/NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR
DISSEMINATION IN THE UNITED STATES/
TSX SYMBOL: TDG and TDG.DB
CALGARY, Feb. 26 /CNW/ - Trinidad Drilling Ltd. ("Trinidad" or the
"Company") reported strong operating and financial results for 2008. The
record levels of revenue, EBITDA (1) and cash flow from operations before
changes in non-cash working capital (1), were driven by the Company's growing
inventory of high-tech, deeper-capacity drilling rigs, expansion into less
seasonal markets and the ongoing commitment of Trinidad's customer base.
"The year 2008 was an important year for Trinidad on many fronts," said
Lyle Whitmarsh, Trinidad's President and Chief Executive Officer. "Not only
did we have record financial and operational results but we grew our fleet
through our rig construction program, we expanded into new markets such as
Mexico and moved under-utilized equipment into more profitable areas. In
addition, we added value through select asset sales, renewal of long-term,
take-or-pay contracts and reduced our debt levels. We believe that 2009 will
be a challenging year for most companies and know that Trinidad is not immune
to these outside influences. However, we have prepared the Company for these
challenges and are confident that once the economy begins to recover, we are
well positioned to take advantage of opportunities and to continue our track
record of value-added growth."
FOURTH QUARTER AND FISCAL 2008 HIGHLIGHTS
(Quarter-over-quarter and full-year comparatives all relate to the
comparable period in 2007)
- Revenue for the fourth quarter of 2008 was $205.3 million and
contributed to a record revenue level of $757.9 million for the full
year, up 40.8% and 20.4%, respectively, largely due to growth through
acquisitions, internal rig construction programs, higher utilization
rates and our successful expansion into the US and Mexican markets.
- Trinidad's fourth quarter 2008 drilling utilization rate of 61% in
Canada continued to substantially exceed industry levels, which
recorded an average utilization rate of 43%. The US and Mexico
drilling operations segment reported strong activity levels, although
down slightly from the previous quarters, with utilization of 80%.
For 2008, Trinidad's Canadian drilling utilization rate was 57%
compared to the industry average of 42%, while the US and Mexico
operations utilization averaged 85%.
- Cash flow from operations before changes in non-cash working capital
was $57.8 million ($0.60 per share (diluted)), in the fourth quarter
of 2008 and $207.1 million ($2.28 per share (diluted)) for the full
year, up 79.5% and 18.5%, respectively. These increased levels were
achieved primarily through the increased rig fleet, the expanded US
and Mexico operations and an ability to maintain gross margins(1)
through stable dayrates and a continued focus on cost control.
- Net earnings in the fourth quarter of 2008 were $21.8 million ($0.23
per share (diluted)) and $82.2 million ($0.90 per share (diluted))
for the full year, up 21.8% and 3.3%, respectively. In 2008, Trinidad
recorded a goodwill impairment charge of $38.2 million, due largely
to the recent economic events impacting the Company's market
capitalization. Net earnings before impairment of goodwill(1) for
2008 were $120.3 million ($1.32 per share (diluted)) up 51.3%
largely due to strong growth in revenue and a stable gross margin
percentage. Net earnings before impairment of goodwill were also
positively impacted by a gain recorded on the sale of a barge
drilling rig and foreign exchange gains.
(1) Please see the Non-GAAP Measures Definitions section of this MD&A for
further details.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following management's discussion and analysis ("MD&A") of financial
condition and results of operations is intended to help the reader understand
the current and prospective financial position and operating results of
Trinidad Drilling Ltd. ("Trinidad" or the "Company"). This MD&A discusses the
operating and financial results for the three and twelve months ended December
31, 2008 and is dated February 20, 2009 and takes into consideration
information available up to that date. The MD&A is based on the annual
Consolidated Financial Statements of Trinidad for the year ended December 31,
2008, which were prepared in accordance with Canadian Generally Accepted
Accounting Principles ("GAAP"). The MD&A should be read in conjunction with
the annual Consolidated Financial Statements and the related notes contained
in this report. Additional information is available on Trinidad's website
(www.trinidaddrilling.com) and all previous public filings, including the most
recently filed Annual Report and Annual Information Form, are available
through SEDAR (www.sedar.com).
As a result of Trinidad's conversion from Trinidad Energy Services Income
Trust (the "Trust") to a corporation, effective March 10, 2008, references to
the "Company", "shares", the "Incentive Options Plan", "options" and
"dividends" should be read as references to the "Trust", "units", "Unit Rights
Incentive Plan", "rights" and "distributions" respectively, for the periods
prior to March 10, 2008. All amounts are denominated in Canadian dollars
("CDN$") 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) 2008 2007 2006
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Revenue 757,900 629,675 579,855
Gross margin(1) 309,495 264,902 269,584
EBITDA(1) 287,470 206,254 210,319
Per share (diluted)(2) 3.16 2.43 2.48
EBITDA before stock-based
compensation(1) 289,935 208,704 217,424
Per share (diluted)(2) 3.19 2.46 2.57
Cash flow from operations before
change in non-cash working
capital(1) 207,121 174,770 196,924
Per share (diluted)(2) 2.28 2.06 2.33
Cash flow from operations 193,043 172,013 152,478
Per share (diluted)(2) 2.12 2.02 1.76
Net earnings 82,174 79,524 123,706
Per share (basic)(2) 0.90 0.95 1.49
Per share (diluted)(2) 0.90 0.94 1.46
Net earnings before impairment of
goodwill(1) 120,328 79,524 123,706
Per share (basic)(2) 1.33 0.95 1.49
Per share (diluted)(2) 1.32 0.94 1.46
Net earnings before stock-based
compensation(1) 84,639 81,974 130,811
Per share (diluted)(2) 0.93 0.96 1.55
Shares outstanding - basic
(weighted average)(2) 90,804,564 83,952,252 83,078,833
Shares outstanding - diluted
(weighted average)(2) 91,003,946 84,957,250 84,644,439
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(1) Readers are cautioned that gross margin, EBITDA, EBITDA before stock-
based compensation, cash flow from operations before change in non-
cash working capital, net earnings before impairment of goodwill and
net earnings before stock-based compensation and the related per
share information do not have a standardized meaning prescribed by
GAAP - see "Non-GAAP Measures".
(2) Basic shares include the weighted average number of shares
outstanding over the period. Diluted shares include the weighted
average 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. Interest expense incurred on the dilutive convertible
debentures is added back to EBITDA, EBITDA before stock-based
compensation, cash flow from operations before change in non-cash
working capital, cash flow from operations, net earnings, net
earnings before impairment of goodwill and net earnings before stock-
based compensation for the diluted per share calculation.
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OPERATING HIGHLIGHTS
For the years ended December 31, 2008 2007 2006
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Land Drilling Market
Operating days - drilling
Canada 12,196 9,835 12,531
United States and Mexico(1) 15,076 12,112 7,046
Rate per drilling day (CDN$)
Canada 23,827 24,042 24,191
United States and Mexico(2) 23,098 23,603 23,724
Utilization rate - drilling
Canada 57% 43% 62%
United States and Mexico 85% 85% 84%
CAODC industry average 42% 38% 55%
Number of drilling rigs
Canada 57 64 60
United States and Mexico 56 46 31
Utilization rate for service rigs 46% 49% 62%
Number of service rigs 23 20 18
Number of coring and surface casing
rigs 20 20 17
Barge Drilling Market(3)
Operating days 1,285 704 -
Rate per drilling day (CDN$) 44,387 49,720 -
Utilization rate(4) 93% 98% -
Number of barge drilling rigs 1 1 -
Number of barge drilling rigs under
Bareboat Charter Agreements 3 3 -
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(1) Trinidad commenced its operations in Mexico effective November 2008.
(2) In US dollars, dayrates remained relatively static, increasing
marginally from $21,867 in 2007 to $22,006 in 2008.
(3) Trinidad commenced its operations in the barge drilling market with
its acquisition of Axxis, effective July 5, 2007.
(4) 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.
FORWARD-LOOKING STATEMENTS
The MD&A 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 MD&A. The forward-looking
information and statements included in this MD&A 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 MD&A may contain
forward-looking information and statements pertaining to the following:
- 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 MD&A speak only as of the date of this MD&A 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.
NON-GAAP MEASURES
This MD&A 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, EBITDA, EBITDA before
stock-based compensation, cash flow from operations before change in non-cash
working capital, net earnings before impairment of goodwill, net earnings
before stock-based compensation and net debt. Please see the Non-GAAP Measures
Definitions section of this MD&A for details with respect to definitions of
these non-GAAP measures.
RESPONSIBILITY OF MANAGEMENT AND THE BOARD OF DIRECTORS
Management is responsible for the information disclosed in this MD&A and
the accompanying annual Consolidated Financial Statements, and has in place
appropriate information systems, procedures and controls to ensure that
information used internally by management and disclosed externally is
materially complete and reliable. In addition, Trinidad's Audit Committee, on
behalf of the Board of Directors, provides an oversight role with respect to
all public financial disclosures made by the Company, and has reviewed and
approved this MD&A and the accompanying annual Consolidated Financial
Statements.
PROFILE
Trinidad is a growth-oriented corporation whose common shares and
convertible debentures trade on the Toronto Stock Exchange ("TSX") under the
symbols TDG and TDG.DB respectively. Trinidad's divisions operate in the
drilling, well-servicing, coring and barge-drilling sectors of the North
American oil and natural gas industry. With the completion of the 2008/2009
rig construction program, Trinidad will have 120 land drilling rigs ranging in
depths from 1,000 - 6,500 metres and operations in Canada, the United States
and Mexico. In addition to its land drilling rigs, Trinidad has 23 service
rigs, 20 pre-set and coring rigs and 4 barge rigs currently operating in the
Gulf of Mexico. Trinidad is focused on providing modern, reliable, expertly
designed equipment operated by well-trained and experienced personnel.
Trinidad's drilling fleet is one of the most adaptable, technologically
advanced and competitive in the industry.
OVERVIEW
Trinidad had another very successful year in 2008, as the Company
achieved record financial and operating results against a backdrop of
significant commodity price fluctuations and unprecedented market turbulence
in the latter part of the year. Trinidad demonstrated strong growth in 2008
and achieved record levels of revenue, gross margin, EBITDA and cash flow from
operations. This was driven by increases in the Company's operating days and
rig utilization while maintaining relatively stable dayrates as compared to
2007. In addition to the Company's record performance, management continued to
make strides on many of its strategic initiatives including; building upon its
base of long-term, take-or-pay contracts, reduction in overall debt levels,
expansion of its rig fleet and entry into new geographic markets. During 2008,
the Company redeployed seven rigs from Canada into the United States ("US")
and Mexican markets and made considerable progress on its 2008/2009 rig build
program by delivering three new technologically-innovative rigs into the US on
long-term, take-or-pay contracts. Subsequent to the 2008 year-end, Trinidad
announced its updated capital expenditure budget for 2009. The revised budget
lowers Trinidad's capital expenditure expectations for 2009, reflecting the
Company's prudent capital management planning and strong customer
relationships. The reduced budget includes changes to Trinidad's previously
announced rig construction programs, most notably; a 12-month delay in the
delivery of six new drilling rigs and the cancellation of four new service
rigs (see the Subsequent Events section of this MD&A for further details on
Trinidad's updated 2009 capital expenditure budget). In 2008, management
continued its focus on delivering industry-leading drilling solutions through
the acquisition of Victory Rig Equipment Corporation ("Victory") and the
expansion of its in-house manufacturing capabilities. These capabilities allow
Trinidad to build new rigs with better functionality, improved performance,
and an integrated top drive solution. These capabilities and the ownership of
this proprietary technology is what ultimately leads to customer cost savings
and enhanced crew safety. The Company also gained strategic entry into the oil
and natural gas market in Mexico through the mobilization of three drilling
rigs into the Chicontepec field in central eastern Mexico. This geographic
expansion reduces the impact of seasonality and provides increased stability
to the Company's cash flows and an entrance into a marketplace with relatively
strong demand for new and advanced drilling equipment. These initiatives, in
combination with the recently announced early renewal of Trinidad's revolving
credit facility (see the Subsequent Events section of this MD&A for further
details on Trinidad's early renewal of its revolving credit facility),
position the Company well to weather the inevitable cycles of the oil and
natural gas industry and to continue its strong track record for value-added
growth.
Trinidad's revenue for the year grew by 20.4% or $128.2 million as
compared to 2007, which was a direct result of higher operating days, improved
rig utilization and maintaining relatively stable dayrates in both Canada and
the US and Mexico land drilling segments. Trinidad's total operating days
increased by 5,906 days or 26.1% for 2008 as compared to 2007 as a result of
increased customer demand and the redeployment of seven existing drilling rigs
from Canada to higher utilization markets in the US and Mexico. In Canada,
drilling rig utilization rose to 57% as strengthening oil and natural gas
prices throughout the first three quarters of 2008 led to higher demand for
contract drilling services. Trinidad's Canadian drilling rig utilization rate
continued to outperform the industry average, exceeding the industry rate of
42% or 35.7% for the year. In the US, the strength and stability of Trinidad's
long-term, take-or-pay contracts was apparent with utilization rates remaining
consistent with the prior year at 85%, despite weakening economic conditions
and extreme volatility in commodity prices experienced in the latter half of
2008. Higher dayrates associated with Trinidad's newer, deeper-capacity
equipment under long-term, take-or-pay contracts were offset by lower dayrates
from spot market activity and the extremely competitive markets in which
Trinidad operates.
Strong growth in revenue and gross margin helped to drive a 51.3%
increase in net earnings before impairment of goodwill to $120.3 million or
$1.32 per share (diluted) for 2008 in comparison to $79.5 million or $0.94 per
share (diluted) in 2007. Given the recent economic events impacting the market
capitalization of Trinidad, the Company, in accordance with its annual
goodwill impairment testing procedures, recognized an impairment charge in
2008 of $38.2 million, specifically in relation to the Canadian drilling
segment. The net impact on earnings per share was a reduction of $0.42 per
share (diluted) for the year ended December 31, 2008. From the annual goodwill
impairment testing procedures, Trinidad's US and Mexico drilling segment,
along with the Company's Construction segment, did not have any goodwill or
intangible valuation impairments, and were therefore not subject to any
write-downs. Trinidad's net earnings during 2008 were also negatively impacted
by reorganization costs and higher income taxes as a result of the conversion
from an income trust into a corporation. Net earnings were also impacted by
increased maintenance and refurbishment costs on some of the older US rigs, as
well as higher interest and depreciation expenses. Interest expense increased
due to the issuance of convertible debentures in connection with the Axxis
acquisition in the second half of 2007 and depreciation increased as a result
of growth in the number of drilling days in both Canada and the US. Helping to
offset these factors was a $33.5 million foreign exchange gain in comparison
to a loss of $12.4 million in the prior year due to changes in the Canadian/US
exchange rates as well as a gain of $29.0 million in relation to the sale of
the Company's newly constructed barge rig during the fourth quarter of 2008.
During 2008, Trinidad made several strategic rig moves from Canada to the
US and Mexico. Trinidad redeployed four rigs from Canada to the US, two of
which were sent to the Deep Bossier play in Texas, one to the Haynesville
Shale in Louisiana and the other to the Bakken Shale in North Dakota. These
redeployments allow the Company to maximize utilization and to increase the
Company's foothold into the unconventional shale natural gas plays in the US.
All four rigs are under long-term, take-or-pay contracts with guaranteed 100%
utilization, adding further stability to the Company's cash flows. Following
the completion of the 2008/2009 rig construction program, Trinidad expects to
have approximately 45% of the Company's rig fleet working in the
unconventional shale plays in North America. As at February 20, 2009
approximately 45% of the Company's total fleet was under long-term contracts.
Additionally, in the fourth quarter of 2008 Trinidad redeployed three rigs
from Canada to Mexico. These rigs are operating in the Chicontepec basin in
Mexico, which is one of the country's largest certified hydrocarbon resource
plays, where drilling activity has been steadily increasing since the early
1970's. One of these rigs began operations in November 2008, the second
started drilling in December 2008, with the third starting operations in
January 2009. These rigs are contracted in US dollars with 100% utilization
for an initial term of six months; with a further six month extension at the
customer's option. Mobilization and de-mobilization costs are paid for by the
operator, however it is anticipated that these rigs will remain in Mexico for
the foreseeable future. This expansion into Mexico continues to demonstrate
Trinidad's ability to add value by redeploying rigs from a seasonal and
increasingly under-utilized capacity base to markets where higher utilization
rates are expected as demand for high-quality, deep-capacity drilling rigs is
expected to continue to be stable.
Trinidad's continued focus is on creating growth and long-term
sustainability, in order to drive strong returns for its shareholders.
Trinidad has developed a strong platform as the third-largest Canadian
drilling company, one of the fastest growing in the US marketplace and has now
successfully expanded its reach internationally to Mexico and to the offshore
barge market. Trinidad's state-of-the-art rig fleet includes onshore, barge,
service and coring rigs which provide tangible competitive advantages in the
markets in which the Company conducts its business. Further advantages stem
from the Company's technically-advanced rig design and patented top drive
packages, reflective of its position as a technology leader with a dedicated
commitment to the needs of Trinidad's valued customers. Trinidad continues to
prove its ability to meet the needs of the ever-changing and demanding North
American drilling environment, by providing assets that can drill today's
tighter, more technically challenging reserves. Trinidad has been built with a
strategic vision and a commitment to executing the Company's business plan
over the long-term. The basis of our strategy has been and will continue to be
focused around maintaining one of the newest, deepest and most
technically-advanced fleet of drilling rigs in the industry; expanding our
operations geographically to provide additional profitability and
diversification to counter market weakness; and maintaining our
customer-focused approach which provides strong utilization levels and reduced
volatility in our revenue through long-term, take-or-pay contracts. This has
created a strong platform for continued profitability and expansion into new
markets, while at the same time providing the Company with stability during
these challenging and volatile economic times.
RESULTS OF OPERATIONS
Canadian Drilling Operations
For the years ended December 31,
($ thousands except percentages and
operating data) 2008 2007 % Change
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Revenue 348,067 297,007 17.2
Operating expense 205,059 182,055 12.6
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Gross margin 143,008 114,952 24.4
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Gross margin percentage 41.1% 38.7%
Operating days - drilling 12,196 9,835 24.0
Rate per drilling day (CDN$) 23,827 24,042 (0.9)
Utilization rate - drilling 57% 43% 32.6
CAODC industry average 42% 38% 10.5
Number of drilling rigs 57 64 (10.9)
Utilization rate for service rigs 46% 49% (6.1)
Number of service rigs 23 20 15.0
Number of coring and surface casing
rigs 20 20 -
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Entering 2008, the outlook for Trinidad's Canadian drilling segment was
uncertain as the Canadian oilfield services market was facing an over-supply
of equipment, the impact of the Alberta government's announced new royalty
rate structure, as well as weak natural gas prices and the effect a strong
Canadian dollar may have on the cash flows of Trinidad's customers. While
these factors contributed to a weak first quarter for the Company, gradual
market improvements over the second and third quarters of 2008 and a shift in
focus by customers on deeper, unconventional resource plays primarily
contributed to stronger than anticipated results for Trinidad's Canadian
drilling segment. As a result, 2008 revenue, gross margin, operating days and
drilling rig utilization rates all exceeded their respective levels in 2007.
Trinidad's Canadian operations experienced higher customer demand in 2008
as compared to 2007 due to the improvement in underlying cash flow
fundamentals for deeper plays in the oil and natural gas industry in Canada.
Trinidad's rigs are better suited for the deeper, more technically-challenging
resource plays and this shift in focus by exploration and production companies
has further differentiated Trinidad from its peer group and the industry as a
whole. Historically, Trinidad has exceeded industry average rig utilization as
a result of its deeper drilling focus. Trinidad's young fleet, consisting of
high-quality, technically-advanced equipment, lowers drilling costs for the
Company's customers by providing better overall drilling performance. Trinidad
continued this trend in 2008 by outperforming the industry in terms of
utilization by 35.7%, achieving rig utilization in Canada of 57% as compared
to the industry average of 42%.
Revenue increased in the Canadian operations by $51.1 million or 17.2%
from $297.0 million in 2007 to $348.1 million in 2008 as a result of higher
operating days and rig utilization. This was achieved with a lower number of
rigs available and at dayrates which were relatively static year-over-year.
Growth in revenue was also attributable to the longer-term duration of
Trinidad's deeper drilling projects, which are not as subject to the
short-term fluctuations in commodity prices as shallow drilling projects tend
to be. Producers operating in deeper plays typically have longer timelines in
terms of both capital outlays and cash flows, which in turn renders deeper
drilling fleets more defensive in terms of utilization when commodity prices
decline. The impact to Trinidad, from the deeper plays, is that the Company
incurs less move days and less downtime; therefore generating higher
utilization.
Overall dayrates remained relatively static in 2008 as compared to 2007,
declining marginally by 0.9% year-over-year. Trinidad's ability to maintain
relatively stable dayrates in a highly competitive environment reflects the
strength of the Company's long-term, take-or-pay contracts and the high
quality of its equipment. Trinidad reduced its Canadian drilling rig fleet by
seven rigs or 10.9% over the course of 2008 as a result of redeployments to
the Company's US and Mexico operations.
In 2008, the industry realized increases in the average annual active
drilling rig count in the Western Canadian Sedimentary Basin ("WCSB").
According to the Canadian Association of Oilwell Drilling Contractors
("CAODC"), the average annual active rig count was 7.4% higher than the levels
witnessed in 2007. During the early stages of 2008, the active rig count in
the industry was below the already suppressed levels encountered in 2007, but
throughout the second, third and fourth quarters of 2008 this trend reversed
as the active rig count surpassed 2007 levels in all three quarters. Another
factor that produced positive results for Trinidad in 2008 was increased well
completion activity in the WCSB, which resulted in stronger year-over-year
activity. As per the CAODC, there were 20,729 wells drilled on a completion
basis during the year, representing an improvement of 8.2% from the levels
reported in 2007. Directional and horizontal drilling continued to be the
theme in the WCSB in 2008 with the number of non-vertical wells drilled
increasing by over 6% as compared to 2007, while the easier vertical wells
drilled were down by close to 18% year-over-year. Directional and horizontal
wells increased to 44% of the total wells drilled in 2008 compared to 38% in
2007, indicating the shift towards these more technically-challenging wells
and demonstrating the increasing amounts of capital being deployed by
producers towards the unconventional resource plays in the WCSB. This trend
bodes well for Trinidad, as the Company's Canadian rig fleet offers customers
these complex and deep-drilling capabilities and is one of the key factors
contributing to the achievement of higher utilization rates as compared to the
industry and Trinidad's strong year-over-year performance.
Operating costs as a percentage of revenue decreased from 61.3% in 2007
to 58.9% in 2008, thus increasing Trinidad's Canadian drilling segment's gross
margin percentage year-over-year. Operating costs for 2008 were $205.1
million, which represents an increase of $23.0 million or 12.6% as compared to
2007. This increase was driven by stronger revenues during the year, thus
increasing overall operating expenses. Gross margin for the Canadian Drilling
segment increased 24.4% to $143.0 million or 41.1% margin as compared to
$115.0 million or 38.7% margin in 2007 as a result of higher utilization and
operating days. As well, the Company's Canadian division was extremely focused
during 2008 on overall cost management given the softer market outlook for
2009.
Overall, the well servicing division had a strong year, especially given
the lower activity levels witnessed in the marketplace. Utilization rates for
Trinidad's well servicing division declined slightly from 49% in 2007 to 46%
in 2008. Lower activity levels and a surplus of equipment in the marketplace
reduced dayrates for 2008 resulting in slight declines in revenue and gross
margin as compared to 2007. Trinidad remains relatively optimistic on
prospects for its well servicing division in light of the increased
completion, work-over and abandonment activity expected over the next several
years, coupled with expected minor equipment expansion industry wide.
Trinidad continued to generate positive cash flows from the Canadian
drilling segment in 2008 and the Company's focus on newer rigs with
deeper-drilling capacity and long-term contracts again proved its overall
value to shareholders. While the Company is cautious regarding the near-term
impact of the global financial crisis and ensuing economic uncertainty,
Trinidad believes that long-term fundamentals require continued exploration
and production in the WCSB to meet North American and world-wide demand for
oil and natural gas. Trinidad's assets and operations are built to help our
customers economically drill for oil and natural gas, including drilling in
the large, relatively undeveloped, unconventional resource areas of the WCSB.
With the anticipated return of stronger commodity prices helping to drive
overall exploration and production activity, these unconventional resource
areas of the WCSB should continue to grow from a rig activity and well
completion standpoint. Trinidad is well positioned to capitalize on this
opportunity, given the Company's technically-advanced asset base, its
proprietary drilling technology and overall drilling performance which lower
drilling costs for Trinidad's customers.
United States and Mexico Drilling Operations
For the years ended December 31,
($ thousands except percentages and
operating data) 2008 2007 % Change
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Revenue 366,803 298,777 22.8
Operating expense 207,523 155,401 33.5
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Gross margin 159,280 143,376 11.1
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Gross margin percentage 43.4% 48.0%
Land Drilling Rigs
Operating days - drilling 15,076 12,112 24.5
Rate per drilling day (CDN$)(1) 23,098 23,603 (2.1)
Utilization rate - drilling 85% 85% -
Number of drilling rigs 56 46 21.7
Barge Drilling Rigs(2)
Operating days - drilling 1,285 704 82.5
Rate per drilling day (CDN$) 44,387 49,720 (10.7)
Utilization rate - drilling(3) 93% 98% (5.1)
Number of barge drilling rigs 1 1 -
Number of barge drilling rigs under
Bareboat Charter Agreements 3 3 -
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(1) In US dollars, dayrates remained relatively static, increasing
marginally from $21,867 in 2007 to $22,006 in 2008.
(2) Trinidad commenced its operations in the barge drilling market with
its acquisition of Axxis, effective July 5, 2007.
(3) During the first quarter of 2008, Trinidad completed significant work
to one of its barge rigs and as a result it was removed from service
and not included in the utilization calculation.
Commensurate with the expansion of operations into Mexico, Trinidad has
included the results of operations for Mexico with the operating results of
its US operations. Accordingly, this segment is named United States and Mexico
Drilling Operations.
Trinidad's continued success in 2008 in the US and Mexico drilling
segment rests on the Company's carefully developed business approach. This
overall business approach has provided Trinidad's US and Mexico segment with
another record year in 2008 and will continue to be the Company's focus moving
forward. The key elements of Trinidad's business strategy in the US and Mexico
markets include:
- Offering modern, state-of-the-art drilling rigs, designed and
manufactured in-house, that can help exploration and production
companies achieve a high rate of drilling success in pursuing today's
deeper, more technically demanding oil and natural gas wells;
- A focus on helping Trinidad's customer base drill productive wells in
a cost effective manner;
- A focus on building customer relationships based on long-term, take-
or-pay contracts, thereby anchoring Trinidad's rig build programs and
securing returns; and
- A commitment to continuously looking for new technologies or new
drilling methods which allow oil and natural gas producers to extract
more oil or natural gas per dollar of capital spent.
Revenue for the US and Mexico drilling operations segment increased by
$68.0 million or 22.8% for the year, up from $298.8 million in 2007 to $366.8
million for 2008. Growth in revenue resulted from the expansion of the US and
Mexico fleet, which increased by 21.7% or ten rigs year-over-year, inclusive
of an additional three rigs that were transferred from Trinidad's Canadian
drilling fleet to Mexico during the fourth quarter of 2008. The additional ten
rigs contributed to an increase in the number of operating days at relatively
consistent US dollar dayrates in comparison to the prior year. Furthermore,
the deployment of these additional rigs, which were committed under long-term,
take-or-pay contracts operating year-over-year, added growth to the overall
operations. Average dayrates in Canadian dollars declined 2.1% year-over-year
due entirely to foreign exchange as a result of the declining strength of the
US dollar during the first half of 2008. In US dollars, average dayrates
remained relatively static increasing marginally by 0.6% from US $21,867 for
2007 to US $22,006 for the same period in 2008.
Average utilization for 2008 in the US and Mexico land drilling segment
was 85%, which was directly in line with levels achieved in 2007. Trinidad
experienced a decline in utilization on the Company's non-contracted rigs
given the change in market fundamentals over the latter part of 2008. However,
Trinidad's increased focus on long-term, take-or-pay contracts helped to
offset this softness and supported stable utilization levels year-over-year.
Moving forward in 2009, Trinidad expects utilization on the US non-contracted
rigs to continue to decline given the current market conditions that have
impacted the overall US economy and drilling market. Helping to offset this
over the course of 2009 will be the rig fleet booked under long-term,
take-or-pay contracts, which as of February 20, 2009 was approximately 60% of
the total US and Mexico fleet. Another factor that helped with utilization in
2008 was the growing level of directional and horizontal wells being drilled
in the US. This trend positively impacted utilization levels in 2008 and will
also be a key aspect of the US and Mexico segment's success moving forward.
According to Baker Hughes (a US based oilfield services company that provides
US drilling industry data), on average the number of rigs drilling directional
and horizontal wells in the US market increased by over 20% as compared to
2007, while the average rigs drilling the easier vertical wells were down by
close to 5% year-over-year. The total average rigs drilling directional and
horizontal wells increased to 49% of the total wells drilled in 2008 compared
to 43% in 2007, indicating the shift towards these more
technically-challenging wells and demonstrating the increasing amounts of
capital being deployed by producers towards the unconventional resource plays
in the US market. As in Canada, Trinidad is strongly positioned to capitalize
on this trend, as the Company's US and Mexico rig fleet is better suited for
the deeper, more technically-challenging wells.
Operating expenses for the year increased by 33.5% from $155.4 million in
2007 to $207.5 million in 2008, reducing overall gross margins from 48.0% to
43.4%. The increase in operating expenses was partially attributable to higher
revenue for the year, however overall increases in operating costs exceeded
the growth in revenue, reducing gross margin as a percentage of revenue on a
year-over-year basis. The decline in gross margin as a percentage of revenue
was driven by refurbishment work completed on a number of Trinidad's older US
rigs, in order to make these rigs more attractive to prospective customers.
While these rigs were being refurbished they had to be temporarily taken out
of service during various parts of the year. Costs for these refurbishments
were charged to operating expenses with no associated revenue during the
downtime, ultimately reducing Trinidad's US gross margin as a percentage of
revenue. Total costs incurred on these refurbishments were approximately $4.4
million, negatively impacting gross margins by 1.2% for the year, without
taking into consideration the lost revenue during the downtime. Without the
impact of these refurbishments and excluding the loss on the Bareboat Charter,
the gross margin and gross margin percentage for 2008 would have been $168.3
million and 45.3%, respectively, as compared to $142.0 million and 47.7%,
respectively, for 2007. The expectation moving forward is that the Company
will see a future benefit from these refurbishments by way of improved
marketability and operating efficiency. In addition, expenses related to
start-up costs, employing additional field supervisors to manage the growing
US fleet and improved safety requirements led to increases in overall
operating expenses. Another factor negatively impacting gross margin was
Trinidad reclassifying costs associated with property taxes on the US rigs
into operating expenses from general and administrative expenses to better
align the Company with current industry standards and allow for increased
consistency amongst Trinidad's peer group. For comparative purposes property
taxes were also reclassified for 2007; however the impact of increased
property taxes on the growing US rig fleet in comparison with the prior year
drove margins down. Property taxes on US-based rigs are assessed annually on
January 1, therefore any rigs deployed later in the year would not have been
subject to these taxes in 2007. As Trinidad increased its US fleet by 15 rigs
during 2007 it resulted in higher property taxes in 2008 in comparison to the
prior year.
During the second half of 2008, the demand for Trinidad's barge drilling
rigs showed signs of softening with operating days, rates per drilling day
(US$) and utilization all decreasing as compared to the same time frame of
2007. These declines were a direct result of the weakening US marketplace
which in turn suppressed commodity prices, reducing overall demand for barge
drilling activity. During the last few months of 2008, approximately one
quarter of the total available barge rigs in the market were working in the
Gulf of Mexico, demonstrating the significant impact the US economy and the
dramatic decline in commodity prices have had on the barge drilling market.
Given Trinidad's strong track record and quality customer relationships, the
Company was able to keep its utilization over 97% on three of the four barge
rigs during the fourth quarter of 2008. For January 2009, Trinidad had one
barge rig that was not drilling, while the remaining three barge rigs were
operating at an average utilization of 99%, with two of these rigs contracted
to work until the latter part of the third quarter in 2009. Moving forward,
Trinidad expects the barge rig segment to continue to be an important
component of the Company's business. This segment has added both asset and
geographical diversification to Trinidad and presents a strong opportunity to
expand into other jurisdictions following the return of more robust market
conditions. For 2008, Trinidad recorded a Bareboat Charter loss of $4.7
million, which was recorded as a decrease to the Company's revenue. This was
due to the decline in dayrates as compared to the original provisions in the
Bareboat Charters, and therefore Trinidad was exposed to the residual loss for
2008 (see the Commitments section of this MD&A for further details).
Over the course of 2008, Trinidad moved four rigs from Canada into the
US, all under long-term, take-or-pay contracts for periods of three and five
years with guaranteed utilization rates of 100% during their respective
contract terms. The first two rigs were moved during the first quarter of the
year at the request of one of Trinidad's customers and were sent to work in
the Deep Bossier play in Texas. The other two rigs were transferred during the
third quarter of 2008 and are operating in the Haynesville Shale, Louisiana
and the Bakken Shale, North Dakota. An additional three rigs were added to the
US fleet in the fourth quarter of 2008 from Trinidad's 2008/2009 rig build
program. Two of these rigs were put into operation in December 2008, while the
third commenced drilling in January 2009. All three of the rigs will be
operating in the Haynesville Shale, Louisiana. Trinidad has a growing presence
in the emerging Haynesville Shale play and following the completion of the
2008/2009 rig build program, the Company expects to have at least 22 rigs
operating in the area. The redeployment of an existing rig to the US side of
the Bakken play represented an expansion into a new area for Trinidad. The
Company has been successful in the Canadian portion of the Bakken Shale play
given the advanced technology and drilling techniques associated with its
drilling fleet, well positioning the Company to drill in this market. This
advanced technology has helped our customers with overall drilling efficiency
and made their associated drilling programs more economically viable making
both the Canadian and US sides of the Bakken Shale play an area of potential
growth moving forward.
During the fourth quarter of 2008, Trinidad moved three rigs from Canada
into the southern edge of the Chicontepec field in central eastern Mexico.
These three rigs represented Trinidad's initial entry into an international
market like Mexico, with one of the rigs operating in November 2008, the
second was drilling in December 2008, and the third rig was operational in
January 2009. The rigs are contracted to work at a utilization rate of 100%
for an initial term of six months, with a further six month extension at the
customer's option. The operator agreed to pay the costs associated with
relocating the rigs into Mexico and returning the rigs to Canada at the end of
the contracted period, if required. It is anticipated that these rigs will
remain in Mexico for the foreseeable future. This move into Mexico follows
Trinidad's overall strategy of initially moving a small number of rigs into
new areas of opportunity, developing a strong reputation locally through high
performance and a customer-focused approach, and then expanding its
operations. Trinidad's expansion into Mexico is in response to the strong
demand for quality drilling equipment and growth in drilling programs planned
for the area, and also allows Trinidad to strategically redeploy rigs from
areas which are subject to the impacts of seasonality or where assets are
under-utilized.
The focus in the US has been on several shale gas plays, including the
Barnett, Bakken, Fayetteville, and Haynesville areas. Most of the US shale
plays require new technology and fit-for-purpose rigs that enable deep
horizontal drilling. Horizontal wells, while more expensive, result in higher
well productivity, by utilizing powerful multi-stage fracturing spreads.
Trinidad has the capability to drill horizontally and directionally at these
deeper requirements and has a strong presence in these key US emerging plays.
This, along with the Company's long-term, take-or-pay contracts, are expected
to provide stable returns from the US and Mexico drilling segment. Trinidad
continues to focus on expanding the Company's US and Mexico market share, with
the underlying fundamental premise that our customers continue to recognize
the benefits of Trinidad's new and technically advanced drilling equipment.
The wells being drilled in North America, as well as globally, require more
technically-advanced rigs to lower the overall drilling costs for exploration
and production companies. Trinidad's ability and reputation for improving the
financial returns for its customers is what will continue to provide
opportunities to grow the Company's US and Mexico drilling segment.
Construction Operations
For the years ended December 31,
($ thousands except percentage data) 2008 2007 % Change
-------------------------------------------------------------------------
Revenue(1) 157,004 89,927 74.6
Operating expense(1) 149,797 83,353 79.7
----------------------------------------
Gross margin 7,207 6,574 9.6
----------------------------------------
Gross margin percentage 4.6% 7.3%
(1) Includes inter-segment revenue and operating expenses of $114.0
million and $56.0 million for the years ended December 31, 2008 and
2007, respectively.
Revenue from construction operations increased by 74.6% from $89.9
million in 2007 to $157.0 million in 2008, while operating expenses increased
79.7% from $83.4 million to $149.8 million over the same time period. Growth
in the manufacturing division was due to the completion of $114.0 million of
inter-segment construction work performed during the year as part of the
2008/2009 rig construction program, in comparison with $56.0 million in 2007,
as well as outside third party work. The increase of $58.0 million in
inter-segment revenue year-over-year was a result of the 2008/2009 drilling
rig construction program, of which Trinidad's Construction segment is
manufacturing seven of the ten rigs currently planned. Trinidad's Construction
segment completed the construction of one of these rigs in 2008 with the
remaining six rigs expected to be deployed throughout 2009. Modification work
completed on Trinidad's rigs that were relocated from Canada to the US and
Mexico also accounted for the increase in inter-segment revenue and operating
expenses. The gross margin percentage decreased from 7.3% last year to 4.6%
for 2008 due to the majority of revenue being generated from inter-segment
work, while third party revenues and associated gross margins remained
relatively static year-over-year.
Effective August 18, 2008 Trinidad acquired all of the outstanding shares
of Victory Rig Equipment Corporation, a privately held oilfield equipment and
fabrication company, based in Red Deer, Alberta for consideration of $12.7
million. Victory provides a selection of patented and highly-effective
drilling equipment including the newly developed patented Victory 200-535 ton
top drive, AC drawworks and pump drive systems. These products, when combined
with the existing manufacturing divisions, will offer an extensive range of
drilling solutions including innovative and technically-advanced rigs capable
of meeting the growing challenges in the oil and natural gas industry. On
January 1, 2009 Trinidad combined all of its oilfield equipment manufacturing
and construction businesses into one segment retaining the name Victory Rig
Equipment Corporation, which combined Victory's and Trinidad's existing
construction operations. The integration of the businesses into one division
will provide a unique and seamless ability to deliver the complete cycle of
drilling solutions from equipment sales, rig design and engineering,
manufacturing, and after-market support services.
GENERAL AND ADMINISTRATIVE EXPENSES
For the years ended December 31,
($ thousands except percentage data) 2008 2007 % Change
-------------------------------------------------------------------------
General and administrative expenses 50,272 43,844 14.7
% of revenue 6.6% 7.0%
General and administrative expenses increased 14.7% to $50.3 million in
2008 from $43.8 million in 2007, however as a percentage of revenue decreased
year-over-year from 7.0% to 6.6%. The continued expansion of Trinidad's
business within the US has led to higher overhead expenses, which is the main
driver for the increase in 2008 as compared to the prior year. Despite the
overall increase, Trinidad has continued to maintain general and
administrative expenses as a percentage of revenue at a relatively consistent
level with the prior year demonstrating its commitment to prudent
administration spending year-over-year.
Effective January 1, 2008, Trinidad reclassified several costs associated
with field management, equipment insurance and property taxes on the US rigs
into operating expenses from general and administrative expenses to better
align the Company with current industry standards and allow for increased
consistency amongst Trinidad's peer group. Comparative figures for 2007 have
also been reclassified and do not impact previously reported net earnings or
retained earnings.
INTEREST
For the years ended December 31,
($ thousands) 2008 2007 % Change
-------------------------------------------------------------------------
Interest on long-term debt 22,018 31,057 (29.1)
Effective interest on deferred
financing costs 1,691 1,592 6.2
----------------------------------------
23,709 32,649 (27.4)
----------------------------------------
Interest on convertible debentures 27,457 13,467 103.9
Effective interest on deferred
financing costs 2,641 1,312 101.3
Accretion of convertible debenture 4,836 2,167 123.2
----------------------------------------
34,934 16,946 106.1
----------------------------------------
For most of 2007, Trinidad had a large portion of its debt facility drawn
in order to fund its rig construction programs, which required intensive
capital expenditures. The convertible debenture offering effective July 2007,
proceeds from the equity financing completed June 2008 and cash flow from
operations were used in the later part of 2007 and throughout 2008 to reduce
the overall indebtedness of the Company. These cash sources reduced long-term
debt levels by 16.2% from $404.2 million at December 31, 2007 to $338.6
million on December 31, 2008, which in addition to reductions in the BA and
LIBOR rates in 2008 as compared to 2007, has further reduced the interest on
both the term and revolving facilities.
Effective July 5, 2007, Trinidad completed the issuance of $354.3 million
in convertible unsecured subordinated debentures in order to complete the
acquisition of Axxis. Interest on the convertible debentures is paid
semi-annually at a coupon rate of 7.75% and for the 12 months ended December
31, 2008, Trinidad recorded associated interest expense of $27.5 million. The
increase in interest on convertible debentures of $14.0 million or 103.9% as
compared to the same period of 2007 was attributable to the debentures being
outstanding for approximately six months of 2007 as compared to the full year
in 2008. The fixed interest rate on the convertible debentures has reduced
Trinidad's exposure to interest rate fluctuations and further enhances cash
flow stability. Additionally, Trinidad has the option to redeem the debentures
in whole or in part at a redemption price of $1,000 after December 31, 2010
and before their maturity date on July 31, 2012, and on redemption or
maturity, Trinidad may elect to satisfy its obligation to repay the principal
by issuing shares.
Total interest expense increased by 18.2% year-over-year as a result of
the convertible debentures being outstanding for the entire 2008 period versus
only a portion of the 2007 period. The funds raised from the convertible
debentures issuance as well as the cash drawn on the term facilities have both
continued to enhance cash flow stability, given the investment in long-term
capital assets that have been used to generate operating cash flow.
STOCK-BASED COMPENSATION
For the years ended December 31,
($ thousands) 2008 2007 % Change
-------------------------------------------------------------------------
Stock-based compensation 2,465 2,450 (0.6)
On March 10, 2008, Trinidad converted from a growth-oriented income trust
to a growth-oriented, dividend-paying corporation. As a result of this
arrangement, Trinidad's former Unit Rights Incentive Plan was rolled into the
Incentive Option Plan (the "Plan"), which is used to assist officers,
employees and consultants of Trinidad and its affiliates to participate in the
growth and development of the Company. Trinidad uses the fair value method to
calculate compensation expense associated with options granted under the Plan.
Compensation expense is then recognized in earnings over the vesting period of
the options granted with a corresponding increase in contributed surplus. As a
result of applying the fair value method, stock-based compensation for 2008
was $1.7 million which was driven by the issuance of 823,810 options during
the third quarter of 2008.
During 2008, Trinidad established a Performance Share Unit Plan ("PSU")
to provide an opportunity for officers and employees of Trinidad and its
affiliates to promote further alignment of interests between employees and
shareholders and to participate in the growth and development of the Company.
Each PSU granted permits the holder to receive a cash payment equal to the
fair value of the volume weighted-average Trinidad share price for the five
days preceding payment. PSUs granted vest 50% on December 31, 2008 and the
remainder vest December 31, 2009. When dividends are paid the value is
credited as additional PSUs on the dividend payment date. As at December 31,
2008, there were 237,000 PSUs outstanding, with a mark-to-market liability of
$0.6 million.
During 2008, the Company established a Deferred Share Unit Plan ("DSU")
to provide a compensation system for the members of the Board of Directors
that is reflective of the responsibility, commitment and risk accompanying
Board membership. Each DSU granted permits the holder to receive a cash
payment equal to the fair value of the volume weighted-average share price for
the five days preceeding payment. DSUs granted are exercisable upon
resignation or termination from the Board of Directors. Dividends are credited
as additional DSUs when paid. As at December 31, 2008, there were 40,732 DSUs
outstanding, with a mark-to-mark liability of $0.2 million.
FOREIGN EXCHANGE (GAIN) LOSS
For the years ended December 31,
($ thousands) 2008 2007 % Change
-------------------------------------------------------------------------
Foreign exchange (gain) loss (33,478) 12,354 (371.0)
Trinidad's US and Mexico operations have continued to grow throughout
2008 and have contributed significantly to the overall operations of the
Company. As a result, upon consolidation Trinidad's US and Mexico operations
are considered to be self-sustaining and therefore, gains and losses due to
fluctuations in the foreign currency exchange rates are recorded in Other
Comprehensive Income ("OCI") on the balance sheet as a component of equity.
However, gains and losses in the Canadian entity on US denominated
intercompany balances continue to be recognized in the statement of
operations. For 2008, Trinidad recognized a gain of $33.5 million in
comparison with a loss of $12.4 million in 2007. The weakening of the Canadian
dollar in 2008, particularly in the fourth quarter of 2008, in comparison with
its strengthening over the same period in 2007, has resulted in Trinidad's
Canadian division recognizing significant foreign exchange gains on
intercompany balances with Trinidad's US operations. Further, significant
growth in these intercompany balances as a result of the rig transfers that
were completed from Canada to the US and Mexico and rig construction programs
that were funded through the Canadian revolving credit facility has caused
foreign exchange fluctuations to become more pronounced. The $33.5 million
gain corresponds to an equal and offsetting unrealized loss in the US and
Mexico subsidiary included in OCI.
DEPRECIATION AND AMORTIZATION
For the years ended December 31,
($ thousands) 2008 2007 % Change
-------------------------------------------------------------------------
Depreciation 94,130 72,260 30.3
Amortization of intangible assets 212 - -
----------------------------------------
94,342 72,260 30.6
----------------------------------------
(Gain) loss on sale of assets (29,312) 355 (8,356.9)
Depreciation increased 30.3% from $72.3 million in 2007 to $94.1 million
in 2008. Changes in the composition of Trinidad's capital asset base through
rig construction programs have resulted in the addition of drilling rigs with
increased drilling depth; therefore incrementally adding to the capital cost
of Trinidad's capital asset base. Depreciation rates per day in Canada
increased to $3,003 for 2008 as compared to $2,953 for 2007, a $49 per day or
1.7% increase year-over-year. Higher depreciation rates in 2008, along with
utilization rate increases of 32.6% year-over-year, has increased the Canadian
division's depreciation despite the reduction of its rig count by seven as
compared to last year. Depreciation in the US and Mexico markets also
increased year-over-year as the rates per drilling day increased by 8.6% or US
$278 from US $3,223 for 2007 to US $3,501 in 2008 as a result of higher cost
of capital on the rigs released under the rig construction programs and the
Axxis acquisition. As well, Trinidad's US and Mexico land drilling division
has increased its rig count by ten over last year, which has driven a 24.5%
increase in operating days for the year, thus increasing overall depreciation
for the US operations. The Company expects the composition of its US
division's assets to continue to grow over the course of 2009, during which
time seven new rigs are expected to be introduced, which will contribute to
incremental depreciation expense and drilling days moving forward.
With the acquisition of Victory, Trinidad acquired intangible assets of
$4.3 million, which were comprised of patent technology, customer
relationships, the Victory trade name and non-compete agreements. These
intangible assets were measured at fair value at the date of acquisition.
Following initial recognition, these intangible assets are measured at fair
value at the date of acquisition less any amortization and any impairment
losses. For 2008, the amortization of intangibles was $0.2 million.
In 2008, Trinidad sold its newly constructed barge drilling rig for US
$53.5 million. The Company recorded a gain of $29.0 million on this sale,
which Trinidad plans to allocate to capital commitments under the 2008/2009
rig construction program. As well, an additional gain was recorded due to the
disposition of two properties owned by Trinidad in 2008 which were not fully
utilized, thereby allowing the associated operations to be consolidated into
other existing facilities.
REORGANIZATION COSTS
For the years ended December 31,
($ thousands) 2008 2007 % Change
-------------------------------------------------------------------------
Reorganization costs 2,766 - -
On January 10, 2008, the Trust announced its intent to convert from a
growth-oriented income trust to a growth-oriented, dividend-paying
corporation, subject to unitholder and regulatory approval. On March 10, 2008,
unitholders and holders of the exchangeable shares voted, and overwhelmingly
approved, the conversion of the Trust into a public oil and natural gas
services corporation retaining the name "Trinidad Drilling Ltd.". As a result
of this reorganization Trinidad incurred one-time costs of $2.8 million
relating to this conversion which included charges for shareholder
communication, legal counsel, development and execution of fairness opinions
and charges in relation to revising and updating necessary legal documents for
Trinidad's new corporate structure. Trinidad has incurred the majority of the
charges in relation to this conversion as of December 31, 2008.
IMPAIRMENT OF GOODWILL
For the years ended December 31,
($ thousands) 2008 2007 % Change
-------------------------------------------------------------------------
Impairment of goodwill 38,154 - -
Goodwill represents the excess of the purchase price over the fair value
of the assets and liabilities purchased. Goodwill is not subject to
amortization, but is tested for impairment at least annually by applying
appropriate fair value based tests. On December 31, 2008, in conjunction with
Trinidad's annual goodwill impairment testing, management reviewed the
estimated fair value of goodwill for each of the Company's operating segments.
Management estimated the fair value using a number of industry accepted
valuation methodologies including capitalized cash flows, available industry
valuation multiples, recent trading activity and capital market pricing of
Trinidad's shares and other valuation considerations. The result of this
analysis indicated that the carrying value of the Canadian drilling operations
segment exceeded its fair value. In accordance with GAAP, the fair value of
this segment was compared to the fair value of its net assets, including
recognized and unrecognized intangibles. Management concluded that no
remaining amount should be attributed to goodwill for the Canadian drilling
operations segment. Accordingly, a goodwill impairment charge of $38.2 million
was recognized at December 31, 2008. The net impact on earnings per share was
a reduction of $0.42 per share (diluted) for the year ended December 31, 2008.
After this goodwill impairment charge the Company no longer has any goodwill
recorded for the Canadian drilling operations segment. Impairment tests
completed on Trinidad's US and Mexico Drilling segment along with the
Company's Construction segment indicated that the fair value exceeded the
carrying value of goodwill for these respective segments, and thus no
impairment charges were required.
INCOME TAXES
For the years ended December 31,
($ thousands) 2008 2007 % Change
-------------------------------------------------------------------------
Current tax expense 1,504 1,917 (21.5)
Future tax expense 41,965 2,603 1,512.2
The current tax expense for the year ended December 31, 2008 has
decreased by 21.5% to $1.5 million over the prior year as a result of the
realization of a $1.3 million refund on the Texas Margins Tax, which was a
$1.3 million expense in 2007, given clearer interpretations of the rules
surrounding this calculation. Offsetting this $2.6 million decrease
year-over-year, are the increased revenues generated by a smaller
manufacturing division, whose taxable earnings surpassed the allowable
deductions creating a tax liability of $1.5 million versus $0.5 million in the
prior year. In addition, US withholding taxes of $1.4 million were paid on
interest payments submitted from the US operations to Canada creating a
current tax that will be used to offset the taxability of the Canadian
operations through triggering a foreign tax credit. However, due to the tax
loss position of the Canadian operations at the end of the year the foreign
tax credit deduction created a further loss therefore triggering a future tax
recovery.
Future income tax expenses increased significantly year-over-year by
$39.4 million, or 1,512.2% to $42.0 million. The increase in future income
taxes is primarily the result of the conversion from an income trust structure
to a corporation, which eliminated the deduction that the Company previously
had for distributions made to unitholders. These increases were slightly
offset as a result of the decreasing future tax rates due to changes in the
Federal Budget during 2007.
Differences between tax depreciation and GAAP depreciation created larger
timing differences in Trinidad's capital asset base resulting in a greater
future tax liability on these assets at December 31, 2008.
NET EARNINGS AND CASH FLOW
For the years ended December 31,
($ thousands except per share data) 2008 2007 % Change
-------------------------------------------------------------------------
Net earnings 82,174 79,524 3.3
Per share (diluted) 0.90 0.94 (4.3)
Net earnings before impairment of
goodwill 120,328 79,524 51.3
Per share (diluted) 1.32 0.94 40.4
Cash flow from operations 193,043 172,013 12.2
Per share (diluted) 2.12 2.02 5.0
Cash flow from operations before
change in non-cash working capital 207,121 174,770 18.5
Per share (diluted) 2.28 2.06 10.7
For 2008, Trinidad's consolidated net earnings were $82.2 million ($0.90
per share (diluted)), an increase of $2.7 million or 3.3% from $79.5 million
($0.94 per share (diluted)) in 2007. The key factor impacting net earnings in
2008 was an impairment of goodwill charge of $38.2 million (see the Impairment
of Goodwill section of this MD&A for further details). Net earnings per share
(diluted) decreased by 4.3% due to an increase in the weighted average number
of shares outstanding in 2008, which was the result of Trinidad issuing
approximately 12.1 million shares in the second quarter of 2008 as part of a
$165.0 million bought deal equity financing. Net earnings before impairment of
goodwill increased by 51.3% to $120.3 million for 2008 as compared to $79.5
million in 2007. Net earnings before impairment of goodwill increased
year-over-year as a result of higher revenues due to increased Canadian
utilization and additional rigs operating in the US and Mexico segment. Both
of these factors drove increases in operating days, which were accompanied by
stable dayrates and helped to drive incremental gross margin and higher net
earnings. As well, there was a foreign exchange gain of $33.5 million due to
the strengthening of the US dollar over the course of 2008, whereas Trinidad
recorded a loss of $12.4 million in 2007. Offsetting these gains was a
decrease in gross margin as a percentage of revenue in the US and Mexico
segment given refurbishments and start-up costs for additional rigs being
added to the fleet during 2008, as well as an increase in depreciation given
the increased number of operating days in the period. In addition, incremental
interest expense on the convertible debentures, higher general and
administrative costs associated with the expansion of the US and Mexico
segment and the incurrence of costs associated with the reorganization of
Trinidad into a new corporate structure also negatively impacted net earnings
year-over-year. Lastly, income tax expense increased by $38.9 million in 2008
as compared to 2007 as a result of the elimination of the income trust tax
structure, which has resulted in a higher effective tax rate and therefore
increased tax expense.
Cash flow from operations for 2008 increased by 12.2% from $172.0 million
($2.02 per share (diluted)) in 2007 to $193.0 million ($2.12 per share
(diluted)) in 2008. The increase is mainly the result of Trinidad generating
cash flow growth from both the Canadian and the US and Mexico operating
segments, given the increases in operating days while maintaining dayrates and
strong utilization. This was partly offset by movements in non-cash working
capital due to increases in both the Company's accounts receivable and
prepaids balances as well as increases in the accounts payable balance
year-over-year. The increase in accounts receivable and accounts payable are
due to overall increased activity for Trinidad during the year, while the
increases in prepaids are due to deposits made on equipment for the Company's
2008/2009 rig build construction program.
Cash flow from operations before changes in non-cash working capital for
2008 increased by 18.5% from $174.8 million ($2.06 per share (diluted)) in
2007 to $207.1 million ($2.28 per share (diluted)) in 2008. Year-over-year
growth was primarily a result of increased revenue and gross margin given the
strong operating results that the Company experienced in 2008 with increased
operating days and utilization in Canada, along with increased operating days
and drilling fleet in the US.
FOURTH QUARTER AND QUARTER BY QUARTER ANALYSIS
---------------------------------------------------------------
2008
($ millions except
per share data and
operating data) Q4 Q3 Q2 Q1
---------------------------------------------------------------
Financial Highlights
Revenue 205.3 191.7 141.2 219.7
Gross margin 84.2 73.1 53.8 98.4
Net earnings 21.8(1) 20.4 1.1 38.9
Depreciation and
amortization 25.8 24.0 20.5 24.0
(Gain) loss on sale
of assets (29.0) - (0.2) (0.1)
Stock-based compensation 0.9 1.2 0.1 0.2
Future income tax expense
(recovery) 19.8 10.3 2.5 9.4
Effective interest on
financing costs 1.1 1.1 1.1 1.1
Accretion on convertible
debentures 1.2 1.2 1.2 1.1
Unrealized foreign
exchange (gain) loss (22.0) (6.6) 0.9 (4.1)
Impairment of goodwill 38.2 - - -
---------------------------------------
Cash flow from operations
before change in non-cash
working capital 57.8 51.6 27.2 70.5
Net earnings per share
(diluted) 0.23 0.21 0.01 0.44
Cash flow from operations
before change in non-cash
working capital per share
(diluted) 0.60 0.53 0.31 0.75
---------------------------------------------------------------
-------------------------------------------------------------------------
2007 2006
($ millions except
per share data and
operating data) Q4 Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Financial Highlights
Revenue 145.8 162.2 115.5 206.2 161.9
Gross margin 58.8 70.5 42.6 93.0 74.9
Net earnings 17.9 15.0 4.7 41.9 31.3
Depreciation and
amortization 19.0 20.2 14.8 18.3 15.4
(Gain) loss on sale
of assets 0.2 - 0.1 0.1 0.1
Stock-based compensation 0.4 0.5 0.7 0.8 1.8
Future income tax expense
(recovery) (7.8) 3.3 (3.1) 10.2 6.2
Effective interest on
financing costs 1.1 1.1 0.4 0.3 -
Accretion on convertible
debentures 1.2 1.0 - - -
Unrealized foreign
exchange (gain) loss 0.2 5.3 5.8 1.2 (0.1)
Impairment of goodwill - - - - -
-------------------------------------------------
Cash flow from operations
before change in non-cash
working capital 32.2 46.4 23.4 72.8 54.7
Net earnings per share
(diluted) 0.21 0.18 0.05 0.49 0.37
Cash flow from operations
before change in non-cash
working capital per share
(diluted) 0.38 0.55 0.27 0.86 0.65
-------------------------------------------------------------------------
(1) Includes impairment of goodwill charge of $38.2 million.
---------------------------------------------------------------
2008
Operating Highlights Q4 Q3 Q2 Q1
---------------------------------------------------------------
Land Drilling Market
Operating days
- drilling
Canada 3,034 3,411 1,742 4,009
United States and
Mexico(2) 3,757 3,861 3,783 3,675
Rate per drilling day
(CDN$)
Canada 26,358 21,772 23,219 24,517
United States and
Mexico(3) 26,418 22,668 21,565 21,735
Utilization rate
- drilling
Canada 61% 63% 31% 72%
United States and
Mexico 80% 85% 87% 87%
CAODC industry average 43% 48% 20% 56%
Number of drilling rigs
Canada 57 60 62 62
United States and
Mexico 56 50 48 48
Utilization for
service rigs 45% 49% 29% 62%
Number of service rigs 23 20 20 20
Number of coring and
surface casing rigs 20 20 20 20
Barge Drilling Market(4)
Operating days 347 305 361 272
Rate per drilling day
(CDN$) 47,583 40,678 41,500 48,128
Utilization rate 94% 83% 100% 98%(5)
Number of barge drilling
rigs 1 1 1 1
Number of barge drilling
rigs under
Bareboat Charter
Agreements 3 3 3 3
---------------------------------------------------------------
-------------------------------------------------------------------------
2007 2006
Operating Highlights Q4 Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Land Drilling Market
Operating days
- drilling
Canada 2,135 2,718 1,165 3,817 3,163
United States and
Mexico(2) 3,399 3,305 2,944 2,464 2,105
Rate per drilling day
(CDN$)
Canada 23,631 21,746 23,527 26,063 26,328
United States and
Mexico(3) 21,404 23,265 24,927 25,506 24,621
Utilization rate
- drilling
Canada 37% 47% 20% 69% 61%
United States and
Mexico 83% 85% 88% 85% 85%
CAODC industry average 37% 39% 17% 59% 47%
Number of drilling rigs
Canada 64 64 64 63 60
United States and
Mexico 46 43 38 37 31
Utilization for
service rigs 57% 46% 23% 73% 64%
Number of service rigs 20 20 21 20 18
Number of coring and
surface casing rigs 20 20 17 17 17
Barge Drilling Market(4)
Operating days 352 352 - - -
Rate per drilling day
(CDN$) 47,536 51,904 - - -
Utilization rate 96% 100% - - -
Number of barge drilling
rigs 1 1 - - -
Number of barge drilling
rigs under
Bareboat Charter
Agreements 3 3 - - -
-------------------------------------------------------------------------
(2) Trinidad commenced its operations in Mexico effective
November 2008.
(3) In US dollars, 2008 dayrates remained relatively static and
fluctuations
are the result of changes in US currency rates.
(4) Trinidad commenced its operations in the barge drilling market with
its acquisition of Axxis, effective July 5, 2007.
(5) 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.
Fourth Quarter Analysis
Overall results for the Canadian drilling operations segment for the
fourth quarter of 2008 were above expectations. Revenue increased by $25.9
million or 41.1% from $63.0 million for the fourth quarter of 2007 to $88.9
for the same time period of 2008. The Canadian operations' revenue in the
fourth quarter represented 43.3% of total revenues in 2008, compared to 43.2%
of overall revenues for the same period of 2007. Gross margin increased by
$15.6 million or 67.4% year-over-year for the quarter, and gross margin as a
percentage of revenue increased from 36.6% to 43.4% over the same time frame.
The increases in both revenue and gross margin as a percentage of revenue were
due to strong growth in operating days, utilization and dayrates during the
quarter all in relation to increased customer demand. The strength behind
commodity prices during the middle part of 2008 helped to solidify customer
capital budgets for the remainder of the year. Although the economy started to
soften in the latter stages of 2008, several of Trinidad's customers already
had plans in place to finalize their capital programs for the remainder of
2008. A stronger concentration of capital was deployed by producers on deeper
unconventional resource plays throughout 2008 and particularly in the fourth
quarter as compared to 2007. This trend benefits Trinidad with its deeper,
more technically-advanced drilling fleet and was a catalyst behind the strong
financial and operating performance for the Company in the fourth quarter of
2008. Trinidad generated a utilization rate of 61% for the fourth quarter of
2008, with dayrates and operating days growing 11.5% and 42.1%, respectively,
as compared to the same time period of 2007.
The US and Mexico drilling segment generated $103.9 million in revenue
for the quarter, a $25.1 million or 31.8% increase as compared to 2007. The US
and Mexico revenue in the fourth quarter represented 50.6% of total revenues
in 2008, compared to 54.0% of overall revenues for the same time period of
2007. Although gross margin increased by 28.2%, gross margin as a percentage
of revenue decreased year-over-year for the fourth quarter from 45.1% in 2007
to 43.9% in 2008. The decrease in gross margin as a percentage of revenue was
driven by refurbishment work completed on a number of US rigs, in order to
make some of the segment's older rigs more attractive to prospective
customers. The expectation moving forward is that the Company will see a
future benefit from these refurbishments by way of improved marketability and
operating efficiency. In addition, expenses related to start-up costs,
employing additional field supervisors to manage the growing US fleet and
improved safety requirements in this segment led to increases in overall
operating expenses. The US and Mexico operations deployed an additional six
rigs in the fourth quarter of 2008, three new rigs to the US from Trinidad's
2008/2009 rig build program, which are operating in the Haynesville Shale in
Louisiana and three rigs transferred from Canada into the southern edge of the
Chicontepec field in central eastern Mexico. These moves were in response to
the strong demand for quality drilling equipment and growth in drilling
programs planned for these areas and also allows Trinidad to strategically
redeploy rigs from a seasonal and increasingly under-utilized capacity base.
With a total fleet of 56 land rigs and four barge rigs, the US and Mexico
operations continued to generate growth and provide overall stability to
Trinidad's revenues and cash flow throughout the fourth quarter, with land and
barge drilling utilization rates of 80% and 94%, respectively. Utilization
rates dropped in the fourth quarter of 2008 given the state of the US economy
and the associated impacts on oil and natural gas commodity prices. The
strength of the Company's long-term, take-or-pay contracts on a portion of the
US rig fleet along with a lack of seasonal activity fluctuations in the US
have been a key factor behind Trinidad's continued success for each
consecutive quarter of 2008.
The Construction segment generated revenue of $71.1 million for the
fourth quarter of 2008, representing a $57.9 million increase over 2007. The
Construction operations revenue net of inter-segment eliminations was $12.5
million or 6.1% of total revenue in the fourth quarter of 2008, compared to
revenue net of inter-segment eliminations of $4.0 million or 2.8% of total
revenue in the fourth quarter of 2007.
