© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to Ensign Energy fourth quarter results. [Operator Instructions]Bob Geddes, President and Chief Operating Officer of Ensign Energy, you may begin.
Thank you, operator. Good afternoon, everyone. Well, certainly, a lot going on in the back half of 2018. As I'm sure all of you on the call are well aware, Ensign successfully acquired Trinidad Drilling. It's a 141-rig worldwide high-spec fleet. This is Ensign's largest and most transformational acquisition to date. The strategic acquisition catapults Ensign into the top 3 land drillers worldwide, with one of the newest fleets. It also doubles our high-spec fleet worldwide. It triples our presence in the Permian, makes Ensign the second largest in the U.S. and the largest in Canada, and it doubles our Middle East operation. The transaction brings together 2 performance-driven cultures, which will provide our clients around the globe more access to the best rigs and the best crews on the planet. With 80% of the combined fleet being high-spec Tier 1-type rigs, and having a diverse fleet including 100 of the ADR 1500 AC-class rigs, 18 of the 1,000-horsepower AC, 17 of the 2000 and 3400-horsepower AC-class rigs, along with 54 high-spec heavy tele-doubles, Ensign has the right rigs in all the major areas around the world.The transition and re-org plan has been executed on, with both the Ensign and Trinidad teams now harmonized into one. We're happy to have the Trinidad people on board. With over $40 million of annualized synergies already identified, the new team has been moving tactically to act on realizing those synergies, most of which should be fully utilized through 2019 and continuing into the future. In addition, the team has identified roughly $30 million of overlapping property -- real estate, yards, facilities, et cetera -- that are already on the market for sale. Also, as our Edge Controls technology platform was purposely designed to be agnostic to rig type, we can easily layer on our Edge Controls platform onto the Trinidad fleet. Edge Controls, as you recall, is our wellside technology platform, which attracts a $900 a day surcharge when installed.Most importantly, the transition further derisks Ensign geopolitically. We now operate 50 rigs internationally in 9 countries outside of the U.S. and Canada. We can talk more on this in the Q&A. In the meantime, I'll turn the call over to Mike Gray for a summary of 2018.
Thanks, Bob. The usual disclaimer: our discussion may include forward-looking statements based upon current expectations that involve a number of business risks and uncertainties. The factors that could cause results to differ materially include, but are not limited to: political, economic and market conditions; crude oil and natural gas prices; foreign currency fluctuations; weather conditions; the company's defense of lawsuits and the ability of customers to pay accounts receivable balances and raise capital; or other unforeseen conditions which could impact the use of the services supplied by the company. During the fourth quarter of 2018, the company acquired 89.3% of Trinidad Drilling, which added 1 month of operations from Trinidad to the company's fourth quarter results. The price recovery of crude oil and natural gas from 2017, as well as the Trinidad acquisition, resulted in increased demand for oilfield services in the fourth quarter of 2018 compared to the fourth quarter of 2017. Operating days were up in the fourth quarter of 2018, with Canadian operations experiencing a 3% increase, United States operation a 54% increase, and international operations showing a 3% increase in operating days compared to the fourth quarter of 2017. For the year ended December 31, 2018, overall operating days were up in the United States operations by 30%, while the Canadian operations experienced a 13% decrease and international operations a 1% decrease compared to the year ended December 31, 2017.Adjusted EBITDA for the fourth quarter of 2018 was $81.7 million, 18% higher than adjusted EBITDA of $69.3 million in the fourth quarter of 2017. Adjusted EBITDA for the year ended December 31, 2018, was $255.7 million, a 27% increase compared to adjusted EBITDA of $201.8 million generated in the year ended December 31, 2017. The 2018 increase in adjusted EBITDA can be attributed to the increased demand for oilfield services caused by a price recovery in crude oil and natural gas commodity compared to the same periods of the prior year in addition to the Trinidad acquisition.Excluding from EBITDA was $1.5 million related to transaction costs from the acquisition of Trinidad. The majority of the costs related to this transaction related to financing has been recorded as such and will not impact EBITDA. The company generated revenue of $346.1 million in the fourth quarter of 2018, a 28% increase compared to revenue of $270 million generated in the fourth quarter of the prior year.For the year ended December 31, 2018, the company generated revenue of $1.2 billion, a 16% increase compared to the revenue of $1 billion generated in the prior year. Gross margin increased to $94.2 million, which is 30.5% of revenue net of third-party, for the fourth quarter of 2018, compared to gross margin of $63.3 million, which is 26.1% of revenue net of third party, for the fourth quarter of 2017.Gross margins increased to $300.5 million, which is 29.4% of revenue net of third party, for the year ended December 31, 2018, compared to a gross margin of $241 million, which is 27.6% of revenue net of third party, for the year ended December 31, 2017. The increase in margins are related to the company's increasing revenue rates year-over-year along with maintaining effective cost controls.Depreciation expense in the year was $415 million, 27% higher than $325.8 million of the prior year. In the first quarter of 2018, the company changed to the straight-line method versus the unit of production and was applied prospectively, which increased depreciation expense for the year ended December 31, 2018, when compared to the prior year. Furthermore, the increase was also partially attributed to the acquisition of the Trinidad's fixed asset base.G&A in the fourth quarter of 2018 was 67% higher than in the fourth quarter of 2017. G&A expense for the year ended December 31, 2018, was 19% higher than in the year ended December 31, 2017. The increase in the year primarily related to the Trinidad acquisition. Net debt at December 31, 2018, was $1.64 billion, compared to $707 million at December 31, 2017. The increase relates to the acquisition of Trinidad, and the company expects to reduce debt by $100 million in 2019.Net CapEx for the fourth quarter of 2018 totaled $16.9 million, compared to net CapEx of $25.2 million in the corresponding period of 2017. Net CapEx totaled $73.3 million, in which $9.1 million was funded by customers, compared to net CapEx of $117.7 million in the corresponding period of 2017.The company added 3 new well servicing rigs in 2018 to the U.S. market and expects the CapEx -- net CapEx budget for 2019 to be $102 million and it will comprise mainly of maintenance capital only.On that note, I'll turn it back to Bob.
Thanks, Mike. So next, let's talk about area updates and outlook. This is on the pro forma fleet, now reflecting 302 drilling rigs and 102 well service rigs around the world.Starting with the United States, where we operate 134 drill rigs and 47 well service rigs in the Rockies and California. On any given day, we run about 90 rigs in the U.S., running at approximately 66% utilization: 13 in California, roughly 14 in the Rockies, and 61 in the Permian. Again, to point out, Ensign tripled its impact in the Permian with the Trinidad acquisition.Just to give you a little bit of insight into the current and forward. The big drop in fourth quarter receipts for the operators has, of course, pushed reduced activity into first quarter and second quarter forecasts. With WTI back in the mid-50s, and with most operators telling us mid-50s today is like mid-60s 5 years ago because of the efficiency gains, we do expect the second half of '19 to get back on pace. While it's true the high-spec rigs of today -- like the ADR 1500 AC -- drill wells 5x faster than 10 years ago, the question is always have we reached technical maturity on the manufacturing of the wellbore cycle? No question the curve is flattening, and what clients are looking for now is reducing the beta between the best and their worst wells. This is where the technology comes in. Reducing the beta from 20% to 5% will drive another 5% to 10% of costs out of well construction over the next few years. This will be achieved, again, through the application of rig controls automation, directional guidance system like the Ensign Edge Controls. As I mentioned prior, the Trinidad fleet can accept the Ensign Edge Controls because of our -- the design application on top of a middleware control platform.Our forecast suggests we may be off a few rigs through the first half of '19, but expect to be back on track on the back half of '19. No question that rates have stopped moving up and are under some pressure on spot pricing; that could range between $500 to $1,000 a day. We are able to counter the pressure to reduce rates by offering what we call performance-based contracts, where the rig rate is tied to performance. The drive to reduce well cost does not always have to mean reduced effective day rates to the contractor. We have about 10% of our Permian fleet now on these types of contracts and are in discussion for more of these.With our Edge Control system installed on the rigs, we do derisk these types of contracts and, more often than not, are able to increase our effective day rate, all while reducing our operators' well costs.Move to the Rockies. The Rockies is running at about 50% capacity, with 14 rigs running and roughly 55% of the well service rigs also running. We just moved one of our ADR 1500s from Canada to the Rockies on a full carried 2-year contract. Forward contracts look steady through to 2020 in the Rockies.California. California remained strong for us, with 65% utilization on the drilling side and roughly 50% on the well servicing side. It's interesting that the heavier California crude is attracting a $5 premium in WTI as a result of the demand for heavier crudes [indiscernible] by the supply dropout of Venezuela.On the international front, where we operate 50 rigs. Kuwait, start with that. Both our 3,400-horsepower rigs have landed in Kuwait and are on schedule for June and July spuds in Kuwait. These will be starting 5-year plus 1-year extension contracts in both cases. The 2 sister rigs to these 2 in Kuwait are back in Mexico and are being bid out. Obviously, we'd like to target these to join the other 2 in Kuwait. These are $60 million-plus rigs apiece, and attract roughly $60,000-a-day day rates. We're also in Bahrain and UAE. We have 2 rigs in this area. One is contracted, one is expecting to go back to work as well here in the next 6 months.Oman, 3 rigs operating in the Mukhaizna field. We're contracted out another year with those contracts. In Mexico, as I mentioned, we have 2 of the sister rigs to the Kuwait rigs in Mexico and 2 tele-doubles in Mexico. These rigs are currently down. In Australia, we have 18 rigs, and we operate 1/3 of all the rigs in Australia, with the newest fleet, and drill roughly half of the wells that are drilled in Australia. We are the largest driller by far. We are currently running 9 of the 18 today, and expect to ramp up to 12 to 14 throughout the rest of the year.Argentina, we have 7 rigs in Argentina. We run approximately 50% utilization continuously. We have ADR 2000s down in the Neuquén area, the Vaca Muerta, working for majors there. Venezuela, we just have 2 rigs operating for a major who has a blockade sanction exemption till July.Let's move to Canada. Canada, where we now have 118 rigs, the largest fleet in Canada. Canada, as you know, has had one of the toughest winters in a long time. I'm sure it's not lost on anyone the reasons why not only the fourth quarter, but the obvious geopolitical challenge with pipeline issues and the -- and now the delay in the Line 3 Enbridge. With the Trinidad acquisition, Ensign shores up its fleet in the deeper capacity spectrum; currently running 37 rigs today, with one of the largest pad type fleets. We expect to be running 24 to 25 rigs over breakup.The Canadian fleet is starting to see some effects of the consolidation and fleet retirements over the last few years. There used to be 800 rigs, now there's 589. There used to be 45 contractors, now there's 25. 20 of the 1500-horsepower class rigs in the market have left, which has really tightened up the 1500-horsepower class rig in Canada. These are the rigs that drill the Duvernay, et cetera. Rates have moved, most recently from the high teens to the low to mid-20s, a $3,000 to $4,000 a day bump on 2- to 3-year contracts moving forward. We have 8 of those types of rigs. The utilization on the heavy tele-double will depend largely on the Montney and Cardium activity, which is expected to be static until the latter half of '19.With respect to well servicing, we're running at about 1/3 capacity at the moment. Again, expect tight summer and improving back half of '19 in Canada.So, in summary, on any given day, we're running plus or minus 150 to 160 drill rigs around the world, 50 service rigs, plus our testing, directional drilling and rentals lines of business. This represents about 50% capacity on a fleet of 302 drill rigs and 102 well service rigs. Lots of [ total ] capacity available into the future.So with that, we'll go to Q&A, operator?
[Operator Instructions] Your first question is from Jon Morrison with CIBC Capital Markets.
Bob, just a clarification. Was the $30 million number that you referenced for the facility overlap based on your carrying value for that real estate? Or is that a reasonable expectation of what you can expect to get in the market right now?
That would be reasonable expectation of what we can get in the market.
Is it fair to assume then, if you were to transact on that, we should also see the net synergy number annualized go up as well, as you don't have to pay for taxes, utilities, alt costs and all of that?
Yes. That is correct. So any of those synergies from those real estates are not included in that $40 million, so that would be on top, and there would be savings related to property tax and utilities.
Yes, and to point out, Jon, the $40 million has been already identified with great visibility. It looks like it's going to appear closer to some numbers that you may have heard the other fellows mentioned in prior calls.
Okay. In typical Ensign style, it's always a conservative number. As you get to know Trinidad's customers better, and have improved line of sight about what their forward demand is looking like across markets -- and they'll tell that in terms of what you know in terms of your own demand for your historical fleet -- is incremental reshuffling of fleets across geographies a high likelihood at this point? Or you feel where assets are located is probably fair for where they're going to be over the next 12 months?
Yes. I think, Jon, that the right assets are in the right areas, most generally. We see the, as I mentioned, a couple of the Mexican 3,400-horsepower new AC rigs are most likely to perhaps move from there. I think that you're starting to see, because of the supply pinch on 1,500s in Canada, because so many of have exited -- Ensign itself has moved 4 to 5 down south over the few last years -- that I think we're quite settled on where everything is sitting, and certainly have no efforts underway to move anything around at this point. And we know these markets quite well. They're -- we'll see, but right now I'd say, no, we're quite happy where we're at.
Okay. Mike, just a point of clarification; the $200 million gain on purchase that you booked, was that all hard asset upward revisions in the carrying values? Was it tax pools? Or what drove the upward revision?
A large chunk of that are tax pools. There'll be a slight revision in the PP&E, but mainly related to pools.
Okay. In terms of Australia, you talked about the momentum unfolding and maybe the potential to add 3 to 5 rigs. Is that momentum enough to cause a material change in price? Or it's largely just activity momentum you're seeing right now?
Yes. It's -- we're starting to get -- it's price and activity. What we've seen is some upgrades required by operators, which have been totally funded by the operator, to keep a close tight veil on the CapEx. But I would say that we've been able to raise rates close to 10% to 15%. Keep in mind that the last 2.5 years, 3 years, have certainly been tight in the Australian market, waiting for the LNG trains to get moving along, which they are. Depletion is a little bit higher than they thought. All of a sudden everyone woke up at the back half of '18 saying, "We need to start drilling again." So we re-contracted probably a quarter of the fleet on 2-year contracts with rate increases in the 10% to 15% range.
And are you seeing material wage rate inflation or labor availability challenges with that, just given it is a small market? And ultimately your peers seem to be experiencing the same thing.
Yes. No. There was a general -- they run with a CBA process in Australia that we're well tuned in with, and it turned over here in the fall. We were in a renegotiation process for a few months and we timed it with our recontracting plans. So again, knowing how to work well in Australia means knowing how to plan recontracting of rigs and your labor CBA turnover. So we're tied in with a CBA on labor probably for the next 3 years. That's how they work.
Okay. Maybe just one last one for me. Any incremental update you can give on Argentina in terms of forward bidding? Obviously, it seems like there's some green shoots in that market as development plans seem to be ramping in the background?
Yes, I would agree with that. We're starting to see more interest in that area for sure.
Your next question is from Ian Gillies with GMP.
Can you provide the term and interest rate on the U.S. $700 million bridge facility or term loan?
Yes, it's about a 5-year term and the rates would be comparable to where our peers high-yield bonds are trading right now.
Okay. And Mike, just to make sure I understand some of the accounting as we close up the -- as the transaction closes for Q1, will there be any additional outflows for the purchase of Trinidad in Q1? Or is that all reflected in the Q4 financials?
So, there'd be the additional purchase, the 10% of Trinidad, in Q1. So the minority interest in Q1 will be eliminated, and it will be taken care of with the purchase of the shares and the squeeze out that happened at the end of January.
Okay. That's helpful. With respect to the DRIP that's been implemented, I mean, pretty clear on why it's been implemented, but can you maybe provide some goalposts with how much dilution you're willing to withstand until you perhaps turn it off, or how you're thinking about keeping it turned on? Is it just to -- due to the $200 million of debt this year, could it stay on longer than that, so on and so forth?
Yes, I think, Ian, we look at the world quarter-by-quarter. So we'll assess the situation next quarter and move from there. I think the math has quite easily backed into $100 million of debt reduction without needing to lean on that lever. But if we had to, we would. But this is something the board looks at every quarter. But I don't know that anyone's got good visibility into the fog that far. So anything is possible. We just have a few more levers, and our conservative estimate on $100 million is before any asset sales or anything like that. So I think we're very comfortable with that.
Yes, certainly. And with respect to credit metrics, are you able to provide some, I guess, goalposts for where you'd like to be there, maybe, on a debt-to-cap basis or net-debt-to-EBITDA basis over, call it, maybe the next 3 years as you, I guess, consolidate in Trinidad?
Yes, the next 3 years, we'll be definitely laser focused on debt reduction. I think we could probably kind of look at it as a 2x debt-to-EBITDA, of probably around 2x for sort of midcycle, and then getting down to maybe a 1x in a peak, and then -- but 3x in a trough. So we know this a is a very cyclical business, and we want to make sure our balance sheet is in a proper shape to weather an up or a down. So sort of that 3x, 2x, 1x is kind of really what we're going to be targeting.
Okay. And operationally, perhaps I misinterpreted what was in the press release, but for international activity absent the Trinidad JV rigs, do you expect activity to be down in that segment? Or is it only for Venezuela that you expect to be down? Because all the other areas sounded like there's some positive tailwinds?
Yes, yes. Venezuela is the only area that is down year-over-year, for obvious reasons.
[Operator Instructions] And this does conclude the Q&A portion of the call. I'll now turn it back to Bob Geddes for any closing remarks.
Thank you, everyone. And thank you for joining us on a Friday afternoon. Exciting times indeed ahead for Ensign. Again, I'll point out, not all drilling companies are designed or managed to thrive through cycles; Ensign is. We've proven that again. Look forward to our next call in 3 months. Thank you very much.
This concludes today's conference call. You may now disconnect.