Tuscany International Drilling Inc.
TSX : TID
COLOMBIA : TIDC

Tuscany International Drilling Inc.

November 14, 2013 09:00 ET

Tuscany International Drilling Inc. Announces Sale of Two Colombian Rigs and Caroil Africa and Financial Results for the Third Quarter 2013

CALGARY, ALBERTA--(Marketwired - Nov. 14, 2013) - Tuscany International Drilling Inc. ("Tuscany" or the "Company") (TSX:TID)(COLOMBIA:TIDC) is pleased to announce the execution of definitive agreements with Etablissements Maurel et Prom S.A. ("M&P") pursuant to which:

  1. M&P will acquire Rigs 112 (Colombia) and C16 (Colombia) from Tuscany (the "Rig Purchase"); and

  2. through the acquisition of the issued and outstanding shares of Caroil SAS ("Caroil"), a wholly-owned subsidiary of Tuscany (the "Caroil Sale"), M&P will indirectly acquire Tuscany's business operations in Africa which are primarily comprised of 9 drilling and workover rigs, associated inventory and related drilling contracts and obligations in respect of the French branch office of Caroil. Caroil's business operations in Colombia, including 5 drilling and workover rigs, associated inventory and related drilling contracts, will be transferred to a wholly-owned subsidiary of Tuscany immediately prior to the completion of the Caroil Sale (the "Caroil Colombia Transfer" and together with the Rig Purchase and the Caroil Sale, the "Transaction").

The aggregate consideration payable by M&P to Tuscany pursuant to the Transaction is comprised of: (i) payment in cash in the aggregate amount of U.S. $23.0 million, of which U.S. $15.3 million has already been advanced by M&P to Tuscany, U.S. $0.7 million to be paid upon completion of the Rig Purchase and U.S. $7.0 million to be deposited into escrow upon completion of the Rig Purchase and released upon the satisfaction of certain conditions, including as to 50% upon completion of the Caroil Sale and as to the remaining 50% upon receipt of Tanzanian competition approval and the repayment to M&P of certain Colombian withholding taxes remitted by M&P in connection with the Transaction; (ii) the assumption by M&P of U.S. $50.0 million of debt under Tuscany's syndicated credit facility; and (iii) subject to compliance with applicable laws, the transfer of the 109 million common shares of Tuscany ("Tuscany Shares") owned by M&P to Tuscany for cancellation (or, in the alternative, a special purpose vehicle not controlled by M&P). Following the completion of the Transaction and the transfer of the Tuscany Shares, M&P will not hold any securities of Tuscany. Based on the average closing price of the Tuscany Shares between October 21, 2013 and October 25, 2013, the Tuscany Shares have a deemed value of $15.3 million.

The proceeds from the completion of the Transaction will be used by Tuscany to reduce its indebtedness under its credit facility and to fund operations.

Upon completion of the Transaction, Tuscany will refocus its operations to South America, including existing operations in Colombia, Brazil and Ecuador. Including the 5 rigs that will remain with Tuscany pursuant to the Caroil Colombia Transfer, Tuscany's fleet will be comprised of 12 rigs in Colombia, 9 rigs in Brazil and 5 rigs in Ecuador.

The table below details the utilization of Tuscany's fleet following the completion of the Transaction:

Country Working/Mobilizing Not Working Total
Colombia 11 1 12
Brazil 2 5 7
Heli-rigs (Brazil) 0 2 2
Ecuador 3 2 5
15 11 26

Citigroup Global Markets Inc. ("Citigroup") provided certain financial advisory services to Tuscany in connection with the Transaction. Black Spruce Merchant Capital Corp. also acted as financial advisor to Tuscany.

As the Transaction involves M&P, an insider of the Company by virtue of holding 29.05% of the issued and outstanding voting securities of the Company, being the 109 million of Tuscany Shares, Tuscany is required to obtain shareholder approval pursuant to the applicable policies of the Toronto Stock Exchange ("TSX") including under subsection 501(c) with respect to transactions involving insiders or other related parties of a non-exempt issuer. Tuscany has applied to the TSX, pursuant to the provisions of subsection 604(e), the "financial hardship exemption", of the TSX Company Manual, for an exemption (the "TSX Exemption") from the requirement to obtain shareholder approval, in consideration of the serious financial circumstances of the Company.

The Company's application to rely on the TSX Exemption was made upon the unanimous recommendation of a special committee (the "Special Committee") of the board of directors (the "Board") of the Company, comprised of Donald Wright, Herb Snowdon and William Dorson, all of whom are members of the Board and independent of any interest in M&P or the Transaction. The Special Committee was established for the purposes of pursuing and evaluating strategic alternatives available to the Company and for negotiating and approving the Transaction.

The Board, after consultation with management of the Company and its advisors, and relying in part on: (i) the fact that the Transaction is designed to improve the financial situation of the Company; (ii) the unanimous recommendation and determinations of the Special Committee; (iii) the fairness opinion received from Citigroup, based on and subject to the matters specified therein, as to the fairness, from a financial point of view and as of the date of such opinion, to Tuscany of the aggregate consideration to be received by Tuscany pursuant to the Transaction; and (iv) after having given due regard to the outcome of the Company's ongoing strategic alternatives review process, which has not been successful in providing a solution for the Company and its shareholders, has concluded that the Company is in serious financial difficulty and the Transaction is reasonable and represents the only practicable solution available to the Company under the current circumstances.

Closing of the Transaction is conditional on receipt of approval by the TSX of the Transaction. The Transaction has not yet been granted conditional approval by the TSX. There can be no assurance that the TSX will grant approval or accept the application for the use of the TSX Exemption, in which case the Transaction may also be subject to the receipt of approval of Tuscany shareholders, excluding M&P. In the event that the TSX permits the Company to rely on the TSX Exemption, this will automatically result in the initiation of a continued listing review by the TSX, as is customary under such circumstances.

In addition, the Transaction is considered to be a "related party transaction" within the meaning of Multilateral Instrument 61-101 ("MI 61-101"). The Company has relied on the exemptions from the valuation and minority shareholder approval requirements in MI 61-101 contained in sections 5.5(g) and 5.7(1)(e) of MI 61-101 in respect of such requirements.

Tuscany's lenders under its syndicated credit facility have provided Tuscany with a "no-objection" letter with respect to the Transaction.

The Company anticipates that the Rig Purchase will be completed within five business days of the Company receiving confirmation from the TSX that it has conditionally approved the Transaction, subject to customary conditions to receipt of final approval. The remainder of the Transaction is expected to be completed on or about December 31, 2013.

The closing of the Transaction is subject to the satisfaction or waiver of conditions customary for transactions of this nature, including, among other things, TSX approvals, regulatory approvals and third party consents.

Messrs. Perret and Canel, the M&P representatives on the board of directors of Tuscany, have tendered their resignations. The Board of Directors of Tuscany thanks Messrs. Perret and Canel for their valuable service to the Company and wish them much success in their future endeavours.

Third Quarter 2013 Financial Results

The unaudited condensed interim consolidated financial statements of the Company for the third quarter ended September 30, 2013 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. Unless otherwise stated, the financial information included herein has been presented in thousands of United States dollars.

Q3 2013 Highlights

  • On November 13, 2013, the Company entered into several agreements whereby the Company effectively will sell all of the assets and liabilities comprising the Company's African segment, as well as two rigs currently located in Colombia to M&P. Total consideration for the sales is $23,000 in cash, the assumption by M&P of $50,000 of the Company's long term debt and the return of 109,000,000 Common shares previously issued to M&P as part of the Company's acquisition of Caroil SAS in September 2011. The Company's September 30, 2013, unaudited condensed consolidated financial statements treat the Company's African operations as discontinued and the two rigs to be sold in conjunction with the sale of the African segment as assets held for sale.

  • The Company has a scheduled principal and interest payment in December 2013 that it will not be able to make. Tuscany anticipates that it will enter into a new credit agreement which will address the requirement to make the December principal and interest payment. In addition, as of the September 30, 2013, determination date, the Company was in breach of the interest coverage ratio outlined in the credit agreement. Subsequent to September 30, 2013, Tuscany received a waiver of this covenant breach. The full amount of long term debt has been classified as a current liability as at September 30, 2013. In addition, during the third quarter Tuscany amortized $11,080 of deferred financing fees relating to the Company's credit facility.

  • In the third quarter of 2013, Tuscany recorded $14,898 of bad debt provisions (in general and administration expense) relating to customers whose accounts receivable were deemed to be uncollectible. Tuscany also recorded $4,010 in other one-time items consisting of termination costs associated with the closing of the Company's Houston office, costs associated with the Company's failed bond financing and previously deferred costs associated with the importation of rigs and equipment into Brazil.

  • The Company recorded revenue from continuing operations of $43,278 during the third quarter compared to $51,756 from continuing operations during the same period last year.

  • Gross margin1 from continuing operations was $10,373 during the third quarter compared to $15,876 from continuing operations during the same period last year.

  • Adjusted EBITDA1 from continuing operations was $(11,885) during the third quarter compared to adjusted EBITDA from continuing operations of $9,207 during the same period in 2012, reflecting the bad debt provisions and other one-time items noted above.

  • Cash generated by continuing operations was $16,228 during the third quarter of 2013 compared to cash generated by continuing operations of $14,760 during the same period in 2012.

  • Net loss from continuing operations was $33,848 during the third quarter compared to net loss from continuing operations of $3,273 during the same period in 2012. The net loss recorded in the third quarter of 2013 reflects the bad debt expense, other one-time costs and amortization of deferred financing fees noted above.

  • General and administrative expenses from continuing operations were $22,290, or 51.5% of revenue, during the third quarter compared to $7,509 of general and administrative expenses from continuing operations, or 14.5% of revenue, during the same period in 2012. Included in the $22,290 is $14,898 in bad debt expense written off during the third quarter of 2013.

  • Revenue utilization of the Company's continuing fleet was 62.9% during the third quarter of 2013 as compared to 62.6% utilization from the Company's continuing fleet during the same period in 2012.

Highlights from Continuing Operations

Three months ended September 30 Nine months ended September 30
$ thousands, except per share data and operating information 2013 2012 % change 2013 2012 % change
Revenue 43,278 51,756 (16)% 128,684 182,633 (30)%
Gross margin2 10,373 15,876 (35)% 32,613 57,435 (43)%
Gross margin percentage 24.0% 30.7% (22)% 25.3% 31.4% (19)%
Adjusted EBITDA2 (11,885) 9,207 (229)% (449) 38,824 (101)%
Adjusted EBITDA per share (basic and diluted) $(0.03) $0.03 (200)% $(0.01) $0.11 (91)%
Net loss for the period (33,848) (3,273) (934)% (59,350) (4,575) (1,197)%
Net loss per share (basic and diluted) $(0.09) $(0.01) (800)% $(0.16) $(0.01) (1,500)%
Funds from (used in) operations2 (2,498) 4,031 (162)% (11,340) 24,656 (146)%
Funds from (used in) operations per share (basic and diluted) (0.01) 0.01 (200)% (0.03) 0.07 (143)%
Cash from (used in) operating activities 16,228 14,760 10% 11,052 (1,768) 725%
Cash from (used in) operating activities per share (basic and diluted) 0.04 0.04 800% 0.03 (0.01) 400%
General and administrative expenses 22,290 7,509 197% 33,726 21,545 57%
General and administrative expenses as a % of revenue 51.5% 14.5% 255% 26.2% 11.8% 107%
Total assets 480,766 660,691 (27)% 480,766 660,691 (27)%
Total long term liabilities 5,307 200,405 (97)% 5,307 200,405 (97)%
Operating Information
Number of available rigs 283 29 (3)% 283 29 (3)%
Revenue days 1,620 1,644 (1)% 5,002 6,253 (20)%
Utilization 62.9% 62.6% 1% 65.4% 79.6% (19)%

Highlights from Discontinued Operations

Three months ended September 30 Nine months ended September 30
$ thousands, except per share data and operating information 2013 2012 % change 2013 2012 % change
Revenue 18,131 22,407 (19)% 63,587 71,041 (10)%
Gross margin4 (939) 6,289 (115)% 16,238 22,228 (27)%
Gross margin percentage (5.2)% 28.1% (118)% 25.5% 31.3% (18)%
Adjusted EBITDA4 (4,532) 5,514 (182)% 7,539 13,094 (42)%
Adjusted EBITDA per share (basic and diluted) $(0.01) $0.02 (133)% $0.02 $0.04 (50)%
Net income (loss) for the period (63,835) 2,593 (2,562)% (55,155) 5,439 (1,114)%
Net income (loss) per share (basic and diluted) $(0.17) $0.01 (1,800)% $(0.15) $0.02 (900)%
Funds from (used in) operations4 (7,754) 3,303 (335)% 2,437 8,011 (70)%
Funds from (used in) operations per share (basic and diluted) (0.02) 0.01 (300)% 0.01 0.02 (50)%
Cash from (used in) operating activities (3,504) (6,069) (42)% 1,650 7,840 (79)%
Cash from (used in) operating activities per share (basic and diluted) (0.01) (0.02) (50)% 0.00 0.02 (100)%
General and administrative expenses 3,593 775 364% 8,699 9,134 (5)%
General and administrative expenses as a % of revenue 19.8% 3.5% 460% 13.7% 12.9% 5%
Operating Information
Number of available rigs 9 8 13% 9 8 13%
Revenue days 616 463 33% 1,772 1,484 19%
Utilization 74.4% 62.9% 18% 72.1% 67.7% 6%

Non-IFRS Measures

This Press Release 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.

Adjusted EBITDA - Continuing Operations

Three months ended September 30 Nine months ended September 30
$ thousands 2013 2012 2013 2012
Oilfield services revenue 43,278 51,756 128,684 182,633
Oilfield services expenses (32,905) (35,880) (96,071) (125,198)
General and administrative expenses (22,290) (7,509) (33,726) (21,545)
Stock-based compensation expense 32 840 664 2,934
Adjusted EBITDA (11,885) 9,207 (449) 38,824

Adjusted EBITDA - Discontinued Operations

Three months ended September 30 Nine months ended September 30
$ thousands 2013 2012 2013 2012
Oilfield services revenue 18,131 22,407 63,587 71,041
Oilfield services expenses (19,070) (16,118) (47,349) (48,813)
General and administrative expenses (3,593) (775) (8,699) (9,134)
Adjusted EBITDA (4,532) 5,514 7,539 13,094

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.

Funds from Operations - Continuing Operations

Three months ended September 30 Nine months ended September 30
$ thousands 2013 2012 2013 2012
Cash flow provided by (used in) operating activities 16,228 14,760 11,052 (1,768)
Changes in non-cash working capital (18,726) (10,729) (22,392) 26,424
Funds from (used in) operations (2,498) 4,031 (11,340) 24,656

Funds from Operations - Discontinued Operations

Three months ended September 30 Nine months ended September 30
$ thousands 2013 2012 2013 2012
Cash flow provided by (used in) operating activities (3,504) (6,069) 1,650 7,840
Changes in non-cash working capital (4,250) 9,372 787 171
Funds from (used in) operations (7,754) 3,303 2,437 8,011

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 rig operations and is used by management to help assess operational performance.

Gross Margin - Continuing Operations

Three months ended September 30 Nine months ended September 30
$ thousands 2013 2012 2013 2012
Oilfield services revenue 43,278 51,756 128,684 182,633
Oilfield services expenses (32,905) (35,880) (96,071) (125,198)
Gross margin 10,373 15,876 32,613 57,435

Gross Margin - Discontinued Operations

Three months ended September 30 Nine months ended September 30
$ thousands 2013 2012 2013 2012
Oilfield services revenue 18,131 22,407 63,587 71,041
Oilfield services expenses (19,070) (16,118) (47,349) (48,813)
Gross margin (939) 6,289 16,238 22,228

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 of Continuing Operations

During the three months ended September 30, 2013, the Company recorded a net loss from continuing operations of $33,848 ($0.09 per common share) compared to net loss from continuing operations of $3,273 ($0.01 per common share) for the three months ended September 30, 2012. Of significance, the Company provided bad debt provisions during the third quarter of 2013 based on new information received during the quarter; CYA $4,000, Centurion $6,500, OGX $1,392, HRT $2,200 and SK Energy $751, for a total of $14,843. In addition, during the third quarter of 2013, Tuscany fully amortized the financing costs related to its existing credit facility. During the nine months ended September 30, 2013, the Company recorded a net loss from continuing operations of $59,350 ($0.16 per common share) compared to a net loss from continuing operations of $4,575 ($0.01 per common share) for the nine months ended September 30, 2012. During the three months ended September 30, 2013, the Company recorded oilfield services revenue of $43,278, adjusted EBITDA(5) of $(11,885) and gross margin5 of $10,373 compared to revenue of $51,756, adjusted EBITDA of $9,207 and gross margin of $15,876 during the three months ended September 30, 2012. During the nine months ended September 30, 2013, the Company recorded oilfield services revenue of $128,684, adjusted EBITDA of $(449) and gross margin of $32,613 compared to revenue of $182,633, adjusted EBITDA of $38,824 and gross margin of $57,435 during the nine months ended September 30, 2012.

The decreases in revenue, adjusted EBITDA and gross margin for the third quarter of 2013 compared to the third quarter of 2012 reflect a 1% decrease in operating activity and a 12% decrease in average revenue per day resulting from high day rate rigs coming off contract during 2012, and three rigs in Colombia being contracted at lower day rates compared to rigs of similar capacity. For the three months ended September 30, 2013, the Company had 1,620 revenue days from continuing rig operations compared to 1,644 revenue days from continuing rig operations during the three months ended September 30, 2012. Gross margin for the three months ended September 30, 2013, was offset by general and administrative expenses of $22,290 (2012 - $7,509), net finance costs of $17,154 (2012 - $6,151), foreign exchange contract gain of $63 (2012 - $299) and depreciation of $5,261 (2012 - $4,922). For the three months ended September 30, 2013, the Company also recorded current income tax expense of $326 (2012 - $2,520), a deferred income tax recovery of $1,224 (2012 - $1,991), foreign exchange losses of $97 (2012 - $304) and equity income of $16 (2012 - loss of $33). The increase in general and administrative expense for the three months ended September 30, 2013, compared to the three months ended September 30, 2012, reflects a $14,898 bad debt provision relating to customers whose accounts receivable were deemed to be uncollectible.

The decreases in revenue, adjusted EBITDA and gross margin for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012, reflect a 20% decrease in operating activity and a 12% decrease in average revenue per day resulting from rigs coming off contract in the second half of 2012. For the nine months ended September 30, 2013, the Company had 5,002 revenue days from continuing rig operations compared to 6,253 revenue days from continuing rig operations during the nine months ended September 30, 2012. Gross margin for the nine months ended September 30, 2013, was offset by general and administrative expenses of $33,726 (2012 - $21,545), net finance costs of $29,498 (2012 - $19,482), foreign exchange contract gain of $50 (2012 - expense of $259) and depreciation of $17,192 (2012 - $20,294). For the nine months ended September 30, 2013, the Company also recorded current income tax expense of $2,391 (2012 - $5,257), deferred income tax expense of $6,424 (2012 - recovery of $3,996), foreign exchange loss of $91 (2012 - $423) and an equity loss of $567 (2012 - income of $1,268). The increase in general and administrative expense in the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012, reflects a $ 16,770 bad debt provision relating to customers whose accounts receivable were deemed to be uncollectible.

During the nine months ended September 30, 2013, The Company spent $22,487 on investing activities from continuing operations, which includes $15,984 of capital expenditures comprised primarily of rig refurbishment activity, and a $6,503 increase in restricted cash. During the nine months ended September 30, 2013, The Company drew an additional $15,000 on its credit facility and repaid $2,000 of its long term debt.

Review of Interim Condensed Consolidated Statement of Financial Position
($ thousands)
Change ($)6 Explanation
Cash and cash equivalents (2,822) See consolidated statement of cash flows.
Restricted cash 6,503 Restricted cash results from the requirement to maintain a debt service reserve account pursuant to the Company's credit facility. In September 2013, debt interest was paid from this reserve account, reducing the balance. Subsequent to the interest payment, deposits of $6,776 were made.
Accounts receivable (33,628) Decrease is due to reclassification of accounts receivable amounts related to the Company's African segment to assets of disposal group held for sale and a bad debt provision of $16,044.
Prepaid expenses and deposits (2,430) Decrease is due to reclassification of prepaid expenses related to the Company's African segment to assets of disposal group held for sale.
Inventory (3,899) Decrease is due to reclassification of inventory amounts related to the Company's African segment to assets of disposal group held for sale.
Assets held for sale 17,721 Increase is due to two rigs reclassified from property and equipment.
Assets of disposal group held for sale 65,261 Increase is due to assets from the Africa operations being revalued and reclassified.
Foreign VAT recoverable (current and non-current) (12,249) Decrease is due to reclassification of foreign VAT recoverable amounts related to the Company's African segment to assets of disposal group held for sale.
Long term investments (835) Decrease is due to losses incurred by Warrior Rig Ltd. ("Warrior") for the period and a foreign exchange loss resulting from the translation of this investment.
Property and equipment (127,118) Decrease is due to reclassification of property and equipment related to the Company's African segment to assets of disposal group held for sale and the reclassification of two rigs to assets held for sale.
Bank indebtedness (3,403) Decrease is due to reclassification of bank indebtedness amounts related to the Company's African segment to assets of disposal group held for sale.
Lines of credit 14,888 Increase due to draw on the Company's revolving line of credit.
Accounts payable and accrued liabilities (2,170) Decrease is due to reclassification of accounts payable amounts related to the Company's African segment to assets of disposal group held for sale offset by a deposit of $15,300 related to the pending sale of the two rigs held for sale.
Income taxes payable (2,829) Decrease is due to reclassification of income taxes payable amounts related to the Company's African segment to assets of disposal group held for sale.
Long term debt (current and long term) 11,572 Increase is due to amortization of all financing costs associated with its existing credit facility (included in long term debt) partially offset by repayment of debt.
Derivative contracts (880) Decrease is due to the change in fair value of hedging contracts entered into during the first three quarters of 2013.
Net deferred taxes (3,435) Decrease is due to reclassification of deferred income taxes payable amounts related to the Company's African segment to assets of disposal group held for sale.
Share capital 23,128 Increase is due to the exercise of warrants during the first quarter of 2013.
Contributed surplus 3,240 Increase relates to the expiry of warrants and stock-based compensation expense recorded during the first three quarters of 2013.
Warrants (25,704) Decrease is due to the exercise and expiry of warrants during the first and second quarters of 2013.
Review of Interim Condensed Consolidated Statement of Comprehensive Income and Loss from Continuing Operations
($ thousands)
Three months ended September 30 Nine months ended September 30
2013 2012 % Change 2013 2012 % Change
Oilfield services revenue 43,278 51,756 (16)% 128,684 182,633 (30)%
Oilfield services expenses (32,905) (35,880) (8)% (96,071) (125,198) (23)%
Gross margin7 10,373 15,876 (35)% 32,613 57,435 (43)%
Gross margin % 23.97% 30.67% (13)% 25.34% 31.45% (20)%

Oilfield services revenue was $43,278 for the three months ended September 30, 2013, compared to $51,756 for the three months ended September 30, 2012, a decrease of 16%. The decrease in revenue is a result of the decrease in the number of revenue days and average revenue per day in the three months ended September 30, 2013, compared to the three months ended September 30, 2012. During the three months ended September 30, 2013, the Company had 1,620 revenue days (62.9% utilization) compared to 1,644 revenue days (62.6% utilization) in the three months ended September 30, 2012. For the three months ended September 30, 2013, average revenue per day decreased to $27.79 from $31.49 for the three months ended September 30, 2012. Average revenue per day decreased in the third quarter of 2013 compared to the third quarter of 2012 due to larger, high day rate rigs coming off contract during the last nine months of 2012, and three rigs in Colombia being contracted at lower day rates compared to rigs of similar capacity. These lower day rates are more than offset by contract terms that provide that the majority of the operating costs are borne by the customer. Twenty-one of the Company's 28 available drilling and heavy-duty workover rigs earned revenue from drilling operations during the three months ended September 30, 2013. During the three months ended September 30, 2012, the Company earned revenues from 25 rigs.

Oilfield services revenue was $128,684 for the nine months ended September 30, 2013, compared with $182,633 for the nine months ended September 30, 2012, a decrease of 30%. The decrease in revenue is a result of decrease in the number of revenue days and average revenue per day in the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012. During the nine months ended September 30, 2013, the Company had 5,002 revenue days (65.4% utilization) compared to 6,253 revenue days (79.6% utilization) in the nine months ended September 30, 2012. Revenue days decreased in the nine months ended September 30, 2013, primarily as a result of rigs coming off contract during the second half of 2012. For the nine months ended September 30, 2013, average revenue per day decreased to $25.73 from $29.20 for the nine months ended September 30, 2012. Average revenue per day decreased in the first nine months of 2013 compared to the first nine months of 2012 due to larger, high day rate rigs coming off contract during 2012, and three rigs in Colombia being contracted at lower day rates compared to rigs of similar capacity. These lower day rates are more than offset by contract terms that provide that the majority of the operating costs are borne by the customer. Twenty-three of the Company's 28 available drilling and heavy-duty workover rigs earned revenue from drilling operations during the nine months ended September 30, 2013. During the nine months ended September 30, 2012, the Company earned revenues from 29 rigs.

For the three months ended September 30, 2013, gross margin was $10,373, or 23.97%, compared with a gross margin of $15,876, or 30.67%, for the three months ended September 30, 2012. For the nine months ended September 30, 2013, gross margin was $32,613, or 25.34%, compared with a gross margin of $57,435 or 31.45%, for the nine months ended September 30, 2012. The decrease in gross margin percentage for the three and nine months ended September 30, 2013, compared to the gross margin percentage for the three and nine months ended September 30, 2012, is primarily due to costs, primarily related to labour, incurred in 2013 associated with rigs that have come off contract during the latter part of 2012.

Three months ended September 30 Nine months ended September 30
2013 2012 % Change 2013 2012 % Change
Depreciation 5,261 4,922 7% 17,192 20,294 (15)%

Depreciation expense totaled $5,261 for the three months ended September 30, 2013, compared with $4,922 for the three months ended September 30, 2012. Depreciation expense totaled $17,192 for the nine months ended September 30, 2013, compared with $20,294 for the nine months ended September 30, 2012. Under the Company's depreciation policy, depreciation of rigs and related equipment is based on the number of days in operation. Depreciation for the three months ended September 30, 2013, compared to the three months ended September 30, 2012, was consistent with the comparable number of revenue days in the three months ended September 30, 2013 compared with the three months ended September 30, 2012. The decrease in depreciation expense for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012, is a result of a decrease in the operating days in the nine months ended September 30, 2013, compared to the corresponding period in 2012. During the nine months ended September 30, 2013, the Company recorded depreciation on 28 rigs.

Three months ended September 30 Nine months ended September 30
2013 2012 % Change 2013 2012 % Change
General and administrative 22,290 7,509 197% 33,726 21,545 57%

General and administrative expense was $22,290 (51.5% of revenue) for the three months ended September 30, 2013, compared to $7,509 (14.5% of revenue) for the three months ended September 30, 2012. General and administrative expense was $33,726 (26.2% of revenue) for the nine months ended September 30, 2013, compared to $21,545 (11.8% of revenue) for the nine months ended September 30, 2012. Included in general and administrative expenses for the three and nine months ended September 30, 2013, is $14,898 and $16,045, respectively, of bad debt expense relating to customers whose accounts receivable were deemed to be uncollectible. The increase in general and administrative expense as a percentage of revenue from the three and nine months ended September 30, 2013, compared to the three and nine months ended September 30, 2012, is due to a 16% and 30% decrease, respectively, in revenue for the three and nine months ended September 30, 2013, respectively, compared to the corresponding periods of 2012.

Included in general and administrative expense for the three and nine months ended September 30, 2013, is $32 and $664, respectively, of stock-based compensation compared to $840 and $2,934, respectively, for the three months and nine months ended September 30, 2012. 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 September 30 Nine months ended September 30
2013 2012 % Change 2013 2012 % Change
Net finance costs 17,154 6,151 177% 29,498 19,482 51%

For the three and nine months ended September 30, 2013, 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 and other smaller interest charges in various countries, net of interest income. Net finance costs increased to $17,154 for the three months ended September 30, 2013, from $6,151 for the three months ended September 30, 2012, and to $29,498 for the nine months ended September 30, 2013, from $19,482 for the nine months ended September 30, 2012, as a result of the increase in the amount drawn under the revolving credit line during the first nine months of 2013 and the amortization of the remainder of deferred financing fees associated with the Company's existing credit facility.

The Company currently has a $253,000 credit facility comprised of a $208,000 term loan and a $45,000 revolving line of credit. 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 noted above, during the third quarter of 2013 Tuscany has fully amortized the remainder of the deferred financing fees associated with its existing credit facility. Total amortization of financing fees are $11,080 and $13,828 for the three months and nine months ended September 30, 2013, respectively, compared to $1,112 and $3,280 for the three and nine months ended September 30, 2012. 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 and nine months ended September 30, 2013, the Company recorded $4,971 and $14,377, respectively, of interest related to the credit facility compared to $4,193 and $12,386, respectively, for the three and nine months ended September 30, 2012.

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 $210,000 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 decreased by $400 for the three months ended September 30, 2013, compared to an increase of $696 for the three months ended September 30, 2012. The fair value of these interest rate contract liabilities increased by $38 for the nine months ended September 30, 2013, compared to an increase of $3,803 for the nine months ended September 30, 2012.

Interest of $703 and $1,256 was incurred in various countries for the three and nine months ended September 30, 2013, respectively, compared to $149 and $278 for the three and nine months ended September 30, 2012, respectively.

Three months ended September 30 Nine months ended September 30
2013 2012 % Change 2013 2012 % Change
Foreign exchange contracts (63) (299) (79)% (50) 259 (102)%

During the six month period ended September 30, 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 $63 (2012 - $299) in the three months ended September 30, 2013 and increased $50 in the nine months ended September 30, 2013 (2012 - decrease $259).

Three months ended September 30 Nine months ended September 30
2013 2012 % Change 2013 2012 % Change
Change in fair value of contingent refundable consideration - - N/A 1,728 - N/A

These costs relate to the acquisition of Drillfor Perfurações do Brasil Ltda ("Drillfor") in May 2011 which were identified during the second quarter of 2013. The costs would normally be included in the acquisition costs at the time of acquisition; however under IFRS standards there can be no changes to the purchase price allocation of an acquired company subsequent to the end of the measurement period, which is one year after the date of acquisition. Since the one year period has expired, these costs are recorded as an expense, as prescribed by IFRS standards.

Three months ended September 30 Nine months ended September 30
2013 2012 % Change 2013 2012 % Change
Foreign exchange loss 97 304 (68)% 91 423 (78)%

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 $)and Brazilian real (BRL). 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 September 30 Nine months ended September 30
2013 2012 % Change 2013 2012 % Change
Equity income (loss) 16 (33) 148% (567) 1,268 145%

The Company has a 33.87% ownership interest in Warrior, 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 $16 for the three months ended September 30, 2013, compared with an equity loss of $33 for the three months ended September 30, 2012. Equity losses totaled $567 for the nine months ended September 30, 2013, compared with equity income of $1,268 for the nine months ended September 30, 2012. Equity income has decreased as a result of decreased activity in Warrior in the first three quarters of 2013 compared to the first three quarters of 2012.

Three months ended September 30 Nine months ended September 30
2013 2012 % Change 2013 2012 % Change
Current income taxes 326 2,520 (87)% 2,391 5,257 (55)%

For the three and nine months ended September 30, 2013, the Company's total current income tax expense is $326 and $2,391, respectively. This is comprised primarily of income taxes calculated on equity in Colombia.

Three months ended September 30 Nine months ended September 30
2013 2012 % Change 2013 2012 % Change
Deferred income taxes (recovery) (1,224) (1,991) 39% 6,424 (3,996) 261%

For the three months ended September 30, 2013, the Company recorded a deferred income tax recovery of $1,224 and for the nine months ended September 30, 2013, the Company recorded deferred income tax expense of $6,424, primarily as a result of the revaluation of the deferred tax assets in Colombia resulting from an eight percent strengthening of the Colombian peso compared to the United States dollar since December 31, 2012.

Review of Interim Condensed Consolidated Statement of Comprehensive Income and Loss from Discontinued Operations

Three months ended September 30 Nine months ended September 30
2013 2012 % Change 2013 2012 % Change
Oilfield services revenue 18,131 22,407 (19)% 63,587 71,041 (10)%
Oilfield services expenses 19,070 16,118 18% 47,349 48,813 (3)%
Depreciation 1,258 710 77% 3,065 2,601 18%
General and administrative 3,593 775 364% 8,699 9,134 (5)%
Other (income) and expenses 344 552 (168)% (504) 1,176 (143)%
Current and deferred income tax expense 3,798 1,659 129% 6,230 3,878 61%
Loss recognized on re-measurement of assets of disposal group (net of tax) 53,903 - N/A 53,903 - N/A
Net income (loss) from discontinued operations (63,835) 2,593 (2,562)% (55,155) 5,439 (1,114)%

Discontinued operations represent the Company's African operations (including costs associated with its Paris head office). As noted previously, on November 13, 2013, the Company entered into several agreements whereby the Company's African segment will be sold to M&P, the previous shareholders of the Company's Caroil subsidiary. The above table shows the major components of the net income (loss) of this segment for the three and nine months ended September 30, 2013 and 2012.

Condensed Interim Consolidated Statement of Financial Position (Unaudited)
(expressed in thousands of U.S. dollars)
September 30, 2013 December 31, 2012
Assets
Current Assets
Cash and cash equivalents 3,481 6,303
Restricted cash 6,776 273
Accounts receivable, net 73,334 106,962
Prepaid expenses and deposits 3,654 6,084
Inventory 14,767 18,666
Foreign VAT recoverable 1,062 4,219
103,074 142,507
Assets held for sale 17,721 -
Assets of disposal group held for sale 99,497 -
220,292 142,507
Foreign VAT recoverable 11 5,455
Deferred tax asset 6,652 15,772
Long term investment 5,577 6,412
Property and equipment 347,731 474,849
580,263 644,995
Liabilities
Current Liabilities
Bank indebtedness 1,092 4,495
Lines of credit 46,357 31,469
Accounts payable and accrued liabilities 61,199 63,369
Current portion of long term debt 208,000 16,875
Foreign VAT payable 3,648 -
Income taxes payable 6,018 8,847
326,314 125,055
Liabilities of disposal group held for sale 34,236 -
360,550 125,055
Long term debt - 179,553
Derivative contracts 3,057 3,937
Deferred tax liability 1,502 7,187
365,109 315,732
Shareholders' Equity
Share capital 389,428 366,300
Contributed surplus 24,900 21,660
Warrants - 25,704
Accumulated other comprehensive loss (657) (389)
Deficit (198,517) (84,012)
215,154 329,263
580,263 644,995
Condensed Interim Consolidated Statement of Comprehensive Income and Loss (Unaudited)
For the three and nine months ended September 30, 2013 and 2012
(expressed in thousands of U.S. dollars)
Three months ended Nine months ended
September 30 2013 September 30 2012 September 30 2013 September 30 2012
Revenue
Oilfield services 43,278 51,756 128,684 182,633
Expenses
Oilfield services 32,905 35,880 96,071 125,198
Depreciation 5,261 4,922 17,192 20,294
General and administrative 22,290 7,509 33,726 21,545
Foreign exchange loss 97 304 91 423
Equity (income) loss (16) 33 567 (1,268)
(17,259) 3,108 (18,963) 16,441
Net finance costs 17,154 6,151 29,498 19,482
Loss (gain) on disposal of property and equipment 396 - 396 (44)
Loss on sale of investment - - - 58
Loss (gain) on foreign exchange contract (63) (299) (50) 259
Change in fair value of contingent refundable consideration - - 1,728 -
Loss before income taxes (34,746) (2,744) (50,535) (3,314)
Current income taxes 326 2,520 2,391 5,257
Deferred income taxes (1,224) (1,991) 6,424 (3,996)
Net loss from continuing operations for the period (33,848) (3,273) (59,350) (4,575)
Net income (loss) from discontinued operations for the period, net of tax (63,835) 2,593 (55,155) 5,439
Net income (loss) for the period (97,683) (680) (114,505) 864
Other comprehensive gain (loss)
Items that may be subsequently reclassified to income and loss: - - - -
Foreign currency translation (77) 69 (268) (144)
Total comprehensive income (loss) (97,760) (611) (114,773) 720
Net loss per share from continuing operations, basic and diluted (0.09) (0.01) (0.16) (0.01)
Net income (loss) per share from discontinued operations, basic (0.17) 0.01 (0.15) 0.02
Net income (loss) per share from discontinued operations, diluted (0.17) 0.01 (0.15) 0.01
Net income (loss) per share, basic and diluted (0.26) 0.00 (0.31) 0.00
Condensed Interim Consolidated Statement of Changes in Equity (Unaudited)
(expressed in thousands of U.S. dollars)
Attributable to equity owners of the Company
Share Capital Contri-buted surplus Warrants Accum-ulated other compre-hensive loss Deficit Total equity
Balance - January 1, 2013 366,300 21,660 25,704 (389) (84,012) 329,263
Net loss for the period - - - - (114,505) (114,505)
Cumulative foreign currency translation adjustment - - - (268) - (268)
Comprehensive loss for the period - - - (268) (114,505) (114,773)
Stock-based compensation - 664 - - - 664
Exercise of warrants 23,128 - (23,128) - - -
Expiration of warrants - 2,576 (2,576) - - -
Balance - September 30, 2013 389,428 24,900 - (657) (198,517) 215,154
Balance - January 1, 2012 366,300 18,106 25,704 (251) (48,948) 360,911
Net income for the period - - - - 864 864
Cumulative foreign currency translation adjustment - - - (144) - (144)
Comprehensive income (loss) for the period - - - (144) 864 720
Stock-based compensation - 2,934 - - - 2,934
Balance - September 30, 2012 366,300 21,040 25,704 (395) (48,084) 364,565
Condensed Interim Consolidated Statement of Cash Flows (Unaudited)
For the three and nine months ended September 30, 2013 and 2012
(expressed in thousands of U.S. dollars)
Three months ended Nine months ended
September 30 2013 September 30 2012 September 30 2013 September 30 2012
Cash flow provided by (used in):
Operating Activities
Net income (loss) for the period (97,683) (680) (114,505) 864
Items not affecting cash:
Depreciation 6,519 5,632 20,356 22,895
Loss (gain) on sale of property and equipment 396 - 396 (44)
Loss on revaluation of assets of disposal group held for sale 53,903 - 53,903 -
Equity (income) loss (16) 33 567 (1,267)
Expense of deferred financing fees 11,080 1,112 13,828 3,280
Change in fair value of derivative contracts (106) 397 (882) 4,005
Stock-based compensation 32 840 664 2,934
Provisions for doubtful accounts 15,623 - 16,770
Changes in non-cash working capital 22,976 1,357 21,605 (26,595)
12,724 8,691 12,702 6,072
Investing Activities
Acquisition of property and equipment (8,175) (12,938) (21,854) (23,745)
Proceeds from sale of property and equipment - - - 588
Restricted cash (6,756) (1,003) (6,503) 223
(14,931) (13,941) (28,357) (22,934)
Financing Activities
Proceeds (repayment) of bank indebtedness (541) - 4,409 -
Proceeds from lines of credit - - 15,000 -
Repayment of long term debt - - (2,000) -
Proceeds from long term debt - - - 15,000
Payment of financing fees 306 (5,114) (257) (6,066)
Change in non-cash working capital - (599) - (599)
(235) (5,713) 17,152 8,335
Increase (decrease) in cash and cash equivalents (2,442) (10,963) 1,497 (8,527)
Cash and cash equivalents, beginning of period 10,242 15,592 6,303 13,156
Cash and cash equivalents, end of period 7,800 4,629 7,800 4,629
Cash Flow Supplementary Information
Interest received 76 188 296 265
Interest paid 5,671 4,140 15,164 12,203
Income taxes paid 1,195 1,805 6,706 5,594

About Tuscany

Tuscany, a corporation headquartered in Calgary, Alberta, is engaged in the business of providing contract drilling and work-over services along with equipment rentals to the oil and gas industry. Tuscany is currently focused on providing services to oil and gas operators in South America and Africa. Tuscany has operating centres in Colombia, Brazil, Ecuador and France.

Reader Advisories

Statements in this news release contain forward-looking information including, without limitation, statements with respect to the completion of each component of the Transaction, the receipt of the Exemption, and the future financial position of the Company. Readers are cautioned that assumptions used in the preparation of such information may prove to be incorrect. Events or circumstances may cause actual results to differ materially from those predicted, a result of numerous known and unknown risks, uncertainties, and other factors, many of which are beyond the control of Tuscany. These risks include, but are not limited to: counterparty completion risks, regulatory approval risk, the risks associated with the oil and gas industry, commodity prices and exchange rate changes, regulatory changes, successful exploitation and integration of technology, customer acceptance of technology, changes in drilling activity and general global economic, political and business conditions. Industry related risks could include, but are not limited to; operational risks, delays or changes in plans, health and safety risks and the uncertainty of estimates and projections of costs and expenses and access to capital. The risks outlined above should not be construed as exhaustive. The reader is cautioned not to place undue reliance on this forward-looking information. Tuscany does not undertake any obligation to update or revise any forward-looking statements except as expressly required by applicable securities laws.

The Toronto Stock Exchange has not reviewed, nor does it accept responsibility for the adequacy or accuracy of this release.

The listing of Tuscany's common shares on the Colombian Stock Exchange does not imply a certification by the BVC of the value or the solvency of Tuscany.

1 Refer to "Non-IFRS Measures".

2 Refer to "Non-IFRS Measures".

3 Includes two rigs held for sale.

4 Refer to "Non-IFRS Measures".

5 Refer to "Non-IFRS Measures".

6 Reflects the movement in accounts from December 31, 2012, to September 30, 2013.

7 Refer to "Non-IFRS Measures".

Contact Information

  • Tuscany International Drilling Inc.
    Walter Dawson
    President and CEO

    Tuscany International Drilling Inc.
    Matt Moorman
    CFO
    (403) 265 8258
    (403) 265 8793 (FAX)
    www.tuscanydrilling.com