Trinidad Drilling Ltd. reports third quarter and year-to-date 2009 results; strong gross margins maintained and expanded US and International operatio
Wed Nov 4, 8:30 AM
TSX SYMBOLS: TDG and TDG.DB
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 $2.5 million which was incurred during the first quarter. This increase is partially offset with the cost reduction measures mentioned above.
INTEREST
Three months ended Nine months ended
September 30, September 30,
($ thousands) 2009 2008 % Change 2009 2008 % Change
-------------------------------------------------------------------------
Interest on
long-term debt 4,443 4,390 1.2 13,994 16,940 (17.4)
Effective interest
on deferred
financing costs 921 420 119.3 2,293 1,260 82.0
-----------------------------------------------------
5,364 4,810 11.5 16,287 18,200 (10.5)
Interest on
convertible
debentures 6,861 6,937 (1.1) 20,584 20,595 (0.1)
Effective interest
on deferred
financing costs 667 661 0.9 1,996 1,979 0.9
Accretion on
convertible
debentures 1,340 1,221 9.7 3,924 3,584 9.5
-----------------------------------------------------
8,868 8,819 0.6 26,504 26,158 1.3
Interest on long-term debt increased by $0.1 million in the quarter, as a result of prepayment penalties paid on the early repayment of term debt in the quarter. This was partially offset by reduced interest as a result of lower average long-term debt levels. Interest on long-term debt decreased by $2.9 million for the year-to-date period, as compared to the same period in the prior year. These decreases were a result of lower average long-term debt levels in addition to declines in both the BA and LIBOR rates compared to the same periods of 2008.
Interest and accretion expenses on the convertible debentures are consistent during both the quarter and year-to-date period as compared to the consistent periods in the prior year. Please refer to the section of the MD&A titled "Liquidity and Capital Resources - Convertible Debentures" for details of Trinidad's ability to acquire up to ten percent of the convertible debentures' public float by way of normal course issuer bid (NCIB).
STOCK-BASED COMPENSATION
Three months ended Nine months ended
September 30, September 30,
($ thousands) 2009 2008 % Change 2009 2008 % Change
-------------------------------------------------------------------------
Stock-based
compensation 2,087 1,197 74.4 4,448 1,499 196.7
Stock-based compensation expense increased by $0.9 million quarter over quarter to $2.1 million and by $2.9 million to $4.4 million, on a year-to-date basis, as compared to the same periods in the prior year. The majority of the quarter and year-to-date increase is directly related to Trinidad establishing and issuing units under two new incentive programs, the Performance Share Unit Plan (PSU Plan) and the Deferred Share Unit Plan (DSU Plan) during 2008. For the three months ended September 30, 2009, the PSUs generated an expense of $1.7 million and the DSUs generated an expense of $0.2 million. The PSUs generated an expense of $3.3 million, while the DSU expense was $0.8 million for the nine months ended September 30, 2009. These costs represent revised estimates which are subject to the fair value method using the Company's higher closing share price at September 30, 2009 in comparison to prior periods. There were no costs associated with either of these option plans in the comparative period of the prior year.
FOREIGN EXCHANGE LOSS(GAIN)
Three months ended Nine months ended
September 30, September 30,
($ thousands) 2009 2008 % Change 2009 2008 % Change
-------------------------------------------------------------------------
Foreign exchange
loss (gain) 11,430 (6,835) (267.2) 16,014 (10,358) (254.6)
For the three months ended September 30, 2009, Trinidad recognized a loss of $11.4 million in comparison with a gain of $6.8 million for the same period in 2008, a difference of $18.3 million. Year to date, the Company recorded a $16.0 million loss in 2009 versus a gain of $10.4 million in 2008. Foreign exchange gains during 2008 relate to strengthening of the US dollar relative to the Canadian dollar throughout the year. For 2009, the Canadian dollar has strengthened by an estimated 12% since December 31, 2008, resulting in foreign exchange losses being reported. These foreign exchange changes are a result of losses and gains in the Canadian entity on US dollar denominated intercompany balances and are recognized in the statement of operations. These intercompany balances are the result of rig funding from Canada, for the US, Mexico and Chile operations and the ongoing US rig construction program. Although Trinidad's US and International operations have continued to contribute significantly to the overall operations of the Company, upon consolidation these operations are considered to be self-sustaining and therefore, losses and gains 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. The $11.4 million loss, in the third quarter of 2009, corresponds to an equal and offsetting unrealized gain from the US and Mexico operations included in OCI.
DEPRECIATION AND AMORTIZATION
Three months ended Nine months ended
September 30, September 30,
($ thousands) 2009 2008 % Change 2009 2008 % Change
-------------------------------------------------------------------------
Depreciation 20,453 23,970 (14.7) 63,278 68,471 (7.6)
Amortization of
intangible assets 148 - - 437 - -
Loss (gain) on
sale of assets 320 (3)(10,766.7) 10,069 (320)(3,246.6)
Depreciation decreased 14.7% to $20.5 million in the third quarter of 2009 from $24.0 million in the same period of 2008; and for the nine months ended September 30, 2009, there was a decrease of 7.6% to $63.3 million from $68.4 million. In comparison to the same periods of 2008, the decline in drilling rig utilization and resultant lower operating days has reduced the depreciation expense in both the Canadian and US drilling divisions compared to the same period of 2008. Another contributing factor of the decline from 2008 relates to a higher US translation rate to Canadian dollars in 2008 versus 2009. As a percentage of revenue, depreciation increased from 12.5% to 16.2% for the quarter and increased from 12.4% to 14.6% over the nine month period. The increasing proportion of drilling rigs with deeper depth capacities has resulted in higher capital asset costs and therefore higher depreciation expense as a percentage of revenue.
The acquisition of Victory included intangible assets of $4.3 million, which are comprised of patent technology, trade name, non-compete agreements and engineering and design costs. Amortization expense related to these intangibles was $0.1 million for the quarter and $0.4 million for the year-to-date period.
During the first nine months of 2009, Trinidad recognized a loss on disposal of assets of $10.1 million. This loss on disposal was related to the replacement of 33 diesel engines on 11 US based rigs, during the first two quarters of the fiscal year. Trinidad has filed a warranty claim related to these engines. At September 30, 2009, Trinidad is unable to conclude on the likelihood or quantify the proceeds, if any, related to this warranty claim.
IMPAIRMENT OF INTANGIBLE ASSET
Three months ended Nine months ended
September 30, September 30,
($ thousands) 2009 2008 % Change 2009 2008 % Change
-------------------------------------------------------------------------
Impairment of
intangible assets - - - 23,189 - -
During the first quarter of 2009, the Company recorded an intangible impairment charge of $23.2 million related to the Bareboat Charters. The intangible asset was recognized in connection with the acquisition of Axxis on July 5, 2007. The original value of $39.6 million was related to the US$12.5 million annual payments to be paid to the former owners of Axxis in relation to the Bareboat Charters. The intangible asset was being amortized over the period of payment term, ending July 2010. Management concluded the remaining value of $23.2 million was fully impaired based on the outlook for the barge drilling market and its adverse effect on the Bareboat Charters up until July 2010. The entire amount has been recognized as an impairment of intangible assets in the statement of operations for the nine months ended September 30, 2009.
REORGANIZATION COSTS
Three months ended Nine months ended
September 30, September 30,
($ thousands) 2009 2008 % Change 2009 2008 % Change
-------------------------------------------------------------------------
Reorganization costs - 24 - - 2,713 -
Trinidad incurred one-time costs of $0.02 million for the third quarter of 2008 and $2.7 million for the nine months ended 2008 relating to its conversion from an income trust to a corporation. Reorganization costs included charges for shareholder communication, legal counsel, development and execution of fairness opinions and charges in relation to revising and updating necessary legal documents for Trinidad's new corporate structure.
INCOME TAXES
Three months ended Nine months ended
September 30, September 30,
($ thousands) 2009 2008 % Change 2009 2008 % Change
-------------------------------------------------------------------------
Current tax expense
(recovery) 2,509 (1,122) (323.6) 5,622 575 877.7
Future tax expense 1,742 10,303 (83.1) 6,614 22,193 (70.2)
Current tax expense has increased by $3.6 million to $2.5 million in the current quarter and by $5.0 million to $5.6 million in the year-to-date period as compared to the same periods in the prior year. This increase is related to the increase in net tax profits in Trinidad's construction operations. The increased profitability in this segment, coupled with a declining tax shield on earnings, has resulted in increased current taxes. Furthermore, the recovery experienced in the three months ended September 30, 2008 was the result of a reversal of previously recognized taxes due to clearer interpretations of the Texas Margins Tax rules.
The decrease in the future tax expense of $8.6 million or 83.1% in the current quarter, as well as the $15.6 million or 70.2% decrease over the nine month period ended September 30, 2009 as compared to the same periods in the prior year, is the result of several factors. The reduction of net income and the graduated reduction of the federal corporate tax rate are the main drivers. In addition, the future tax expense was further decreased by the reversal of future tax assets sooner than anticipated within the construction operations due to their increasing profitability. Offsetting these factors continues to be a greater proportion of profitability coming from our US and international operations where tax rates are higher than typical corporate averages.
NET EARNINGS (LOSS) AND CASH FLOW
Three months ended Nine months ended
($ thousands except September 30, September 30,
per share data) 2009 2008 % Change 2009 2008 % Change
-------------------------------------------------------------------------
Net earnings
(loss) (12,143) 20,373 (159.6) (26,382) 60,426 (143.7)
Per share
(diluted) (0.10) 0.21 (147.6) (0.25) 0.67 (137.3)
Net earnings (loss)
before impairment
of intangible
assets(1) (12,143) 20,373 (159.6) (3,193) 60,426 (105.3)
Per share
(diluted) (0.10) 0.21 (147.6) (0.03) 0.67 (104.5)
Cash flow from
operations (3,302) 24,582 (113.4) 126,564 154,906 (18.3)
Per share
(diluted) (0.03) 0.25 (112.0) 1.22 1.73 (29.5)
Cash flow from
operations before
change in non-cash
working capital(1) 26,975 51,538 (47.7) 106,144 149,250 (28.9)
Per share
(diluted) 0.22 0.53 (58.5) 1.02 1.67 (38.9)
(1) Readers are cautioned that net earnings (loss) before impairment of
intangible assets and cash flow from operations before change in
non-cash working capital and the related per share information do not
have standardized meanings prescribed by GAAP - see "Non-GAAP
Measures".
For the three months ended September 30, 2009, Trinidad's consolidated net loss was $12.1 million, representing a decline of $32.5 million compared to net earnings of $20.4 million in the same period of 2008. Net earnings declined quarter over quarter as a result of reduced revenues and increased general and administrative costs, including stock-based compensation, as explained above, and foreign exchange losses of $11.4 million compared to a gain of $6.8 million in the same quarter in 2008. The decline is partially offset by lower deprecation and income tax expenses.
Year to date, the Company's consolidated net loss of $26.4 million decreased by 143.7% over the 2008 year-to-date net earnings of $60.4 million. These declines were primarily the result of reduced utilization levels on a company wide basis, reducing overall revenues from the prior-year period. Slightly offsetting the decrease in revenue was the decrease in operating costs of $79.8 million, or 24.4%, the result of cost-cutting initiatives implemented during the first nine months. Additional items which impacted the net loss were the loss on foreign exchange of $16.0 million as compared to a gain of $10.4 million in the prior period and loss on sale of assets of $10.1 million which the majority related to the replacement of diesel engines on US rigs. The most significant factor impacting net earnings was a $23.2 million impairment of intangible assets charge; excluding this amount, Trinidad would have reported year-to-date net loss of $3.2 million.
Cash flow from operations for the third quarter decreased by 113.4% from $24.6 million cash inflow ($0.25 per share (diluted)) in 2008 to a cash outflow of $3.3 million (($0.03) per share (diluted)) in 2009 and cash flow from operations before changes in non-cash working capital for the same period decreased by 47.7% from $51.5 million ($0.53 per share (diluted)) in the third quarter of 2008 to $27.0 million ($0.22 per share (diluted)) in 2009. The decrease in cash flow from operations and cash flow from operations before change in non-cash operating working capital was primarily a result of the current period's net loss of $12.1 million as compared to the net earnings of $20.4 million in 2008, less the changes year-over-year in the unrealized foreign exchange losses/gains of the quarters of $18.0 million (2009 - $11.4 million, 2008 - $(6.6 million)). Year-to-date cash flow from operations was $126.6 million ($1.22 per share (diluted)), representing a decrease of $28.3 million or 29.5% as compared to $154.9 million ($1.73 per share (diluted)) for the same period of 2008. Cash flow from operations before changes in non-cash working capital also decreased by $43.1 million, or 28.9%, to $106.1 million ($1.02 per share (diluted)) from $149.3 million ($1.67 per share (diluted)) for the same period in 2008. Again, the year-to-date changes were related to those mentioned above from the third quarter of 2008 versus 2009.
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LIQUIDITY AND CAPITAL RESOURCES September 30, December 31,
($ thousands except percentage data) 2009 2008
-------------------------------------------------------------------------
Working capital(1) 59,978 85,789
Current portion of long-term debt 431 16,844
Long-term debt(2) 210,355 321,768
Convertible debentures(2) 329,208 323,381
---------------------------
Total debt 539,994 661,993
---------------------------
Total debt as a percentage of assets 32.5% 35.6%
Net debt(1) 479,585 559,360
Net debt as a percentage of assets 28.9% 30.0%
Total assets 1,662,295 1,862,064
Total long-term liabilities 627,910 742,692
Total long-term liabilities as a
percentage of assets 37.8% 39.9%
Shareholders' equity 921,302 919,471
Total debt to shareholders' equity 58.6% 72.0%
Net debt to shareholders' equity 52.1% 60.8%
-------------------------------------------------------------------------
(1) Readers are cautioned that working capital and net debt do not have
standardized meanings prescribed by GAAP - see "Non-GAAP Measures".
(2) Convertible debentures and long-term debt are reflected net of
associated transaction costs.
On June 25, 2009, the Company closed a bought deal equity financing whereby 27,184,500 shares were issued for gross proceeds of $140.0 million. Net of transaction costs, the amount received was $133.8 million. A total of $141.0 million, mostly consisting of funds from the equity offering, was applied to reduce debt, of which $71.0 million was applied in late June 2009 to reduce amounts outstanding under the revolving facility and $70 million was applied in early July 2009 to reduce outstanding term indebtedness. Trinidad's long-term debt decreased by $111.4 million or 34.6% from $321.8 million at year end to $210.4 million at September 30, 2009 primarily as a result of the debt repayment, although partially offset by indebtedness used to fund the 2009 capital expenditure program. As at September 30, 2009, $47.0 million was outstanding on the Company's revolving credit facility of which $178.0 million remained unutilized.
A total of $38.8 million (including deposits) of capital expenditures were incurred in the third quarter of 2009 compared to $81.0 million in the third quarter of 2008. Total capital expenditures (including deposits) for the nine months ended September 30, 2009 were $130.2 million compared to $138.9 million in the same period last year. Both third quarter and year-to-date expenditures in 2009 were substantially related to the Company's 2009 rig build program in addition to capital upgrades related to the redeployment of four rigs into Mexico and one rig to Chile.
Working capital decreased by $25.8 million or 30.1% as at September 30, 2009 compared to the year ended December 31, 2008, as a result of lower activity levels in the current quarter compared to the fourth quarter of 2008.
On July 5, 2007, Trinidad issued $354.3 million in unsecured subordinated convertible debentures, which are convertible into shares of Trinidad at the option of the holder at any time prior to maturity at a conversion price of $19.30 per share. They have a face value of $1,000, a coupon rate of 7.75%, and mature on July 31, 2012, with interest being paid semi-annually on June 30 and December 31. 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 redemption or maturity, Trinidad may elect to satisfy its obligation to repay the principal by issuing common shares at a price equal to 95.0% of the weighted average trading price of the shares. Trinidad's covenants under its current credit facility exclude the debentures in their calculations.
Shareholders' equity increased by $1.8 million compared to December 31, 2008 mostly due to the net proceeds from the equity offering of $133.8 million less shares repurchased of $14.4 million, $26.4 million of net losses and $16.7 million of dividends declared to shareholders during the nine months ended September 30, 2009. Accumulated Other Comprehensive Income, which is comprised of losses and gains on the translation of the Company's foreign subsidiaries and the fair value of Trinidad's interest rate swaps, reduced shareholders' equity by $83.2 million over the nine month period almost exclusively related to the strengthening of the Canadian dollar relative to the US dollar.
Current financial performance is well in excess of the financial ratio covenants under the revolving and term facilities (the "Facilities") as reflected in the table below:
RATIO September 30, 2009 December 31, 2008 THRESHOLD
-------------------------------------------------------------------------
Current Ratio(1) 1.43:1 1.71:1 1.20:1 minimum
Leverage(2) 1.18:1 1.43:1 2.5:1 maximum
Interest Coverage(3) 9.53:1 10.14:1 5.0:1 minimum
Fixed Charge Coverage(4) 8.14:1 9.03:1 1.25:1 minimum
Distribution Payout(5) 41.73% 36.25% 85% maximum
(1) Current Ratio means, the ratio of consolidated current assets
(excluding cash and cash equivalents) to consolidated current
liabilities (excluding the current portion of the Facilities
outstanding).
(2) Leverage Ratio means, the ratio of (i) consolidated total debt
(excluding convertible debentures) to (ii) consolidated EBITDA for
the trailing twelve months (TTM).
(3) Interest Coverage Ratio means, calculated on a TTM basis, the ratio
of (i) consolidated EBITDA to (ii) consolidated Cash Interest Expense
(excluding interest paid under the convertible debentures) for the
TTM.
(4) Fixed Charge Coverage Ratio means, calculated on a TTM basis, the
ratio of (i) consolidated EBITDA minus (a) capital expenditures which
are not financed under the Facilities and (b) current taxes to (ii)
consolidated Fixed Charges. Fixed Charges are defined as the sum of
(a) Cash Interest Expense (excluding interest paid on the convertible
debentures), (b) scheduled principal repayments due during the period
and (c) commitment fees relating to the issuance of debt.
(5) Distribution Payout Ratio means, calculated on a TTM basis, the
ratio of Restricted Payments to Excess Cash Flow. Restricted
Payments include dividends, distributions, purchase of stock or
stock equivalents under NCIB and interest payments on convertible
debentures. Excess Cash Flow is calculated as consolidated net
earnings (loss) adjusted for items including depreciation and
amortization, future income taxes, unrealized foreign exchange gains
(losses), stock-based compensation and interest expense on the
convertible debentures.
Readers are cautioned that the ratios noted above do not have standardized meanings prescribed in GAAP. More specific information regarding the debt covenants is available in the credit facility agreement which has been filed with SEDAR and can be accessed at www.sedar.com. Following the renewal of the Revolver, Trinidad has no significant term-debt repayment required until April 2011.
The following table summarizes Trinidad's existing term-debt facilities:
Amount
drawn at
Debt September Repayment
Facility Currency Amount 30, 2009 Maturity requirements
-------------------------------------------------------------------------
Revolving $225.0 $47.0 Next renewal If not renewed,
credit CDN $ million million in April 2010 repayment due
facility 364 days later
Five-year $100.0 $68.0 1% amortization,
term CDN $ million million May 1, 2011 balloon
facility repayment at
maturity
Five-year $125.0 $85.0 1% amortization,
term US $ million million May 1, 2011 balloon
facility repayment at
maturity
The Facilities are secured by a general guarantee over the assets of the Company and its subsidiaries.
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY September 30, December 31,
($ thousands) 2009 2008
-------------------------------------------------------------------------
Common shares 948,383 828,882
Common shares increased by $119.5 million to $948.4 million at September 30, 2009. The increase was mainly attributable to equity financing during the second quarter whereby 27,184,500 shares were issued for gross proceeds of $140.0 million. Net of transaction costs, the amount received was $133.8 million. This equity financing was primarily applied to reduce debt levels on both the revolving and the term facilities.
On September 2, 2008, Trinidad announced its intent to acquire for cancellation up to ten percent (9,373,221 common shares) of the Company's public float by way of NCIB and would extend to the earlier of September 3, 2009 or the date upon which the Company acquired the ten percent. During the first nine months of 2009, Trinidad repurchased 1,576,100 shares ($14.4 million of book value) by way of the NCIB. Partly offsetting this was a conversion of convertible debentures during the quarter of 5,181 shares ($0.1 million of book value). At September 30, 2009, under this NCIB plan, Trinidad has acquired and cancelled a total of 2,763,500 shares at a cost of $12.0 million, at an average cost of $4.34 per share. The NCIB was terminated on September 4, 2009 as per the expiry timeline.
Common shares on November 3, 2009 were $948.4 million (120,840,962 shares).
GOING CONCERN
The Company's MD&A and financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Trinidad's ability to continue as a going concern is substantially dependent on, but not limited to, the successful execution of the Company's objectives and strategies outlined in this MD&A, as well as the Company's ability to be proactive in managing these objectives and strategies in a timely manner. This financial information does not include any adjustments relating to the recoverability and classification of recorded asset amounts nor to the amounts and classification of liabilities that may be necessary should Trinidad be unable to continue as a going concern.
SEASONALITY
Trinidad operates a substantial number of rigs in western Canada, and therefore operations are heavily dependent upon the seasons. The winter season, which incorporates the first quarter, is a busy period as oil and natural 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 are usually representative of average activity levels.
Trinidad's expansion to the US, Mexican and Chilean markets has reduced its overall exposure to the seasonal factors that are present in its Canadian operations. These seasonal conditions typically limit Canadian drilling activity, whereas in the United States, Mexico and South America operators have more flexibility to work throughout the year. This increased number of operating days throughout the year has allowed Trinidad to better manage its business with more sustainable cash flow throughout the annual cycle.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the unaudited interim consolidated financial statements requires that certain estimates and judgements be made with regard to the reported amount of revenues and expenses and the carrying values of assets and liabilities. These estimates are based on historical experience and management judgement. Anticipating future events involves uncertainty and consequently the estimates used by management in the preparation of the unaudited interim consolidated financial statements may change as future events unfold, additional experience is acquired or Trinidad's operating environment changes.
Depreciation and amortization
The accounting estimate that has the greatest impact on Trinidad's financial results is depreciation and amortization. Depreciation and amortization of Trinidad's capital assets and intangible assets incorporates estimates of useful lives and residual values. These estimates may change as more experience is obtained or as general market conditions change impacting the operation of Trinidad's capital assets. In addition, these estimates are reviewed at least annually, to ensure they are still valid.
Stock-based compensation
Compensation expense associated with options at grant date are estimates based on various assumptions such as volatility, annual dividend yield, risk free interest rate and expected life using the Black-Scholes methodology to produce an estimate of the fair value of such compensation. In addition, the deferred share units and the performance share units are subject to estimates of their fair values using the appropriate market rates at period end.
Allowance for doubtful accounts receivable
Trinidad performs credit evaluations of its customers and grants credit based on past payment history, financial conditions and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts is established based on specific situations and overall industry conditions. Trinidad's history of bad debt losses has been minimal and generally limited to specific customer circumstances; however, given the cyclical nature of the oil and natural gas industry, the credit risks can change suddenly and without notice.
Goodwill
In accordance with Canadian GAAP, Trinidad performs a goodwill impairment test at least annually and will conduct the test at an earlier date if changing circumstances indicate a possible impairment exists. Trinidad re-evaluated the conclusions from its 2008 year end test at the end of the third quarter of 2009 and determined that no impairment existed in the carrying value of goodwill.
Fair value of interest rate swaps
The fair value of the interest rate swaps are estimated based on future projected interest rates and adjusted on a quarterly basis for monthly settlements and changes in projections. Trinidad receives the valuation from the contract counterparty on a quarterly basis, reviews it for reasonability, and records the associated change in fair value at each reporting period.
Convertible debentures
The proceeds from the July 2007 issuance were bifurcated into separate liability and equity components. The value of the conversion feature has been determined based on the Black-Scholes option pricing model and recorded as equity on the consolidated balance sheets.
Future Income Taxes
The recording of future income tax involves the use of various assumptions to estimate the amounts and timing of the reversals of temporary differences between assets and liabilities recognized for accounting and tax purposes. It also involves the estimation of the effective tax rates for future fiscal years. The assumptions used (which include, but are not limited to, estimated results of operations, tax pool claims and accounting deductions) are based on management's current estimates and will likely change in future periods based on actual results and accordingly so will the estimates.
ADOPTION OF NEW ACCOUNTING STANDARDS
Effective January 20, 2009, Trinidad adopted the Canadian Institute of Chartered Accountants ("CICA") Emerging Issues Committee ("EIC") 173 Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. EIC 173 establishes standards for companies to take into account the credit risk of a counterparty to a financial instrument in determining the fair value of financial assets and financial liabilities, including derivative instruments for presentation and disclosure purposes. To date, there is no effect in the implementation of this new standard on the Company.
FUTURE CHANGES IN ACCOUNTING POLICIES
Canadian Generally Accepted Accounting Policies
In December 2008, the CICA issued section 1582 Business Combinations which will replace CICA section 1581 of the same name. Under this new guidance, the purchase price used is based on the fair value as of the date of acquisition. Furthermore, the new guidance generally requires all acquisition costs to be expensed, rather than the current practice of capitalizing them as part of the purchase price; contingent liabilities are to be recognized at fair value at the acquisition date and revalued at fair value with the change flowing through earnings until settled. Lastly, negative goodwill is required to be recognized immediately into earnings, unlike the current requirement to eliminate it by deducting it from non-current assets in the purchase price allocation. Entities adopting section 1582 will also be required to adopt CICA section 1601 Consolidated Financial Statements and section 1602 Non-Controlling Interests. Sections 1601 and 1602 will require a change in the measurement of non-controlling interest and will require the change to be presented as part of shareholders' equity on the balance sheet. In addition, the income statement of the controlling parent will include one hundred percent of the subsidiary's results and present an allocation of net income between controlling interest and non-controlling interest. These three standards will be effective for Trinidad on January 1, 2011, but Trinidad has the option to early adopt all three. When adopted, section 1582 will be applied on a prospective basis and 1601 and 1602 will be applied retrospectively.
International Financial Reporting Standards
In February 2008, the Canadian Accounting Standards Board (AcSB) announced that Canadian public reporting issuers will be required to report under International Financial Reporting Standards (IFRS) beginning January 1, 2011. Consequently, the transition date of January 1, 2011 will require restatement for comparative purposes of amounts reported by the Company for the year ended December 31, 2010.
Trinidad has started to determine the potential effects of the changeover to IFRS by:
- Researching and documenting expected differences between its current
accounting policies that are in accordance with Canadian GAAP and
those to be adopted under IFRS;
- Considering financial statement presentation and disclosure options
available to Trinidad upon initial changeover to IFRS;
- Developing a timeline for key milestones on the changeover project;
- Raising awareness of the change with accounting staff and the Audit
Committee of Trinidad's Board of Directors;
- Considering the impacts on the Company's financial reporting systems,
performance metrics, staff training, and internal/external
communications; and
- Concluding that the Company will not early adopt IFRS.
The changeover will affect the presentation and valuation of balances and transactions presented in Trinidad's interim and annual consolidated financial statements and related notes; however it is too early in the changeover process for the Company to provide quantification of those effects.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL
REPORTING
There have been no significant changes in the Company's disclosure controls and procedures (DC&P) and internal controls over financial reporting (ICFR) for the three or nine month periods ended September 30, 2009 and no material weaknesses or significant deficiencies have been identified in the design and operating effectiveness of these controls, that could materially affect or are reasonably likely to affect Trinidad's internal controls over financial reporting.
In accordance with the provisions of section 3.3 of NI 52-109, in relation to the acquisition of Victory effective August 18, 2008, Trinidad has removed its limitation on its assessment of Victory's internal control environment. Trinidad's management has successfully aligned Victory's systems, processes and controls with corporate standards and has concluded on the design of DC&P or ICFR for this subsidiary.
RELATED PARTY TRANSACTIONS
All related party transactions were incurred during the normal course of operations on similar terms and conditions to those entered into with unrelated parties. These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
Trinidad engages Blake, Cassels & Graydon LLP, a law firm in which a director is a partner, to provide legal advice. During the three and nine month periods ended September 30, 2009, Trinidad incurred legal fees of $0.3 million and $0.8 million, respectively (2008 - $0.3 million and $1.2 million, respectively) to Blake, Cassels & Graydon LLP. On September 30, 2009 there was $0.1 million outstanding, and on September 30, 2008 there were no amounts outstanding.
During the first quarter of 2009, Trinidad purchased a parcel of land from 1010460 Alberta Ltd, a company owned by an executive officer within Trinidad's Canadian operations. The land proceeds on purchase of $1.6 million, as well as all of the purchase agreement's conditions, were representative of an unrelated party transaction. This property currently houses a facility used in the coring division of the Canadian Drilling Operations.
BUSINESS RISKS
The business of Trinidad Drilling Ltd. is subject to certain risks and uncertainties. Prior to making any investment decision regarding Trinidad investors should carefully consider, among other things, the risks described herein (including the risks and uncertainties listed in the Forward-Looking Statements section in this MD&A) and the risk factors set forth in the most recently filed Annual Information Form of the Company which are incorporated by reference herein. The Annual Information Form has been filed with SEDAR and can be accessed at www.sedar.com. Copies of the Annual Information Form may be obtained, on request without charge, by contacting Trinidad at (403) 265-6525.
OUTLOOK
Moving into the fourth quarter of 2009, industry activity levels remain low relative to historical levels and competitive pricing pressures persist. There does however, appear to be an upswing in the general outlook for future industry conditions. The stabilization of oil prices and somewhat higher natural gas prices have improved the confidence and optimism among exploration and production companies. These improved conditions, combined with encouraging comments from several countries indicating the end of the recession, have led to a more positive outlook for the world economy and the oil and gas industry. While these changes are promising, Trinidad does not expect to see an immediate recovery in the oil and gas sector. Natural gas storage levels remain very high and the Company believes that there will need to be strong recovery in demand levels, particularly in the US, before natural gas prices return to levels that will encourage strong, wide-spread activity.
Exploration and production companies continue to be selective in their development plans, selecting those projects with more robust economics, typically unconventional plays. Trinidad's foresight in building a fleet of deep-capacity, technically-advanced rigs has positioned it well in this environment and is largely the reason the Company has been able to record industry-leading utilization rates and maintain strong margins. Trinidad does not expect the interest in unconventional shale plays to be fleeting. In fact, the Company anticipates that drilling activity will be increasingly focused in these plays moving forward. Trinidad currently has approximately 40% of its fleet operating in these areas, largely under long-term, take-or-pay contract. Trinidad's strong performance and customer-focused approach has created a reputation as a driller-of-choice with key shale operators; a reputation that will be a valuable asset when industry activity levels ramp up.
While industry conditions have been challenging, Trinidad has remained focused on executing its business plan. The Company's operations have expanded in the US with the delivery of the final rigs in the 2009 rig construction program and in Mexico and Chile through the redeployment of existing, under-utilized equipment. The Company expects to continue to find opportunities to place its equipment in areas of high utilization and robust margins and, where appropriate, to back-up these operations with take-or-pay contracts. International markets are now recognizing the benefits of modern, technically-advanced equipment and the Company will continue to pursue select opportunities to further broaden its operating base.
Recent equity issues by a number of existing and potential customers suggest that they will be in a better position to pursue their development plans in the near future. Trinidad does not believe that a full-scale recovery in the oil and natural gas sector is eminent; the Company anticipates seeing ongoing improvements in activity and a slow return of price control in 2010, perhaps towards mid-2010. The number of rigs returning to work in both Canada and the US is beginning to increase, with the deeper, high-tech equipment the first to be picked up and generally put to work in the unconventional shale plays. As the number of rigs working increases, pricing control will begin to move back to the drilling contractors, particularly for the in-demand style of equipment in which Trinidad specializes. Trinidad's deep-drilling, technically-advanced fleet combined with its long-term contracts and improved financial flexibility positions the Company well to lead the industry out of this downturn.
Trinidad Drilling Ltd. is a growth-oriented, dividend-paying oil and natural gas services provider based in Calgary, Alberta. Focusing on deep drilling, modern rig fleets, in-house design and technology-based advancement, Trinidad has positioned itself as a premium service provider. Trinidad's growth is driven by chasing and capturing new horizons - advancing technologies, offering new services, entering new markets and performing strategic acquisitions. Trinidad has 119 land drilling rigs ranging in depth capacities from 1,000 - 6,500 metres and four barge drilling rigs operating in the Gulf of Mexico. Trinidad has operations in Canada, the United States, Mexico and Chile. In addition to its drilling rigs, Trinidad will have 23 well servicing rigs that have been completely retrofitted or were constructed within the past five years and 20 pre-setting and coring rigs. 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 highly capable, expertly designed, well-equipped, adaptable and competitive in the industry.
NON-GAAP MEASURES DEFINITIONS
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, 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. These non-GAAP measures are identified and defined as follows:
"Gross margin" is used by management to analyze overall and segmented operating performance. Gross margin is not intended to represent operating income nor should it be viewed as an alternative to net earnings or other measures of financial performance calculated in accordance with Canadian GAAP. Gross margin is calculated from the consolidated statements of operations and retained earnings (deficit) and from the segmented information contained in the notes to the consolidated financial statements and is defined as revenue less operating expenses.
"Gross margin percentage" is used by management to analyze overall and segmented operating performance. Gross margin percentage is calculated from the consolidated statements of operations and retained earnings (deficit) and from the segmented information in the notes to the consolidated financial statements and is defined as gross margin divided by revenue.
"EBITDA" is a measure of the Company's operating profitability. EBITDA provides an indication of the results generated by the Company's principal business activities prior to how these activities are financed, assets are depreciated, amortized and impaired, or how the results are taxed in various jurisdictions.
EBITDA is derived from the consolidated statements of operations and retained earnings (deficit) and is calculated as follows:
Three months ended Nine months ended
September 30, September 30,
($ thousands) 2009 2008 2009 2008
-------------------------------------------------------------------------
Net earnings (loss) (12,143) 20,373 (26,382) 60,426
Plus:
Interest on long-term debt 5,364 4,810 16,287 18,200
Interest on convertible
debentures 8,868 8,819 26,504 26,158
Depreciation and
amortization 20,601 23,970 63,715 68,471
Impairment of intangible
assets - - 23,189 -
Loss (gain) on disposal
or sale of assets 320 (3) 10,069 (320)
Income taxes 4,251 9,181 12,236 22,768
---------------------------------------------
EBITDA 27,261 67,150 125,618 195,703
---------------------------------------------
"EBITDA before stock-based compensation" is used by management to analyze EBITDA (as defined above) prior to the effect of stock-based compensation.
"Cash flow from operations before change in non-cash working capital" is used to assist management and investors in analyzing Trinidad's liquidity and ability to generate cash to fund investing and financing activities. Cash flow from operations before change in non-cash working capital is derived from the consolidated statements of cash flows and is defined as cash flow from operating activities plus or minus the change in non-cash operating working capital.
"Net earnings before impairment of intangible asset" and "net earnings (loss) before stock-based compensation" are used by management to analyze net earnings prior to the effect of intangible impairment or stock-based compensation charges, respectively, and are not intended to represent net earnings as calculated in accordance with Canadian GAAP.
Net earnings (loss) before impairment of intangible asset is derived from the consolidated statements of operations and retained earnings (deficit) and is calculated as follows:
Three months ended Nine months ended
September 30, September 30,
($ thousands) 2009 2008 2009 2008
-------------------------------------------------------------------------
Net earnings (loss) (12,143) 20,373 (26,382) 60,426
Plus:
Impairment of
intangible assets - - 23,189 -
---------------------------------------------
Net earnings (loss)
before impairment of
intangible asset (12,143) 20,373 (3,193) 60,426
---------------------------------------------
Net earnings (loss) before stock-based compensation is derived from the consolidated statements of operations and retained earnings (deficit) and is calculated as follows:
Three months ended Nine months ended
September 30, September 30,
($ thousands) 2009 2008 2009 2008
-------------------------------------------------------------------------
Net earnings (loss) (12,143) 20,373 (26,382) 60,426
Plus:
Stock-based compensation 2,087 1,197 4,448 1,499
---------------------------------------------
Net earnings (loss)
before stock-based
compensation (10,056) 21,570 (21,934) 61,925
---------------------------------------------
"Net debt" is used by management and the investment community to analyze the amount of debt less the working capital of the Company.
Net debt is derived from the consolidated balance sheets and is calculated as follows:
September 30, December 31,
($ thousands) 2009 2008
-------------------------------------------------------------------------
Convertible debentures 329,208 323,381
Long-term debt 210,355 321,768
Less:
Working capital:
Current assets 173,061 285,690
Current liabilities (113,083) (199,901)
----------------------------
Net debt 479,585 559,360
----------------------------
"Working capital" is used by management and the investment community to analyze the operating liquidity available to the Company.
Working capital is derived from the consolidated balance sheets and is calculated as follows:
September 30, December 31,
($ thousands) 2009 2008
-------------------------------------------------------------------------
Current Assets 173,061 285,690
Less:
Current liabilities 113,083 199,901
----------------------------
Working capital 59,978 85,789
----------------------------
References to gross margin, gross margin percentage, EBITDA, EBITDA before stock-based compensation, cash flow from operations before changes 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 throughout this MD&A have the meanings set out above.
"signed" Lyle C. Whitmarsh "signed" Brent J. Conway
----------------------------- -------------------------
President and Chief Executive Executive Vice President and
Officer Chief Financial Officer
The Toronto Stock Exchange has neither approved nor disapproved the
information contained herein.
Trinidad will be holding a conference call and webcast to discuss its third quarter 2009 results on November 4, 2009 beginning at 9:00 a.m. MT (11:00 a.m. ET). To participate, please dial (800) 796-7558 (toll-free in North America) or (416) 644-3433 approximately 10 minutes prior to the conference call. An archived recording of the call will be available from approximately 12:00 p.m. MT on November 4 until midnight November 11, 2009 by dialing (877) 289-8525 or (416) 640-1917 and entering replay access code 4175959 followed by the pound sign.
A live audio webcast of the conference call will also be available on the investor relations page of Trinidad's website www.trinidaddrilling.com.
CONSOLIDATED BALANCE SHEETS
($ thousands - Unaudited)
September 30, December 31,
2009 2008
-------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 20,107 31,202
Accounts receivable 122,678 225,744
Inventory (note 5) 23,414 14,834
Prepaid expenses 6,814 13,811
Future income taxes 48 99
----------------------------
173,061 285,690
Deposit on capital assets 2,341 11,581
Capital assets (note 6) 1,329,189 1,375,661
Intangible assets (note 7) 4,066 26,959
Goodwill 153,638 162,173
----------------------------
1,662,295 1,862,064
----------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 81,782 134,764
Dividends payable 6,042 14,305
Current portion of deferred revenue 18,885 28,241
Current portion of long-term debt 431 16,844
Current portion of fair value of interest
rate swap 5,943 5,747
----------------------------
113,083 199,901
Deferred revenue - 1,572
Long-term debt, net of transaction costs 210,355 321,768
Convertible debentures, net of transaction
costs 329,208 323,381
Fair value of interest rate swaps 3,062 7,144
Future income taxes 85,285 88,827
----------------------------
740,993 942,593
Shareholders' equity
Common shares (note 8(a)) 948,383 828,882
Convertible debentures 28,207 28,215
Contributed surplus (note 8(b)) 27,712 19,043
Accumulated other comprehensive income (loss) (42,271) 40,932
Retained earnings (deficit) (40,729) 2,399
----------------------------
921,302 919,471
----------------------------
1,662,295 1,862,064
----------------------------
(See notes to the unaudited interim consolidated financial statements)
Commitments (note 12)
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
($ thousands except share and per share data - Unaudited)
Three months ended Nine months ended
September 30, September 30,
2009 2008 2009 2008
-------------------------------------------------------------------------
Revenue
Oilfield services 126,086 192,162 431,356 555,038
Bareboat Charter (loss)
income (note 12) (24) (1,330) 1,900 (3,635)
Other 80 855 1,155 1,114
---------------------------------------------------
126,142 191,687 434,411 552,517
---------------------------------------------------
Expenses
Operating 73,159 118,594 247,463 327,231
General and
administrative 12,205 11,557 40,868 35,729
Interest on long-term
debt 5,364 4,810 16,287 18,200
Interest on convertible
debentures 8,868 8,819 26,504 26,158
Stock-based compensation 2,087 1,197 4,448 1,499
Foreign exchange loss
(gain) 11,430 (6,835) 16,014 (10,358)
Depreciation and
amortization 20,601 23,970 63,715 68,471
Loss (gain) on disposal
or sale of assets 320 (3) 10,069 (320)
Impairment of intangible
assets (note 7) - - 23,189 -
Reorganization costs - 24 - 2,713
---------------------------------------------------
134,034 162,133 448,557 469,323
---------------------------------------------------
Earnings (loss) before
income taxes (7,892) 29,554 (14,146) 83,194
Income taxes
Current tax expense
(recovery) 2,509 (1,122) 5,622 575
Future tax expense 1,742 10,303 6,614 22,193
---------------------------------------------------
4,251 9,181 12,236 22,768
---------------------------------------------------
Net earnings (loss) (12,143) 20,373 (26,382) 60,426
Dividends (6,042) (14,447) (16,746) (33,091)
Trust distributions - - - (8,362)
Charges for normal
course issuer bid - (9) - (9)
Retained earnings
(deficit) - beginning
of period (22,544) (10,934) 2,399 (23,981)
---------------------------------------------------
Retained earnings
(deficit) - end of
period (40,729) (5,017) (40,729) (5,017)
---------------------------------------------------
Earnings (loss) per share
Basic (0.10) 0.21 (0.25) 0.68
Diluted (0.10) 0.21 (0.25) 0.67
Weighted average number
of shares
Basic 120,840,962 96,289,155 103,559,122 89,021,557
Diluted 120,840,962 96,869,702 103,559,122 89,551,403
(See notes to the unaudited interim consolidated financial statements)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
($ thousands - Unaudited)
Three months ended Nine months ended
September 30, September 30,
2009 2008 2009 2008
-------------------------------------------------------------------------
Net earnings (loss) (12,143) 20,373 (26,382) 60,426
Other comprehensive
income (loss)
Change in fair value
of derivatives
designated as cash
flow hedges, net of
income tax (note 11) 437 (265) 1,516 (510)
Foreign currency
translation
adjustment (note 15) (52,771) 20,698 (84,719) 33,258
---------------------------------------------------
Total other
comprehensive income
(loss) (52,334) 20,433 (83,203) 32,748
---------------------------------------------------
Comprehensive income
(loss) (64,477) 40,806 (109,585) 93,174
---------------------------------------------------
(See notes to the unaudited interim consolidated financial statements)
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
($ thousands - Unaudited)
Three months ended Nine months ended
September 30, September 30,
2009 2008 2009 2008
-------------------------------------------------------------------------
Accumulated other
comprehensive income
(loss) - beginning
of period 10,063 (49,473) 40,932 (61,788)
Other comprehensive
income (loss) during
the period (52,334) 20,433 (83,203) 32,748
---------------------------------------------------
Accumulated other
comprehensive loss
- end of period (42,271) (29,040) (42,271) (29,040)
---------------------------------------------------
(See notes to the unaudited interim consolidated financial statements)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands - Unaudited)
Three months ended Nine months ended
September 30, September 30,
2009 2008 2009 2008
-------------------------------------------------------------------------
Cash provided by
(used in)
Operating activities
Net earnings (loss)
for the period (12,143) 20,373 (26,382) 60,426
Items not affecting cash
Effective interest
on financing costs
(note 11) 1,588 1,081 4,289 3,239
Accretion on
convertible
debentures 1,340 1,221 3,924 3,584
Stock-based
compensation 2,087 1,197 4,448 1,499
Unrealized foreign
exchange loss (gain) 11,440 (6,604) 16,278 (9,842)
Depreciation and
amortization 20,601 23,970 63,715 68,471
Loss (gain) on sale
of assets 320 (3) 10,069 (320)
Impairment of
intangible asset - - 23,189 -
Future income tax
expense 1,742 10,303 6,614 22,193
---------------------------------------------------
26,975 51,538 106,144 149,250
Change in non-cash
operating working
capital (30,277) (26,956) 20,420 5,656
---------------------------------------------------
(3,302) 24,582 126,564 154,906
---------------------------------------------------
Investing activities
(Increase) decrease
in deposits on
capital assets (976) (15,358) 9,240 (16,276)
Purchase of capital
assets (37,833) (65,664) (139,447) (122,579)
Purchase of intangibles (2) - (77) -
Proceeds from
dispositions 2,818 3 4,378 3,263
Change in non-cash
investing working
capital 14,073 (5,092) 3,210 (16,575)
---------------------------------------------------
(21,920) (86,111) (122,696) (152,167)
---------------------------------------------------
Financing activities
(Decrease) increase
in long-term debt, net (49,337) 27,288 (110,740) (122,265)
(Costs) proceeds
from share issuance
(note 8), net (414) (28) 133,929 158,010
Repurchased shares
(note 8) - (175) (6,120) (175)
Proceeds from exercise
of options (note 8) - 188 - 1,377
Dividends paid (6,063) (14,442) (25,030) (18,644)
Debt financing costs - - (2,619) (600)
Trust unit distribution - - - (17,978)
---------------------------------------------------
(55,814) 12,831 (10,580) (275)
---------------------------------------------------
Cash flow from
operating, investing
and financing
activities (67,706) (48,698) (6,712) 2,464
Effect of translation
on foreign
currency cash (16,034) 679 (4,383) 913
---------------------------------------------------
(Decrease)increase in
cash for the period (83,740) (48,019) (11,095) 3,377
Cash - beginning of
period 103,847 69,417 31,202 18,021
---------------------------------------------------
Cash - end of period 20,107 21,398 20,107 21,398
---------------------------------------------------
Interest paid 4,626 4,430 28,079 31,193
Interest received 5 142 98 435
Taxes paid 1,876 2,122 3,748 4,222
(See notes to the unaudited interim consolidated financial statements)
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. STRUCTURE OF THE CORPORATION
Organization
Trinidad Drilling Ltd. ("Trinidad" or the "Company") is incorporated
under the laws of the Province of Alberta. The Company was formed by
way of an arrangement under the Business Corporations Act of Alberta
pursuant to an arrangement agreement dated January 9, 2008 between
the Company and Trinidad Energy Services Income Trust (the "Trust").
The Arrangement involved the exchange, on a one-for-one basis of
trust units and exchangeable shares, after accounting for the
conversion factor applicable to the exchangeable shares, for common
shares of Trinidad. The effective date of the Arrangement was
March 10, 2008 - see note 8(a).
Operations
Trinidad operates in the land and barge drilling, coring and surface
casing and well-servicing sectors of the North American oil and
natural gas industry. Trinidad owns 119 land drilling rigs ranging in
depths from 1,000 - 6,500 metres and operates 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 and surface
casing 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.
2. ACCOUNTING POLICIES AND ESTIMATES
These unaudited interim consolidated financial statements are
prepared by management, in accordance with Canadian Generally
Accepted Accounting Principles (GAAP), and follow the same accounting
policies and methods as the audited consolidated financial statements
for the year ended December 31, 2008, except as noted below, and
therefore do not contain all of the disclosures required for the
annual financial statements. As a result, the unaudited interim
consolidated financial statements should be read in conjunction with
the audited consolidated financial statements of Trinidad contained
in the annual report for the year ended December 31, 2008.
ADOPTION OF NEW ACCOUNTING STANDARDS
Effective January 20, 2009, Trinidad adopted the Canadian Institute
of Chartered Accountants ("CICA") Emerging Issues Committee ("EIC")
173 Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities. EIC 173 establishes standards for companies to take into
account the credit risk of a counterparty to a financial instrument
in determining the fair value of financial assets and financial
liabilities, including derivative instruments for presentation and
disclosure purposes. To date, there is no effect in the
implementation of this new standard on the Company.
FUTURE CHANGES IN ACCOUNTING POLICIES
Canadian Generally Accepted Accounting Policies
In December 2008, the CICA issued section 1582 Business Combinations
which will replace CICA section 1581 of the same name. Under this new
guidance, the purchase price used is based on the fair value as of
the date of acquisition. Furthermore, the new guidance generally
requires all acquisition costs to be expensed, rather than the
current practice of capitalizing them as part of the purchase price;
contingent liabilities including contingent consideration are to be
recognized at fair value at the acquisition date and revalued at fair
value with the change flowing through earnings until settled. Lastly,
negative goodwill is required to be recognized immediately into
earnings, unlike the current requirement to eliminate it by deducting
it from non-current assets in the purchase price allocation. Entities
adopting section 1582 will also be required to adopt CICA section
1601 Consolidated Financial Statements and section 1602 Non-
Controlling Interests. Sections 1601 and 1602 may require a change in
the measurement of non-controlling interest and will require the
change to be presented as part of shareholders' equity on the balance
sheet. In addition, the income statement of the controlling parent
will include one hundred percent of the subsidiary's results and
present an allocation of income between controlling interest and non-
controlling interest. These three standards will be effective for
Trinidad on January 1, 2011, but Trinidad has the option to early
adopt all three. When adopted, section 1582 will be applied on a
prospective basis and 1601 and 1602 will be applied retrospectively.
International Financial Reporting Standards
In February 2008, Canada's Accounting Standards Board (AcSB)
announced that Canadian public reporting issuers will be required to
report under International Financial Reporting Standards (IFRS)
beginning January 1, 2011. Consequently, the transition date of
January 1, 2011 will require restatement for comparative purposes of
amounts reported by the Company for the year ended December 31, 2010.
The adoption of IFRS is intended to increase transparency and bring a
higher degree of global comparability as IFRS has been adopted in
more than 100 countries. Management is currently evaluating the
effects of adopting IFRS on its consolidated financial statements and
is in the design stage, including evaluation of key differences
between Canadian GAAP and IFRS and creating new accounting policies.
Trinidad cannot at this time reasonably estimate the impact of
adopting IFRS on its consolidated financial statements.
3. SEASONALITY
Trinidad operates a substantial number of rigs in western Canada and
therefore, Canadian Drilling Operations are heavily dependent upon
the seasons. The winter season, which incorporates the first quarter,
is typically a busy period 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 are usually
representative of average activity levels.
Trinidad's expansion to the US, Mexican and South American markets
has reduced its overall exposure to the seasonal factors that are
present in its Canadian operations. These seasonal conditions
typically limit Canadian drilling activity, whereas in the US, Mexico
and South America, operators have increased flexibility to work
throughout the year. This increased number of operating days
throughout the year has allowed Trinidad to better manage its
business with more sustainable cash flows throughout the annual
cycle.
4. ACQUISITION
Acquisition of the outstanding shares of Victory Rig Equipment
Corporation
Effective August 18, 2008, Trinidad purchased all of the outstanding
shares, operating assets and assumed all of the related obligations
of Victory Rig Equipment Corporation (Victory), a Red Deer, Alberta-
based, privately-held fabrication company for consideration of
$16.7 million. All earnings of Victory have been included in
Trinidad's consolidated statements of operations since August 18,
2008.
The consideration paid for this acquisition has been allocated under
the purchase method as follows:
($ thousands) 2009
---------------------------------------------------------------------
Purchase price allocated as follows:
Capital assets 1,334
Other long-term assets 73
Intangible assets 4,290
Goodwill 15,901
Working capital deficiency (491)
Long-term liabilities (4,413)
------------------
16,694
------------------
Financed as follows:
Cash 12,694
Contingent consideration 4,000
------------------
16,694
------------------
The purchase price allocation has not been finalized as it is subject
to contingent payments. During the first quarter of 2009, an
additional $4.0 million of purchase consideration was accrued. As per
the share purchase agreement, additional consideration to a maximum
of $4.0 million was payable to the former shareholders of Victory Rig
Equipment Corporation based on the achievement of certain earnings
level targets. Contingency payments have been accrued based on
conditions at September 30, 2009 and have caused an increase in
goodwill and the purchase price of $4.0 million. Changes to the
contingency payments in the future will be offset by changes in
goodwill.
5. INVENTORY
September 30, December 31,
($ thousands) 2009 2008
---------------------------------------------------------------------
Parts and materials 17,029 10,378
Work-in-progress 6,385 4,456
----------------------------
Total inventory 23,414 14,834
----------------------------
All inventory balances are carried at the lower of cost or net
realizable value. The construction operations regularly utilizes
inventory in the construction and recertification of rigs and rig
related equipment. For the three and nine months ended September 30,
2009, there were no material write-downs or reversals of previously
written-down amounts (2008 - no material write-downs).
Throughout the period the amount of inventories recognized as an
expense were:
Three months ended Nine months ended
September 30, September 30,
($ thousands) 2009 2008 2009 2008
---------------------------------------------------------------------
Raw materials and
consumables
purchased 25,211 37,372 85,475 64,659
Labour costs 3,819 5,240 15,622 12,548
Other costs 182 199 475 417
Decrease (increase)
in inventory 727 (1,222) (8,580) 1,100
-------------------------------------------------
Amount of
inventories
expensed in period 29,939 41,589 92,992 78,724
-------------------------------------------------
6. CAPITAL ASSETS
As at September 30, 2009
Accumulated
($ thousands) Cost Depreciation Net Book Value
---------------------------------------------------------------------
Rigs and rig-related
equipment 1,475,888 284,875 1,191,013
Automotive equipment
and other equipment 27,877 16,151 11,726
Construction equipment 3,464 774 2,690
Building 39,059 4,166 34,893
Land 15,732 - 15,732
Assets under
construction 73,135 - 73,135
--------------------------------------------
1,635,155 305,966 1,329,189
--------------------------------------------
As at December 31, 2008
Accumulated
($ thousands) Cost Depreciation Net Book Value
---------------------------------------------------------------------
Rigs and rig-related
equipment 1,440,511 262,242 1,178,269
Automotive equipment
and other equipment 28,266 13,020 15,246
Construction equipment 1,776 326 1,450
Building 33,306 3,047 30,259
Land 12,740 - 12,740
Assets under
construction 137,697 - 137,697
--------------------------------------------
1,654,296 278,635 1,375,661
--------------------------------------------
7. INTANGIBLE ASSETS
As at September 30, 2009
Accumulated
($ thousands) Cost Amortization Net Book Value
---------------------------------------------------------------------
Customer contracts 30,964 30,964(1) -
Patents 3,001 336 2,665
Customer relationships 820 183 637
Trade name 790 177 613
Non-compete agreements 130 49 81
Engineering and design
costs 75 5 70
--------------------------------------------
35,780 31,714 4,066
--------------------------------------------
(1) Amount includes impairment of $23,189 recorded at March 31, 2009.
As at December 31, 2008
Accumulated
($ thousands) Cost Amortization Net Book Value
---------------------------------------------------------------------
Customer contracts 30,964 8,083 22,881
Patents 3,000 111 2,889
Customer relationships 370 27 343
Trade name 790 58 732
Non-compete agreements 130 16 114
--------------------------------------------
35,254 8,295 26,959
--------------------------------------------
There are no internally developed intangible assets.
The aggregate amortization expense for the intangible assets for the
three and nine months ended September 30, 2009 is $0.1 million and
$0.4 million, respectively (2008 - $2.2 million and $7.7 million,
respectively) and is included in depreciation and amortization.
Engineering and design costs are being amortized over five years,
with no residual value.
8. SHAREHOLDERS' EQUITY AND CONTRIBUTED SURPLUS
a) Common shares
Authorized
Unlimited number of common shares, voting, participating
($ thousands except
share data) September 30, 2009 December 31, 2008
---------------------------------------------------------------------
Number Number
of Shares Amount $ of Shares Amount $
----------------------------------------------------
Common shares -
opening balance 95,227,381 828,882 - -
Shares issued for
cash, net of
transaction costs 27,184,500 133,829 12,132,353 158,010
Shares issued on
conversion of
convertible
debentures 5,181 99 4,921 95
Shares repurchased
under NCIB
(defined herein) (1,576,100) (14,427) (1,048,800) (9,122)
Shares issued on
exercise of
options - - 241,634 1,851
Contributed
surplus
transferred on
exercised options - - - 279
Shares issued
pursuant to the
Arrangement - - 84,035,873 678,282
----------------------------------------------------
120,840,962 948,383 95,365,981 829,395
Shares
repurchased, but
not cancelled - - (138,600) (513)
----------------------------------------------------
Common shares -
closing balance 120,840,962 948,383 95,227,381 828,882
----------------------------------------------------
During the quarter ended June 30, 2009, the Company closed a bought
deal equity financing whereby 27,184,500 shares were issued for gross
proceeds of $140.0 million. Net of transaction costs, the amount
received was $133.8 million. The net proceeds of the issuance were
used to reduce overall indebtedness. A total of $141.0 million, the
majority of which was related to the equity proceeds, was applied to
reduce debt, of which $71.0 million was applied in late June 2009 to
reduce amounts outstanding under the revolving facility and
$70.0 million was applied in early July of 2009 to reduce outstanding
term indebtedness.
Effective September 2, 2008, Trinidad announced its intent to
acquire, for cancellation, up to ten percent (9,373,221 common
shares) of the Company's public float by way of normal course issuer
bid (NCIB) commencing September 4, 2008 and extending to the earlier
of September 3, 2009 or the date upon which the Company acquires the
maximum number of common shares to be purchased pursuant to the NCIB.
At September 3, 2009, Trinidad acquired and cancelled 2,763,500
shares at an average cost of $4.34 per share. As the purchase price
was lower than the carrying amount of the common shares acquired and
cancelled, the difference between cost and carrying value at
repurchase was recorded as contributed surplus. The NCIB was
terminated on September 4, 2009 as per the expiry timeline.
On March 10, 2008, unitholders of the Trust and holders of the
exchangeable shares (the "Securityholders") voted, and overwhelmingly
approved, reorganizing the Trust, by way of a plan of arrangement
under the Business Corporations Act (Alberta), into a corporation
(the "Arrangement") pursuant to an arrangement agreement dated
January 9, 2008 between Trinidad and the Trust. The purpose of the
Arrangement was to convert the Trust back into a corporate structure
that was better suited to its core business model of growth and
capital appreciation for its Securityholders. Management and the
Board of Directors believe that the best opportunity for creating
value is by reinvesting a significant portion of overall cash flow
back into the business and to focus on increasing overall per share
earnings, cash flow, net asset value, as well as overall debt
reduction and they believe that a corporate structure better
positions Trinidad to pursue these initiatives. For financial
reporting presentation purposes, these changes are being treated as
if they occurred on January 1, 2008.
The Arrangement resulted in: (i) unitholders receiving Trinidad
shares in exchange for their trust units on a one-for-one basis; and
(ii) exchangeable shareholders receiving Trinidad shares on the same
basis as unitholders based on the number of trust units into which
such shares were exchangeable into on the effective date of the
Arrangement.
b) Contributed surplus
September 30, December 31,
($ thousands) 2009 2008
---------------------------------------------------------------------
Contributed surplus - opening balance 19,043 13,843
Stock-based compensation expense, from
Incentive Option Plan 362 1,713
Contributed surplus transferred on
exercise of options - (289)
Effect of NCIB 8,307 3,776
----------------------------
Contributed surplus - ending balance 27,712 19,043
----------------------------
c) Exchangeable shares
Pursuant to the Arrangement all the exchangeable shares of Trinidad
were converted based on the exchange ratio in effect at the time of
conversion to trust units and subsequently exchanged on a one-for-one
basis for common shares. The initial series exchangeable shares were
exchanged at a ratio of 1.39024 providing for 352,328 trust units
upon conversion. Series C exchangeable shares were exchanged at a
ratio of 1.27001 providing for 59,905 trust units upon conversion.
9. STOCK-BASED COMPENSATION PLANS
a) Incentive Option Plan
The Incentive Option Plan was created to assist directors, officers,
employees and consultants of Trinidad and its affiliates to
participate in the growth and development of the Company.
Options granted vest 50% immediately and 25% on the first and second
anniversaries of the date of grant (unless otherwise determined by
the Board of Directors at the time of issuance) and shall be
exercisable for a period of five years from the date of grant. The
options will have an exercise price not exceeding the closing trading
price for the common shares on the TSX on the date immediately
preceding the date of grant and not less than the price permitted by
applicable securities law.
The following summarizes the options that are outstanding under
Trinidad's Incentive Option Plan as at September 30, 2009 and
December 31, 2008 and the changes during the periods:
September 30, 2009 December 31, 2008
---------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Number Price Number Price
of Options ($) of Options ($)
---------------------------------------------------------------------
Outstanding -
opening balance 8,259,495 12.66 7,965,670 12.55
Granted during
the period - - 823,810 11.95
Exercised during
the period - - (249,484) 7.69
Forfeited during
the period (1,258,218) 9.75 (280,501) 11.83
---------------------------------------------------
Outstanding -
ending balance 7,001,277 13.18 8,259,495 12.66
---------------------------------------------------
Trinidad uses the Black-Scholes option-pricing model to determine the
estimated fair value of the options granted subsequent to January 1,
2003. The per share weighted average fair value of options granted
during the period ended September 30, 2009 was nil, as no options
were granted over this period (September 30, 2008 - $2.47).
b) Deferred Share Unit Plan
In 2008, Trinidad established a Deferred Share Unit Plan (DSU) to
provide a compensation system for members of the Board of Directors
of Trinidad 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 Trinidad share price for the five days
preceding payment. DSUs granted are exercisable upon resignation or
termination from the Board of Directors. When dividends are paid, the
value is credited as additional DSUs on the dividend payment date.
As at September 30, 2009, there were 142,475 (December 31, 2008 -
40,732) DSUs outstanding. Trinidad recognized compensation expense of
$0.8 million for the nine months ended September 30, 2009, with an
accumulated mark-to-market liability of $1.0 million (September 30,
2008 - nil), which is included in accounts payable and accrued
liabilities. The expense related to the DSUs is recognized in stock-
based compensation in the consolidated statement of operations.
c) Performance Share Unit Plan
In 2008, Trinidad established a Performance Share Unit Plan (PSU) to
provide an opportunity for officers and employees of Trinidad and its
subsidiaries to promote further alignment of interests between
employees and the 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 have various vesting periods, of which none
exceed three years from the date of grant. When dividends are paid,
the value is credited as additional PSUs on the dividend payment
date.
As at September 30, 2009, there were 886,750 (December 31, 2008 -
237,000) PSUs outstanding, with an accumulated mark-to-market
liability of $3.8 million (September 30, 2008 - nil), which is
included in accounts payable and accrued liabilities. The expense
related to the PSUs is recognized in stock-based compensation in the
consolidated statement of operations.
10. CAPITAL MANAGEMENT
Trinidad's capital is comprised of debt, convertible debentures and
shareholders' equity, less cash and cash equivalents. Management
regularly monitors total capitalization to ensure flexibility in the
pursuit of ongoing initiatives, while ensuring that shareholder
returns are being maximized. The overall capitalization of the
Company is outlined below:
September 30, December 31,
($ thousands) 2009 2008
---------------------------------------------------------------------
Long-term debt(1) 223,841 316,564
Convertible debentures(1) 336,861 333,029
----------------------------
Total debt 560,702 649,593
Shareholders' equity 921,302 919,471
Less: cash and cash equivalents (20,107) (31,202)
----------------------------
Total capitalization 1,461,897 1,537,862
(1) Balance outstanding without consideration of transaction costs.
Management is focused on several objectives while managing the
capital structure of the Company. Specifically:
a) Ensuring Trinidad has the financing capacity to continue to
execute on opportunities to increase overall market share through
strategic acquisitions and fleet construction programs that add
value for our shareholders;
b) Maintaining a strong capital base to ensure that investor,
creditor and market confidence is secured;
c) Maintaining balance sheet strength, ensuring Trinidad's strategic
objectives are met, while retaining an appropriate amount of
leverage;
d) Providing shareholder returns through dividends to ensure that
income-oriented investors are provided a cash yield; and
e) Safeguarding the entity's ability to continue as a going concern,
such that it continues to provide returns for shareholders and
benefits for other stakeholders.
Trinidad manages its capital structure based on current economic
conditions, the risk characteristics of the underlying assets, and
Trinidad's planned capital requirements, within guidelines approved
by its Board of Directors. Total capitalization is maintained or
adjusted by drawing on existing debt facilities, issuing new debt or
equity securities when opportunities are identified and through the
disposition of underperforming assets to reduce debt or equity when
required.
On March 23, 2009, Trinidad announced its intent to acquire, for
cancellation, by way of normal course issuer bid (the "Bid"),
convertible unsecured subordinated debentures (the "Debentures") of
the Corporation in the principal amount of up to $35,417,934, which
represents approximately ten percent of the Corporation's public
float. The Bid commenced on March 25, 2009 and will terminate on the
earlier of March 24, 2010 or the date upon which the Corporation
acquires the maximum amount of Debentures pursuant to the Bid. There
were no debentures repurchased under the Bid as at September 30,
2009.
The Company's syndicated loan facility is subject to five financial
covenants, which are reported to the bank on either a monthly or
quarterly basis. These covenants are used by management to monitor
capital, with increased focus on the Consolidated Leverage Ratio,
which is a non-GAAP measure. This ratio is calculated as the
consolidated debt balance, excluding convertible debentures, divided
by consolidated net earnings, adjusted by interest on the long-term
debt, depreciation and amortization, income taxes, gain/loss on sale
of assets and unrealized foreign exchange for the rolling four
quarters, and must be maintained below 2.5:1. For the rolling four
quarters ended September 30, 2009, this ratio was 1.18:1
(December 31, 2008 - 1.43:1).
Trinidad remains in compliance with all of the banking syndicate's
financial covenants.
11. FINANCIAL INSTRUMENTS
Carrying Value and Fair Value Disclosures on Financial Instruments
Trinidad's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities,
interest rate swaps, long-term debt, and the convertible debentures.
The carrying amounts of these financial instruments, reported on the
Company's unaudited interim consolidated balance sheets, approximates
their fair values due to their short-term nature, with the exception
of the interest rate swaps which is carried at fair value, along with
long-term debt and the convertible debentures. The carrying values of
Trinidad's financial instruments are as follows:
September 30, 2009
Total
Held for Loans and Other Carrying
($ thousands) Trading Receivables Liabilities Value
---------------------------------------------------------------------
Cash and cash
equivalents 20,107 - - 20,107
Accounts receivable - 122,678 - 122,678
Accounts payable
and accrued
liabilities - - 81,782 81,782
Interest rate swaps - - 9,005 9,005
Long-term debt - - 210,786 210,786
Convertible
debentures - - 357,415 357,415
---------------------------------------------------
December 31, 2008
Total
Held for Loans and Other Carrying
($ thousands) Trading Receivables Liabilities Value
---------------------------------------------------------------------
Cash and cash
equivalents 31,202 - - 31,202
Accounts receivable - 225,744 - 225,744
Accounts payable
and accrued
liabilities - - 134,764 134,764
Interest rate swaps - - 12,891 12,891
Long-term debt - - 315,731 315,731
Convertible
debentures - - 351,596 351,596
---------------------------------------------------
The fair values and carrying values of Trinidad's financial
instruments are as follows:
September 30, 2009 December 31, 2008
Carrying Carrying
($ thousands) Fair Value Value Fair Value Value
---------------------------------------------------------------------
Interest rate swaps 9,005 9,005 12,891 12,891
Credit facilities(1)
Canadian Revolving
Credit Facility 47,000 47,000 62,980 65,000
Canadian Term
Facility 65,464 68,048 91,937 97,333
US Term Facility 87,616 91,074 139,974 148,190
Convertible
debentures(1) 342,633 365,068 214,317 361,245
Other debt 7,823 7,602 6,168 7,959
---------------------------------------------------
559,541 587,797 528,267 692,618
---------------------------------------------------
(1) The convertible debentures and credit facilities are recorded at
their gross amounts and do not include transaction costs incurred
on their issuance and the convertible debentures' carrying value
includes both the debt and equity components.
Trinidad has estimated the fair value amounts using appropriate
valuation methodologies and information available to management as of
the valuation dates. The following methods and assumptions were used
to estimate the fair value of each class of financial instrument for
which it was practicable to estimate that value:
- Cash and cash equivalents, accounts receivable and accounts
payable and accrued liabilities - The carrying amounts
approximate fair value because of the short maturity of these
instruments.
- Interest rate swaps - The fair value of the interest rate swaps
is based on the quoted market prices at period end.
- Long-term debt - The fair value of the various pieces of long-
term debt are based on values quoted from third-party financial
institutions using current market price indicators.
- Convertible debentures - The fair value is based on the closing
market price at period end.
Interest rate swaps
Trinidad has two cash flow hedges using interest rate swap
arrangements to hedge the floating interest rate on 71% of the
outstanding balance of the US and Canadian term debt facilities.
These contracts have been recorded at their fair values on the
Company's unaudited interim consolidated financial statements. During
the three and nine months ended September 30, 2009, Trinidad recorded
gains of $0.4 million and $1.5 million, respectively, (2008 - losses
of $0.3 million and $0.5 million, respectively) in Other
Comprehensive Income (OCI), net of taxes of $0.5 million and
$1.6 million for each respective period (2008 - $0.2 million and
$0.2 million, respectively), due to the change in fair value of the
cash flow hedge. Trinidad has assessed 100% hedge effectiveness;
hence the entire change in fair value has been recorded in OCI.
Financing costs
The carrying value of the long-term debt and convertible debentures
was recorded net of debt issuance costs. Under the effective interest
rate method Trinidad recorded interest expense of $0.9 million and
$2.3 million (2008 - $0.3 million and $1.1 million, respectively) for
the three and nine months ended September 30, 2009 relating to costs
under the debt facility. In addition, Trinidad also recognized
interest expense of $0.7 million and $2.0 million (2008 -
$0.7 million and $2.0 million, respectively) relating to costs
associated with the convertible debentures for the same period using
the effective interest method. The total effective interest costs on
debt for the three and nine months ended September 30, 2009 are
$1.6 million and $4.3 million (2008 - $1.0 million and $3.1 million)
respectively.
Nature and Extent of Risks Arising from Financial Instruments
Trinidad is exposed to a number of market risks arising through the
use of financial instruments in the ordinary course of business.
Specifically, Trinidad is subject to credit risk, currency risk,
interest rate risk and liquidity risk.
Credit Risk
Trinidad is exposed to credit risk as a result of extending credit to
customers prior to receiving payment for services performed, creating
exposure on accounts receivable balances with trade customers. This
exposure to credit risk is managed through a corporate credit policy
whereby upfront evaluations are performed on all customers and credit
is granted based on payment history, financial conditions and
anticipated industry conditions. In the instance that a customer does
not meet initial credit evaluations, work may be performed subject to
a prepayment of services. Customer accounts are continuously
monitored to ensure the creditworthiness of all customers with
outstanding balances and when collectability becomes questionable a
provision for doubtful accounts has been established. The following
is a reconciliation of the change in the reserve balance:
Nine months
ended Year ended
September 30, December 31,
($ thousands) 2009 2008
---------------------------------------------------------------------
Opening reserve balance 4,849 4,364
Increase in reserve recorded in the income
statement in the current period 2,469 2,534
Write-offs charged against the reserve (2,751) (1,122)
Recoveries of amounts previously written-off (175) (927)
----------------------------
Reserve allowance at period end 4,392 4,849
----------------------------
As at September 30, 2009, Trinidad had accounts receivable of
$8.8 million that were greater than 90 days for which no provision
had been established, as the Company believes that these amounts will
be collected.
Currency Risk
Trinidad's operations are affected by fluctuations in currency
exchange rates due to the Company's expansion into the US marketplace
and reliance on US suppliers to deliver components used by its
manufacturing subsidiaries. Over the last few years, the Canadian
dollar has experienced significant volatility, ranging from an
exchange low of $0.77 US/Canadian to an exchange high of $1.10
US/Canadian. The exposure to realized foreign currency fluctuations
from its US, Mexican and Chilean subsidiaries is mitigated due to the
independence of the US, Mexican and Chilean operations from its
Canadian parent company for cash flow requirements to satisfy daily
operations, creating a natural hedge. However, upon consolidation,
Trinidad is exposed to unrealized fluctuations in the gains and
losses on consolidation and US dollar-denominated intercompany
balances with the Canadian entities. As at September 30, 2009, the
Company did not have any foreign currency hedges in place. The
Company may, however, hedge foreign currency rates in the future,
depending on the business environment and growth opportunities.
The fluctuations in the foreign currency exchange rates are recorded
in unrealized foreign exchange losses or gains in the consolidated
statement of cash flows, with an equal and offsetting unrealized
loss or gain included in the current translation adjustment in the
consolidated statements of comprehensive income (loss) during the
period as disclosed in Note 15.
As at September 30, 2009, portions of Trinidad's cash and cash
equivalents, accounts receivable, accounts payable and accrued
liabilities were denominated in US dollars and Mexican Pesos. In
addition, Trinidad's US, Mexican and Chilean subsidiaries are subject
to translation losses and gains upon consolidation. Based on these
foreign currency financial instrument closing balances, net income
for the three and nine months ended September 30, 2009, would have
fluctuated by approximately $0.1 million and $0.1 million,
respectively, and OCI would have fluctuated by $5.0 million for the
quarter ended September 30, 2009, for every $0.01 variation in the
value of the US/Canadian exchange rate.
Interest Rate Risk
Trinidad is subject to risk exposure related to changes in interest
rates on borrowings under the credit facilities which are subject to
floating interest rates. In order to hedge this overall risk exposure
Trinidad entered into interest rate swaps on 71% of the outstanding
borrowings under the US and Canadian term credit facilities,
rendering them partially fixed. As at September 30, 2009, Trinidad
had $206.1 million outstanding under the credit facilities. A change
of one percent in the interest rates would cause a $0.3 million and a
$1.4 million change in the interest expense for the three and nine
months ended September 30, 2009, respectively (2008 - $0.2 million
and $1.5 million, respectively).
Liquidity Risk
Liquidity risk is the risk that Trinidad will not be able to meet its
financial obligations as they become due. The Company actively
manages its liquidity through daily, weekly and longer-term cash
outlook and debt management strategies. Trinidad's policy is to
ensure that sufficient resources are available either from cash
balances, cash flows or undrawn committed bank facilities, to ensure
all obligations are met as they fall due.
To achieve this objective, the Company:
- Maintains cash balances and liquid investments with highly-rated
counterparties;
- Limits the maturity of cash balances; and
- Borrows the bulk of its debt needs under committed bank lines or
other term financing.
The following maturity analysis shows the remaining contractual
maturities for Trinidad's financial liabilities:
As at
September 30, There-
2009 2009 2010 2011 2012 2013 after
---------------------------------------------------------------------
Accounts payable
and accrued
liabilities 81,782 - - - - -
Interest rate
swaps 1,554 5,639 1,812 - - -
Canadian
revolving
debt(1)(3) - 47,000 - - - -
Canadian term
debt(3) 250 1,000 66,798 - - -
US term debt(3) 335 1,338 89,401 - - -
Other debt 123 491 6,987 - - -
Convertible
debentures(2)(3) - - - 354,142 - -
Interest payments
on contractual
obligations 8,639 33,462 28,980 13,723 - -
-----------------------------------------------------
Total 92,683 88,930 193,978 367,865 - -
-----------------------------------------------------
(1) This revolving debt facility is renewable annually subject to the
mutual consent of the lenders. To the extent that it is not
renewed, the drawn-down balance would become due 364 days later.
Trinidad anticipates this debt facility to be renewed into the
future.
(2) The financial liability of the convertible debentures represents
the face value at maturity in 2012.
(3) The convertible debentures and credit facilities are recorded at
their gross amounts and do not include transaction costs incurred
on their issuance.
12. COMMITMENTS
Rig Construction Program
In 2008, Trinidad announced its intent to expand its existing
drilling fleet through the construction of an additional nine
drilling rigs which have now been deployed in the US. These drilling
rigs have depth capacities ranging from 16,000 feet to 18,000 feet
and are backed by three to five year long-term, take-or-pay contracts
with three major North American oil and natural gas exploration and
production companies which provides Trinidad with a guaranteed
utilization rate of 100% on these rigs over their respective contract
terms. Six rigs were deployed in the nine months ended September 30,
2009, in addition to the three rigs which were deployed during 2008.
Bareboat Charters
As a part of the Axxis acquisition, Trinidad entered into an
Assignment Agreement in which the contracts to operate three barge
rigs (the "Bareboat Charters" or "Charter") were transferred to
Trinidad. Under the Bareboat Charters, Trinidad is committed to
operate the rigs on behalf of a third party. In turn, as the owners
of the rigs, this third party is entitled to receive 25% of the net
operating revenues and 50% of the net margin earned under each
charter. Under the original agreement any earnings in excess of this
payment were to be retained as compensation for the operation of the
barge rigs; however, as part of the purchase agreement Trinidad
committed to pay the former owners of Axxis US$12.5 million per year
for the three years subsequent to acquisition, of which one-third of
the payment, or US$4.2 million, shall be attributable to each of the
three Bareboat Charters.
This payment is contingent on the continued operation of the rigs and
to the extent that the contract is terminated by the rigs' owner, no
further payments will be required. This fixed payment was structured
to represent the residual earnings in excess of the payment to the
third party. In the instance that dayrates or expenses fluctuate from
the original provisions in the Bareboat Charters, Trinidad is exposed
to the residual gain or loss. Trinidad has disclosed all transactions
pertaining to the Bareboat Charters on a net basis. Trinidad does not
bear the significant risks and rewards of the arrangement nor does it
absorb the associated credit risk or asset risk.
13. SEGMENTED INFORMATION
Since Trinidad announced its intention to expand operations into the
US marketplace in 2005, its operations have been diversified from its
primary geographical focus in western Canada to include various
locations in the US, such that a significant proportion of Trinidad's
operations now occur in the US marketplace. The acquisitions of
Cheyenne Drilling and Axxis Drilling, as well as Trinidad's rig
construction programs have provided additional rigs of varying depths
and capabilities for the US operations, which complemented the
drilling fleet operating in the Canadian market and expanded
Trinidad's overall drilling operations. Despite the similarities in
the identified assets, the increased management depth in the US and
the varying conditions between the Canadian and US markets have
resulted in management evaluating Trinidad's drilling performance on
a geographically segmented basis. Trinidad's newly established
operations in Mexico and Chile have been combined with the US
operations as these operations did not meet the requirement for
disclosure as a separate segment.
The acquisition of Mastco in 2006 and Victory in 2008 further
broadened the operations of Trinidad to include the capability to
design, manufacture, sell and refurbish drilling rigs and related
equipment. The unique characteristics of this subsidiary, which are
different from Trinidad's core drilling operations, have resulted in
management's separate evaluation of its results. Transactions between
the segments are recorded at cost and have been eliminated upon
consolidation.
---------------------------------------------------------------------
United
Three months States/
ended Inter- Inter-
September 30, Canadian national Constr- segment
2009 Drilling Drilling uction Elimin-
($ thousands) Operations Operations Operations ations Total
---------------------------------------------------------------------
Revenue 40,979 83,494 29,502 (27,833) 126,142
Operating
expense 25,430 45,623 29,939 (27,833) 73,159
------------------------------------------------------
Gross margin 15,549 37,871 (437) - 52,983
Interest on
long-term debt 2,999 2,348 17 - 5,364
Interest on
convertible
debentures 8,868 - - - 8,868
Depreciation and
amortization 6,728 13,342 531 - 20,601
(Gain) loss on
sale of assets 258 58 4 - 320
------------------------------------------------------
Income (loss)
before corporate
items (3,304) 22,123 (989) - 17,830
General and
administrative 12,205
Stock-based
compensation 2,087
Foreign exchange
(gain) loss 11,430
Reorganization
costs -
Income tax
recovery 4,251
------------------------------------------------------
Net loss (12,143)
------------------------------------------------------
Capital
expenditures
(including
acquisitions
and deposits) 16,730 21,883 196 - 38,809
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months
ended United Inter-
September 30, Canadian States Constr- segment
2008 Drilling Drilling uction Elimin-
($ thousands) Operations Operations Operations ations Total
---------------------------------------------------------------------
Revenue 82,680 92,661 44,791 (28,445) 191,687
Operating
expense 52,100 53,350 41,589 (28,445) 118,594
------------------------------------------------------
Gross margin 30,580 39,311 3,202 - 73,093
Interest on
long-term debt 2,461 2,341 8 - 4,810
Interest on
convertible
debentures 8,819 - - - 8,819
Depreciation and
amortization 9,627 14,160 183 - 23,970
(Gain) loss on
sale of assets - (3) - - (3)
------------------------------------------------------
Income (loss)
before corporate
items 9,673 22,813 3,011 - 35,497
General and
administrative 11,557
Stock-based
compensation 1,197
Foreign exchange
(gain) loss (6,835)
Reorganization
costs 24
Income tax
expense 9,181
------------------------------------------------------
Net earnings 20,373
------------------------------------------------------
Capital
expenditures
(including
acquisitions
and deposits) 27,658 52,441 923 - 81,022
---------------------------------------------------------------------
---------------------------------------------------------------------
United
Nine months States/
ended Inter- Inter-
September 30, Canadian national Constr- segment
2009 Drilling Drilling uction Elimin-
($ thousands) Operations Operations Operations ations Total
---------------------------------------------------------------------
Revenue 142,973 265,717 99,862 (74,141) 434,411
Operating
expense 86,725 141,887 92,992 (74,141) 247,463
------------------------------------------------------
Gross margin 56,248 123,830 6,870 - 186,948
Interest on
long-term debt 9,197 7,033 57 - 16,287
Interest on
convertible
debentures 26,504 - - - 26,504
Depreciation and
amortization 19,724 42,505 1,486 - 63,715
(Gain) loss on
sale of assets 125 9,940 4 - 10,069
Impairment of
intangible
assets - 23,189 - - 23,189
------------------------------------------------------
Income before
corporate items 698 41,163 5,323 - 47,184
General and
administrative 40,868
Stock-based
compensation 4,448
Foreign exchange
(gain) loss 16,014
Reorganization
costs -
Income tax
expense 12,236
------------------------------------------------------
Net loss (26,382)
------------------------------------------------------
Capital
expenditures
(including
acquisitions
and deposits) 23,213 106,202 792 - 130,207
---------------------------------------------------------------------
---------------------------------------------------------------------
Nine months
ended United Inter-
September 30, Canadian States Constr- segment
2008 Drilling Drilling uction Elimin-
($ thousands) Operations Operations Operations ations Total
---------------------------------------------------------------------
Revenue 259,125 262,944 85,923 (55,475) 552,517
Operating
expense 154,751 149,231 78,724 (55,475) 327,231
------------------------------------------------------
Gross margin 104,374 113,713 7,199 - 225,286
Interest on
long-term debt 10,971 7,222 7 - 18,200
Interest on
convertible
debentures 26,158 - - - 26,158
Depreciation and
amortization 27,320 40,634 517 - 68,471
(Gain) on sale
of assets (60) (17) (243) - (320)
Impairment of
intangible
assets - - - - -
------------------------------------------------------
Income before
corporate items 39,985 65,874 6,918 - 112,777
General and
administrative 35,729
Stock-based
compensation 1,499
Foreign exchange
(gain) loss (10,358)
Reorganization
costs 2,713
Income tax
expense 22,768
------------------------------------------------------
Net earnings 60,426
------------------------------------------------------
Capital
expenditures
(including
acquisitions
and deposits) 37,448 100,230 1,177 - 138,855
---------------------------------------------------------------------
---------------------------------------------------------------------
United
States/
As at Inter- Inter-
September 30, Canadian national Constr- segment
2009 Drilling Drilling uction Elimin-
($ thousands) Operations Operations Operations ations Total
-------------------------------------------------------
Total assets 666,301 1,053,097 35,215 (92,318) 1,662,295
Goodwill - 91,117 62,521 - 153,638
Future income
tax asset
(liability) (9,995) (91,908) (2,177) 18,843 (85,237)
---------------------------------------------------------------------
---------------------------------------------------------------------
United
States/
As at Inter- Inter-
December 31, Canadian national Constr- segment
2008 Drilling Drilling uction Elimin-
($ thousands) Operations Operations Operations ations Total
-------------------------------------------------------
Total assets 634,499 1,184,827 42,738 - 1,862,064
Goodwill - 103,652 58,521 - 162,173
Future income
tax asset
(liability) (14,279) (72,522) (1,927) - (88,728)
---------------------------------------------------------------------
14. RELATED PARTY TRANSACTIONS
All related party transactions were incurred during the normal course
of operations on similar terms and conditions to those entered into
with unrelated parties. These transactions are measured at the
exchange amount, which is the amount of consideration established and
agreed to by the related parties.
Trinidad engages Blake, Cassels & Graydon LLP, a law firm in which a
director is a partner, to provide legal advice. During the three and
nine month periods ended September 30, 2009, Trinidad incurred legal
fees of $0.3 million and $0.8 million, respectively (2008 -
$0.3 million and $1.2 million, respectively) to Blake, Cassels &
Graydon LLP. On September 30, 2009 there was $0.1 million
outstanding, and on September 30, 2008 there were no amounts
outstanding.
During the first quarter of 2009, Trinidad purchased a parcel of land
from 1010460 Alberta Ltd, a company owned by an executive officer
within Trinidad's Canadian operations. The land purchase of
$1.6 million, as well as all of the purchase agreement's conditions,
were representative of an unrelated party transaction. This property
currently houses a facility used in the coring and surface casing
division of the Canadian Drilling Operations.
15. FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Three months ended Nine months ended
September 30, September 30,
($ thousands) 2009 2008 2009 2008
---------------------------------------------------------------------
Unrealized (losses)
gains on translating
financial statements
of self-sustaining
foreign operations
excluding
intercompany balances (64,211) 27,302 (100,997) 43,100
Unrealized gains
(losses) on
foreign currency
translation
adjustments on
intercompany balances 11,440 (6,604) 16,278 (9,842)
--------------------------------------------
Total foreign currency
translation adjustment (52,771) 20,698 (84,719) 33,258
--------------------------------------------
16. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform
to current year's presentation. Such reclassification did not impact
previously reported net earnings (loss) or retained earnings
(deficit).
17. SUBSEQUENT EVENTS
On October 5, 2009, an independent third party acquired 10% of
Trinidad's operations in Chile in exchange for cash of $1.1 million
and a note receivable of $1.1 million. This minority interest in
Chile will require their portion of the net assets and net income to
be segregated as non-controlling interest in Trinidad's consolidated
financial statements.
ContactsLyle Whitmarsh
President & Chief Executive Officer or Brent Conway
Executive Vice President & Chief Financial Officer or Lisa Ciulka
Director of Investor Relations at: Phone: (403) 265-6525
Fax: (403) 265-4168
E-mail: lciulka@trinidaddrilling.com
49.51 (0.43%)
