Ensign Energy Services Inc

TSX:ESI

Earnings Call Transcript

[Operator]

Thank you for standing by, and welcome to the Ensign Energy Services, Inc. Second Quarter 2020 Results. [Operator Instructions] I'd now like to hand the conference over to your speaker today, Nicole Romanow, Investor Relations. Thank you. Please go ahead.

[Nicole Romanow, Head of Investor Relations]

Thank you. Good morning, and welcome to Ensign's Second Quarter Earnings Conference Call and Webcast. On our call today, Bob Geddes, President and COO; and Mike Gray, Chief Financial Officer, who will review Ensign's second quarter highlights and financial results followed by our operational update and outlook. We'll then open the call for questions.Our discussion today 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 materially differ include, but are not limited to, political, economic market conditions, crude oil and natural gas prices, foreign currency fluctuations, weather conditions, the company's defense of lawsuits, the ability of oil and natural gas companies to pay accounts receivable balances and raise capital or any other foreseen conditions -- unforeseen conditions, which could impact the use of the services supplied by the company.Additionally, our discussion today may refer to non-GAAP measures, such as adjusted EBITDA. Please see our second quarter earnings release and SEDAR filings for more information on forward-looking statements and the company's use of non-GAAP measures.With that, I'll pass it on to Bob.

[Robert H. Geddes, President, COO & Non]

Thanks, Nicole. Good morning, everybody. It's not lost on anyone on the call that this world is still being severely impacted by COVID-19, which continues to wreak havoc with the macro demand for energy. In light of the COVID-19 pandemic, we are happy to report that the team in the field and the office has been able to stay operational with essentially little or no impact to fuel operations revenue. Also, in the second quarter, we completed Phase 3 of the overhead restructuring plan, which puts our fixed cost overhead structure 35% below where it was last year's second quarter.So I'll put the call back over to Mike Gray, the CFO for a detailed financial summary of the quarter. Over to you, Mike.

[Michael R. Gray, Chief Financial Officer]

Thanks, Bob. Results for the second quarter of 2020 were negatively impacted by the COVID-19 pandemic. Global measures implemented to combat the spread of the COVID-19 including stay-at-home restrictions, led to a significant slowdown in global economic activity that subsequently reduced the demand for crude oil and natural gas over the short term. This significant reduction in demand contributed to a sharp decline in global crude oil and natural gas prices over the first half of the quarter. As a result, the company's operating days were lower in the second quarter of 2020 when compared to the second quarter of 2019. As customers quickly responded to steep declines in commodity prices and an uncertain industry outlook by reducing capital expenditures and winding down drilling programs.Operating days overall were lower in the second quarter of 2020 with Canadian operations experiencing a 71% decrease; United States, a decrease of 66%; and international operations, a 41% decrease compared to the second quarter of 2019.For the 6 months of 2020, operating days were also lower with Canadian operations experiencing a 21% decrease; United States operations, a 44% decrease; and international operations showing a 15% decrease compared to the first 6 months of 2019. The company generated revenue of $194.8 million in the second quarter of 2020, a 48% decrease compared to revenue of $377.5 million generated in the second quarter of the prior year. For the 6 months of 2020, the company generated revenue of $578.6 million, a 30% decrease compared to revenue of $822.5 million generated in the first 6 months of the prior year. Adjusted EBITDA for the second quarter of 2020 was $58.1 million, 43% lower than adjusted EBITDA of $101.8 million in the second quarter of 2019. Adjusted EBITDA for the first 6 months of 2020 totaled $149.3 million, 32% lower than adjusted EBITDA of $219.1 million generated in the first 6 months of 2019. The decrease in adjusted EBITDA was primarily due to the decrease in activity across global operations.Depreciation expense in the first 6 months of 2020 was $182 million, an increase of 3% compared to $177.2 million for the first 6 months of 2019.General and administrative expense in the second quarter of 2020 was 33% lower than the second quarter of 2019. G&A expenses decreased as a result of cost-saving initiatives, wage subsidies received from various governments and organizational restructuring.Total debt for the second quarter of 2020 decreased year-over-year by $107.3 million to $1.56 billion, the decrease in total debt was partially offset by $30.1 million in foreign currency exchange fluctuations. Net capital proceeds for the second quarter of 2020 was $3.7 million, consisting of $13.2 million maintenance capital offset by proceeds of $17 million from disposals. Planned capital expenditures for the 2020 year remains at $50 million, of which approximately $40 million will be maintenance capital.On that note, I'll turn the call back to Bob.

[Robert H. Geddes, President, COO & Non]

Thanks, Mike. So let's run around the world and do an operational update. Worldwide, we have 55 drill rigs under contract with roughly 45 drilling rigs active today and also 33 well service rigs active today across our 5 basic regions around the globe. 20 in the U.S. are running, 3 in California, 1 in the Rockies, 16 in Southern, 9 are on [ IBC for ] 29 under contract. We have 11 rigs in Canada, 13 under contract. 7 in Australia, 8 under contract, 1 is waiting on location. And we have 4 in the Middle East, 2 in Kuwait, 2 in Bahrain, non-operating in Oman at this point. In Latin America, where we operate in Venezuela and Argentina, we have just 1 running in Argentina at this point in time.So coming back to the U.S., the U.S. business unit has certainly been hit the hardest and has had the largest year-over-year impact on Ensign's earnings. While we had a generous EBITDA pop in the quarter, as Mike pointed out in the U.S., it was bittersweet as we saw roughly 10 rigs have their contracts canceled as operator shutdown drilling programs. While we had some hope that drilling may claw back in the fourth quarter of '20. We are doubtful that will occur in 2020. And depending on commodity prices, we see any rebound being a 2020 event -- 2021 event, I'm sorry, not a 2020 event. The well servicing business unit continues to drive utilization with 25 of its 49 well service rigs active. We have 12 in California, 10 in the Rockies, 2 in the Permian and 1 in the Eagle Ford.We continue, of course, to drive cost efficiency -- efficiencies through the business, but meaningful gains are getting tougher and tougher to capture. Ensign continues to expand its performance-based contract PBC platform. This is where the rig is offered at a market competitive day rate with performance bonuses for beating established metrics with the platform Ensign decides what EDGE technology is best introduced and turned on at the rig. The EDGE technology earns its way at no risk to the operator. We also put our APM team, our Advanced Performance Management team on projects to enhance performance specifics and work with the operators engineering teams. While we are on the technology theme, our EDGE technology is now installed and ready for use on over 50 of our rigs worldwide. Also happy to report that our EDGE AutoPilot, which would charge-out at about $2,700 a day on a-la-carte basis, outside of PBC has been successfully bedded tested on 2 wells now and is now being installed on the rig, which will be on a PBC contract here in the next few months.In the Middle East, as we announced a few weeks back, we took out Halliburton's 40% ownership in the JV, July 1. We have the 2 3,400 horse power super-spec rigs operating and fully contracted in Kuwait until mid-2024. And we also have our Bahrain rigs, one of which was a JV rig contracted out until late 2023. Our Oman business has been pulled back to standby mode with a skeleton staff as we await indications of when rigs may be going back to work.In Venezuela and in our Latin American business units, the Venezuela is still shut down, subject to U.S. OFAC sanctions. In Argentina, we have 1 rig operating for a measure in the Neuquén area, which looks like it will be residual mid-2021. At this point, we have some active bids for other rigs, but nothing firm at this point. In Australia, we have 8 out of our 16 rigs in Australia, 7 operating today, 1 waiting on location, as I mentioned before. We're experiencing challenges moving across between the states and Australia due to of 2019 travel restrictions but have not impacted operations as of yet.In Canada, we have 11 rigs out of 99 running today. We've gained market share in the last few months and are running close to 25% market share in Canada as our high-spec rig starts to go back to work after breakup. Canada had arguably one of the worst second quarters at record for rig activity and sits at only 50 running today. The back half of 2020 looks painfully optimistic, but our schedule and -- our scheduled booking is still quite loose. The Canadian emergency wage subsidy are helping to keep crews active for we can find work, but operators' budgets remain tight fisted for obvious reasons.Our directional drilling business unit has 2 or 3 jobs on the go today, and we should get to 5 jobs in the fourth quarter. Well servicing is running about 8 rigs over the summer with expected bump to 15 in the back half as the abandonment programs of the OWA and the SRP, the Site Reclamation Plan start to actually hit the ground. While the government-funded abandonment program is well intended, it has had its challenges through the application process. In any case, this will help put more of our well service rigs and move some of our crews back to work here over the next 3 to 4 months and into 2021.For an outlook, it's clear with almost every drill company in the OFS space, reporting large ETFs in the quarter. This is the proxy that operators will continue to pull in their horns to reduce drilling programs at least until well into 2021. As reported, Ensign had roughly [ CAD ] 20 million of ETFs and IBCs in the second quarter alone. We expect the combination of ETFs and IBCs to drop off about 30% to 40% quarter-over-quarter until mid-2021 as we move forward. While a few months back, we thought that Q3 would be the trough. We're not so sure of that anymore.With that, I'll turn it over to the Q&A back to the operator.

[Operator]

[Operator Instructions] Your first question comes from Keith MacKey with RBC.

[Keith MacKey, Analyst]

Just a quick question on the Oman rigs. So they rolled off contract. Is it just a matter of timing due to the pandemic that's keeping those from going back into the field? Or do you have to recontract them kind of entirely?

[Robert H. Geddes, President, COO & Non]

Well, we were awarded a contract, which got put on pause about 6 months ago. I suspect that it will be rebid again once they get their understanding together and when they want to do the project. Our guess is it's pushed in 2021 at least at this point.

[Keith MacKey, Analyst]

Okay. And just moving to Western Canada. Looking at where the rig activity is running. You mentioned about 50 rigs across the industry. We see kind of 20-some in the Montney from the data that we have and you guys seem to be running a little bit behind where you'd normally be in the Montney as far as market share goes. So question there is, is that more of a matter of customer mix? Or have you seen incremental rate pressure there that's made that region a bit more competitive than maybe it was last year?

[Robert H. Geddes, President, COO & Non]

Yes. I would say that it's customer mix. We now have a rig active in the Montney, rig 60 working for a measure. And it's not lost on us that I think it's fair to say that we fell behind in the money on market share, and that is changing.

[Operator]

[Operator Instructions] Your next question goes from ATB Capital with Waqar Syed.

[Waqar Mustafa Syed]

Mike, what's your guidance for DD&A with the -- your increased share in the TDI rigs? Or is it -- does it not change?

[Michael R. Gray, Chief Financial Officer]

There will be an increase just given the value of those rigs, but do not have a specific number.

[Waqar Mustafa Syed]

Okay. And then what portion of these wage subsidies, $5.1 million, how much was that in the G&A line and how much in the OpEx line?

[Michael R. Gray, Chief Financial Officer]

Probably close to, let's say, 15% to 20% was in the G&A line, and then the remainder would be under the oilfield services expense.

[Waqar Mustafa Syed]

Okay. Makes sense. And Rob, could you comment on the rate and margin environment in the U.S. business?

[Robert H. Geddes, President, COO & Non]

Yes. It really hasn't changed much from our last call, Waqar. We're finding that we're not necessarily bidding on rate. We're bidding on performance and experience in an area. And most of the contracts we're negotiating and talking about now have a PBC, performance-based contract theme to them. So I would say that not much has changed. It's just -- the big thing in the second quarter was we had 10 or 12 rigs come off with an ETF where the contract was canceled. Some additional rigs were put onto an IBC base where the operator has the option to bring them back to work within the contract rather than paying the lump sum ETF.

[Waqar Mustafa Syed]

Okay. And for these rigs on standby -- earning standby revenues, is the OpEx for them 0? And any revenues that come in is ready 100% margin? Or how should we be thinking about those revenues?

[Robert H. Geddes, President, COO & Non]

Yes. Essentially, we have stacked off costs where we rent a yard or in most cases, we're in the operator's area. So the costs are essentially nominal, 0.

[Waqar Mustafa Syed]

Okay. And are you still seeing additional rigs going on standby? Or do you think that standby number kind of stays flat?

[Robert H. Geddes, President, COO & Non]

Well, as I mentioned, we're seeing probably a 30% to 40% quarter-over-quarter drop. Some of that will be the IBCs that fall off and some of it may be more rigs. But I think we've kind of hit the bottom as far as number of rigs active or running. I don't -- we're not seeing any visibility into a number of active rigs dropping. But as I mentioned, we'll be seeing the ETFs in the future quarters, fall off by about 30% to 40% sequentially quarter-over-quarter as we move forward.

[Operator]

Your next question comes from John Gibson with BMO Capital.

[John Gibson, Analyst]

Just on the -- on your debt repayments versus liquidity? I know your bonds are trading at attractive levels. But just given your soft activity level outlook, do you expect to lean more towards managing liquidity or buying back bonds? And has this down sort of changed in the last few weeks?

[Michael R. Gray, Chief Financial Officer]

So, I mean, some of the previous quarters, I mean, we don't have a specific program, and we assess it kind of on a -- on a day-to-day basis, so liquidity is important, specifically in this market. So we'll continue to monitor it as we go.

[John Gibson, Analyst]

Great. And then just on the well management program, how impactful do you think this could be? And I guess, would it be more of a Q4 thing? And I guess, just a little more color on sort of when it could show up in your in year-end financials here.

[Robert H. Geddes, President, COO & Non]

That was on the abandonment program you're talking about?

[John Gibson, Analyst]

Yes, just on the rebuild.

[Robert H. Geddes, President, COO & Non]

Yes. Yes. I think that it's -- we are wishing for it to be a third quarter event, and I think that was the plan, but the application process has been just horrendous, but we've been working with the government and the associations to get that cleaned up. I think it will have more impact in the fourth quarter and then bleeding well into 2021. But I'm sensing that, I mean, for us, we'll probably add the 7 or 8 rigs into the back half on the well servicing side. And so yes, a more pleasant back half or well servicing than originally thought by that amount of rigs. Yes.

[John Gibson, Analyst]

Okay. Great. And then just last one for me, and apologies if you could kind of touch on this already. But just on that 30%, 40% to 40% decline in IBC and early term revenue, you referenced is this more related to IBC revenue or really term payments? Or is it a combination of both? And I guess what I'm trying to get at is, do you expect to see more early term payments next quarter?

[Robert H. Geddes, President, COO & Non]

Yes. I think the ETFs, as far as the lump sum, the balance between ETFs and the IBCs will change where the number of rigs with a hard, flat sum ETF will diminish at a faster pace than the IBCs. So you'll see the IBCs as the term on the contract falls off, so does the IBC fall off. So just to give you some sense of modeling, you can probably take the $20 million that were in the second quarter and adjust that by 30% to 40% quarter-over-quarter sequentially as we move through the rest of the year and into half of 2021.

[Operator]

And your last question comes from Jeff Fetterly with Peters Company.

[Jeffrey Eric Fetterly, Principal and Oilfield Services Analyst]

A couple of clarification questions. First off, on CapEx. So your $50 million budget for the year, is that a gross or a net number?

[Robert H. Geddes, President, COO & Non]

That will be a gross number.

[Jeffrey Eric Fetterly, Principal and Oilfield Services Analyst]

And so last quarter, Bob, you mentioned about $10 million per quarter cadence for spend. Looking at the second half of the year, your cadence would be about half of that. What do you expect on a go-forward basis of the current activity that your normalized cadence would look like?

[Robert H. Geddes, President, COO & Non]

Yes. I would say it'd probably be in that 7.5% per quarter range. And it's all completely driven by how many active rigs you think are going to be running, right? So if you think of 45 to 50 rigs running on a go-forward annual basis, you're probably looking at about 7.5% as high as 10 a quarter with that range.

[Jeffrey Eric Fetterly, Principal and Oilfield Services Analyst]

Is there anything else from an asset sales standpoint that you expect to transact in the foreseeable future?

[Robert H. Geddes, President, COO & Non]

Well, we have some other real estate assets that are going on the market. I mean, keep in mind that TDM facility we just sold was on the market for almost 4 years up in Edmonton. So you said foreseeable future, I'm not seeing anything in the foreseeable future. If we think of that as 6 months to a year, it's going to take some time to dispose of these properties.

[Jeffrey Eric Fetterly, Principal and Oilfield Services Analyst]

And then on the U.S. side, just to clarify a couple of data points. So in Q2, you said you had 10 rig contract -- rig contracts that were terminated for that USD 13.2 million?

[Robert H. Geddes, President, COO & Non]

Correct.

[Jeffrey Eric Fetterly, Principal and Oilfield Services Analyst]

Great. And have you seen thus far in Q3, any additional contracts get terminated?

[Robert H. Geddes, President, COO & Non]

There are a few under negotiation. When I say under negotiation, the operator may want to hang on to the rig or may decide to [ flat summit ] on the ETF, but it would be notional from 2 to 3.

[Jeffrey Eric Fetterly, Principal and Oilfield Services Analyst]

Okay. And did I hear correctly earlier that you currently have 9 rigs under IBC in the U.S.?

[Robert H. Geddes, President, COO & Non]

Correct.

[Jeffrey Eric Fetterly, Principal and Oilfield Services Analyst]

Okay. And do you expect that there's going to be any other rigs go under IBC? I know you mentioned sort of a stabilized active rig count going forward. But are you concerned? Or do you have any visibility for additional rigs to go idle?

[Robert H. Geddes, President, COO & Non]

Well, the 2 or 3 I mentioned, that might go to fund some ETF. The other consequences would be they go to IBC, right, where they operate.

[Jeffrey Eric Fetterly, Principal and Oilfield Services Analyst]

So those 2 or 3 would currently be running today. It's not like they're on IBC and potentially going to be bought out, they would actually be running and could go into the other 2 categories.

[Robert H. Geddes, President, COO & Non]

Correct.

[Operator]

And we have no further questions at this time.

[Robert H. Geddes, President, COO & Non]

All right. Thanks, operator. Thanks for the questions, everyone. For wrap up comments, as we mentioned, we continue to drive cost down and operational efficiency metrics up. We continue to move to institutionalize the PBC contracts in a very tough environment. While we remain optimistic for the back half of 2020, we certainly do not see the macro changing in this business until well into 2021. Thank you for listening in on our second quarter call and look forward to reporting to you with our third quarter in 3 months' time.

[Operator]

This concludes today's conference call. You may now disconnect.