMMARY
As at December 31, 2010 2009 2008
($ thousands except percentage data)
-------------------------------------------------------------------------
Working capital(1) 126,811 90,673 85,789
Current portion of long-term debt 546 14,146 16,844
Long-term debt(2) 606,154 216,273 321,768
Convertible debentures(3) - 331,249 323,381
--------------------------------------
Total debt 606,700 561,668 661,993
--------------------------------------
Total debt as a percentage of assets 39.4% 34.6% 35.6%
Net debt(1) 479,343 456,849 559,360
Net debt as a percentage of assets 31.2% 28.1% 30.0%
Total assets 1,538,593 1,624,013 1,862,064
Total long-term liabilities 689,142 631,074 742,692
Total long-term liabilities as a
percentage of assets 44.8% 38.9% 39.9%
Shareholders' equity 778,476 913,958 919,471
Total debt to shareholders' equity 77.9% 61.5% 72.0%
Net debt to shareholders' equity 61.6% 50.0% 60.8%
-------------------------------------------------------------------------
(1) Please see Non-GAAP Measures definition section of this document for
further details.
(2) Long-term debt and Senior Notes are reflected net of associated
transaction costs.
(3) Convertible debentures are reflected net of the related equity
component and associated transaction costs.
On December 16, 2010, Trinidad issued US$450.0 million in 7.875% senior unsecured notes (Senior Notes) for gross proceeds of US$446.7 million, due January 2019. The Canadian dollar equivalency on this date was $449.1 million. Interest is payable semi-annually in arrears on January 15 and July 15. The costs incurred in issuing these notes were $11.7 million and were recorded as a deferred financing charge offset against the long-term debt and amortized over the life of the Senior Notes. A portion of the proceeds from the Senior Notes totaling $355.6 million was used to redeem the Company's convertible debentures that were due to mature in 2012. See discussions on this redemption further in this section.
Also on December 16, 2010, Trinidad terminated its existing credit facility that was due to mature in 2012, consisting of a Canadian dollar revolving facility of $150.0 million, a US based revolving facility of US$100.0 million, a Canadian dollar term facility of $100.0 million and a US based term facility of US$125.0 million, and entered into a new senior secured revolving facility which includes $200.0 million in Canadian dollars and $100.0 million in US dollars. The new Canadian and US revolving facility requires quarterly interest payments that are based on LIBOR and Bankers Acceptance (BA) rates and incorporate a tiered interest rate, which varies depending on the results of the Consolidated Total Debt to Consolidated EBITDA ratio. This facility matures December 16, 2014, and is subject to annual extensions of an additional year on each anniversary. The members of the syndicated groups include major Canadian, United States and international financial institutions. This debt is secured by a general guarantee over the assets of Trinidad and its subsidiaries. As a result of the extinguishment of the former credit facility, Trinidad recognized an expense of approximately $4.9 million of previous deferred financing charges. Trinidad capitalized $2.5 million in deferred financing charges related to the new credit facility.
Prior to December 16, 2010, Trinidad amended its credit facility on April 6, 2010. The cost to Trinidad of this amendment was $6.6 million, which was included in deferred financing costs and was amortized over the life of the amended agreement until December 16, 2010. The remaining unamortized cost was included in the $4.9 million of deferred financing charges recognized.
A total of $139.6 million of capital expenditures were incurred during the twelve months ended December 31, 2010 compared to $162.6 million in 2009. Capital expenditures in 2010 were substantially related to the six rigs included in the Company's 2010 rig build program, an additional rig built for the Canadian drilling operations segment in the first quarter and capital upgrades to a number of rigs to improve their marketability, including three rigs since redeployed to the Bakken play in North Dakota. In addition, capital expenditures were incurred on the enhancement of the Company's additional barge drilling rig.
Working capital increased by $36.1 million to $126.8 million as at December 31, 2010 compared to $90.7 million at December 31, 2009. The increase was largely due to an increase of $26.7 million in current assets related to an increase in accounts receivable of $20.4 million and an increase of $3.7 million in cash and cash equivalents in addition to a reduction of current liabilities of $8.0 million. The decline in current liabilities was mostly related to the changes in long-term debt on December 16, 2010 as mentioned above, in addition to the final payment made in the third quarter of 2010 to the former owners of the US subsidiary of Axxis, in relation to the Bareboat charter agreement.
Convertible debentures
In connection with the acquisition of Axxis, Trinidad issued $354.3 million in unsecured subordinated convertible debentures, of which $325.0 million was issued through a public offering and $29.3 million was issued to the former owners of Axxis. The debentures were convertible into shares of Trinidad at the option of the holder at any time prior to maturity at a conversion price of $19.30 per share. They had a face value of $1,000, a coupon rate of 7.75% and a maturity date of July 31, 2012, with interest being paid semi-annually on June 30 and December 31. Trinidad had the option to redeem the debentures in whole or in part at a redemption price of $1,000 after December 31, 2010 and before their maturity date. On redemption or maturity, Trinidad could elect to satisfy its obligation to repay the principal by issuing common shares. The value of the conversion feature at the time of issuance was determined using the Black-Scholes pricing model to be $28.2 million and was recorded as equity with the remaining $326.1 million allocated to long-term debt, net of $13.6 million of transaction costs. The debentures were accreted such that the liability at maturity would equal the face value of the debt.
On December 16, 2010, the Company gave notice for early redemption of its outstanding convertible unsecured subordinated debentures for the total outstanding value of $354.1 million originally due in 2012. The notice of redemption was required to be given 30 days prior to redemption; therefore, the redemption date occurred on January 19, 2011. During this 30 day period, no conversion to shares occurred. A redemption price of $1,004.03 per debenture was awarded consisting of $1,000 principal and accrued and unpaid interest. A portion of the proceeds from the Senior Notes of $355.6 million was used to pay for the redemption. On December 20, 2010, these funds which included $354.1 million of principal in addition to $1.5 million of accrued interest for the period up to January 19, 2011 period, were put in trust with the Company's debenture trustee until payment on January 19, 2011.
In accordance with CICA handbook section 3855.45-49, Trinidad has met the requirements for a financial liability to be derecognized and extinguished from its consolidated balance sheet as at December 31, 2010. According to the debenture's Indenture agreement, Trinidad has been legally released of this liability due to the following indenture requirements performed by the Company and trustee. The requirements include that the funds were paid to the trustee and held in trust and were beyond the control of Trinidad, and the officers' certificate delivered to the trustee. The trustee has provided a release and discharge of the indenture and the trustee has mailed redemption notices to the debenture holders.
As the debenture met the extinguishment requirements prior to the year ended December 31, 2010, Trinidad's consolidated statement of operations includes in interest on convertible debentures the remaining unamortized accredited amount of $10.1 million. Also included in this interest expense is the remaining unamortized deferred financing costs related to the debentures of $4.3 million. The equity portion of $28.2 million was transferred to contributed surplus, as the value of the conversion option was deemed to be nil upon redemption.
OUTLOOK
The first quarter of 2011 has begun strongly. Activity levels remain robust and demand for high quality equipment such as Trinidad's is high. Dayrates are continuing to show upward momentum and now, with the majority of the Company's reactivation costs complete, gross margins are also increasing. Ongoing customer demand and the continuing strength in crude oil prices indicate that these improved industry conditions should continue into at least the first half of 2011, if not the full year.
While demand is strong for Trinidad's existing equipment, there is interest from current and new customers for newly constructed equipment that would be well suited to plays where natural gas liquids contents tends to be high. Trinidad will consider requests for new equipment and assess whether the contract terms and project returns meet the Company's internal hurdles. Trinidad is committed to reducing debt levels relative to the size of its business and will review its growth opportunities while balancing this with its debt reduction strategy.
Moving forward Trinidad has decided to narrow the focus of its rig construction operations to the rig design, commissioning and development of new technology. The operations will be limited to these areas and focus on constructing rigs for internal purposes. Trinidad will continue to specialize in designing and building the technically advanced equipment that it is known for and outsource specific components and core fabrication which are more widely available. These changes are expected to reduce the Company's cost structure and protect its internally created technology, while retaining the ability to design and assemble the state-of-the-art drilling rigs that are in demand in today's drilling environment.
Trinidad expects to complete the last two rigs from the 2010 construction program in early 2011. These rigs are expected to be in operation during the first quarter of the year. In addition, the Company has contracted one rig to be built in 2011. The rig is expected to be delivered for operation in the Horn River in the second half of the year and is backed by a five-year, take-or-pay contract. In addition, Trinidad anticipates making minor upgrades to a small number of rigs throughout the year in order to improve their marketability. Overall Trinidad's fleet of new, deep capacity rigs is well suited to the current drilling environment and the Company expects that it will maintain its ability to achieve industry-leading utilization rates. Trinidad has approximately half of its fleet under long-term, take-or-pay contracts with an average term remaining of 1.7 years. This strategic positioning allows the Company to have improved certainty and visibility for a significant portion of it revenue stream while also maintaining exposure to increasing dayrates on the remainder of its equipment.
Trinidad's outlook for 2011 is for an improvement over the last year. Stronger oil prices and industry conditions, as well as more stable equity and credit markets provide a solid base for improved results this year. The Company remains concerned with the high natural gas storage levels and relatively low natural gas prices; however, the industry is showing a strong ability to refocus its development plans towards crude oil and natural-gas-liquids rich projects. This activity along with a number of shale gas projects that remain economic at lower natural gas prices bode well for continued demand in 2011. Trinidad's modern, technically advanced equipment and its reputation for top performance position the Company well to benefit from these stronger conditions.
CONFERENCE CALL
A conference call and webcast to discuss the results will be held for the investment community on Thursday March 3rd 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 March 3rd until midnight March 10th, 2010 by dialing (800) 642-1687 or (416) 849-0833 and entering replay access code 45429801.
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.
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CONSOLIDATED BALANCE SHEETS
As at December 31, 2010 2009
($ thousands)
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Assets
Current assets
Cash and cash equivalents 7,905 4,198
Accounts receivable 159,866 139,418
Inventory 25,448 20,378
Prepaid expenses 4,567 5,660
-------------------------
197,786 169,654
Capital assets 1,254,135 1,302,591
Intangible assets 2,031 3,806
Goodwill 84,641 147,962
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1,538,593 1,624,013
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Liabilities
Current liabilities
Accounts payable and accrued liabilities 62,291 51,055
Dividends payable 6,042 6,042
Deferred revenue 105 1,965
Current portion of long-term debt,
net of transaction costs 546 14,146
Current portion of fair value of
interest rate swaps 1,991 5,773
-------------------------
70,975 78,981
Long-term debt, net of transaction costs 606,154 216,273
Convertible debentures, net of
transaction costs - 331,249
Fair value of interest rate swaps - 1,886
Future income taxes 82,988 81,666
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760,117 710,055
Shareholders' equity
Common shares 951,863 951,863
Convertible debentures - 28,207
Contributed surplus 56,388 27,832
Accumulated other comprehensive loss (80,646) (53,453)
Deficit (149,129) (42,828)
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Equity attributable to shareholders 778,476 911,621
Non-controlling interest - 2,337
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778,476 913,958
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1,538,593 1,624,013
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CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
For the years ended December 31, 2010 2009
($ thousands except share and per share data)
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Revenue
Oilfield services 643,612 578,402
Bareboat Charter gain 1,413 1,550
Other 1,633 2,639
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646,658 582,591
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Expenses
Operating 394,563 335,849
General and administrative 53,949 53,117
Interest on long-term debt 29,536 21,163
Interest and accretion on convertible debentures 51,629 35,406
Stock-based compensation 3,971 4,366
Foreign exchange loss 7,068 24,638
Depreciation and amortization 101,788 87,032
(Gain) loss on disposal or sale of assets (3,315) 10,544
Impairment of capital assets 23,853 -
Impairment of intangible assets 912 23,189
Impairment of goodwill 58,522 -
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722,476 595,304
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Earnings (loss) before income taxes (75,818) (12,713)
Income taxes
Current tax expense 2,892 1,871
Future tax expense 3,423 7,741
-------------------------
6,315 9,612
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Net earnings (loss) before non-controlling
interest (82,133) (22,325)
Net earnings attributable to non-controlling
interest - 114
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Net earnings (loss) (82,133) (22,439)
Dividends (24,168) (22,788)
Retained earnings (deficit) - beginning of year (42,828) 2,399
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Retained earnings (deficit) - end of year (149,129) (42,828)
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Earnings (loss) per share
Basic (0.68) (0.21)
Diluted (0.68) (0.21)
Weighted average number of shares
Basic 120,840,962 107,915,093
Diluted 120,840,962 107,915,093
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the years ended December 31, 2010 2009
($ thousands)
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Net earnings (loss) before non-controlling
interest (82,133) (22,325)
Other comprehensive loss
Change in fair value of derivatives designated
as cash flow hedges, net of income tax 3,443 2,292
Transfer of fair value changes due to
termination of cash flow hedge 625 -
Foreign currency translation adjustment (31,062) (96,876)
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Total other comprehensive loss (26,994) (94,584)
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Total comprehensive loss (109,127) (116,909)
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CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
For the years ended December 31, 2010 2009
($ thousands)
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Accumulated other comprehensive (loss) income
- beginning of year (53,453) 40,932
Other comprehensive loss attributable
to shareholders(1) (27,193) (94,385)
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Accumulated other comprehensive loss
- end of year (80,646) (53,453)
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(1) For the year ended December 31, 2010, the balance excludes $0.2
million of recovery of the foreign currency translation adjustment on
the sale of the Chilean assets
Equity Attributable to Non-Controlling Interest
For the years ended December 31, 2010 2009
($ thousands)
Equity attributable to non-controlling interest
- beginning of year 2,337 -
Recovery of equity attributable to
non-controlling interest ownership (2,337) -
Share issuance - 2,422
Net earnings - 114
Other comprehensive loss from foreign
currency translation adjustment - (199)
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Equity attributable to non-controlling interest
- end of year - 2,337
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CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2010 2009
($ thousands)
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Cash provided by (used in)
Operating activities
Net earnings (loss) (82,133) (22,439)
Items not affecting cash
Effective interest on financing costs 15,744 5,870
Accretion on convertible debentures 15,909 5,296
Accretion on Senior Notes 25 -
Fair value of interest rate swaps 362 -
Stock-based compensation 3,971 4,366
Unrealized foreign exchange loss 7,520 22,813
Depreciation and amortization 101,788 87,032
(Gain) loss on disposal or sale of assets (3,315) 10,544
Impairment of capital assets 23,853 -
Impairment of intangible assets 912 23,189
Impairment of goodwill 58,522 -
Future income tax expense 3,423 7,741
Non-controlling interest - 114
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146,581 144,526
Change in non-cash operating working capital (27,161) (37,446)
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119,420 107,080
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Investing activities
Purchase of capital assets (139,640) (162,563)
Proceeds from dispositions of capital assets 24,118 4,762
Expenditures on intangibles - (75)
Change in non-cash investing working capital 1,003 14,280
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(114,519) (143,596)
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Financing activities
Proceeds from Senior Notes 449,108 -
Increase in long-term debt 299,908 145,000
Decrease in long-term debt (350,960) (226,664)
Redemption of convertible debentures (355,571) -
Dividends paid (24,168) (31,072)
Debt financing costs (19,846) (2,619)
Proceeds on share issuance, net - 133,800
Repurchased shares - (6,120)
Proceeds from non-controlling interest
share issuance - 2,422
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(1,529) 14,747
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Cash flow from operating, investing,
and financing activities 3,372 (21,769)
Effect of translation of foreign currency cash 335 (5,235)
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Increase (decrease) in cash for the year 3,707 (27,004)
Cash and cash equivalents - beginning of year 4,198 31,202
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Cash and cash equivalents - end of year 7,905 4,198
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Interest paid 47,958 45,761
Interest received 118 103
Taxes paid 5,272 4,328
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 gross margin, gross margin percentage, EBITDA, Adjusted EBITDA, cash flow from operations before change in non-cash working capital, Adjusted net earnings, Adjusted net earnings before refinancing costs, net 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:
"Gross margin" is used by management 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 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.
"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 to analyze EBITDA (as defined above) prior to the effect of foreign exchange loss (gain), stock-based compensation and are not intended to represent net earnings as calculated in accordance with Canadian GAAP.
"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 annual 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.
"Adjusted net earnings" is used by management to analyze net earnings prior to the effect of foreign exchange loss (gain), stock-based compensation charges and impairment charges of capital assets, intangible assets and goodwill, respectively, and are not intended to represent net earnings as calculated in accordance with Canadian GAAP.
"Adjusted net earnings before refinancing costs" is used by management to analyze adjusted net earnings prior to the effect of refinancing costs and are not intended to represent net earnings as calculated in accordance with Canadian GAAP. These refinancing costs represent previous deferred financing charges related to the Company's former long-term debt.
"Working capital" is used by management and the investment community to analyze the operating liquidity available to the Company.
"Net debt" is used by management and the investment community to analyze the amount of debt less the working capital of the Company.
References to gross margin, gross margin percentage, EBITDA, Adjusted EBITDA, cash flow from operations before changes in non-cash working capital, Adjusted net earnings, Adjusted net earnings before refinancing costs and net debt throughout this document have the meanings set out above.
Trinidad is a growth-oriented corporation whose common shares trade on the Toronto Stock Exchange (TSX) under the symbol TDG. 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.
FORWARD-LOOKING STATEMENTS
The 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 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.