Tuscany International Drilling Inc.
TSX : TID
COLOMBIA : TIDC

Tuscany International Drilling Inc.

March 21, 2013 09:00 ET

Tuscany International Drilling Inc. Announces Fourth Quarter and Year-End 2012 Results With Operational Update

CALGARY, ALBERTA--(Marketwire - March 21, 2013) - Tuscany International Drilling Inc. ("Tuscany" or the "Company") (TSX:TID) (COLOMBIA:TIDC) announces its fourth quarter and year-end 2012 results. The complete consolidated financial statements of the Company for the year ended December 31, 2012 and the related management's discussion and analysis will be filed under the Company's profile on the SEDAR website at www.sedar.com. The financial information described below should be read in conjunction therewith. The financial information included herein is unaudited and unless otherwise stated, has been presented in United States dollars.

2012 Highlights

  • At the end of 2012, our operating rig utilization was 65%, with 24 of 37 rigs under contract. Brazil continued to be a challenging market at the end of 2012 with 4 rigs under contract and Colombia beginning to show improvement with 9 rigs under contract at the end of the year. As we move towards the end of our first quarter of 2013, our rig utilization is improving with 2 idled rigs in Africa currently awarded to LOI's and 4 idled rigs in Colombia either awarded LOI's or in the final stages of contract negotiation. We would expect these new opportunities to be under contract and working no later than end of Q2. Prospects for two additional rigs to be under contract by the beginning of Q4 remain very strong, including the opportunity of at least one of our Brazilian Heli rigs.
  • Generated $75.8 million in revenue during the fourth quarter, a decrease of 20% over the same period last year and $329.5 million in revenue during 2012, an increase of 75% over the previous year.
  • Gross margin was $15.6 million during the fourth quarter, a decrease of 52% over the same period last year and $95.3 million during 2012, an increase of 50% over the previous year.
  • Adjusted EBITDA1 was $11 million during the fourth quarter compared to Adjusted EBITDA of $18.4 million during the same period last year. The 2012 Adjusted EBITDA was $62.9 million compared to an Adjusted EBITDA of $36.7 million the previous year.
  • Funds from operations1 were $8.5 million during the fourth quarter vs. funds from operations of $7.4 million during the same period last year. The 2012 funds from operations were $41.2 million vs. funds from operations of $7.7 million the previous year.
  • General and administrative expenses were $5.2 million during the fourth quarter, a decrease of 66% over the same period last year and $35.9 million during 2012, an increase of 14% over the previous year. This represents 6.9% of revenue in the fourth quarter and 10.9% of revenue in 2012. General and administrative expenses are expected to decrease marginally as a percentage of revenue in 2013 as revenue increases with higher expected rig utilization.
  • At December 2012, Management has decided that Rigs 121, 124 and 129 in Brazil and Rig 103 in Colombia no longer constitute any value to the Company and therefore an impairment charge of $24.8MM has been taken against the net book value of these rigs. An additional $3.7MM impairment charge has been taken against the remaining rigs in Brazil and $4.8 MM impairment charge against the rigs in Africa.
Operational Highlights
Three months ended December 31 Year ended December 31
$ thousands, except per share data and operating information 2012 2011 % change 2012 2011 % change 2010
Revenue 75,844 94,385 (20 )% 329,518 187,940 75 % 20,223
Gross margin(1) 15,621 32,210 (52 )% 95,284 63,631 50 % 4,310
Gross margin percentage 20.6 % 34.1 % (40 )% 28.9 % 33.9 % (15 )% 21.3 %
Adjusted EBITDA1 11,005 18,377 (40 )% 62,923 36,707 71 % (7,476 )
Adjusted EBITDA per share (basic) $ 0.03 $ 0.07 (57 )% $ 0.18 $ 0.14 29 % $ (0.05 )
Net loss for the period (35,928 ) (4,085 ) (780 )% (35,064 ) (26,117 ) (34 )% (20,186 )
Net loss per share (basic) $ (0.10 ) $ (0.02 ) (400 )% $ (0.10 ) $ (0.10 ) 0 % $ (0.13 )
Funds from operations1 8,500 7,393 15 % 41,167 7,668 437 % (10,597 )
Funds from operations per share (basic) $ 0.02 $ 0.03 (33 )% $ 0.12 $ 0.03 300 % $ (0.07 )
Cash from operating activities (62 ) 11,402 (101 )% 6,010 9,897 (39 )% (10,696 )
Cash from operating activities per share (basic) $ 0.00 $ 0.04 (100 )% $ 0.02 $ 0.04 (50 )% $ (0.07 )
General and administrative expenses 5,236 15,445 (66 )% 35,915 31,533 14 % 12,640
General and administrative expenses as a % of revenue 6.9 % 16.4 % (58 )% 10.9 % 16.8 % (35 )% 62.5 %
Total assets 644,995 642,306 0 % 644,995 642,306 0 % 276,967
Total long-term liabilities 190,677 177,658 7 % 190,677 177,658 7 % 70,731
Operating information
Number of available rigs 37 36 3 % 37 36 3 % 10
Revenue days 2,252 2,835 (21 )% 9,989 6,241 60 % 1,251
Utilization 66.2 % 85.6 % (23 )% 74.5 % 84.1 % (13 )% 77.9 %

(1) Refer to "Non-IFRS Measures"

Non-IFRS Measures

This MD&A contains references to adjusted EBITDA, adjusted EBITDA per share, funds from operations, funds from operations per share, and gross margin.

Adjusted EBITDA is defined as "Oilfield services revenue less oilfield services expenses less general and administrative expenses (excluding stock-based compensation expense)". Management believes that in addition to net income, adjusted EBITDA is a useful supplemental measure as it provides an indication of the results generated by the Company's principal business activities prior to the consideration of how these activities are financed, how the results are taxed in various jurisdictions and how the results are impacted by accounting standards associated with the Company's share-based compensation plan and corporate development activities. Per share amounts are calculated using the weighted average number of outstanding shares for the period under review.

$ thousands 2012 2011
Oilfield services revenue 329,518 187,940
Oilfield services expenses (234,234 ) (124,309 )
General and administrative expenses (35,915 ) (31,533 )
Stock-based compensation expense 3,554 4,609
Adjusted EBITDA 62,923 36,707

Funds from operations is defined as "cash flow provided by/used in operating activities before the change in non-cash working capital". Funds from operations is a measure that provides shareholders and potential investors additional information regarding the Company's liquidity and its ability to generate funds to finance its operations. Management will use this measure to assess the Company's ability to finance operating activities, capital expenditures and corporate development initiatives. Per share amounts are calculated using the weighted average number of outstanding shares for the period under review.

$ thousands 2012 2011
Cash flow provided by operating activities 6,010 9,897
Changes in non-cash working capital 35,157 (2,229 )
Funds from operations 41,167 7,668

Gross margin is defined as "oilfield services revenue less oilfield services expenses". Gross margin is a measure that provides shareholders and potential investors additional information regarding the profitability of the Company's rigs and is used by management to help assess operational performance.

$ thousands 2012 2011
Oilfield services revenue 329,518 187,940
Oilfield services expenses (234,234 ) (124,309 )
Gross margin 95,284 63,631
Percentage 28.9 % 33.9 %

Adjusted EBITDA, adjusted EBITDA per share, funds from operations, funds from operations per share, and gross margin are not measures that have any standard meaning prescribed by IFRS and accordingly, may not be comparable to similar measures used by other companies.

Overview

During the year ended December 31, 2012, the Company recorded a net loss of $35,064 ($0.10 per common share) compared to a net loss of $26,117 ($0.10 per common share) for the year ended December 31, 2011. During the year ended December 31, 2012, the Company recorded oilfield services revenue of $329,518, gross margin from rig operations of $95,284 and adjusted EBITDA of $62,923, compared to revenue of $187,940, gross margin from rig operations of $63,631 and adjusted EBITDA of $36,707 during the year ended December 31, 2011.

The increases in revenue, adjusted EBITDA and gross margin for 2012 compared to 2011, reflect the increase in rig count and associated revenue days during 2012 compared to 2011. During the second quarter of 2011 the Company acquired Drillfor, a Brazilian drilling and workover company, together with seven drilling rigs and one workover rig. During the third quarter of 2011, the Company completed the acquisition of Caroil, a Paris based drilling and workover company with operations in Colombia and central Africa, and a fleet of fourteen drilling and workover rigs and one rig which was managed for a third party. These two acquisitions increased the Company's original fleet by 22 rigs in 2011, and is the primary reason for the significant increases in revenue, adjusted EBITDA and gross margin for 2012 compared to 2011. For the year ended December 31, 2012, the Company had 9,989 revenue days from rig operations compared to 6,241 revenue days from rig operations during the year ended December 31, 2011. Gross margin percentage of 28.9% for the year ended December 31, 2012 was five percentage points lower than the gross margin percentage of 33.9% for the year ended December 31, 2011, primarily as a result of continuing labour costs associated with the unexpected early termination of contracts associated with four drilling rigs during the second half of 2012. Gross margin in 2012 was offset by general and administrative expenses of $35,915 (2011: $31,533), net finance costs of $28,824 (2011: 19,294), acquisition costs of $452 (2011: $5,044) and depreciation of $30,237 (2011: $19,901). For the year ended December 31, 2012, the Company also recorded current income tax expense of $8,610 (2011: 5,520), deferred income tax recovery of $8,026 (2011: deferred tax expense of $9,644), foreign exchange losses of $2,747 (2011: $123), equity income of $1,790 (2011: $1,311) and property and equipment impairment of $33,320 (2011: Nil). Compared to the year ended December 31, 2011, the increase in general and administrative expense reflects administrative costs associated with consolidating the Drillfor and Caroil operations for a full year in 2012 compared to a partial year in 2011.

During the year ended December 31, 2012, Tuscany spent $35,248 on investing activities, which includes $37,063 of capital expenditures comprised primarily of rig refurbishment activity, offset by proceeds from sale of property and equipment of $588 and a $1,227 reduction in restricted cash. During the year ended December 31, 2012, Tuscany drew an additional $15,000 on its credit facility, drew an additional $10,000 on its revolving line of credit, drew $1,469 on operating lines of credit and received $4,495 of funds from bank overdrafts and spent $8,579 related to amendments of its existing credit facility and the withdrawal of a senior notes offering.

Review of Consolidated Statement of Financial Position

($ thousands)

Change
($)(2)
Explanation
Cash and cash equivalents (6,853) See consolidated statement of cash flows.
Restricted cash (1,227) Restricted cash results from the requirement to maintain a debt service reserve account pursuant to the Company's credit facility. In December 2012, debt interest was paid from this reserve account, bringing the balance of the account to $Nil. Subsequent to the interest payment, deposits of $1,227 were made.
Accounts receivable 22,130 Increase is a result of an increase in the aging of accounts receivable balances.
Prepaid expenses
and deposits
4,440 Increase is due to additional advances to suppliers and prepaid expenses, primarily insurance, for the calendar year incurred during 2012.
Inventory 3,358 Increase is due to an increase in purchases partially offset by usage of existing inventories.
Foreign VAT recoverable (current and non-current) (3,260) Decrease is due to the recovery of amounts paid on prior importation of rigs into South America during the period offset by VAT applicable to payments to suppliers in Africa.
Long-term investments 592 Increase is due to equity income of Warrior Rig Ltd. ("Warrior") for the period, offset by a foreign exchange loss resulting from the translation of this investment and the sale of 6.13% of this investment.
Property and equipment (27,038) Decrease is due to impairment in the value of the assets and depreciation expense, partially offset by costs capitalized related to the refurbishment and enhancement of rigs.
Bank overdraft 4,495 Increase as a result of additional draws on bank overdraft facilities available to the Company.
Lines of credit 11,469 Increase as a result of additional draws on credit lines available to the Company.
Accounts payable and accrued liabilities (899) Decrease reflects the decrease in fourth quarter activity compared to the prior year, partially offset by a general increase in the aging of accounts payable balances.
Change ($)(1) Explanation
Income taxes payable (623) Decrease is due to the decrease in taxable income and taxable net asset basis in 2012.
Net deferred tax asset 8,025 Increase due primarily to the recognition of additional deferred tax assets in Colombia.
Long-term debt (current and long-term) 13,435 Increase is due to the Company renegotiating and increasing the amount of its credit facility, as well as the amortization of financing costs included in long-term debt offset by fees incurred during the period.
Contributed surplus 3,554 Increase relates to stock-based compensation expense recorded during the year of 2012.

(1) Reflects the movement in accounts from December 31, 2011 to December 31, 2012.

Review of Annual Consolidated Statement of Comprehensive Loss

($ thousands)

2012 2011 % Change
Oilfield services revenue 329,518 187,940 75 %
Oilfield services expenses (234,234 ) (124,309 ) 88 %
Gross margin(2) 95,284 63,631 50 %
Gross margin % 28.9 % 33.9 % 15 %

(1) Reflects the movement in accounts from December 31, 2011 to December 31, 2012.

(2) Refer to Non-IFRS measures

Oilfield services revenue was $329,518 for the year ended December 31, 2012, compared with $187,940 for the year ended December 31, 2011, an increase of 75%. The increase in revenue is a result of a significantly increased fleet size in 2011 and associated increase in the number of revenue days, and an increase in the average revenue per day in the year ended December 31, 2012, compared to the year ended December 31, 2011. During the year ended December 31, 2012, the Company had 9,989 revenue days compared to 6,241 revenue days in the year ended December 31, 2011. Revenue days increased in the year ended December 31, 2012, as a result of the additional rigs acquired through the Company's 2011 acquisitions of Drillfor and Caroil being available to the Company for a full year in 2012 compared to a partial year in 2011. For the year ended December 31, 2012, average revenue per day increased to $33.0 from $30.1 for the year ended December 31, 2011. Average revenue per day was increased in 2012 primarily as a result of higher rates for the Caroil rigs, which are larger horsepower rigs and therefore command higher day rates. All thirty-seven of the Company's drilling and heavy-duty workover rigs earned revenue from drilling operations during the year ended December 31, 2012. During the year ended December 31, 2011, the Company earned revenues from 34 rigs.

For the year ended December 31, 2012, gross margin was $95,284, or 28.9%, compared with a gross margin of $63,631, or 33.86%, for the year ended December 31, 2011. The decrease in gross margin percentage for the year ended December 31, 2012, compared to the gross margin percentage for the year ended December 31, 2011, reflects costs, primarily rig personnel/termination costs, which continued/were incurred after the unexpected early termination of four drilling rigs during the second half of 2012.

2012 2011 % Change
Depreciation 30,237 19,901 52 %

Depreciation expense totaled $30,237 for the year ended December 31, 2012, compared with $19,901 for the year ended December 31, 2011. Under the Company's depreciation policy, depreciation of rigs and related equipment is based on the number of days in operation. The significant increase in depreciation expense for the year ended December 31, 2012, compared to the year ended December 31, 2011, is a result of a significant increase in the size of the Company's fleet and related operating days in the year ended December 31, 2012, compared to the corresponding period of 2011. During 2012, the Company recorded depreciation on thirty-seven rigs compared to thirty-four rigs during the year ended December 31, 2011.

2012 2011 % Change
General and administrative 35,915 31,533 14 %

General and administrative expense increased to $35,915 (10.9% of revenue) for the year ended December 31, 2012, from $31,533 (16.8% of revenue) for the year ended December 31, 2011. During the second quarter of 2011 the Company acquired Drillfor, and during the third quarter of 2011 the Company acquired Caroil, which added to the Company's general and administrative expenses for the year ended December 311, 2012, compared to the year ended December 31, 2011. As a percentage of revenue, general and administrative expense decreased from the year ended December 31, 2011, to the year ended December 31, 2012, which reflects the critical mass and larger revenue base associated with increasing the Company's operations in Brazil and Colombia subsequent to the first three quarters of 2011, and management's efforts to realize efficiencies associated with these acquisitions.

Included in general and administrative expense for the year ended December 31, 2012, is $3,554 of stock-based compensation compared to $4,609 for the year ended December 31, 2011. Stock-based compensation expense represents the value, calculated using the Black-Scholes option pricing model, related to the granting of stock options.

2012 2011 % Change
Net finance costs 28,824 19,294 49 %

Net finance costs increased to $28,313 for the year ended December 31, 2012, from $19,294 for the year ended December 31, 2011. For the year ended December 31, 2012, net finance costs includes interest and amortization of costs associated with the Company's credit facility, the change in value on the Company's interest rate hedges, costs incurred associated with the Company's withdrawn senior notes offering, interest on payable amounts to Brazilian tax authorities and other smaller interest charges in various countries, net of interest income.

In August 2010, the Company entered into a $125,000 credit facility. During the third quarter of 2011 this credit facility was amended. The amendment consisted primarily of an increase in the credit facility to $220,000, including a $25,000 revolving line of credit, and was negotiated in conjunction with the Company's acquisition of Caroil. Fees associated with the credit facility have been presented as a direct reduction to the face value of the long-term debt. The effective interest rate method has been applied and results in the amortization of the debt discount over the life of the loan. Amortization of financing fees related to the credit facility of $5,044 has been included in net finance costs for the year ended December 31, 2012, compared to $10,865 (which includes the write-off of previously unamortized financing fees of $8,291 which existed at the time the facility was amended and expanded in September 2011) for the year ended December 31, 2011. In addition to the financing fees associated with this facility, the Company incurs interest expense on the amount drawn under the credit facility at three-month LIBOR plus 6.5% per annum. During the year ended December 31, 2012, the Company recorded $16,605 of interest related to the credit facility compared to $8,438 for the year ended December 31, 2011.

During 2010, the Company received $5,875 of short-term advances from Perfco Investments Ltd, a corporation owned by the Company's Executive Chairman. The short-term advances incurred interest at 10% per annum and were settled in April 2011. During the year ended December 31, 2012, the Company recorded $Nil interest expense related to these advances compared to $197 in the year ended December 31, 2011.

During the year ended December 31, 2012, the Company entered into two separate agreements to hedge the interest rate on a total of $100,000 of the $195,000 term loan. The Company has entered into floating for fixed swap agreements on three-month LIBOR to maturity of the term loan under the Company's credit facility. The fair value of these interest rate contract liabilities increased by $3,892 for the year ended December 31, 2012 (2011 - $Nil).

The Company is being charged interest on amounts owing to the Brazilian tax authority. Interest on amounts owing to the Brazilian tax authority was $1,041 for the year ended December 31, 2012 (2011 - $Nil). The Company also incurred costs of $1,939 related to an unsuccessful bond offering (2011: Nil).

The above finance costs incurred are partially offset by interest earned of $10 and in the year ended December 31, 2012 and $206 in the year ended December 31, 2011. Interest of $351 was incurred in other countries in the year ended December 31, 2012 (2011: Nil)

2012 2011 % Change
Impairment of property and equipment 33,320 - N/A

For the year ended December 31, 2012, the Company determined that the carrying value of certain assets held for sale exceeded their recoverable amounts, based on the higher of value in use and fair value, and recorded an impairment expense of $33,320. Tuscany recorded impairment on assets of $22,959 in Brazil, $5,561 in Colombia and $4,800 in Africa.

2012 2011 % Change
Foreign exchange contracts 45 - N/A

During the year ended December 31, 2012, the Company entered into a Euro/United States dollar cross costless collar on a total of 19,200 Euro. The contract consists of 24 contracts with notional amounts of 800 Euro per contract. The contract has a two year term and the fair value of this foreign exchange contract liability increased $45 in the year ended December 31, 2012 (2011 - Nil).

2012 2011 % Change
Foreign exchange loss 2,747 123 2,133 %

In addition to incurring operating expenses and capital expenditures in the Company's functional currency (United States dollars), the Company also incurs operating expenses and capital expenditures in Colombian pesos (COP), Canadian dollars (CDN $), Brazilian real (BRL), African francs (CFA), Trinidad and Tobago dollars (TTD), Euro (EUR) and Guyanese Dollars (GYD). Foreign exchange gains and losses arise primarily on the settlement of accounts payable invoices that are denominated in currencies other than the United States dollar.

2012 2011 % Change
Equity income 1,790 1,311 37 %

The Company has a 33.87% ownership interest in Warrior Rig Ltd., a private oilfield services company involved in the development and manufacture of oilfield services equipment. The carrying value of this investment is adjusted to include the pro-rata share of the investee's earnings, less dividends received. Equity income totaled $1,790 for the year ended December 31, 2012, compared with equity income of $1,311 for the year ended December 31, 2011. Equity income has increased as a result of increased activity in Warrior in 2012.

2012 2011 % Change
Acquisition costs 452 5,044 (91 )%

In the second quarter of 2011, the Company acquired Drillfor, and in the third quarter of 2011 the Company acquired Caroil. The acquisition costs for the year ended December 31, 2011, represent the costs associated with the acquisition of these two entities. In 2012, additional costs relating to these acquisitions were recorded by the Company.

2012 2011 % Change
Current income taxes 8,610 5,520 56 %

For the year ended December 31, 2012, Tuscany's current income tax expense of $8,610 is primarily comprised of taxes payable in Colombia ($3,467), Gabon ($3,268) and Ecuador ($670). The Company also has $1,205 of current tax expense from Canada, Brazil, Trinidad, Congo, Peru and Luxembourg.

2012 2011 % Change
Deferred income taxes (recovery) (8,026 ) 9,644 (177 )%

For the year ended December 31, 2012, Tuscany recorded a net deferred income tax recovery of $8,026. For the year ended December 31, 2012, deferred income tax expense of $857 in Ecuador and $1,580 in Tanzania was offset by a deferred income tax recovery of $10,204 in Colombia, $151 in Brazil and $108 in Trinidad. The deferred income tax recoveries relate primarily to the recognition of previously unrecognized tax losses.

Review of Fourth Quarter Consolidated Statement of Comprehensive Loss

($ thousands)

Three months ended
Dec 31, 2012 Dec 31, 2011 % Change
Oilfield services revenue 75,844 94,385 (20 )%
Oilfield services expenses (60,223 ) (62,175 ) (3 )%
Gross margin(1) 15,621 32,210 (52 )%
Gross margin % 20.6 % 34.1 % (40 )%

(1) Refer to Non-IFRS measures

Oilfield services revenue was $75,844 for the three months ended December 31, 2012, compared with $94,385 for the three months ended December 31, 2011, a decrease of 20%. The decrease in revenue is a result of a decrease in the number of revenue days and revenue per day during the three months ended December 31, 2012, compared to the three months ended December 31, 2011. During the three months ended December 31, 2012, the Company had 2,252 revenue days (66.2% utilization) compared to 2,835 revenue days (85.6% utilization) in the fourth quarter of 2011. Revenue days decreased in the three months ended December 31, 2012, primarily as a result of rigs coming off contract during 2012. For the three months ended December 31, 2012, average revenue per day increased to $33.68 from $33.29 for the three months ended December 31, 2011. Twenty-eight of the Company's 37 drilling and heavy-duty workover rigs earned revenue from drilling operations during the fourth quarter of 2011. During the fourth quarter of 2011 the Company earned revenues from 33 rigs.

For the three months ended December 31, 2012, gross margin was $15,621, or 20.6%, compared with a gross margin of $32,210, or 34.1%, for the three months ended December 31, 2011. The decrease in gross margin percentage for the three months ended December 31, 2012, compared to the gross margin percentage for the three months ended December 31, 2011, primarily reflects lower than expected operating results from the Company's rigs in Africa, and continuing rig personnel and employee termination costs associated with the early termination of the HRT contracts in Brazil and other operating costs associated with rigs coming off contract during the year ended December 31, 2012.

Three months ended
Dec 31, 2012 Dec 31, 2011 % Change
Depreciation 7,342 9,914 (26 )%

Depreciation expense totaled $7,342 for the fourth quarter of 2012 compared with $9,914 for the fourth quarter of 2011. Under the Company's depreciation policy, depreciation of rigs and related equipment is based on the number of days in operation. The significant decrease in depreciation expense for the three months ended December 31, 2012, compared to the three months ended December 31, 2011, is a result of decreased operating days in the three month period ended December 31, 2012, compared to the corresponding period of 2011. During the fourth quarter of 2012, the Company recorded depreciation on 28 rigs compared to 32 rigs during the fourth quarter of 2011.

Three months ended
Dec 31, 2012 Dec 31, 2011 % Change
General and administrative 5,236 15,445 (66 )%

General and administrative expense decreased to $5,236 (6.9% of revenue) for the fourth quarter of 2012 from $15,445 (16.4% of revenue) for the fourth quarter of 2011. As a percentage of revenue, general and administrative expense decreased from the three months ended December 31, 2011, to the three months ended December 31, 2012, which reflects management's efforts to realize efficiencies associated with these 2011 acquisitions.

Included in general and administrative expense for the three months ended December 31, 2012, is $620 of stock-based compensation compared to $755 for the three months ended December 31, 2011. Stock-based compensation expense represents the value, calculated using the Black-Scholes option pricing model, related to the granting of stock options.

Three months ended
Dec 31, 2012 Dec 31, 2011 % Change
Net finance costs $ 8,729 5,234 67 %

For the three months ended December 31, 2012, net finance costs includes interest and amortization of costs associated with the Company's credit facility, the change in value on the Company's interest rate hedges, costs associated with the withdrawn senior notes offering, interest on payable amounts to Brazilian tax authorities and other smaller interest charges in various countries, net of interest income. Net finance costs increased to $8,729 for the three months ended December 31, 2012, from $5,234 for the three months ended December 31, 2011.

In August 2010, the Company entered into a $125,000 credit facility. During the third quarter of 2011 this credit facility was amended. The amendment consisted primarily of an increase in the credit facility to $220,000, including a $25,000 revolving line of credit, and was negotiated in conjunction with the Company's acquisition of Caroil. Fees associated with the credit facility have been presented as a direct reduction to the face value of the long-term debt. The effective interest rate method has been applied and results in the amortization of the debt discount over the life of the loan. As a result, amortization of financing fees related to the credit facility of $1,764 have been included in net finance costs for the three months ended December 31, 2012, compared to $1,273. In addition to the financing fees associated with this facility, the Company incurs interest expense on the amount drawn under the credit facility at three-month LIBOR plus 6.5% per annum. During the three months ended December 31, 2012, the Company recorded $4,219 of interest related to the credit facility compared to $3,966 for the year ended December 31, 2011.

During the year ended December 31, 2012, the Company entered into two separate agreements to hedge the interest rate on a total of $100,000 of the $195,000 term loan. The Company has entered into floating for fixed swap agreements on three-month LIBOR to maturity of the term loan under the Company's credit facility. The fair value of these interest rate contract liabilities increased by $111 for the three months ended December 31, 2012 (2011 - $Nil). The Company also incurred costs of $1,939 related to a failed bond offering (2011: Nil).

The Company is being charged interest on amounts owing to the Brazilian tax authority. Interest on amounts owing to the Brazilian tax authority was $354 for the year ended December 31, 2012 (2011 - $Nil). Interest of $342 was incurred in various countries in the year ended December 31, 2012 (2011 - Nil).

Three months ended
Dec 31, 2012 Dec 31, 2011 % Change
Impairment of property and equipment 33,320 - N/A

For the three months ended December 31, 2012, the Company determined that the carrying value of certain assets held for sale exceeded their recoverable amounts, based on the higher of value in use and fair value, and recorded an impairment expense of $33,320. Tuscany recorded impairment on assets of $22,959 in Brazil, $5,561 in Colombia, and $4,800 in Africa.

Three months ended
Dec 31, 2012 Dec 31, 2011 % Change
Foreign exchange contracts (158 ) - N/A

During the year ended December 31, 2012, the Company entered into a Euro/United States dollar cross costless collar on a total of 19,200 Euro. The contract consists of 24 contracts with notional amounts of 800 Euro per contract. The contract has a two year term and the fair value of this foreign exchange contract liability decreased $158 in the three months ended December 31, 2012 (2011 - Nil)

Three months ended
Dec 31, 2012 Dec 31, 2011 % Change
Foreign exchange loss (gain) 1,745 (1,063 ) (264 )%

In addition to incurring operating expenses and capital expenditures in the Company's functional currency (United States dollars), the Company also incurs operating expenses and capital expenditures in Colombian pesos (COP), Canadian dollars (CDN $), Brazilian real (BRL), African francs (CFA), Trinidad and Tobago dollars (TTD), Euro (EUR) and Guyanese Dollars (GYD). Foreign exchange gains and losses arise primarily on the settlement of accounts payable invoices that are denominated in currencies other than the United States dollar.

Three months ended
Dec 31, 2012 Dec 31, 2011 % Change
Equity income 522 748 (30 )%

The Company has a 33.87% ownership interest in Warrior Rig Ltd., a private oilfield services company involved in the development and manufacture of oilfield services equipment. The carrying value of this investment is adjusted to include the pro-rata share of the investee's earnings, less dividends received. Equity income totaled $522 for the fourth quarter of 2012 compared with an equity income of $748 for the fourth quarter of 2011. Equity income has increased as a result of increased activity in Warrior in 2012.

2012 2011 % Change
Acquisition costs 452 - (91 )%

In the second quarter of 2011, the Company acquired Drillfor, and in the third quarter of 2011 the Company acquired Caroil. The acquisition costs for the year ended December 31, 2011, represent the costs associated with the acquisition of these two entities. In 2012, additional costs relating to these acquisitions were recorded by the Company.

Three months ended
Dec 31, 2012 Dec 31, 2011 % Change
Current income taxes 466 (714 ) 165 %

For the three months ended December 31, 2012, Tuscany's total current income tax expense of $466 is comprised of current income tax expenses of $2,194 (primarily in Colombia and Gabon) offset by current income tax recoveries of $866 in Ecuador and $862 in Trinidad.

Three months ended
Dec 31, 2012 Dec 31, 2011 % Change
Deferred income taxes (5,061 ) 9,644 152

For the three months ended December 31, 2012, Tuscany recorded a deferred income tax recovery of $5,061. For the three months ended December 31, 2012, deferred income tax expenses of $788 in Ecuador and $1,008 in Tanzania were offset by deferred income tax recoveries of $4,609 in Colombia, $1,790 in Brazil and $458 in Uganda.

Tuscany International Drilling Inc.

Consolidated Statement of Financial Position (unaudited)

(expressed in thousands of US dollars)

December 31 December 31
2012 2011
Assets
Current Assets
Cash and cash equivalents 6,303 13,156
Restricted cash 273 1,500
Accounts receivable 106,962 84,832
Prepaid expenses and deposits 6,084 1,644
Inventory 18,666 15,308
Foreign VAT recoverable 4,219 2,994
142,507 119,434
Foreign VAT recoverable 5,455 9,940
Deferred tax asset 15,772 5,225
Long-term investment 6,412 5,820
Property and equipment 474,849 501,887
644,995 642,306
Liabilities
Current Liabilities
Bank overdraft 4,495 -
Lines of credit 31,469 20,000
Accounts payable and accrued liabilities 63,369 64,267
Current portion of long-term debt 16,875 10,000
Income taxes payable 8,847 9,470
125,055 103,737
Long-term debt 179,553 172,993
Derivative financial instruments 3,937 -
Deferred tax liability 7,187 4,665
315,732 281,395
Shareholders' Equity
Share capital 366,300 366,300
Contributed surplus 21,660 18,106
Warrants 25,704 25,704
Accumulated other comprehensive loss (389 ) (251 )
Deficit (84,012 ) (48,948 )
329,263 360,911
644,995 642,306

Tuscany International Drilling Inc.

Consolidated Statement of Comprehensive Loss (unaudited)

For the years ended December 31, 2012 and 2011

(expressed in thousands of US dollars, except per share data)

December 31 December 31
2012 2011
Revenue
Oilfield services 329,518 187,940
Expenses
Oilfield services 234,234 124,309
Depreciation 30,237 19,901
General and administrative 35,915 31,533
Foreign exchange loss 2,747 123
Equity income (1,790 ) (1,311 )
Acquisition costs 452 5,044
301,795 179,599
Net finance costs 28,824 19,294
Gain on sale of property and equipment (44 ) -
Impairment of property and equipment 33,320
Loss on sale of investment 58 -
Foreign exchange contract 45 -
Loss before income taxes (34,480 ) (10,953 )
Current income taxes 8,610 5,520
Deferred income taxes (8,026 ) 9,644
Net loss for the year (35,064 ) (26,117 )
Other comprehensive loss
Foreign currency translation (138 ) (545 )
Total comprehensive loss (35,202 ) (26,662 )
Net loss per share, basic and diluted (0.10 ) (0.10 )

Tuscany International Drilling Inc.

Consolidated Statement of Changes in Equity (unaudited)

(expressed in thousands of US dollars)

Attributable to equity owners of the Company
Share capital Contributed surplus Warrants Accumulated other comprehensive income (loss) Deficit Total equity
Balance - January 1, 2012 366,300 18,106 25,704 (251 ) (48,948 ) 360,911
Net loss for the year - - - - (35,064 ) (35,064 )
Cumulative foreign currency translation adjustment
-

-

-

(138
)
-

(138
)
Comprehensive loss for the year - - - (138 ) (35,064 ) (35,202 )
Stock-based compensation - 3,554 - - - 3,554
Balance - December 31, 2012 366,300 21,660 25,704 (389 ) (84,012 ) 329,263
Balance - January 1, 2011 190,701 2,707 14,392 294 (22,831 ) 185,263
Net loss for the year - - - - (26,117 ) (26,117 )
Cumulative foreign currency translation adjustment
-

-

-

(545
)
-

(545
)
Comprehensive loss for the year - - - (545 ) (26,117 ) (26,662 )
Stock-based compensation - 4,609 - - - 4,609
Loan conversion 6,168 - - - - 6,168
Subscription receipt issuance 102,321 - - - - 102,321
Issuance of shares 71,844 - - - - 71,844
Share issuance costs (5,760 ) - - - - (5,760 )
Issuance of warrants - - 23,128 - - 23,128
Exercise of warrants 1,026 - (1,026 ) - - -
Expiration of warrants - 10,790 (10,790 ) - - -
Balance - December 31, 2011 366,300 18,106 25,704 (251 ) (48,948 ) 360,911

Tuscany International Drilling Inc.

Consolidated Statement of Cash Flows (unaudited)

For the year ended December 31, 2012 and 2011

(expressed in thousands of US dollars)

December 31 December 31
2012 2011
Cash flow provided by (used in):
Operating Activities
Net loss for the year (35,064 ) (26,117 )
Items not affecting cash
Depreciation 30,237 19,901
Unrealized foreign exchange loss 3 -
Gain on sale of property and equipment (44 ) -
Property & equipment impairment 33,320 -
Equity income (1,790 ) (1,311 )
Amortization of financing fees 7,014 10,586
Change in fair value of derivative contracts 3,937 -
Stock based compensation 3,554 4,609
Changes in non-cash working capital (35,157 ) 2,229
6,010 9,897
Investing Activities
Acquisition of property and equipment (37,063 ) (80,169 )
Proceeds from sale of property and equipment 588 -
Acquisition of Drillfor - (55,945 )
Acquisition of Caroil - (112,249 )
Restricted cash 1,227 1,828
(35,248 ) (246,535 )
Financing Activities
Proceeds from issuance of share capital, net - 99,497
Proceeds from long term debt 15,000 101,908
Costs of issuance of long term debt - (232 )
Payment of financing fees (8,579 ) -
Proceeds from bank overdraft 4,495 -
Proceeds from lines of credit 11,469 -
Proceeds of issuance of warrants, net - 656
22,385 201,829
Decrease in cash and cash equivalents (6,853 ) (34,809 )
Cash and cash equivalents, beginning of year 13,156 47,965
Cash and cash equivalents, end of year 6,303 13,156
Cash Flow Supplementary Information
Interest received 10 206
Interest paid 17,804 6,605
Income taxes paid 9,233 1,036

Contact Information

  • Tuscany International Drilling Inc.
    Walter Dawson
    President and CEO
    (403) 265-8258
    (403) 265-8793 (FAX)

    Tuscany International Drilling Inc.
    Matt Moorman
    CFO
    (403) 265-8258
    (403) 265-8793 (FAX)

    Tuscany International Drilling Inc.
    1950, 140-4th Avenue S.W.
    Calgary, Alberta
    www.tuscanydrilling.com