Nov. 4, 2009 (Canada NewsWire Group) --
CALGARY, Nov. 4 /CNW/ -- Trinidad Drilling Ltd. ("Trinidad" or the "Company") reported operating and financial results for the third quarter and first nine months of 2009 today. Trinidad maintained strong gross margins in the quarter and year to date, with utilization levels staying above industry average and the Company remaining focused on cost reductions. In addition, Trinidad expanded its US operations with the delivery of the last two rigs constructed in 2009, began the redeployment of four rigs to its Mexican operations and moved an existing rig into a new area of operations in Chile.
"During the quarter, Trinidad was able to achieve strong gross margins by remaining focused on its existing business and improving efficiencies where possible. In addition, we broadened our operations base further, increasing the Company's exposure to the high-activity, high-margin shale gas drilling in North America and provided additional diversification by expanding our international operations," said Lyle Whitmarsh, Trinidad's President and Chief Executive Officer. "Trinidad has consistently shown an ability to identify, grasp and execute on value-adding opportunities. Our growth in the US, Mexico and Chile in the third quarter demonstrates that our strategy has not changed."
THIRD QUARTER AND YEAR-TO-DATE HIGHLIGHTS
(Quarter-over-quarter and year-to-date comparatives all relate to the
comparable period in 2008)
- Trinidad recorded revenue of $126.1 million for the third quarter of
2009 and $434.4 million year to date, down 34.2% and 21.4%
respectively, largely due to lower utilization rates and weaker
industry conditions.
- Drilling utilization in Canada averaged 36% in the third quarter and
33% year to date, exceeding industry utilization averages by 15 and
11 percentage points, respectively, but down from the levels recorded
in 2008 of 63% for the quarter and 55% for the first nine months of
the year. The US and International drilling operations reported
utilization of 61% in the quarter and 62% year to date compared to
85% and 86% in the respective comparative periods. Trinidad has
also outperformed the industry activity levels in the US. Since the
peak of the market in the fall of 2008, the industry active rig
count has dropped 54% while Trinidad is down 22% over the same
period. (Source - Tudor Pickering Holt/Rig Data)
- Trinidad's high level of rigs under contract, its modern, deeper-
capacity fleet and its focus on cost control allowed the Company to
record a strong gross margin(1) percentage of 42% in the third
quarter and 43% year to date compared to 38% and 41%, respectively,
in 2008.
- Net earnings before impairment of intangible asset(1) in the third
quarter were a loss of $12.1 million ($0.10 per share (diluted)) and
a loss of $3.2 million ($0.03 per share (diluted)) year to date,
compared to earnings of $20.4 million and $60.4 million, respectively
in 2008. In the third quarter, in addition to the items above, net
earnings were impacted by a foreign exchange loss of $11.4 million.
- Earnings before interest, taxes, depreciation and amortization
(EBITDA)(1) prior to stock based compensation and foreign exchange
loss or gains was $40.8 million in the third quarter compared to
$61.5 million in the same quarter of 2008.
- Cash flow from operations before changes in non-cash working
capital(1) was $27.0 million ($0.22 per share (diluted)) in the
third quarter of 2009 and $106.1 million ($1.02 per share (diluted))
year-to-date, down 47.7% and 28.9%, respectively, compared to the
same periods last year. The lower cash flow levels reflect the
reduced revenue generated, however this impact was partially
mitigated through improved cost control in the quarter and year to
date.
- During the third quarter of 2009, Trinidad delivered two new rigs
into its US operations, redeployed four existing, under-utilized rigs
to its Mexican operations and one rig into Chile, all under long-
term, take-or-pay contracts with 100% utilization over the contracted
periods.
(1) Please see the Non-GAAP Measures Definitions section of this MD&A
(as defined herein) for further details.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following management's discussion and analysis (MD&A) of the 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"). The MD&A discusses the operating and financial results for the three and nine months ended September 30, 2009, and is dated November 3, 2009 and takes into consideration information available up to that date. The MD&A is based on the unaudited consolidated financial statements of Trinidad for the three and nine month periods ended September 30, 2009, which were prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP). This MD&A should be read in conjunction with the annual consolidated financial statements and related notes for the year ended December 31, 2008. Additional information is available on Trinidad's website (www.trinidaddrilling.com) and all previous public filings, including the most recently filed Annual Report and Annual Information Form, are available through SEDAR (www.sedar.com).
As a result of Trinidad's conversion from an income trust to a corporation, effective March 10, 2008, references to the "Company", "shares", the "Incentive Options Plan", "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
($ thousands except share,
per share and percentage data)
Three months ended September 30,
2009 2008 % change
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Revenue 126,142 191,687 (34.2)
Gross margin(1) 52,983 73,093 (27.5)
Gross margin percentage(1) 42.0% 38.1% 10.2
EBITDA(1) 27,261 67,150 (59.4)
Per share (diluted)(2) 0.23 0.69 (66.7)
EBITDA before stock-based
compensation(1) 29,348 68,347 (57.1)
Per share (diluted)(2) 0.24 0.71 (66.2)
Cash flow from operations (3,302) 24,582 (113.4)
Per share (basic)(2) (0.03) 0.26 (111.5)
Per share (diluted)(2) (0.03) 0.25 (112.0)
Cash flow from operations before
changes in non-cash working
capital(1) 26,975 51,538 (47.7)
Per share (diluted)(2) 0.22 0.53 (58.5)
Net earnings (loss) (12,143) 20,373 (159.6)
Per share (basic)(2) (0.10) 0.21 (147.6)
Per share (diluted)(2) (0.10) 0.21 (147.6)
Net earnings (loss) before
impairment of intangible asset(1) (12,143) 20,373 (159.6)
Per share (basic)(2) (0.10) 0.21 (147.6)
Per share (diluted)(2) (0.10) 0.21 (147.6)
Net earnings (loss) before
stock-based compensation(1) (10,056) 21,570 (146.6)
Per share (diluted)(2) (0.08) 0.22 (136.4)
Capital expenditures
(including deposits) 38,809 81,022 (52.1)
Net debt(1) 479,585 510,102 (6.0)
Shares outstanding - basic
(weighted average)(2) 120,840,962 96,289,155 25.5
Shares outstanding - diluted
(weighted average)(2) 120,840,962 96,869,702 24.7
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Nine months ended September 30,
2009 2008 % change
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Revenue 434,411 552,517 (21.4)
Gross margin(1) 186,948 225,286 (17.0)
Gross margin percentage(1) 43.0% 40.8% 5.4
EBITDA(1) 125,618 195,703 (35.8)
Per share (diluted)(2) 1.21 2.19 (44.7)
EBITDA before stock-based
compensation(1) 130,066 197,202 (34.0)
Per share (diluted)(2) 1.26 2.20 (42.7)
Cash flow from operations 126,564 154,906 (18.3)
Per share (basic)(2) 1.22 1.74 (29.9)
Per share (diluted)(2) 1.22 1.73 (29.5)
Cash flow from operations before
changes in non-cash working
capital(1) 106,144 149,250 (28.9)
Per share (diluted)(2) 1.02 1.67 (38.9)
Net earnings (loss) (26,382) 60,426 (143.7)
Per share (basic)(2) (0.25) 0.68 (136.8)
Per share (diluted)(2) (0.25) 0.67 (137.3)
Net earnings (loss) before
impairment of intangible asset(1) (3,193) 60,426 (105.3)
Per share (basic)(2) (0.03) 0.68 (104.4)
Per share (diluted)(2) (0.03) 0.67 (104.5)
Net earnings (loss) before
stock-based compensation(1) (21,934) 61,925 (135.4)
Per share (diluted)(2) (0.21) 0.69 (130.4)
Capital expenditures
(including deposits) 130,207 138,855 (6.2)
Net debt(1) 479,585 510,102 (6.0)
Shares outstanding - basic
(weighted average)(2) 103,559,122 89,021,557 16.3
Shares outstanding - diluted
(weighted average)(2) 103,559,122 89,551,403 15.6
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(1) Readers are cautioned that gross margin, gross margin percentage,
EBITDA, EBITDA before stock-based compensation, cash flow from
operations before change in non-cash working capital, net earnings
(loss) before impairment of intangible asset, net earnings (loss)
before stock-based compensation 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
Three months ended Nine months ended
September 30, September 30,
2009 2008 % change 2009 2008 % change
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Land Drilling Market
Operating days -
drilling
Canada 1,739 3,411 (49.0) 4,976 9,162 (45.7)
United States and
International(1) 3,419 3,861 (11.4) 9,895 11,319 (12.6)
Rate per
drilling day
Canada (CDN$) 21,486 21,772 (1.3) 23,639 22,989 2.8
United States and
International
(CDN$)(1) 21,819 22,668 (3.7) 24,187 21,996 10.0
United States and
International
(US$)(1) 19,632 22,049 (11.0) 20,370 21,715 (6.2)
Utilization rate
- drilling
Canada 36% 63% (42.9) 33% 55% (40.0)
United States and
International(1) 61% 85% (28.2) 62% 86% (27.9)
CAODC industry
average 21% 48% (56.3) 22% 41% (46.3)
Number of drilling
rigs at quarter end
Canada 53 60 (11.7) 53 60 (11.7)
United States and
International(1) 66 50 32.0 66 50 32.0
Utilization rate
for service rigs 27% 49% (44.9) 30% 46% (34.8)
Number of service
rigs at quarter end 23 20 15.0 23 20 15.0
Number of coring and
surface casing rigs
at quarter end 20 20 - 20 20 -
Barge Drilling Market
Operating days 266 305 (12.8) 862 938 (8.1)
Rate per drilling
day (CDN$) 28,805 40,678 (29.2) 32,915 43,208 (23.8)
Rate per drilling
day (US$) 25,736 39,620 (35.0) 27,566 42,712 (35.5)
Utilization rate 72% 83% (13.3) 79% 93%(2) (15.1)
Number of barge
drilling rigs at
quarter end 1 1 - 1 1 -
Number of barge
drilling rigs under
Bareboat Charter
Agreements 3 3 - 3 3 -
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(1) Trinidad commenced its operations in Mexico effective November 2008
and expanded its international operations into Chile effective
August 2009.
(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.
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 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, gross margin percentage, EBITDA (as defined in Non-GAAP Measures Definitions section), EBITDA before stock-based compensation, cash flow from operations before change in non-cash working capital, net earnings (loss) before impairment of intangible asset, net earnings (loss) before stock-based compensation, net debt and working capital. 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 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 consolidated financial statements.
PROFILE
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. Trinidad has 119 land drilling rigs ranging in depths from 1,000 - 6,500 metres and operations in Canada, the United States, Mexico and Chile. In addition to its land drilling rigs, Trinidad has 23 service rigs, 20 pre-set and coring rigs and four barge rigs operating in the Gulf of Mexico. Trinidad is focused on providing modern, reliable, expertly designed equipment operated by well-trained and experienced personnel. Trinidad's drilling fleet is one of the most adaptable, technologically advanced and competitive in the industry.
OVERVIEW
Conditions in the drilling sector remained difficult in the third quarter of 2009; lower activity levels and a competitive pricing environment limited Trinidad's ability to generate high levels of revenue, cash flow and earnings. Despite these challenging conditions, Trinidad was able to maintain focus on its existing operations, improving efficiencies and recording strong gross margins in the quarter and year to date. In addition, the Company expanded its operations through the completion of its rig building program and by redeploying existing, under-utilized equipment to high-utilization, high-margin areas.
Lower utilization rates in both Canada and the US led to a reduced revenue level of $126.1 million in the third quarter of 2009 compared to $191.7 million in the previous comparative quarter, a reduction of 34.2%. For the first nine months of 2009, Trinidad recorded revenue of $434.4 million, a 21.4% decrease from the same period in 2008. As a percentage of revenue, gross margin was 42.0% in the third quarter and 43.0% for the first nine months of 2009, up from 38.1% and 40.8%, respectively, in 2008. The Company's high level of contracted rigs, the predominantly deeper mix of active rigs and a continued focus on cost control were the key drivers behind the strong margins achieved in the quarter and year to date.
EBITDA (as defined in Non-GAAP measures section) was $27.3 million and $125.6 million, respectively, for the three and nine month periods ended September 30, 2009, a decrease of $39.9 million and $70.1 million, respectively, as compared to 2008. EBITDA in the third quarter of 2009 was negatively impacted by the lower revenue levels generated in the period. EBITDA also decreased due to an $11.4 million foreign exchange loss recorded in the quarter, reflecting the impact of the weakening of the US dollar relative to the Canadian dollar. Since the beginning of 2009, the US/Canadian exchange rate has weakened substantially; at the end of September the US dollar was 12% weaker than at year-end 2008. Excluding stock-based compensation and foreign exchange losses or gains from Trinidad's EBITDA figures increases the total to $40.8 million in the quarter and $146.1 million year to date.
Trinidad reported a net loss of $12.1 million or $0.10 per share diluted for the quarter ended September 30, 2009, a decrease from net earnings of $20.4 million or $0.21 per share (diluted) as reported in the third quarter of 2008. For the first nine months of 2009, Trinidad reported a net loss of $26.4 million or $0.25 per share (diluted), down from net earnings of $60.4 million or $0.67 per share (diluted) in the same period in 2008. In addition to the items mentioned above, net earnings in the third quarter of 2009 were positively impacted by lower depreciation costs due to lower activity levels and lower income tax expenses, partially offset by higher stock-based compensation expenses. Net earnings per share (diluted) for the third quarter also reflect a 25.5% increase in the weighted-average diluted shares outstanding following Trinidad's equity offering in June 2009.
Industry activity levels in the third quarter improved in Canada and the US compared to the second quarter, however both regions remain at levels below historical averages. Despite low industry utilization for the quarter, Trinidad was able to continue to achieve industry-leading utilization. Along with Trinidad's long-term contracts, the Company's focus on deep, technical drilling has allowed it to outperform the industry on a consistent basis. Trinidad has approximately 50% of its fleet under long-term, take-or-pay contracts with an average term remaining of 2.5 years.
In the third quarter of 2009, Trinidad continued its strategy of diversifying its operations geographically through organic growth and the redeployment of existing assets to areas with attractive utilization levels and strong gross margins. The last two rigs built under Trinidad's 2009 rig build program were deployed to the US in the third quarter; these rigs were both moved into the Haynesville shale increasing the Company's exposure to the more economic and higher activity North American shale plays. Trinidad is well positioned as a key player in the shale plays with approximately 40% of its fleet operating in these areas. In addition, the Company expanded its Mexican operations and delivered three of the four rigs it had previously agreed to move into the country. The remaining rig has recently completed some minor enhancements and is now in Mexico. As well, in the third quarter, Trinidad moved an existing rig from its US operations into Chile, creating a new operating area for the Company. The deployment of these rigs during the quarter demonstrates Trinidad's ongoing strategy for pursuing new opportunities for its equipment and maximizing returns for the Company. All the rigs were deployed with long-term, take-or-pay contracts, guaranteeing 100% utilization and solid day rates during the term of their contracts. Trinidad will continue to be opportunistic in deploying rigs to North American and international markets with minimal new capital investment requirements and contracts that reward high-value, high-performance drilling rigs.
Trinidad's earnings are highly dependent upon crude oil and natural gas commodity prices which drive its customers' cash flow levels and, in turn, demand for its oilfield services. The Company's strong base of long-term, take-or-pay contracts and its extensive exposure to the unconventional shale plays throughout North America have helped mitigate the impact of the reduced activity levels; however, the non-contracted portion of the fleet remains vulnerable to these market conditions. Low activity levels and downward pricing pressure appear to have reached their extremes and a conservative level of optimism is creeping into the drilling sector. This changing outlook did not materially impact the sector in the third quarter; however, Trinidad believes that the industry may be in early stages of recovery. While West Texas Instrument (WTI) oil prices were down 42% during the third quarter of 2009 compared to the same period in 2008, oil prices moved up 14% from the prior quarter on expectations that global economies have potentially troughed. Meanwhile, Henry Hub natural gas decreased 22% from the second quarter of 2009 and 62% from the same period of 2008, as storage levels remain high and the market is oversupplied with natural gas. In response to falling natural gas prices, producers have reduced their development plans due to contracting economics, thus curbing the flow of new natural gas supplies into the market. Trinidad believes that once economic conditions improve and energy demand increases, the sharp reduction in natural gas drilling activity, together with declining existing production levels, will bring supply back in line with demand and help bolster natural gas prices.
Trinidad's high quality equipment with deep-drilling capacity and advanced technology provides the Company with a competitive advantage. The Company's proven performance and strong customer relationships position it well for continued geographic expansion and to perform strongly once more robust natural gas pricing returns.
QUARTERLY ANALYSIS 2009 2008
($ millions except per
share and operating data) Q3 Q2 Q1 Q4 Q3
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Financial Highlights
Revenue 126.1 116.7(1) 191.6 205.3 191.7
Gross margin 53.0 52.5 81.5 84.2 73.1
Net earnings (loss) (12.1) (8.6) (5.6)(2) 21.8(3) 20.4
Depreciation and
amortization 20.6 19.1 24.0 25.8 24.0
Loss (gain) on disposal
or sale of assets 0.3 5.6 4.1 (29.0) -
Stock-based compensation 2.1 1.7 0.7 0.9 1.2
Future income tax
(recovery) expense 1.7 (2.9) 7.8 19.8 10.3
Effective interest on
financing costs 1.6 1.6 1.1 1.1 1.1
Accretion on convertible
debentures 1.3 1.3 1.2 1.2 1.2
Unrealized foreign
exchange loss (gain) 11.4 9.9 (5.0) (22.0) (6.6)
Impairment of intangible
asset or goodwill - - 23.2 38.2 -
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Cash flow from operations
before change in non-cash
working capital 26.9 27.7 51.5 57.8 51.6
Net earnings (loss) per
share (diluted) (0.10) (0.09) (0.06) 0.23 0.21
Cash flow from operations
before change in non-cash
working capital per
share (diluted) 0.22 0.29 0.55 0.60 0.53
QUARTERLY ANALYSIS 2008 2007
($ millions except per
share and operating data) Q2 Q1 Q4 Q3
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Financial Highlights
Revenue 141.2 219.7 145.8 162.2
Gross margin 53.8 98.4 58.8 70.5
Net earnings (loss) 1.1 38.9 17.9 15.0
Depreciation and
amortization 20.5 24.0 19.0 20.2
Loss (gain) on disposal
or sale of assets (0.2) (0.1) 0.2 -
Stock-based compensation 0.1 0.2 0.4 0.5
Future income tax
(recovery) expense 2.5 9.4 (7.8) 3.3
Effective interest on
financing costs 1.1 0.4 1.1 1.1
Accretion on convertible
debentures 1.2 1.8 1.2 1.0
Unrealized foreign
exchange loss (gain) 0.9 (4.1) 0.2 5.3
Impairment of intangible
asset or goodwill - - - -
---------------------------------
Cash flow from operations
before change in non-cash
working capital 27.2 70.5 32.2 46.4
Net earnings (loss) per
share (diluted) 0.01 0.44 0.21 0.18
Cash flow from operations
before change in non-cash
working capital per
share (diluted) 0.31 0.75 0.38 0.55
(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 intangible asset charge of $23.2 million.
(3) Includes impairment of goodwill charge of $38.2 million.
QUARTERLY ANALYSIS 2009 2008
($ millions except per
share and operating data) Q3 Q2 Q1 Q4 Q3 Q2
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Operating Highlights
Land Drilling Market
Operating days - drilling
Canada 1,739 692 2,545 3,034 3,411 1,742
United States and
International(1) 3,419 3,233 3,243 3,757 3,861 3,783
Rate per drilling day
Canada (CDN$) 21,486 23,564 25,132 26,358 21,772 23,219
United States and
International
(CDN$)(1) 21,819 23,747 27,124 26,418 22,668 21,565
United States and
International
(US$)(1) 19,632 19,554 21,961 22,882 22,049 21,449
Utilization rate
- drilling
Canada 36% 14% 51% 61% 63% 31%
United States and
International(1) 61% 61% 64% 80% 85% 87%
CAODC industry average 21% 11% 36% 43% 48% 20%
Number of drilling rigs
at quarter end
Canada 53 53 57 57 60 62
United States and
International(1) 66 64 58 56 50 48
Utilization for service
rigs 27% 19% 41% 45% 49% 29%
Number of service rigs
at quarter end 23 23 23 23 20 20
Number of coring and
surface casing rigs
at quarter end 20 20 20 20 20 20
Barge Drilling Market(2)
Operating days 266 351 245 347 305 361
Rate per drilling
day (CDN$) 28,805 30,250 41,183 47,583 40,678 41,500
Rate per drilling
day (US$) 25,736 24,906 33,353 41,401 39,620 41,268
Utilization rate 72% 96% 68% 94% 83% 100%
Number of drilling rigs
at quarter end 1 1 1 1 1 1
Number of drilling rigs
under Bareboat Charter
Agreements at quarter end 3 3 3 3 3 3
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QUARTERLY ANALYSIS 2008 2007
($ millions except per
share and operating data) Q1 Q4 Q3
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Operating Highlights
Land Drilling Market
Operating days - drilling
Canada 4,009 2,135 2,718
United States and
International(1) 3,675 3,399 3,305
Rate per drilling day
Canada (CDN$) 24,517 23,631 21,746
United States and
International
(CDN$)(1) 21,735 21,404 23,265
United States and
International
(US$)(1) 21,636 21,650 21,978
Utilization rate
- drilling
Canada 72% 37% 47%
United States and
International(1) 87% 83% 85%
CAODC industry average 56% 37% 39%
Number of drilling rigs
at quarter end
Canada 62 64 64
United States and
International(1) 48 46 43
Utilization for service
rigs 62% 57% 46%
Number of service rigs
at quarter end 20 20 20
Number of coring and
surface casing rigs
at quarter end 20 20 20
Barge Drilling Market(2)
Operating days 272 352 352
Rate per drilling
day (CDN$) 48,128 47,536 51,904
Rate per drilling
day (US$) 47,910 47,991 49,050
Utilization rate 98%(3) 96% 100%
Number of drilling rigs
at quarter end 1 1 1
Number of drilling rigs
under Bareboat Charter
Agreements at quarter end 3 3 3
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(1) Trinidad commenced its operations in Mexico effective November 2008
and expanded its international operations into Chile effective
August 2009.
(2) Trinidad commenced its operations in the barge drilling market with
its acquisition of Axxis effective July 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.
An assessment or comparison of Trinidad's quarterly results, at any given time, requires consideration of crude oil and natural gas commodity prices and seasonality. Commodity prices ultimately drive the level of exploration and development activities carried out by the Company's customers and the associated demand for the oilfield services provided by Trinidad. Generally speaking, North American markets have greater exposure to natural gas prices while international markets are more heavily weighted to crude oil projects. From a seasonality perspective, Trinidad operates a substantial number of rigs in western Canada and therefore operations are impacted by weather and seasonal factors. The winter season, which occurs during the first quarter, is generally a busy period in western Canada as oil and gas companies take advantage of frozen conditions to move drilling rigs into regions which might otherwise be inaccessible to heavy equipment due to swampy conditions. The second quarter normally encompasses a slow period referred to as spring break-up. During this period, melting conditions result in temporary municipal road bans that effectively prohibit the movement of drilling rigs. The third and fourth quarters in western Canada are usually representative of average activity levels.
Trinidad's continued expansion into the US and international markets have reduced the Company's overall exposure to the seasonal factors that are present in its Canadian operations. Operators in the US, Mexico and Chile have more flexibility to work throughout the year. This increased number of available operating days has allowed Trinidad to better manage its business with more sustainable cash flow throughout the annual cycle. This was evident throughout 2007 and 2008 as Trinidad expanded its operations in the US land and barge rig markets and in the fourth quarter of 2008 into Mexico.
Throughout 2007, Canadian drilling operations faced declining market conditions as a result of lower commodity prices and high natural gas storage levels. Canadian dayrates decreased due to these conditions and the industry experienced lower utilization levels from the second quarter of 2007 onwards, in comparison to the same period in the prior year. The fourth quarter of 2007 was particularly impacted in western Canada as the Alberta Government announced a new royalty regime which resulted in many of Trinidad's key customers reducing their spending levels.
Overall, in 2008 Trinidad performed strongly in both the western Canadian and US drilling markets, as dayrates and utilization levels generally improved. The Company's revenue also continued to grow as a result of acquisitions, redeployment of existing under-utilized assets into regions with higher activity levels, the continued deployment of rigs under previous rig construction programs and an improvement in market conditions. Upward momentum in Trinidad's operations was evident throughout 2008 as reflected in the growth in the Company's revenue, gross margin and EBITDA. However, a goodwill impairment charge, higher interest, depreciation expense, increased income taxes and reorganization costs from conversion back to a corporation downwardly impacted net earnings during the year.
Trinidad's financial and operating results for the first nine months of 2009 have been impacted by the global economic recession. These downward financial and operational trends in 2009 are directly tied to the global recession, tight capital markets, and sustained lows for energy commodity prices, particularly natural gas. Drilling activity levels remain at historically low levels, particularly in Alberta, which is seeing the largest portion of the decrease. Overall demand is down, commodity prices are low, which in addition to other factors, has caused exploration and production companies to significantly reduce their spending. Trinidad significantly reduced its capital expenditure plans, lowered its dividend and undertook a number of cost reduction measures in 2009 to mitigate the impact of the challenging industry conditions.
RESULTS FROM OPERATIONS
Canadian Drilling Operations
($ thousands except Three months ended Nine months ended
percentages and September 30, September 30,
operating data) 2009 2008 % Change 2009 2008 % Change
-------------------------------------------------------------------------
Revenue 40,979 82,680 (50.4) 142,973 259,125 (44.8)
Operating expense 25,430 52,100 (51.2) 86,725 154,751 (44.0)
-----------------------------------------------------
Gross margin 15,549 30,580 (49.2) 56,248 104,374 (46.1)
-----------------------------------------------------
Gross margin
percentage 37.9% 37.0% 39.3% 40.3%
Operating days -
drilling 1,739 3,411 (49.0) 4,976 9,162 (45.7)
Rate per drilling
day (CDN$) 21,486 21,772 (1.3) 23,639 22,989 2.8
Utilization rate -
drilling 36% 63% (42.9) 33% 55% (40.0)
CAODC industry
average 21% 48% (56.3) 22% 41% (46.3)
Number of drilling
rigs at quarter end 53 60 (11.7) 53 60 (11.7)
Utilization rate
for service rigs 27% 49% (44.9) 30% 46% (34.8)
Number of service
rigs at quarter end 23 20 15.0 23 20 15.0
Number of coring and
surface casing rigs
at quarter end 20 20 - 20 20 -
-------------------------------------------------------------------------
Weak conditions in the oilfield services industry in Canada continued in the third quarter of 2009. Following the seasonal spring break-up period in the second quarter, industry activity failed to return to historical levels and industry utilization for the third quarter of 2009 was 21% compared to 48% in 2008. Industry utilization over the first nine months of 2009 averaged 22% compared to 41% for the same period of 2008. While activity levels have been low to date in 2009 compared to the same time frame in 2008, Trinidad's record of substantially exceeding industry utilization continued in 2009. The Company's deliberate focus on deep drilling and long-term contracts resulted in utilization levels of 36% for the third quarter and 33% year to date. Trinidad's utilization rates were 15 percentage points higher than the industry in the third quarter and 11 percentage points higher for the nine months ended September 30, 2009.
Relatively low natural gas prices and a hesitancy to commit to capital programs led oil and gas companies to delay drilling programs during the third quarter of 2009. Operators continued to be very selective in the development plans that did move forward in the quarter and activity levels were relatively stronger in the unconventional shale plays, such as the Montney, Horn River and Bakken compared to conventional drilling areas in western Canada. The bulk of Trinidad's deeper capacity rigs are operating in these unconventional areas, largely under long-term, take-or-pay contracts.
The number of wells rig released in the quarter declined by 63%, from 5,295 wells to 1,965 wells year over year. On a year-to-date basis, 5,719 wells rig released over the first nine months of 2009, compared to 12,056 wells in 2008, representing a 53% decline. This large decline reflects the strong impact the recessionary economic environment has had on drilling activity in Canada. The industry has not been impacted evenly across all drilling depths; the deeper portion of both Trinidad's fleet and the industry has been more highly utilized than the shallower rigs. For the first nine months of 2009, industry utilization for shallow rigs, with a drilling capacity of less than 2,400 metres, was 17%, while deeper rigs averaged 33%. Trinidad's strategic focus on deep-capacity and technically-advanced rigs has positioned it well for this market. The Company expects the trend towards deeper, more challenging drilling to continue over the long term as the more robust economics of the deeper wells drives higher activity. Trinidad's rigs are purpose built for the deeper style of drilling and this shift in focus by exploration and production companies continues to differentiate the Company from its competitors.
Trinidad's Canadian drilling segment experienced strong declines in operating days during the third quarter of 2009, with 1,739 operating days, representing a 49.0% decline year over year for the quarter. Year to date in 2009, operating days declined by 45.7%, from 9,162 days to 4,976 days year over year due to lower utilization levels, as well as strategic rig redeployments. In the past 12 months, Trinidad has redeployed seven under-utilized rigs from its Canadian fleet into its Mexican operations. Although operating days declined, the Company has been able to maintain relatively stable dayrates year over year in a highly competitive environment, reflecting the strength of its long-term, take-or-pay contracts and the high quality of its equipment. The Company's deeper-capacity drilling rig mix operating in 2009, compared to 2008 also helped to maintain stable day rates.
Revenue decreased by $41.7 million or 50.4% from $82.7 million in the third quarter of 2008 to $41.0 million for the three months ended September 30, 2009. On a year-to-date basis, revenue was $143.0 million, down $116.2 million or 44.8% compared to the same time period of 2008. The lower revenue levels are largely a factor of lower rig utilization, lower operating days, rig redeployments and reduced activity levels in the service rig and coring operating divisions. Operating costs as a percentage of revenue decreased slightly in the third quarter of 2009 to 62.1%, compared to 63.0% in the prior year's comparative quarter, increasing Trinidad's Canadian drilling segment's gross margin percentage to 37.9% for the quarter compared to 37.0% in 2008. Trinidad's ongoing focus on cost control and stable dayrates allowed the Company to maintain and slightly strengthen gross margins in the quarter. Gross margin for the first nine months of 2009, for the Canadian Drilling segment, was $56.2 million or 39.3% of revenue compared to $104.4 million or 40.3% of revenue in the first three quarters of 2008.
Utilization for the Company's service rigs was 27% for the quarter and 30% for the nine months ended September 30, 2009. These represent declines of 44.9% and 34.8%, respectively, compared to the same periods of 2008. Significantly lower activity levels in the Western Canadian Sedimentary Basin have reduced the need for well completions, this combined with limited spending on producing wells has negatively impacted Trinidad's well servicing division over the past quarter and nine months. Hourly rates for service rigs have been subject to competitive pressure as a large number of available rigs compete for limited work. Trinidad's coring and surface casing rigs continue to be negatively impacted by cutbacks in oil sands projects compared to the first nine months of 2008. The drastic drop in oil prices in the past 12 to 18 months has resulted in the reduction of capital spending by oil sands producers, which has had a significant impact on this division's financial and operating results to date in 2009. While crude oil prices have recovered somewhat in recent months, operators appear to be slow at committing to upcoming winter coring projects and pricing pressure is strong on those bids that are beginning to appear.
United States and International Drilling Operations
($ thousands except Three months ended Nine months ended
percentages and September 30, September 30,
operating data) 2009 2008 % Change 2009 2008 % Change
-------------------------------------------------------------------------
Revenue 83,494 92,661 (9.9) 265,717 262,944 1.1
Operating expense 45,623 53,350 (14.5) 141,887 149,231 (4.9)
-----------------------------------------------------
Gross margin 37,871 39,311 (3.7) 123,830 113,713 8.9
-----------------------------------------------------
Gross margin
percentage 45.4% 42.4% 46.6% 43.2%
Land Drilling Rigs
Operating days -
drilling 3,419 3,861 (11.4) 9,895 11,319 (12.6)
Rate per drilling
day (CDN$) 21,819 22,668 (3.7) 24,187 21,996 10.0
Rate per drilling
day (US$) 19,632 22,049 (11.0) 20,370 21,715 (6.2)
Utilization rate -
drilling 61% 85% (28.2) 62% 86% (27.9)
Number of drilling
rigs at quarter end 66 50 32.0 66 50 32.0
Barge Drilling Rigs
Operating days -
drilling 266 305 (12.8) 862 938 (8.1)
Rate per drilling
day (CDN$) 28,805 40,678 (29.2) 32,915 43,208 (23.8)
Rate per drilling
day (US$) 25,736 39,620 (35.0) 27,566 42,712 (35.5)
Utilization rate -
drilling 72% 83% (13.1) 79% 93%(1) (15.1)
Number of barge
drilling rigs at
quarter end 1 1 - 1 1 -
Number of barge
drilling rigs under
Bareboat Charter
Agreements at
quarter end 3 3 - 3 3 -
(1) 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.
Trinidad's US and International drilling operations continued to be impacted by low industry activity and weak economic conditions in the third quarter of 2009. Trinidad's US non-contracted fleet bore the brunt of these conditions with the remainder of the rigs in this division all working under long-term contracts. Baker Hughes drilling utilization statistics reported that industry activity levels in the US have declined steeply on a year-over-year comparison. The average active land rig count for the third quarter of 2009 was 929 rigs, which was down 51% from the same time period of 2008 with 1,886 active rigs. Over the first nine months of 2009 there were on average 1,029 active rigs, representing a 42% drop from the levels seen in the nine months ended September 30, 2008. Although the active rig count has come down significantly year over year, it has rebounded from the lows experienced in the second quarter of 2009, largely reflecting stronger crude oil prices. On average, the third quarter US active rig count was up 6% or 50 rigs from the average level recorded in the previous quarter. Trinidad's utilization for its US and International land drilling segment in the third quarter of 2009 was 61%, representing a 28.2% decline from levels achieved in 2008. On a year-to-date basis, the division's land drilling rig utilization was 62%, down 27.9% from the levels recorded over the first nine months of 2008. Total land drilling operating days declined 11.4% in the third quarter and 12.6% year-to-date compared to 2008. Trinidad's decline in utilization and operating days is largely a reflection of the change in market fundamentals over the latter part of 2008 and first nine months of 2009 on the Company's non-contracted rigs.
Trinidad's US and International fleet has approximately 65% of its rigs under long-term, take-or-pay contract, including six rigs with delayed construction dates. While the contracts have mitigated the effect of the industry downturn for both utilization levels and dayrates, the non-contracted portion of the fleet has been impacted by the challenging industry conditions present to date in 2009. The increasing number of active rigs in the US is encouraging for the industry, however pricing pressure continued throughout the third quarter of the year. As Trinidad's non-contracted rigs go back to work, they are exposed to the current market conditions and competitive pricing environment. The lower dayrates available for non-contracted rigs have had a negative impact on dayrates. In the second quarter of 2009, Trinidad renegotiated 17 long-term, take-or-pay contracts with one of its key US customers. The contracts were due to expire over the next few years and the Company was able to extend the average term on these contracts by one year. In exchange for adding visibility to its revenue stream during a challenging time, Trinidad reduced dayrates to better reflect the existing operating environment. These reduced dayrates also contributed to the lower dayrates recorded in the quarter. US dollar denominated dayrates averaged US$19,632 in the third quarter of 2009, down 11.0% from the same quarter last year. Year-to-date dayrates were US$20,370 down 6.2% from last year. On a Canadian dollar basis, dayrates were stable quarter over quarter but up 10.0% year to date, reflecting a weaker Canadian dollar in the first half of 2009.
The US and International drilling segment generated revenue of $83.5 million in the third quarter of 2009 compared with revenue of $92.7 million recorded in the comparable quarter of 2008, a decrease of 9.9%. The lower revenue in the quarter was largely driven by lower utilization, lower operating days and lower dayrates. For the first nine months of 2009, revenue from the US and International segment totalled $265.7 million, up 1.1% from the same period in 2008. The impact of lower operating days and lower utilization levels was offset during this time frame by a relatively weaker Canadian dollar, particularly in the first half of 2009, compared to 2008.
Operating expenses for the quarter decreased by 14.5% from $53.4 million in 2008 to $45.6 million in 2009, causing the gross margin percentage to increase from 42.4% to 45.4%. For the nine month period ended September 30, 2009, gross margin increased 8.9% or $10.1 million from $113.7 million to $123.8 million; gross margin percentage in the same time frame increased from 43.2% to 46.6%. Over the past twelve months, Trinidad has expanded its US and International Drilling segment by 16 rigs, through the delivery of nine rigs built in its rig construction program and the redeployment of seven existing under-utilized rigs from its Canadian operations into Mexico. These rigs are all backed by long-term, take-or-pay contracts and generate strong gross margins. The majority of this segment's revenue is now being driven by deeper rigs under long-term contracts that tend to work at higher margins. The Company's gross margins have also been positively impacted by reduced operating expenses. Trinidad has carefully scrutinized its operating expenses; eliminating unnecessary expenses, rolling back wages and implementing cost cutting initiatives. These changes have significantly impacted gross margins in the quarter and year to date and reflect the Company's flexible cost structure.
Trinidad completed its 2009 rig build program in the third quarter with the delivery of the remaining two rigs into its US operations. During 2009, Trinidad has delivered six new build rigs into its US operations; five of these rigs were constructed at the Company's rig manufacturing facility, Victory. All six rigs are operating in the unconventional shale plays, under long-term, take-or-pay contracts.
Trinidad continued its value-adding strategy of redeploying existing, under-utilized equipment into higher-margin, higher-utilization regions in the third quarter. The Company moved a rig from its US operations to create a new operating area in Chile. The rig is now on location in northern Chile, where it is drilling geothermal wells for an Italian/Chilean joint venture company. The rig is contracted for a period of two years with a possible extension. Earlier in 2009, the previous term contract on this rig was paid out; Trinidad is currently receiving the anticipated gross margin on the rig while also generating revenue from operating the rig in Chile.
Trinidad expanded its Mexican operations in the third quarter of 2009, delivering three of the four rigs the Company had previously agreed to move into the country. The remaining rig has recently completed the minor enhancements needed to operate in the Mexican climate and in the specific drilling environment and is now in Mexico. The four existing, under-utilized rigs were redeployed from Trinidad's Canadian operations with take-or-pay contracts for an initial term of 18 months, with a further 18-month extension option, at a utilization rate of 100%. Trinidad's operations in Mexico have been performing well and the Company's ability to grow its fleet in this area reflects the quality of its equipment and experience of its crews. All seven of Trinidad's rigs in Mexico are operating in the Chicontepec region in central eastern Mexico. Activity in this area has increased sharply over the past 12 months with a large number of rigs moving into the area. Petroleos Mexicanos (Pemex), the Mexican national oil company, has recently been undergoing a review of their operations in the region, looking to incorporate some of the knowledge gained from its previous drilling programs into its future development plans. Trinidad believes that activity will continue in the area, although at a more measured pace. The Company is also of the opinion that Pemex is recognizing the benefits of high-quality equipment and the gains in performance and efficiency it can provide, a trend that positions Trinidad's high-performing fleet well for future opportunities in the area and elsewhere in Mexico.
The Company's barge drilling operations have been negatively impacted by the slow down in activity and low natural gas prices. US dollar denominated dayrates were US$25,736 in the third quarter, down 35.0% and US$27,566 for the first nine months of the year, down 35.5%, compared to the same periods in 2008. During the quarter, Trinidad experienced a number of logistical issues, including permit delays, which impacted its utilization level, bringing the rate to 72% compared to 83% in the third quarter of 2008. These issues were not work related and the Company anticipates an increased utilization rate moving forward. Year to date in 2009, utilization of the barge drilling rigs has averaged 79% compared to 93% in 2008. Trinidad continued during the quarter to proactively manage costs to partially offset dayrate reductions. At the end of September 2009, the barge drilling rig industry utilization in the Gulf of Mexico was approximately 25% (source: Delta Towing, L.L.C.). Given Trinidad's strong track record for superior performance and quality customer relationships, the Company was able to outperform the industry utilization and is well positioned to attract new business when activity levels improve. Moving forward, Trinidad expects the barge rig segment to continue to be an important component of the Company's business.
The Company now has a total of 66 rigs in its US and International drilling operations, 58 rigs operate in the US, seven in Mexico and one in Chile. In addition, this division operates four shallow barge drilling rigs in the Gulf of Mexico, including three rigs operating under bareboat arrangements.
Construction Operations
Three months ended Nine months ended
($ thousands except September 30, September 30,
percentage data) 2009 2008 % Change 2009 2008 % Change
-------------------------------------------------------------------------
Revenue(1) 29,502 44,791 (34.1) 99,862 85,923 16.2
Operating
expense(1) 29,939 41,589 (28.0) 92,992 78,724 18.1
-----------------------------------------------------
Gross margin (437) 3,202 (113.6) 6,870 7,199 (4.6)
-----------------------------------------------------
Gross margin
percentage (1.5)% 7.1% 6.9% 8.4%
(1) Includes inter-segment revenue and operating expenses of
$27.8 million and $28.4 million for the three months ended
September 30, 2009 and 2008, respectively and $74.1 million and
$55.5 million for the nine months ended September 30, 2009 and 2008,
respectively.
Revenue from construction operations for the third quarter of 2009 decreased by 34.1% or $15.3 million from $44.8 million in 2008 to $29.5 million in 2009. Gross margin as a percentage of revenue decreased from 7.1% for the third quarter of 2008 to (1.5)% for the same time period of 2009. The lower revenue level for the division in the third quarter is due to a significant decline in third party work compared to the same period of 2008 as a result of a general slowdown in available work and depressed industry conditions. A total of $27.8 million of inter-segment construction work was completed in the quarter as part of the current rig construction program compared to $28.4 million of inter-segment rig construction work in the same quarter of 2008. As this division operates as a cost centre to the other Trinidad divisions, the significant reduction in third party work led to a small loss in gross margin compared to a $3.2 million gross margin in the third quarter of 2008. The loss in gross margin in the third quarter is a result of the fixed portion of operating costs which were not supported by sufficient third party revenue in the quarter compared to the third quarter of 2008. The division completed the final rig of the three rig construction project for a major third party customer in the quarter.
Trinidad's Construction segment manufactured six of the nine rigs under its 2008/2009 rig build program. The segment completed the construction and delivery of the final two rigs in this project in the third quarter of 2009.
Revenue for the nine months ended September 30, 2009 improved by 16.2% or $14.0 million from $85.9 million to $99.9 million, while gross margin declined by 4.6% compared to the same period last year. The increase in revenue was a result of the increase in inter-segment rig construction compared to last year. Reduced gross margins are predominantly related to the increase in inter-segment construction work performed at cost and the overall decline in third party rig construction work as a result of industry activity levels.
GENERAL AND ADMINISTRATIVE EXPENSES
Three months ended Nine months ended
($ thousands except September 30, September 30,
percentage data) 2009 2008 % Change 2009 2008 % Change
-------------------------------------------------------------------------
General and
administrative
expenses 12,205 11,557 5.6 40,868 35,729 14.4
% of revenue 9.7% 6.0% 9.4% 6.5%
General and administrative (G&A) expenses increased by 5.6% to $12.2 million in the third quarter of 2009 as a result of Trinidad's international expansion into Mexico and Chile over the past twelve months ended September 30, 2009. The Company also incurred $0.8 million in non-recurring costs related to its international expansion and tax planning in the quarter. Partly offsetting these are the numerous cost reduction measures implemented by the Company during 2009, which include administrative and office staff reductions, wage rollbacks and further reductions in support costs.
The increase of 14.4% on a year-to-date basis is attributable to both the international expansion as well as an increase in the allowance for doubtful accounts of $2.5 million which was incurred during the first quarter.
