Ensign Energy Services Inc. Reports 2017 Third Quarter Results

CALGARY, Nov. 6, 2017 /CNW/ -

OVERVIEW

Revenue for the third quarter of 2017 was $247.1 million, an increase of 29 percent from revenue for the third quarter of 2016 of $191.3 million. Revenue for the nine months ended September 30, 2017 was $730.6 million, an increase of 17 percent from revenue for the nine months ended September 30, 2016 of $625.7 million. Revenue, net of third party, for the third quarter of 2017 was $211.3 million, an increase of 26 percent from Revenue, net of third party, for the third quarter of 2016 of $168.1 million. Revenue, net of third party, for the nine months ended September 30, 2017 was $631.9 million, an increase of 15 percent from Revenue, net of third party, for the nine months ended September 30, 2016 of $551.4 million.      

Adjusted EBITDA totaled $52.6 million ($0.34 per common share) in the third quarter of 2017, 24 percent higher than Adjusted EBITDA of $42.5 million ($0.28 per common share) in the third quarter of 2016. For the first nine months of 2017, Adjusted EBITDA totaled $147.0 million ($0.95 per common share), 10 percent higher than Adjusted EBITDA of $133.5 million ($0.88 per common share) in the first nine months of 2016.

Net loss for the third quarter of 2017 was $36.5 million ($0.23 per common share) compared to a net loss of $33.7 million ($0.22 per common share) for the third quarter of 2016. Net loss for the nine months ended September 30, 2017 was $84.1 million ($0.54 per common share), compared to net loss of $88.6 million ($0.58 per common share) for the nine months ended September 30, 2016.

Funds flow from operations increased 31 percent to $39.6 million ($0.25 per common share) in the third quarter of 2017 compared to $30.3 million ($0.20 per common share) in the third quarter of the prior year. Funds flow from operations increased six percent to $129.2 million ($0.83 per common share) in the first nine months of 2017 compared to $121.8 million ($0.80 per common share) in the first nine months of the prior year.

Operating days across the Company's fleet were higher in the third quarter of 2017 when compared to the third quarter of 2016 due primarily to increased demand for oilfield services caused by a modest price recovery of crude oil and natural gas commodity prices. A relatively consistent United States dollar translation against the Canadian dollar in 2017 did not impact United States and international financial results on translation to Canadian dollars. The average United States exchange rate was $1.31 for the first nine months of 2017(2016 - $1.32) versus the Canadian dollar.

Gross margin increased to $61.9 million (29.3 percent of Revenue, net of third party) for the third quarter of 2017 compared to gross margin of $52.4 million (31.2 percent of Revenue, net of third party) for the third quarter of 2016. Gross margin increased to $177.7 million (28.1 percent of Revenue, net of third party) for the nine months ended September 30, 2017 compared to a gross margin of $173.9 million (31.5 percent of Revenue, net of third party) for the nine months ended September 30, 2016. The increase in gross margin in the third quarter of 2017 compared to the third quarter of 2016 was primarily attributed to slightly higher revenue rates in 2017 and rig mix. The increase in gross margin was partially offset with no short fall revenue earned in 2017 versus the same period in 2016.

Working capital at September 30, 2017 was a surplus of $136.3 million, compared to a deficit of $11.2 million at December 31, 2016, largely due to the repayment of a portion of long-term debt (USD $100.0 million of senior unsecured notes bearing interest at 3.43 percent, paid February 22, 2017). The Company's bank credit facilities provide unused and available borrowings of $16.5 million at September 30, 2017, down by $167.9 million, compared to $184.4 million at December 31, 2016, due to the senior unsecured notes repayment in February 2017.

FINANCIAL AND OPERATING HIGHLIGHTS
(Unaudited, in thousands of Canadian dollars, except per share data and operating information)

THIRD QUARTER HIGHLIGHTS

• Revenue for the third quarter of 2017 was $247.1 million, a 29 percent increase from the third quarter of 2016 revenue of $191.3 million.
• Quarterly revenue by geographic area:
• Canada - $63.2 million, 26 percent;
• United States - $122.0 million, 49 percent; and
• International - $61.9 million, 25 percent.
• The process of turning over our fleet to high specification, high quality ADR^® drilling rigs is contributing to higher market share in all areas of our business.
• Canadian drilling recorded 1,744 operating days in the third quarter of 2017, a 63 percent increase from 1,073 operating days in the third quarter of 2016. Canadian well servicing recorded 16,763 operating hours in the third quarter of 2017, a 10 percent increase from 15,214 operating hours in the third quarter of 2016.
• United States drilling recorded 3,035 operating days in the third quarter of 2017, a 91 percent increase from 1,586 operating days in the third quarter of 2016. United States well servicing recorded 24,962 operating hours in the third quarter of 2017, a 41 percent increase from 17,651 operating hours in the third quarter of 2016.
• International drilling recorded 1,475 operating days in the third quarter of 2017, a three percent decrease from 1,521 operating days recorded in third quarter of 2016.
• Adjusted EBITDA for the third quarter of 2017 was $52.6 million, a 24 percent increase from Adjusted EBITDA of $42.5 million for the third quarter of 2016. Funds flow from operations for the third quarter of 2017 increased 31 percent to $39.6 million from $30.3 million in third quarter of the prior year.
• Net capital expenditures for the calendar year 2017 are currently targeted between $100 to $105 million compared to the revised estimate of $90 to $95 million. The increase in capital expenditures primarily relates to the construction of one new ADR® 1500 for the United States and one new ADR® 1000 for Canada both of which are targeted to go to work in Q4 2017, the purchase of a new heavy Permian type service rig and continued enhancements to the super-spec rig fleet.
• The Company declared a fourth quarter cash dividend on common shares of $0.12 per common share, payable on January 4, 2018 with a record date of December 20, 2017.

REVENUE AND OILFIELD SERVICES EXPENSE

Revenue for the three months ended September 30, 2017 totaled $247.1 million, an increase of 29 percent from the third quarter of 2016 of $191.3 million. Revenue for the nine months ended September 30, 2017 totaled $730.6 million, a 17 percent increase from the nine months ended September 30, 2016. As a percentage of Revenue, net of third party, gross margin for the third quarter of 2017 decreased to 29.3 percent (2016 - 31.2 percent) and decreased to 28.1 percent for the nine months ended September 30, 2017 (2016 - 31.5 percent).

The cautious optimism regarding oil and natural gas commodity prices has increased demand for oilfield services, which resulted in higher equipment utilization rates; however, revenue rates declined during the prior years and have yet to increase with demand. 

CANADIAN OILFIELD SERVICES

Revenue increased 22 percent to $63.2 million for the three months ended September 30, 2017 from $52.0 million for the three months ended September 30, 2016. The Company recorded revenue of $198.5 million in Canada for the nine months ended September 30, 2017, an increase of 23 percent from $161.7 million recorded for the nine months ended September 30, 2016. Canadian revenues accounted for 26 percent of the Company's total revenue in the third quarter of 2017, compared to 27 percent in the third quarter of 2016. During the nine months ended September 30, 2017, Canadian revenues were 27 percent of the Company's revenue, compared with 26 percent in the nine months ended September 30, 2016. For three months ended September 30, 2017 the Company received nil in shortfall revenue compared to $6.1 million in the corresponding period of 2016. For the nine months ended September 30, 2017 the Company received $1.3 million in shortfall revenue compared to $12.1 million in the corresponding period of 2016.

The Company's Canadian operations recorded 1,744 drilling days in the third quarter of 2017, compared to 1,073 drilling days for the third quarter of 2016, an increase of 63 percent. For the nine months ended September 30, 2017, the Company recorded 5,210 drilling days compared to 3,316 drilling days for the nine months ended September 30, 2016, an increase of 57 percent. Canadian well servicing hours increased by 10 percent to 16,763 operating hours in the third quarter of 2017 compared to 15,214 operating hours in the corresponding period of 2016. For the nine months ended September 30, 2017, well servicing hours increased by 26 percent to 53,609 operating hours compared with 42,668 operating hours for the nine months ended September 30, 2016.

Demand for the Company's Canadian oilfield services was higher compared to the prior quarters due primarily to the modest increase in oil and natural gas commodity prices. The increase in demand was offset by lower revenue rates and nominal short fall revenue earned, compared to the first half of 2016.

During the nine months ended September 30, 2017, the Company added one new build ADR^® drilling rig to the Canadian fleet.

UNITED STATES OILFIELD SERVICES

The Company's United States operations recorded revenue of $122.0 million in the third quarter of 2017, a 67 percent increase from the $72.9 million recorded in the corresponding period of the prior year. During the nine months ended September 30, 2017, revenue of $330.3 million was recorded, an increase of 34 percent from the $246.1 million recorded in the corresponding period of the prior year. The Company's United States operations accounted for 49 percent of the Company's revenue in the third quarter of 2017 (2016 - 42 percent) and 45 percent of the Company's revenue in the first nine months of 2017 (2016 - 39 percent).

Drilling rig operating days increased by 91 percent to 3,035 drilling days in the third quarter of 2017 from 1,586 drilling days in the third quarter of 2016. Drilling operating days increased by 55 percent from 5,085 operating days in the first nine months of 2016 to 7,878 operating days in first nine months of 2017. Well servicing activity expressed in operating hours increased by 41 percent in the third quarter of 2017 to 24,962 operating hours from 17,651 operating hours in the third quarter of 2016. For the nine months ended September 30, 2017 well servicing activity increased 41 percent to 66,637 operating hours from 47,235 operating hours in the first nine months of 2016.

Overall operating and financial results for the Company's United States operations were positively impacted by a modest increase in demand for oilfield services due to renewed optimism regarding oil and natural gas commodity prices. During the nine months ended September 30, 2017, the Company added one service rig to the United States fleet.

INTERNATIONAL OILFIELD SERVICES

The Company's international operations recorded revenue of $61.9 million in the third quarter of 2017, a seven percent decrease from the $66.4 million recorded in the corresponding period of the prior year. International revenues for the nine months ended September 30, 2017, decreased seven percent to $201.8 million from $218.0 million recorded in the six months ended September 30, 2016. The Company's international operations contributed 25 percent of the total revenue in the third quarter of 2017 (2016 - 35 percent) and 28 percent of the Company's revenue in the first nine months of 2017 (2016 - 35 percent).

International operating days for the three months ended September 30, 2017, totaled 1,475 drilling days compared to 1,521 drilling days in the same period of 2016, a decrease of three percent. For the nine months ended September 30, 2017, international operating days totaled 4,559 operating days compared to 4,855 drilling days for the nine months ended September 30, 2016, a decrease of six percent.

The international operations saw a decrease in activity as certain rigs on long-term contracts rolled off by completing their term and were not renewed.

DEPRECIATION

Depreciation expense totaled $79.2 million for the third quarter of 2017 compared with $84.0 million for the third quarter of 2016, a decrease of six percent. Depreciation expense for the first nine months of 2017 decreased by 10 percent to $234.1 million compared with $259.8 million for the first nine months of 2016. Depreciation expense was lower in nine months ended September 30, 2017 when compared to the nine months ended September 30, 2016, due to certain operating assets having become fully depreciated in which case no further depreciation expense is required on such assets.

GENERAL AND ADMINISTRATIVE EXPENSE

General and administrative expense decreased 6 percent to $9.3 million (3.8 percent of revenue) for the third quarter of 2017 compared to $9.9 million (5.2 percent of revenue) for the third quarter of 2016. For the nine months ended September 30, 2017, general and administrative expense totaled $30.7 million (4.2 percent of revenue) compared to $40.4 million (6.5 percent of revenue) for the nine months ended September 30, 2016. The decrease in general and administrative expense resulted from the Company's initiatives to reduce staffing and other costs in reaction to lower oil and natural gas commodity prices.

SHARE-BASED COMPENSATION

Share-based compensation expense arises from the Black-Scholes valuation accounting associated with the Company's share-based compensation plans, whereby the liability associated with share-based compensation is adjusted for the effect of granting and vesting of employee stock options and changes in the underlying market price of the Company's common shares.

For the three months ended September 30, 2017 share-based compensation was an expense of $1.5 million compared with an expense of $3.9 million recorded in the three months ended September 30, 2016. For the nine months ended September 30, 2017 share-based compensation was a recovery of $0.4 million compared with an expense of $5.1 million for the nine months ended September 30, 2016. The share-based compensation expense for the nine months ended September 30, 2017 was a result of changes in the fair value of the share-based compensation liability and it impacted by the amortization of share options. 

The fair value of share-based compensation is impacted by both the input assumptions used to estimate the fair value and the price of the Company's common shares during the period.  The closing price of the Company's common shares was $7.05 at September 30, 2017 ($7.50 at September 30, 2016), compared with $6.93 at June 30, 2017 ($7.25 at June 30, 2016) and $9.38 at December 31, 2016 ($7.38 at December 31, 2015).

During the third quarter of 2017 the Company granted Performance Share Units (PSUs) to certain officers and employees of the Company to participate in the growth and development of the Company and to promote further alignment of interests between employees and the shareholders. PSUs are subject to the Company's pre-established performance metrics with a three year performance period. Each PSU granted permits the holder to receive a cash payment equal to the fair market value of a share as of the maturity date, adjusted for a performance multiplier.

The per unit weighted average fair value of the performance share units granted during 2017 was $8.00 estimated on the grant date using a Monte Carlo simulation with a two percent cap based on certain financial performance metrics. Included in net earnings for the three and nine months ended September 30, 2017 is an expense of $0.5 million (2016 - $nil).

INTEREST EXPENSE

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Interest is incurred on the Company's $500.0 million global revolving credit facility (the "Global Facility") and the United States dollar $200.0 million ($300.0 million at December 31, 2016) senior unsecured notes (the "Notes") issued in February 2012. The amortization of deferred financing costs associated with the issuance of the Notes is included in interest expense.

Interest expense increased by 30 percent for the first nine months ended September 30, 2017 compared to the same period in 2016 as a result of borrowings of an additional $35.8 million on the bank credit facilities in the first nine months of 2017 and due to an increase in the interest rate.

FOREIGN EXCHANGE AND OTHER

Included in this amount is the impact of foreign currency fluctuations in the Company's subsidiaries that have functional currencies other than the Canadian dollar. During the three months ended September 30, 2017, the Australian dollar strengthened by approximately two percent against the United States dollar causing a foreign currency loss on translation of the Company's United States dollar denominated assets into Australian dollars. During the nine months ended September 30, 2017, the Australian dollar strengthened against the United States dollar by approximately eight percent (2016 - five percent). 

INCOME TAXES

The effective income tax rate for the three months ended September 30, 2017 was 20.1 percent compared to 25.5 percent for the three months ended September 30, 2016. The effective income tax rate for the nine months ended September 30, 2017 was 28.8 percent compared with 34.0 percent for the nine months ended September 30, 2016. The effective tax rate in the first nine months of the current year was lower than the effective tax rate in the first nine months of 2016 due to the impact of lower earnings in foreign jurisdictions.

FINANCIAL POSITION

Significant changes in the consolidated statement of financial position from December 31, 2016 to September 30, 2017 are outlined below:

FUNDS FROM OPERATIONS AND WORKING CAPITAL

During the three months ended September 30, 2017, the Company generated Funds flow from operations of $39.6 million ($0.25 per common share) compared to Funds flow from operations of $30.3 million ($0.20 per common share) for the three months ended September 30, 2016, an increase of 31 percent. For the nine months ended September 30, 2017, the Company generated Funds flow from operations of $129.2 million ($0.83 per common share) an increase of six percent from $121.8 million ($0.80 per common share) for the nine months ended September 30, 2016. The increase in Funds flow from operations in 2017 compared to 2016 is due to higher net income.

At September 30, 2017 the Company's working capital was a surplus of $136.3 million, compared to a working capital deficit of $11.2 million at December 31, 2016. The increase in working capital in the first nine months of 2017, was mainly related to the repayment a USD $100.0 million of senior unsecured notes. The Company currently expects funds generated by operations, combined with current and future credit facilities, to fully support current operating and capital requirements. Existing revolving credit facilities provide for total borrowings of $500.0 million, of which $16.5 million was undrawn and available at September 30, 2017. In addition, the Company has a $50 million accordion to be included in the existing revolving global facilities but not yet exercised.

INVESTING ACTIVITIES

Net purchases of property and equipment for the third quarter of 2017 totaled $16.9 million (2016 - $7.7 million). Net purchases of property and equipment during the first nine months of 2017 totaled $92.5 million (2016 - $31.9 million). The purchase of property and equipment relates predominantly to the construction of two new ADR^® drilling rigs, one service rig and upgrades to certain drilling rigs to a higher specification, as well as for maintenance capital costs incurred in the current quarter and first nine months of this year.

FINANCING ACTIVITIES

The Company's available bank credit facilities consist of a $500.0 million Global Facility. The Global Facility is available to the Company and certain of its wholly-owned subsidiaries, and may be drawn in Canadian, United States or Australian dollars, up to the equivalent value of $500.0 million Canadian dollars. The Global Facility matures in early October 2018. 

In addition, the Company has a $20.0 million uncommitted facility, solely for issuing letters of credit, primarily used for bidding on contracts in the normal course of business.

The Company has a $50 million accordion to be included in the existing revolving global facilities but not yet exercised. Subsequent to the quarter, the Company is expecting to finalize a waiver that allows the Company to keep the Global Facility unsecured. 

The Company has received net debt proceeds of $35.8 million during the nine months ended September 30, 2017, increasing the outstanding long-term debt balance. As of September 30, 2017, the credit facilities are primarily being used to fund capital expenditures.

NEW BUILDS AND MAJOR RETROFITS

During the nine months ended September 30, 2017, the Company added one new build ADR^® drilling rig to its expansive tier one fleet worldwide, which rig has been contracted on a long-term contract and one service rig in the United States. The Company continues to selectively add new ADR^® drilling rigs to meet the increasing technical demands of its customers.

Subsequent to September 30, 2017, the Company deployed on new ADR^® 1000 in Canada and is currently in the process of completing one additional new ADR^® 1500 for the United States, which is expected to begin work in the fourth quarter of 2017. The new rigs were partially assembled from equipment that was part of the rig build program that the Company halted in 2014 to preserve the balance sheet in a declining market.

OUTLOOK

As a result of global oil production gains, flat to decreasing drilling rig counts in the United States, increased drilled but uncompleted wells ("DUCS") and geo-political tension WTI crude oil prices continue to range between $45 -$55. The expectation for 2018 is that these levels will continue into the near future and recent oil price estimates by commodity analysts have continued to trim their 2018 forecasts for WTI to an average of mid to low $50's. Lower for longer continues to be the motto for many companies including Ensign, and managements believes the structural changes made during the downturn will better position Ensign to capitalize on future opportunities. 2018 pricing and capital spend by the Company's customers is unclear at this point and will likely be similar to 2017 spend, unless commodity pricing changes.

Canada 

In Canada, the Baker Hughes rig count on October 20, 2017 decreased by 10 rigs from the week before to 202 drilling rigs. This is up 59 rigs from the previous year. The rig count in Canada has been steady with an average of 190 rigs running according to the CAODC during the third quarter. Q4, 2017 industry activity is expected increase marginally over Q3, 2017. The Montney continues to be the driver for activity in Canada and is also the Company's most active Canadian area. Utilization for the Company's tier 1 drilling rigs continue to exceed the industry average. Of the Company's Canadian rigs, 30 drilling and coring rigs are currently under contract with 47% of those under contract longer than six months. 

United States 

In the United States, the Baker Hughes rig count on October 20, 2017 decreased by 15 drilling rigs from the week before to a total of 913 but is up 360 drilling rigs from the previous year. The recent rig count in the United States has continued to remain flat with a slight decline and this is expected to continue for the remainder of the year. As the rig count has remained flat this has caused pricing to flatten out.  As at October 20, 2017, nine Company drilling rigs are currently running in the Rockies, 11 in California, 18 in the Permian Basin and one rig running in the North eastern United States. Of the Company's United States drilling rigs, 25 rigs are currently under contract with 28% of those under contract longer than six months. 

International 

Activity internationally continues to remain flat and will remain for the rest of the year when compared to 2017. There are a total of eight Company drilling rigs currently running in Latin America as at October 20, 2017 and that is expected to be maintained throughout the remainder of the year, but could vary depending on the political situation in Venezuela. The Company has a total of 10 Company drilling rigs running in the Middle East and Australia. The Middle East and Australia are expected to see flat activity for the remainder of the year. In the international segment, 15 drilling rigs are under contract with 60% percent of those under contract longer than six months.

RISKS AND UNCERTAINTIES

This document contains 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 oil and gas companies to pay accounts receivable balances and raise capital or other unforeseen conditions which could impact on the use of the services supplied by the Company.

CONFERENCE CALL

A conference call will be held to discuss the Company's third quarter 2017 results at 2:00 p.m. MDT (4:00 p.m. EDT) on Monday, November 6, 2017. The conference call number is 1-647-427-7450 (in Toronto) or 1-888-231-8191 (outside Toronto). A taped recording will be available until November 13, 2017 by dialing 1-416-849-0833 (in Toronto) or 1-855-859-2056 (outside Toronto) and entering the reservation number 63542942. A live broadcast may be accessed through the Company's web site at www.ensignenergy.com.

Ensign Energy Services Inc. is an international oilfield services contractor and is listed on the Toronto Stock Exchange under the trading symbol ESI.

Ensign Energy Services Inc.
Consolidated Statements of Financial Position

Ensign Energy Services Inc.
Consolidated Statements of Loss

Ensign Energy Services Inc.
Consolidated Statements of Cash Flows

SOURCE Ensign Energy Services Inc.