Ensign Energy Services Inc. Reports 2018 First Quarter Results

CALGARY, May 7, 2018 /CNW/ -

OVERVIEW

Revenue for the three months ended March 31, 2018 was $258.5 million, an increase of three percent from revenue for the three months ended March 31, 2017 of $251.3 million. Revenue, net of third party, for the three months ended March 31, 2018 was $227.0 million, an increase of nine percent from Revenue, net of third party, for the three months ended March 31, 2017 of $208.9 million. Adjusted EBITDA totaled $52.3 million ($0.33 per common share) in the first quarter of 2018, four percent higher than Adjusted EBITDA of $50.1 million ($0.32 per common share) in the first quarter of 2017.

Net loss for the three months ended March 31, 2018 was $26.7 million ($0.17 per common share), compared to net loss of $13.8 million ($0.09 per common share) for the three months ended March 31, 2017. Funds flow from operations increased 20 percent to $53.9 million ($0.34 per common share) in the first quarter of 2018 compared to $44.8 million ($0.29 per common share) in the first quarter of the prior year.

Operating days were higher in the United States in the first quarter of 2018 when compared to the first quarter of 2017 due to increased demand in oilfield services caused by a price recovery of crude oil and natural gas commodity prices. Operating days were lower in Canada in the first quarter of 2018 when compared to the first quarter of 2017 mainly due to geopolitical factors and the lack of access for oil and natural gas to markets. A year-over-year weakening of the United States dollar against the Canadian dollar negatively impacted United States and international financial results on translation to Canadian dollars. The average United States dollar exchange rate was 1.26 for the first three months of 2018 (first three months of 2017 - 1.32) versus the Canadian dollar, a decrease of four percent, compared to the first three months of 2017.

Gross margin increased to $63.1 million (27.8 percent of Revenue, net of third party) for the first quarter of 2018 compared to gross margin of $60.6 million (29.0 percent of Revenue, net of third party) for the first quarter of 2017. The decrease in gross margin percentage in the first quarter of 2018 compared to the first quarter of 2017 was primarily attributed to the decrease in activity in Canada and negative impact of the weakened United States dollar against the Canadian dollar.

Working capital at March 31, 2018 was a deficit of $441.9 million, compared to a deficit of $342.2 million at December 31, 2017. The decrease in working capital year-over-year was largely due to the Company's Global Bank Facility ($486.7 million due in October 2018) and senior unsecured notes (USD $100 million due in February 2019). The Company's bank credit facilities provide unused and available borrowings of $13.5 million as at March 31, 2018, up by $2.3 million, compared to $11.2 million at December 31, 2017.

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

FIRST QUARTER HIGHLIGHTS

• Revenue for the first quarter of 2018 was $258.5 million, a three percent increase from the first quarter of 2017 revenue of $251.3 million.
• Revenue by geographic area:
• Canada - $73.8 million, 29 percent of total;
• United States - $125.5 million, 49 percent of total; and
• International - $59.1 million, 22 percent of total.
• Canadian drilling recorded 1,960 operating days in the first quarter of 2018, a 16 percent decrease from 2,325 operating days in the first quarter of 2017. Canadian well servicing recorded 16,726 operating hours in the first quarter of 2018, a 20 percent decrease from 20,783 operating hours in the first quarter of 2017.
• United States drilling recorded 2,904 operating days in the first quarter of 2018, a 29 percent increase from 2,253 operating days in the first quarter of 2017. United States well servicing recorded 22,406 operating hours in the first quarter of 2018, a 12 percent increase from 20,081 operating hours in the first quarter of 2017.
• International drilling recorded 1,358 operating days in the first quarter of 2018, a 14 percent decrease from 1,578 operating days recorded in first quarter of 2017.
• Adjusted EBITDA for the first quarter of 2018 was $52.3 million, a four percent increase from Adjusted EBITDA of $50.1 million for the first quarter of 2017. Funds from operations for the first quarter of 2018 increased 20 percent to $53.9 million from $44.8 million in first quarter of the prior year.
• Net capital expenditures for the calendar year 2018 remain targeted at $64 million.
• The Company declared a second quarter cash dividend on common shares of $0.12 per common share, payable July 6, 2018.

REVENUE AND OILFIELD SERVICES EXPENSE

Revenue for the three months ended March 31, 2018 totaled $258.5 million, an increase of three percent from the first quarter of 2017 of $251.3 million. As a percentage of Revenue, net of third party, gross margin for the first quarter of 2018 decreased to 27.8 percent (2017 - 29.0 percent).

The moderate price increases in oil and natural gas commodity prices have increased demand for oilfield services in the United States, which resulted in higher equipment utilization rates; however revenues have declined both in Canada and internationally year-over-year. The financial results from the Company's United States and international operations were negatively impacted on translation, as the United States dollar weakened relative to the Canadian dollar in the first three months of 2018 as opposed to a strengthening in the first quarter of 2017. This served to offset the impact of some of the revenue rate increases experienced during the past several months.

CANADIAN OILFIELD SERVICES

The Company recorded revenue of $73.8 million in Canada for the three months ended March 31, 2018, a decrease of 12 percent from $84.3 million recorded for the three months ended March 31, 2017. Canadian revenues accounted for 29 percent of the Company's total revenue in the first quarter of 2018, compared to 34 percent in the first quarter of 2017.

Despite, the increase in oil and natural gas commodity prices, demand for the Company's Canadian oilfield services was lower compared to the prior quarters mainly due to geopolitical factors and limited access for oil and natural gas to markets. 

For the three months ended March 31, 2018, the Company recorded 1,960 drilling days compared to 2,325 drilling days for the three months ended March 31, 2017, a decrease of 16 percent. Well servicing hours decreased by 20 percent to 16,726 operating hours in the first quarter of 2018 compared to 20,783 operating hours in the corresponding period of 2017.

During the three months ended March 31, 2018, the Company decommissioned three service rigs in Canada. 

UNITED STATES OILFIELD SERVICES

During the three months ended March 31, 2018, revenue of $125.5 million was recorded by the Company's United States operations, an increase of 28 percent from the $98.0 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 first quarter of 2018 (2017 - 39 percent).

Drilling rig operating days increased by 29 percent to 2,904 drilling days in the first quarter of 2018 from 2,253 drilling days in the first quarter of 2017. Well servicing activity expressed in operating hours increased by 12 percent in the first quarter of 2018 to 22,406 operating hours from 20,081 operating hours in the first quarter of 2017.

Overall operating results for the Company's United States operations were positively impacted by a significant increase in demand for oilfield services due to renewed optimism regarding oil and natural gas commodity prices. Revenue rates in the United States have modestly rebounded with operating activity. The improved results were partially offset by one-time reactivation expenses for the quarter and a weakening United States dollar, which decreased four percent versus the Canadian dollar when compared to the three months ending March 31, 2017.

During the three months ended March 31, 2018, the Company began construction on four new service rigs to meet increasing demand in the United States, while decommissioned one drilling rig and two service rigs.

INTERNATIONAL OILFIELD SERVICES

The Company's international operations recorded revenue of $59.1 million in the first quarter of 2018, a 14 percent decrease from the $69.0 million recorded in the corresponding period of the prior year. The Company's international operations contributed 22 percent of the total revenue in the first quarter of 2018 (2017 - 27 percent).

For the three months ended March 31, 2018, international operating days totaled 1,358 operating days compared to 1,578 drilling days for the three months ended March 31, 2017, a decrease of 14 percent.

The international operations saw a decrease in activity as certain rigs that were on long-term contracts rolled off and were not renewed. Similar to the Company's United States operations, international operations were negatively impacted by the weakening United States dollar year-over-year in the first three months of 2018, versus the Canadian dollar, on translation into Canadian dollars for reporting purposes compared to the same period of 2017.

DEPRECIATION

Depreciation expense totaled $98.6 million for the first quarter of 2018 compared with $79.4 million for the first quarter of 2017. In the first quarter of 2018, the Company reviewed the useful life estimates for all rigs and related equipment and determined that using a straight-line method (versus operating days) would more accurately reflect the future economic benefits related to these assets. These adjustments were applied prospectively and, as such, have caused an increased depreciation expense in 2018.

GENERAL AND ADMINISTRATIVE EXPENSE

General and administrative expense increased 2 percent to $10.8 million (4.2 percent of revenue) for the first quarter of 2018 compared to $10.6 million (4.2 percent of revenue) for the first quarter of 2017. The consistent general and administrative expense has been reduced substantially in recent years and reflects the Company's continued initiatives to reduce costs.

INTEREST EXPENSE

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 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 10 percent for the first quarter of 2018 compared to the same period in 2017 as a result of an increase to the overall interest rate and total debt. The increased interest expense was partially offset by the positive translational impact on United States dollar-denominated debt of a weakening United States dollar versus the Canadian dollar on a year-over-year basis.

FOREIGN EXCHANGE GAIN 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.

INCOME TAXES

The effective income tax rate for the three months ended March 31, 2018 was 36.3 percent compared with 37.3 percent for the three months ended March 31, 2017. The effective tax rate in the first quarter of the current year was lower than the effective tax rate in the first quarter of 2017 due to the impact of the reductions in foreign tax rates.

FUNDS FLOW FROM OPERATIONS AND WORKING CAPITAL

For the three months ended March 31, 2018, the Company generated Funds flow from operations of $53.9 million ($0.34 per common share) an increase of 20 percent from $44.8 million ($0.29 per common share) for the three months ended March 31, 2017. The increase in Funds flow from operations in 2018 compared to 2017 is due to the increase in revenue rates, and increased activities compared to the prior period, which was partially offset by the weakening United States dollar.

At March 31, 2018 the Company's working capital was a deficit of $441.9 million, compared to a working capital deficit of $342.2 million at December 31, 2017. The decrease in working capital in the first three months of 2018, was mainly related to the financial statement reclassification of a portion of long-term debt ($486.5 million of the Global Bank Facility, due October 3, 2018 and $129 million of the Senior unsecured notes, due February 22, 2019) maturing within the next 12 months to current liabilities. The Company 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 $22.0 million was undrawn and available at March 31, 2018. The Company has a $50.0 million accordion to be included in the existing revolving credit facilities but not yet exercised. 

INVESTING ACTIVITIES

Net purchases of property and equipment for the first quarter of 2018 totaled $15.4 million (2017 - $29.5 million). The purchase of property and equipment relates predominantly to maintenance capital for certain drilling rigs and to the construction of four service rigs for the United States.

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. The Company also has available a $50.0 million accordion that would be included in the existing revolving credit facilities if exercised.

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 received net debt proceeds of $3.0 million during the three months ended March 31, 2018. On March 29, 2018 the Company announced the closing of a non-brokered private placement of unsecured, subordinated convertible debentures (the "Debentures") for gross proceeds of $25.95 million. The Debentures bear interest from the date of closing at 7.0% per annum, payable semi-annually in arrears, on April 1 and October 1 each year. The debentures will mature on January 31, 2022. $19.0 million of the proceeds were used to pay off a $19.0 million loan that was incurred during the first quarter of 2018.

The Debentures are convertible at the option of the holder into common shares of the Corporation ("Common Shares") at any time prior to the close of business on the Maturity Date upon at least 61 days prior notice, at a conversion price of $7.00 per Common Share, subject to customary anti-dilution adjustments (the "Conversion Price"). Holders converting their Debentures will receive accrued and unpaid interest thereon (if any), up to, but excluding, the date of conversion.

If, on and after April 1, 2021, the closing price of the Common Shares on the Toronto Stock Exchange exceeds 125% of the Conversion Price for at least 30 consecutive trading days, the Debentures may be redeemed by the Corporation for cash, in whole or in part from time to time, on not more than 90 days and not less than 60 days prior notice, at a redemption price equal to the outstanding principal amount of the Debentures plus accrued and unpaid interest thereon (if any), up to, but excluding, the date of redemption.

The Board of Directors of the Company has declared a second quarter cash dividend of $0.12 per common share to be payable on July 6, 2018 to all Common Shareholders of record as of June 22, 2018. The dividend is pursuant to the quarterly dividend policy adopted by the Company. Pursuant to subsection 89(1) of the Canadian Income Tax Act ("ITA"), the dividend being paid is designated as an eligible dividend, as defined in subsection 89(1) of the ITA.   

NEW BUILDS AND MAJOR RETROFITS

During the three months ended March 31, 2018, the Company decommissioned three service rigs in Canada and one drilling rig and two service rigs in the United States. The Company continues to selectively add new ADR^® drilling rigs to meet the increasing technical demands of its customers and is currently in the process of construction of four new service rigs for the United States. 

OUTLOOK

Industry Overview

The rebalancing of the oil markets has continued into 2018. OPEC and non-OPEC members, led by Russia, still remain supportive of the oil production cuts helping boost oil prices and reduce global inventory gluts. Optimism about the recovery is still being overshadowed by the continued rise in oil production from the United States; however cost inflation, and infrastructure bottlenecks appear to be easing some concerns about the over production. In addition, some oil producing countries including Venezuela and Libya continue to experience political and economic problems which have caused oil output to decline resulting in a substantial increase in oil prices. As global oil inventories continue to be drawn down and global demand continues to increase the rebalancing of the oil market is expected to continue into 2018 and beyond and is expected to create more demand for oilfield equipment and related services.

Canadian Activity 

Takeaway capacity continues to be one of the largest obstacles for the oil and natural gas industry in Canada. The contested proposed Kinder Morgan Trans Mountain pipeline expansion is causing uncertainty in the industry. Due to this uncertainty resulting in depressed natural gas prices and oil price differentials, activity in Canada is expected to be similar or slightly down in 2018 when compared to 2017. The 2018 CAODC forecast expects 70,587 operating days compared to 2017 actual operating days of 69,353, a 1.8% increase. As of May 4, 2018, 25 drilling and coring rigs are currently under contract with 18 under contract longer than six months (21 percent of the marketed fleet).

United States Activity

Optimism in the United States market continues to increase in 2018 with the Baker Hughes US rig count at the beginning of April 2018 climbing above 1,000 rigs for the first time since April 2015. Analysts are expecting the rig count to continue to grow in 2018 with additional rig deployments into 2019. 

Continued tightness in the high specification AC 1500 horse power drilling rig category is placing upward pressure on revenue day rates for that class of assets. The tightness in supply of those type of rigs should start to trickle down to lower specification drilling rigs in 2018. Subsequent to March 31, 2018, we've successfully contracted an idle ADR^®1500 in Canada to a US customer under a long-term contract. Recent capital expenditure programs for oilfield service companies has so far excluded the construction of new drilling rigs and this lack of new drilling rigs should continue to support pricing increases into the future.

Of our United States rigs, 43 drilling rigs are currently under contract with 13 under contract longer than six months (20 percent of the marketed fleet).

International Activity 

The Company's expectation for its International segment still remains the same which is modest growth in 2018, specifically the latter half of 2018. There are a total of six of our drilling rigs currently running in Latin America as at May 4, 2018 and that is expected to be maintained throughout the year with the possibility of a slight increase, but could vary depending on the political situation in Venezuela, which continues to cause an unstable environment. We have a total of three rigs running in the Middle East and eight in Australia. In the international segment we have 17 drilling rigs under contract with 12, or 20 percent of the marketed fleet 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 first quarter 2018 results at 2:00 p.m. MDT (4:00 p.m. EDT) on Monday, May 7, 2018. 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 May 14, 2018 by dialing 1-416-849-0833 (in Toronto) or 1-855-859-2056 (outside Toronto) and entering the reservation number 39429967. 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.