The following is a transcription of the above video, and The Market Online has edited it for clarity.
AKITA Drilling (TSX:AKT.A) is a leading intermediate North American land drilling contractor that is valued far below its assets with a fleet of 36 high-spec rigs operating in major resource basins in Canada and the United States.
We recently spoke with President and CEO Colin Dease, and CFO Darcy Reynolds, who discussed the outlook for AKITA and the industry, more broadly.
TMO: Colin, just to kick us off, what has made the company so undervalued?
Dease: I think there are a couple main reasons why we’re undervalued. For starters, oil and gas producers are trading at lower multiples than they have in the past, and then secondly, Canadian companies are generally trading at a discount to their U.S. peers.
The last I checked, the Canadian industry is trading around 15 times compared to a three-year average that’s closer to 22 times, and then there’s a further discount for oil field services companies. And then finally, we’re a microcap company that hasn’t recently returned capital to shareowners.
So these are the main reasons why I think we’re undervalued today.
TMO: Sticking with you, Colin, how does the company manage the cyclical nature of the drilling business, and what are some of the prospects for the remainder of the year?
Dease: I can tell you that market cyclicality is top of mind for every major decision we make at AKITA. We’ve recognized the challenges of servicing debt in the weak parts of the market cycle. That’s why we keep such a diligent watch over our balance sheet. We don’t want to be exposed when the market turns. So, we’re much less levered than most of our peers in Canada.
Fortunately for us, most of our labour force is a variable cost that scales up and down with activity, so these are some of the ways that we manage the cyclicality that we’re very aware of.
For 2024, we’re expecting improvement in both divisions over the back half of the year versus the first.
TMO: Darcy, moving over to you, AKITA reduced debt by more than $21 million over the past year with plans to reduce by another $20 million this year. Why this strategy?
Reynolds: That’s right, Ryan. We paid back $24 million in debt last year, which was 20 per cent above our 2023 debt target. As Colin said, we feel that the key to survival in a cyclical industry is a strong balance sheet. That’s why debt reduction is our current strategy. This strategy ensures that AKITA is well-positioned to weather future cyclicality.
Our plan in general is to get to a comfortable debt level and we feel that debt level is between $40 (million) and $50 million, at which time we’d shift our focus to shareholder return, which we feel is very important. An additional benefit to lowering our debt levels is that in a potential weak market, we are more able to pursue potential growth opportunities should they arise.
TMO: Darcy, what makes AKITA stand out from its peers, and is there anything investors should know about the company that’s often overlooked?
Reynolds: I think first and most important is their size. AKITA is a smaller public driller, which means we’re nimble, allowing us to provide more of a boutique level of customer service. But we’re also sophisticated enough that our Canadian customers are all blue-chip customers and we have the ability to work for the most discerning operators in the U.S., which is a pretty rare combination in the industry.
Second, I would say it’s our fleet makeup. We have the largest percentage of triple rigs in the public Canadian drilling market. And, our U.S. fleet is a hundred percent AC electric, featuring 13 AC triples, and one AC double.
And the third differentiator is our oil sands expertise. In Canada, we were recognized as a leader in oil sands drilling and have decades of experience in this market.
A couple of things that are usually overlooked about AKITA; I think one of them is our First Nation and Metis joint venture.
AKITA is a pioneer in establishing joint ventures with First Nation and Metis people, building strong relationships in key Canadian basins. And these partnerships benefit the communities in which we operate and also the companies that we work for are placing an increasing value on these relationships.
And from a financial perspective, one thing that’s overlooked is our tax losses. We have a total gross tax loss of $415 million. Ninety-two per cent of these are in the U.S. with the balance in Canada. These losses are another valuable part of our company that we don’t feel is reflected in our share price.
TMO: Colin, why invest in AKITA right now?
Dease: Well, from an outlook perspective, activity in the Permian Basin now looks to be slowly recovering. That’s where our 14-rig U.S. fleet is entirely consolidated.
Secondly, we feel we’re very well-positioned to take advantage of the improving market conditions in Canada. A market that’s finally been reinvigorated by the completion of the TransMountain expansion, and also by the Coastal GasLink ahead of LNG Canada finally coming online.
Further, global oil demand continues to grow even by IEA forecasts. And then finally, some don’t realize that AKITA has an important role to play in any form of energy transition.
We’ve drilled carbon capture storage wells and hydrogen storage wells. We’ve also drilled a geothermal well and we’ve built a niche in potash drilling. Currently we’re seeking opportunities to drill for both lithium and helium.
Furthermore, we have materially strengthened our balance sheet and yet we still trade at an extremely low multiple. In fact, last year our trailing 12-month EBITDA was 86 per cent of our entire current market cap. So these are some of the compelling reasons we feel people should invest in AKITA now.
You can find AKITA Drilling Ltd. on the Toronto Stock Exchange under the symbol AKT.A or head to their website at akitadrilling.com for more information.
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