Q3 2020 Ensign Energy Services Inc Earnings Call
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It sounds like to hand, the conference over to your Speaker today, Nicole Romano's director of Investor Relations. Thank you. Please go ahead.
Thank you Chris.
Good morning, and welcome to enzyme energy services third quarter earnings conference call and webcast on our call today, Bob get Us President and CEO and Michael Grade Chief Financial Officer will review ends on third quarter highlights and financial results followed.
Followed by our operational update and outlook well 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.
Factors that could cause results to materially different materially differ 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 defensive lawsuits.
Bill do you have oil and gas companies to pay accounts receivable balances and raise capital and any other unforeseen conditions that could impact the use of our services supply by the company.
Additionally, our discussion today may refer to non-GAAP measures such as adjusted EBITDA. Please see our third quarter earnings release, and SEDAR filings for more information on forward looking statements and the company to use non-GAAP measures.
With that I'll pass it on to both.
Thanks, Nicole and thanks, everyone for joining the call today Mike.
Amongst these very challenging times.
So third quarter 2020 of it certainly appears activity trough is behind us as depletion starts catching up with everyone certainly in North America and sign hit a record low 42 rigs running mid summer would have ramped up today, the 60 to 65 rigs and expect to build up to 80 close rates.
First quarter 21.
In the third quarter, we doubled down on our middle East Operation and completed the acquisition of Halliburton is 40% ownership interest. The majority is a joint venture and sign now always on a percent of the five newer 30 402000 horsepower issues Super spec rigs Super spec rigs two of which are in.
Oh wait one in Bahrain and two in Mexico.
Our international business segment now accounts for worldwide, 33% over third of our revenue base.
With a continued focus on efficiencies G.N.A. expense dropped 21% year over year for the quarter.
So for a more comprehensive summer summary of the third quarter I'll pass it over to Mike right Mike.
Thanks, Bob please.
For the third quarter of 2020 were negatively impacted by the current operating environment globally measures implemented in March to mitigate the spread a little bit 19, including stay at home restrictions led to a significant slowdown in global economic activity, but subsequently reduced the demand for crude oil and natural gas products over the short term, which that really impact to commodity prices.
Although oil markets have started to stabilize over the short term operating results continued to be impacted by these events.
Using a cold at 19 restrictions improved oil demand over the third quarter. This in combination with the global supply production curtailments not to stabilize commodity prices over the balance of the quarter.
However, due to the uncertain industry outlook customers remain reluctant to wrap up drilling drilling programs, resulting in lower activity year over year in the third quarter.
Operating days overall were lower in the third quarter of 2020 Canadian operations recorded 686 operating days, 71% decrease the United States recorded 1437, a decrease of 77% in international operations recorded 790, 844% decrease for the nine months of 2020 operating days there.
<unk> also overall lower with the Canadian operations experiencing at 38% decrease.
United States operation to 55% decrease in international operations, showing a 26% decrease compared to the first nine months of 2019.
The company generated revenue of 156.9 million in the third quarter of 2020.
60% decrease compared to revenue of 393.4 million generated in the third quarter of the prior year.
For the nine months ended 2020, the company generated revenue of 735.6 million, a 40% decrease compared to revenue of 1.22 billion generated in the first nine months of the prior year.
Adjusted EBITDA for the third quarter of 2020 was 39.5 million, 60% lower than adjusted EBIT of $97.9 million in the third quarter of 2019.
Adjusted EBITDA for the nine months of 2020 totaled 888.8 million, 40% lower than adjusted EBITDA of 317.1 million generated in the first nine months of 2019.
The decrease in adjusted EBITDA for the three and nine months was due to the decrease in activity across global operations.
Depreciation expense in the first nine months of 2020 was 278.4 million an increase of 3% compared to 269.6 million for the nine months of 2019.
<unk> expense for the third quarter of 2020 was 21% lower than the third quarter of 2019.
<unk> expense decrease was the result of ongoing cost saving initiatives wage subsidy is an organizational restructuring.
Total debt for the third quarter of 2020 decreased year over year by 159.4 million to 1.47 billion as of September Thirtyth 2020 for 1.63 billion as of September Thirtyth 2019, the decrease in aggregate that was partially offset by foreign exchange.
Fluctuations.
That capital purchases for the third quarter was 3.2 million consisting of 5.5 million in maintenance capital offset by proceeds of 2.3 million from disposals.
Planned capital expenditures or expenditures for 2020 remains at 50 million of which approximately 40 million will be maintenance capital on that note I'll turn it back to Bob.
Thanks, Mike.
Let me start off by addressing the obvious.
Business needs a shot and they are quite literally with Goldman Sachs seem to get this market coming back.
As mentioned earlier, we're running 60 rigs around the world today and have contracts lined up that will she has built a plus in the first quarter Weve.
We have over 60% of our active contracted fleet under long term contracts and we have a certain rate rigs contracted out as far as 2025, let's start with Canada. Today, we have 20 rigs active with contract visibility to 25 rigs in the next few weeks. This is awful low of five rigs or.
Back in August.
We're expecting to hit a peak in first quarter of a 40 plus rigs active.
Sure thing is running plus or minus 10 rigs daily and are finally, starting to see some of the SRP that safe reclamation plan grant worth coming our way.
Actual drilling hung in there in the third quarter with just one job running and now have two with two more starting up so we'll be getting up for Erie Shortly shadow rentals had a tough summer.
For us, but she is strong winter with tank farms and Madden.
Right, so somewhat stabilize as we bid ourselves in this winter work.
This operations as you know, we operate and all the major basins in the U.S. from California for the Rockies, North Dakota down into the Permian and east to the Eagle Ford Haynesville well.
30 rigs running in the U.S. today, we are up 50% from the trough of 20 rigs.
In the third quarter rate seem to have stabilized now that bid activity is picking up.
[laughter].
U.S. full service business segment is performing extremely well, especially over in California on the directional drilling front, we are four jobs currently underway.
Moving to international.
The news in the third quarter for our International Group was of course the acquisition of <unk>.
However, 40% interest in the JV.
Page rigs are running extremely well and continue to deliver wellbores for KFC in the top 10%. These rigs are under take or pay contracts 2024 right.
Rich controls on these rigs is providing very efficient and highly productive fee rates pushing is as I mentioned.
Yes so.
Also happy to report our two brain rigs received contract extensions on their contracts, taking us from 2022 to 2023.
Two one year extensions, which could take us down to 2025.
Argentina has one rig active for a major which is contracted until mid 2021, and we have bids out.
Three or four offer it is for a second rig Australia steady with eight rigs active in bid activity, increasing as we approached 2021 should see us fairly you get the 10 rigs in 2021 again as operators work too.
Catch up on gas deflation.
On the technology front Erez wall side technology.
About 75% of our active AC rigs today are utilizing our edge controls technology. Additionally, we just completed the second well the beta testing for our edge auto pilot system.
Its sticker prices for $2500, a day, which suggests it must provide at least a 5% wall time reduction to create value we're already seeing it already deliver at least 10% to 15% fee rate increases.
We're also leveraging off our in house as controls historian reporting capability to help manage our PV. She's performance based contracts, we have about 20% of the U.S. fleet on a T.V.C. type contract currently which provides almost a doubling of or if it does some of those projects.
I'll put it back to the operator for acuity.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Pause for just a moment to compile the <unk> roster.
And your first question comes from coal Forever of Stifel.
The line is open.
Hey, good morning, guys.
Michael.
As we think about the balance sheet you guys had previously indicated that issuing $125 million.
As a possibility I mean is this.
Something you guys are thinking about or do you think it dead capital markets need to improve.
Before we get there.
Mike you want to handle that one.
Yeah like you said it was more from the press release from the perspective of letting people know that there's that optionality there.
There hasn't been any let's say processes put in place to actually look to execute on that but it is a possibility that delta.
Okay got it that's a that's.
That's helpful. I mean as a as activity starts to return in the U.S. can you talk about how well you're seeing demand in terms of the different rig classes and whether that's just concentrating and leading edge Super spec 15, hundreds or a couple of different classes.
Yeah, what we're certainly seeing the.
The Super spec, depending on the client the Super spec rigs.
Which would suggest as the three pump for January and then the standard 1500.
We're seeing a little more activity building in the Haynesville area of course gas three dollar close gas is really helping move that along.
For me as it is it's.
Very steady I mean, you you you're very well aware of all the.
Merger acquisition activity of course, which has put a little bit of a pause in people's plans and notwithstanding a oil.
Struggling to get it back.
To 40 plus.
You know, we're seeing or some of the the double fleet. We have five five of our rigs are the smaller type capacity rigs.
You know, they're working for small independent small independents.
Can occasionally.
Fine profit and $40 barrel oil so we're seeing some activity there.
Generally it's.
The phone is ringing off the hook, but we're seeing more bid activity than we have in the last six months.
Got it that's helpful color. Thanks.
So obviously leverage metrics are elevated across the space here and one Avenue to address this would obviously be through M&A can you guys share how you're kind of thinking about that in the current market.
Yeah, so on the operator side, you're talking about no.
No sorry, I meant specifically.
For a enzyme in the drilling space.
Okay, Yeah the.
One.
There appears to be a lot of rigs around the world capable of drilling a lot of wells. So arguably too many so that hurt me stepping out a little bit.
And you know there is a five contractors that deliver 80% of the Wellbores in North America, not one having more than 20% market share. So at some point in time, some M&A activity needs to needs to move there is a mid pack of Oh.
Probably 10 contractors that own you know 30.
30, 40, 50 type rigs that.
Right.
Need to be consolidated would have to be consolidated so yeah. It's it's it's definitely I'm starting to get interesting on that front I'm not aware of any rumors so I can't.
Okay.
Okay. Thanks, that's all for me I'll turn it back now.
Thanks, a lot.
Your next question comes from what car so yes.
<unk> capital markets.
[music].
Thank you for taking my question.
Bob could you guide us to what's your expectation is for shock fall down any contract termination revenues for the fourth quarter, and then four or maybe even first quarter of next year.
Yeah the.
Mike or do we disclose that anywhere.
Oh, we do disclose the idle, but contracted an early term.
I think similar to your comment in Q2, it was kind of dropping a third and a third and a third.
Okay, Yeah, yeah, so you're probably seeing it a in that age range I would suggest a good.
Fourth quarter. The challenges you know we have some clients that well have the rig on a on a oh standby charge, which is an act of charge and then expecting a program to develop in the next quarter and then it doesn't and then they call and they wish to terminate the call.
Contract and and either pay out.
A different H.T.F. rate through the rigs through the remainder of the contract or pay contract out. So it's you know our guidance probably isn't that age range for fourth quarter or.
Okay.
And.
Then you have.
Have you started negotiations with the lenders on a covenant relief fund if you know could you give any update on how that's progressing.
Mike you want to have to do well more conversations are taking place as of yet.
Okay, and any plans or any expectations. When do you expect to begin those conversations.
Well, we haven't during the fourth quarter.
Yeah.
Bob in terms of activity increases in Australia.
Did you could you quantify you know for the next couple of years, how do you see activity trends there.
Sure.
Yeah.
One thing in Australia is a they're finding that depletion rates are always higher than they they expect.
Demand well I mean, the demand was.
As.
[noise] pulled back a little bit because a couple bad that is starting to come back.
We're starting to see some bid activity. It's 2021 as I mentioned in the call I think will increase another couple of rigs what car.
In a 2021 and Australia is usually quite a stable market for us.
It is very low.
Lets compare to the North American market, because it's so gas driven and utility driven some LNG driven as well.
Yeah.
And just one final question could you maybe provide some.
Hard numbers around what you.
Did it changes could be in Canadian market in the U.S. market.
You made a comment that there's been some pricing pressures.
Yeah, I I suggest that the pricing pressure has stopped that.
Now people are.
Nice taker is while they move up the utilization curve.
I would suggest we need to see a little more utilization before people start to be a little more bullish on raising their prices. So you know I would say I would I call. It the <unk>.
Stabilized world of day rates right now.
Both north and south of the border.
We are able to raise our prices.
You know, where we have contract or we have operators I'm sorry in Canada.
Requesting certain types of rigs in the first quarter.
We're finding that you know the higher spec or heavy tele doubles and the sales.
Some 1500 horsepower type base he rigs.
Our very much going to be a little tighter this winter.
So we're seeing you know we're testing the market by pushing rates, Oh, I'm, a little bit here. Its a November I mean, we're not too far away from.
The winter season, we're also suggesting to our clients that they should probably get the rig moved in rigged up and.
Surface hole drilled before Christmas.
It's we're finding it harder and harder to find a good stable crews to to hit the peak, which we usually find in the first quarter of the winter.
And it will probably be challenged again we.
We always find people, but we want to make sure we're able to get our that our right people back. So there's a there's little bit of a push for he will give you a better rate to the end of the year, but once we get into the new quarter.
You know, it's it's up a couple of thousand dollars a day type of thing.
How about the U.S. market.
The <unk> the U.S. market again that is still a we're price takers were not able to move the price at all in the U.S.. It's it's stabilized we're not having to drop it either.
Is that enough for the tier one type rigs is the read now in the high teens on.
Is it staying within that low to mid twentys in that range.
I would I would say that height.
Okay great.
Thank you very much I appreciate the color or yeah. Appreciate the question.
Again, if you would like to ask a question press star of the number one on your telephone keypad.
Next question comes from Keith Markey of RBC.
<unk>.
Hi, Good morning, Thanks for taking my question I just wanted to start out with a comment you made around performance based contracts and having about 20% of your rigs I think on on some kind of performance based maybe you can just talk a little bit more about the terms and whether you're seeing more clients investigate this ad.
Having you as capital remains constrained amongst producers versus just having to pay that straight high teens day rate. These days.
Yeah, well the the PBC contracts are constructed with a competitive base day rate and then there is upticks from there based on hitting key metrics.
Penetration rate also there's always a safety component and any of that.
Meantime between failure is.
Slips that slips how quickly get back to bottom.
There's usually a three or four key indicators that.
We quantify.
And we put a we've got a small engineering team that.
The advanced performance management team.
Any of these contracts say focus on.
Client one of the clients is one of the one of the ones were beta testing or auto pilot on so where.
We're getting the benefit of advanced performance, while we're testing.
So that's that's working out very well.
So you know, it's it's basically a no risk proposition for the operator, they get the the day rate that they normally would we decide what a technology, we want to put on the rig and we're managing at a.
24, seven in a real time operating center type of environment.
Got it now I'm guessing that there hasn't been a whole lot of opportunity for re contracting in such given given where we are but has that proposition or pitch that you know that you that you're giving to to the operator.
Finding that there are more receptive to that so that no risk proposition. These days are most still choosing to pick a day rate.
Well, yeah. They again, it's they're always.
The rig is always on a base day rate and then there is optics that we charge for when we had performance. So the the challenge is sometimes the operators acceptance.
He is.
If you do too well I'll be out of a job.
You know as as.
Drilling manager or whatever but most the most these days I understand that they are short.
Short staffed that.
You know, bringing in Wellbores with Lord cause is.
Consistent with the keeping one's job. These days. So there now that we're building up a lot more data in different areas and the data we get from different areas and also similar data from the same area whether it be with this operator, another operator helps us build or algorithms and.
You know working or Dgs space, which ties.
Ties into the the the control of the machine, which completes the circle of the loop for the auto pilot.
Got it okay, and maybe just turning to Canada or the rig optics, you're expecting to activate in the next little bit do you get the sense that those are just the continuation of operator, 2020 capital spending or is it some acceleration of 2021.
Good question good question.
I <unk>.
I don't know I I think that.
You know the lines are blurred now on annual budgets because everyone is happy so dynamic I'm not sure I'm not sure the response.
Yeah.
Got it Okay and then just final one for me mention the SRP starting to see a little bit there can you maybe quantify what you've seen so far and what you expect and.
You know just your your potential potential impact on hiring and potential inflation that you might expect to see there you can't get the people we need.
Yeah, I don't think we'll see wage inflation fellows are paid well when they when they work. The problem is they just have been working much. So I don't expect any wage inflation.
You know there was a lot of challenges with the rollout of the various governmental levels in the SRP and that frustrated a industry. This quite extensive.
It looks like I'm Dave.
You know through regular meetings.
With the industry associations and the government, we've been able to streamline.
That process, we believe anyway and get some boots on the ground working.
It's been it's been very dismal in the.
Second and third quarter fourth quarter, it looks like were everyone starting to understand.
And the government how to approve viz, a viz things I will expect that there may be some future announcements or perhaps.
Perhaps for the government because there was a lot of unused to cap or unused grant money.
That didn't get allocated out that sort of I think it will be circling back on this so I think we'll see more of it in 2021, Keith now, but it's a.
Process has been streamlined a little bit better.
Okay, well that's it for me thanks, very much for the color.
Thanks Keith.
Your next question comes from just federally Peters and company. Your line is open.
Morning, guys.
Hey, Jeff.
Couple of follow up questions.
Hello.
Yes.
<unk>.
Q3.
Oh, how many rigs is.
I want to say, we probably had a.
And Mike you may have that handy I want to say, we probably had about.
10 rigs somewhere in that range.
Yeah, I think that's about right.
Yeah, and and was there a second part to that question Jeff.
We're just numbers today.
I would say, it's probably around six.
Okay.
<unk>.
You referenced.
It includes the six <unk>.
It would yes.
So what is your line of sight.
Yes.
Any of the <unk>.
But also in terms of your overall.
<unk>.
Right.
I would say that the city that were at today, there's probably some room for.
Visibility to five more.
And.
Those those five would be a new contracts.
We're seeing some some operators that that have contracts, where they're paying and IVC rate in one area on one of our rigs and operating a rig in another area.
Come.
Come back to the swap Ibcs and one for another because they want to put the other rig back to work and shut down the other one everyone's budgets or.
Tighter than heck, they're not changing at all obviously, so you know we are seeing.
And I'd also let me back up that's in the and.
With the.
Front window of the interface of these mergers, which you know the cons show Conoco.
Your part as you know we work for all of them.
And you know we know that some of their plans will be a real did little bit while they pause and reflect on what their what their plans are in certain areas coordinate their efforts.
And then come back at it so I I think that again, we may see some visibility to a 35.
Here through 2021.
And.
You know, our IVC contracts or you know, they're they're peeling off every quarter.
I would say that you know that we've been.
Sure.
Are we coming in.
In the fourth quarter that will probably dribbled down too.
You know maybe six in the first quarter of 2021 and down from there as we replenish contracts. So it's quite difficult for us to put a term of the contract terms. These days or six months you know, we're not willing to sign rigs up at these rates for any longer than six months, but they do a six month term.
Just so I understand when you see.
In the fourth quarter, that's why you see plus early term.
<unk> 13 million.
You showed in Q3.
Correct.
Okay.
And lastly on the Canadian side.
Reference to peaking at 40 rigs from the 25.
20 today in the 25 in Q4.
Those incremental rigs going into the winter.
Generally what style or <unk>.
Where do you expect those incremental rigs are going to work.
Yeah, certainly the the.
The montney.
Yeah couple and they do every day, but the money would be the most.
Prevalent area and they'd be the.
Yeah.
The.
Allison to 1500 AC type class rigs and a a couple of the heavy tele doubles the.
The heavy tele doubles buys.
Okay.
Thanks appreciate the color.
Thanks, Jeff.
Again in order to ask a question press Star then the number one on its own phone keeps that your next question comes from John Gibson of BMO capital markets. Your line is open.
Thanks, Good morning.
Yes.
You are fairly active on debt repurchases in the quarter and you know that it's.
Continuing into Q4 do you expect this to continue sort of.
Towards the end of the year and it's a 2021, especially where your bonds are trading up.
Oh, we got to take it day by day, so there won't be a particular plan that we're following so.
So really can't provide much more color than that.
Okay. It sort of a follow on then if we look towards a refinance of the credit facility what would an ideal.
Refinancing look like when it would would it include potentially a higher credit facility and lower amount of no.
No I think it's more likely to be a it's a sort of covenant relief.
Then.
Looking at extending the facility out for a period of time I think the credit trucks.
Structure of the capital structure, we have right now is.
I was working to be more of just pushing out the facility probably by year or so.
With some movement in the covenants to make sure that we can sort of balance out 2021 correctly.
Okay. Thanks next one just what are you expecting for Q than Q4, 2000, and then can you remind me as Australia ended its extended its wage subsidies into 2021 as well.
Yes, really I believe goes Oh go ahead.
No go ahead Mike.
Well isn't Australia extended until I believe at the end of Q1 you.
Canadian one continue to sort of augment so I think it's now until June of 2021, So I think.
Quarter over quarter, a I'd say, it's probably going to be similar.
So what we saw in Q3, maybe slightly lower.
In Q1 would probably be similar to Q4.
It really depends on how the Canadian government modifies the programs they seem to be doing not every sort of once a month.
And when you talk about similar to Q3, you're referencing or the combined <unk> Canadian and Australian numbers.
Yes, so the Canadian Q3 was 4.2 million in Australia was 3.2, so it's probably going to be similar in Q4.
Okay.
And then just a follow up on the <unk> reclamation work that started in Q4 as it is a more preliminary right now and I guess.
So could you provide some guidance on when do you anticipate it being more material to your financial results.
Yeah, I think it will build a I would suggest.
When we enter 2021 I think we're starting to see some good traction on some of the programs some of the operators.
Process.
And.
Put on the backburner different phases of it of course, so I would suggest that two we'd be looking more into 2021.
The the more larger benefits of it.
Okay, great. Thanks for the answers I'll turn it back.
Hi, Sean.
There are no further questions at this time I'll now return the call to Mr. Davis for closing comments.
Thank you Chris.
That's a covert virus runs its course and what the vaccine around the core or the expectation is that the world will require energy at least back to the level. It was pretty cool, but unless you believe the world will not.
Man low cost energy as it comes out of this covert situation. It was just a matter of time before the world opens back up the reality of accelerated depreciation becomes certain.
Well it seems like around 40 Bucks what is encouraging is the natural gas price appreciation up over $3. Currently with this we would see more active natural gas projects come back to life.
As I continue to stay laser focused on debt reduction and of course to acquire as controls Bulls eye technology on PVC contracts in order to grow EBITDA and continue to differentiate ourselves from our peer group. Thank you for joining the call and look forward to our next call in the fourth quarter. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].