Highlights For First Quarter 2009
Cash flow from operations before changes in non-cash working capital was $51.5 million ($0.55 per share (diluted)) in the first quarter of 2009, down 27.0%, compared with the year-ago quarter. This drop was primarily caused by lower revenue due to slower industry activity, higher general and administrative costs resulting from increased bad debt provisions and higher current taxes.
The company recorded a net loss in the first quarter of 2009 of $5.6 million (a net loss of $0.06 per share (diluted)), down 113%, compared with the year-ago quarter. The key factor causing the net loss in the quarter was an impairment of intangible asset charge of $23.2 million that Trinidad recorded in relation to its Barge Drilling operations. Net earnings before impairment of intangible assets(1) in the quarter was $17.5 million ($0.19 per share (diluted)), down 54.9%, primarily for the same reasons impacting cash flow from operations before changes in non-cash working capital mentioned above.
In the first quarter of 2009 the company took several steps to strengthen its financial position including: the early renewal of its $225 million revolving credit facility, a reduction in the quarterly dividend from $0.15 per share to $0.05 per share and the reduction of its 2009 forecast capital expenditures from $330 million to $165 million.
The company delivered sound financial results in the first quarter of 2009, a declining North American drilling market which continued to be hampered by the global economic crisis, negatively impacted both commodity prices and capital spending by exploration and production companies. Although, Trinidad’s overall financial results represent a decline from the previous year, the results demonstrate the strength of the Company’s market position and its ability to maintain strong margins given the current tumultuous economic environment. Trinidad Drilling took several steps in the first quarter to strengthen its financial position and prudently manage cash outflows. These steps will favorably position the Company to weather weak market conditions and enable it to capitalize on opportunities when market conditions improve.
During the first quarter of 2009, Trinidad Drilling concluded the renewal of its $225 million revolving credit facility (as defined in annual consolidated financial statements – note 9). The facility was renewed with no changes in debt covenants and at rates which will allow Trinidad Drilling to maintain a similar effective interest rate as the previous year, given existing market rates. As well, in this quarter, Trinidad Drilling substantially reduced its capital expenditure budget for 2009, postponed delivery of six out of its 15 US rig builds until 2010, cancelled the construction of four new service rigs and reduced its quarterly dividend from $0.15 per share to $0.05 per share. These initiatives have allowed the company to preserve cash flows, lower projected debt levels and continue to execute on strategic commitments. Trinidad Drilling continued to make progress on its 2008/2009 rig build program by delivering two new technologically-innovative rigs into the US on long-term, take-or-pay contracts. Trinidad Drilling also had a very successful quarter in Mexico, with its three land drilling rigs performing extremely well and providing strong gross margins and profitability. The geographic expansion into Mexico continues to reduce the impact of seasonality and provides increased stability to the Company’s cash flows along with an entrance into a marketplace with relatively strong demand for new and advanced drilling equipment.
Trinidad Drilling’s revenue for the quarter decreased by 12.8% or $28.1 million from $219.7 million in 2008 to $191.6 million in 2009, which was a direct result of the current suppressed market conditions impacting commodity prices and overall customer demand. These conditions impacted Trinidad Drilling’s overall operating days and reduced rig utilization in Canada and the US, as well as the company’s barge drilling rigs year-over-year. Trinidad’s total operating days decreased by 1,923 days or 24.2% for the first quarter of 2009, while land drilling rig utilization in Canada and the US and Mexico segments declined by 29.2% and 26.4% respectively. Trinidad’s Canadian drilling rig utilization rate, however, continued to outperform the industry average, exceeding the industry rate of 36% by 41.7% for the quarter. In the US and Mexico, the strength and stability of Trinidad Drilling’s long-term, take-or-pay contracts helped to stabilize dayrates and support utilization levels.
During the first quarter of 2009, continued softness in the US barge drilling market negatively impacted Trinidad’s barge operations as rates per drilling day and utilization levels decreased compared to the same time frame of 2008. Given the recent economic events impacting the barge drilling market, Trinidad recognized a one-time impairment charge of $23.2 million in the quarter related to the Bareboat Charters (see the Impairment of Intangible Asset section of this MD&A for further details).
Trinidad Drilling’s net earnings before impairment of intangible asset dropped by 54.9% to $17.5 million or $0.19 per share (diluted) for the first quarter of 2009, compared with the $38.9 million or $0.44 per share (diluted) in 2008. The net impact of the impairment on earnings per share was a reduction of $0.25 per share (diluted) for the three months ended March 31, 2009.
Trinidad Drilling’s net earnings before impairment of intangible asset during the quarter were also negatively impacted by higher General and Administrative (G&A) expenses, as a result of an increased bad debt provision, and increased income taxes as compared to the same time period of 2008. Offsetting these factors were the additional rigs operating in the US and Mexico segment, marginal increases in dayrates in both the Canadian and US land drilling divisions and decreased interest on long-term debt and reorganization costs year-over-year.
For the first quarter of 2009, Henry Hub natural gas spot prices averaged $4.60 per mmBtu, a decrease of 47% over the first quarter 2008 average of $8.64 per mmBtu. West Texas Intermediate crude oil averaged $43.04 per barrel during the first quarter of 2009, a 56% decline in comparison to $97.59 per barrel for the same period of 2008. The significant decline in commodity prices has been driven predominantly by global recessionary conditions brought about by volatility in the credit and capital markets.
These factors have curbed spending plans for many of Trinidad Drilling’s customers and had a negative impact on Trinidad Drilling’s operations during the first quarter of 2009. While commodity prices recovered somewhat during the quarter compared to the fourth quarter of 2008, there remains considerable price uncertainty for both oil and natural gas due to low levels of demand and continuing high storage levels. Management has taken steps during the first quarter of the year to proactively adjust its operating and administrative cost structure, including a reduction in staffing levels, wage rollbacks and decreased overhead and support infrastructure reflecting the lower activity levels.
These measures have been implemented to ensure Trinidad Drilling maintains strong margins in light of potentially lower activity levels. While Trinidad’s focus in Canada and the US is on cost management and preservation of market share, Trinidad Drilling is opportunistic with respect to its international expansion initiatives and is pursuing strategic opportunities with limited capital expenditures and a balance between risk and reward.
