Q4 2020 Ensign Energy Services Inc Earnings Call
Yes.
Ladies and gentlemen, thank you for standing by and welcome to the Ensign Energy Services, Inc. Fourth quarter 2020 results conference call at.
At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask the question. During the session you will need to press star one on your telephone.
Please be advised the today's conference is being recorded and if you require any further assistance. Please press star zero for.
And now like to hand, the conference over to your Speaker today Ms. Nicole Romanow. Please go ahead.
Thank you Gabriel.
And welcome to Ensign Energy services fourth quarter and year end 2020 conference call and webcast.
On our call today, Bob Geddes, President and COO, and Mike Gray Chief Financial Officer will review <unk> fourth quarter and year end 2020 highlights and financial results followed by our operational update and outlook. We'll then open the call for questions.
Discussion today May include forward looking statements based on current expectations and 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 the ability of oil and gas companies to pay accounts receivable balances or other unforeseen conditions, which could impact the demand for the services of supply by the company.
Additionally, our discussion today may refer to non-GAAP financial measures such as adjusted EBITDA. Please see our fourth quarter earnings press release, and SEDAR filings for more information on forward looking statements and the company the use of non-GAAP financial measures.
With that I'll pass it on for Bob.
Thanks, Nicole good morning, everyone.
Well say 2020 was anything but a very unique year would be nothing short of a complete understatement.
The 20 tested management and systems like no other year in our history.
But like we always say never let a crisis go to waste.
And the signs quite proactive response early on in 2020 enabled enzyme to get ahead of the obvious significant change in business brought on by the Covid and all of the subsequent macro diamond dynamics that came along with that.
In spite of the serious COVID-19 challenges keeping ensign rigs operating out of the field is not lost on any of us the extra ordinary personal commitment and dedication made by all of our professional crews on all of our rigs around the world I'd like to take this opportunity to thank all of them for keeping all of our rigs around the world running without any significant disruptions.
It is amazing that our crews also recorded our best safety record in the company's history amongst all of the Covid distractions for Ensign 2020 was a year, where the team never lost track of its laser focus on debt reduction.
We reacted quickly to the market decline with further right sizing cost reductions capital constraint.
And further debt reduction Mike Gray, our CFO will get into the numbers with you in a few moments, but here of some of the highlights we accomplished for 2020, we were able to generate free cash flow of sufficient to reduce net debt by over $200 million, we're able to maintain the fleet and keep market share with the $50 million maintenance Capex, we guided the street to we.
Moving to reduce R&M costs and deliver on the new supply chain model for the field, which helped drive costs even further lower.
We successfully competed completed the beta testing of our edge autopilot technology and commercialize it recently.
We successfully purchased halliburton's, 40% in the joint venture.
The five rigs and once again, we were able to deliver all of this with the base safety metrics in our history. All in all we ended the year with the strong fourth quarter I'll, let Mike run over the financial details over to you Mike.
Thanks, Bob.
For the fourth quarter and year ended December 31, 2020 were negatively impacted by the macroeconomic conditions due.
Due to the pandemic operating days were down in the fourth quarter of 2020, the Canadian operations experiencing 35 per cent decrease the United States of operation of 60% of decrease in the international operations. So on the 37% decrease in operating days compared to the fourth quarter of 2019.
For the year ended December 31, 2020 operating days were down 18 operations experience in the 37 per cent decrease.
The state's operations of 56% decrease in the international operations showing of 29% decrease in operating days compared to the year ended December 31 2019.
Even with the significant slowdown in activity of the company's total debt net of cash decreased the $88 $1 million of 6% from the fourth quarter of 2020 from one of four 7 billion at September 30 of 2020 to $1 3 billion at December 31 2020.
Year over year total debt decreased by $169 nine weighted to $1 3 billion at December 31, 2020 for $1 five 8 billion of December 31 2019.
Over the 2020 year of the company repurchased one.
$198 7 million face value of senior notes and recorded a gain of $162 8 million.
Adjusted EBITDA for the fourth quarter of 2020 was $52 7 million, 45% lower than adjusted EBITDA of $95 4 million in the fourth quarter of 2019.
Adjusted EBITDA for the year ended December 31, 2020 was $241 5 million of 41% decrease compared to the adjusted EBITDA of $412 5 million generated in the year and year ended December 31 2019.
The 2020 of decrease in adjusted EBITDA due to the macro economic and industry conditions caused by the pandemic until the 19th.
The company generated revenue of $201 3 million in the fourth quarter of 2020 of 46% decrease compared to the revenue of $375 4 million generated in the fourth quarter of the prior year.
For the year ended December 31, 2020, the company generated revenue of $1 9 billion of 41% decrease compared to the revenue of $1 6 billion generated in the prior year depreciation.
<unk> expense for the year was $374 7 million, 3% higher than $363 1 million from the.
Prior year.
G&A expense for the fourth quarter of 2020 was 12% lower than the fourth quarter of 2019 G&A.
G&A for the year ended December 31, 2020 was 21% more than the year ended December 31, 2018 for the result of cost saving initiatives weight subsidies and organizational restructuring the.
The company recorded $11 4 million in non cash expenses related to the classification of the Kurdistan the operations into discontinued operations.
Net proceeds of.
The property and equipment for the fourth quarter for 2020 of totaled $3 3 million compared to net purchases of $17 3 million for the corresponding period of 2019 net.
Net purchases of the property equipment during the fiscal year 2020 totaled $18 4 million compared to net purchases of 96 million in the corresponding period of 2019 on that note I'll turn it back to Bob.
Thanks, Mike Star.
The starting with the U S. Today, we have 36 of our 90 high spec fleet in the U S running in the three areas of predominance of the Permian and the Rockies and California.
We are seeing the bid book strengthened with the smaller cap companies for all of the majors, who most of our active in M&A activity for 2020 will remain somewhat muted through what we believe will be the next few quarters as they settle into figuring out their budgets for the combined entities and establish their drilling plans were.
We're also getting serious traction with our edge technology suite and now with the edge autopilot fully field beta tested and commercial we have seen of strong early response from our client base with our edge autopilot suite into performance based contracts, which will have up to $3000 of day upticks of performance metrics.
The edge autopilot helps to enhance.
Our well servicing business continues to work quietly in the background with re completions of servicing getting stronger as operators push to bring production back with these commodity prices.
Our directional drilling business is generally focused in the Rockies on our turnkey contracts in the U S for the professional team can maximize its impact.
Generally, we see market pricing, improving and operators looking to tie breaks up longer term a sign that the market is definitely troughs.
Our strategy of to respond to these requests for term with step day rates tied to WTO prices. We have a few of these kind of already effectively pulled out rates up in the the twenties not.
Notwithstanding there is an excess of highest spec rigs of need to be contracted before we generally see significant uptick in day rates.
Once we see 60% of greater utilization of any rig category of geographic area.
That is always the sign the contractors will turn from being price takers and become market makers.
We are still at least a few quarters away from that occurring and would anticipate we'll see that starting to happen in the back half of 2021.
Internationally, we have a fleet of 40 rigs in our international business unit at the operating in the Middle East area, Australia, and South America areas the <unk>.
Middle East and Australia business units, our most active areas are areas, where we have the longest contract coverage out as far as 2024.
Approximately 75% of our guaranteed contract term rigs are in our international Arena.
Recall, we purchased halliburton's, 40% interest in the international business unit last summer, which gave US 100% ownership of the $2 3400 horsepower Super spec rigs in Kuwait, which I'll point out are tied up on long term contracts until 2020 for also the 2000 horsepower Super spec rig in Bahrain, which is tied up for three more years.
And 200, 3400 horsepower AC Super spec rigs in Mexico, which are currently down.
In Oman, where we have six of our rigs all of our currently down but we've started to see more bids come out and fully expecting at least half of those rigs to get that working before the end of the year, Venezuela is still quiet for obvious reasons.
Argentina, where we have six rigs and one of operating today on a long term contract is starting to see more bid activity. We fully expect to see at least one more rig go back to work in Argentina before year end, Australia, where we operate a fleet of 16 of high spec rigs with eight under contract today is basically a steady as she goes business our long term core.
Contract renewals staging process provides us the steady diet of consistent work in the various basins in Australia. We have a few contract extension negotiations underway on four of our rigs, which will push our contracted fleet in Australia was solid work out of few more years again.
Canada, we operate the second largest drilling fleet in Canada, with 92 rigs and have about 20% of the market share we hit a peak of 34 rigs this winter and with breakup upon us Brexit dropping fast today, we have about 17 running after breakup, we have about 10% of our total fleet tied up on firm contracts and are starting to see a few.
The request for longer term contracts with the associated circulating system upgrades, which will allow operators to drill out further.
Notional capital upgrades well of course, the all tied to incremental rate increases and long current and long term contracts as mentioned before our strategy on anywhere anytime on any long term contract negotiations is to have a step day rate approach tied to WCS.
Based on the strong WCS in gas prices in Canada, we fully anticipate we will see an uptick coming out of summer and in the September and expect to climb up over 40 rigs running into the fourth quarter.
Well servicing under the new management team is already coming out of the gate with better utilization and also winning more SRP OWS abandonment work over the summer we expect to have at least 11, well service rig steady on this work over the over the summer and into the fall our directional drilling business has been surprising us to the upside with 12 jobs, you're writing today and what looks to be of strong book after.
Breakup rentals.
The rentals had a strong matting revenue first quarter, and we expect that to rollover at the breakout.
In summary, we will see the after effects of high commodity pricing, but I did of more buffered response for that in prior swings. This the result of a tight capital market presence, whom are unwilling to jump back into the space and also the effect of all of the recent M&A activity, which will push plans for the back half of the year as they get organized also because of utilization levels are still low animal.
Lots of the highest spec rigs ready to go to work to fill that ryzen demand. We are confident of that rates will move, but they will move slowly as we get back into the back as we get into the back half of the year.
Thank you I'll turn the call back to the operator for Q&A.
Thank you and as a reminder to ask the question you will need to press star one on your telephone keypad. If you wish to withdraw your question press the pound key.
Your first question will come from coal per.
<unk> of Stifel. Please go ahead.
Good morning, everyone.
Just ask about the <unk>.
Rig additions in the U S.
Can you talk about which basin you are seeing more of that coming from and just wanted to clarify debt again, it's still kind of remains the more from the private operators.
Yes.
California is fairly steady and we've seen some increased activity in well servicing in California and the Rockies.
So the smaller upticks in both drilling and well servicing but the the.
Predominant talk is in the Permian.
Where we're starting to see.
Month over month horizon.
Rig count.
And it is yes, predominantly with the smaller cap guys.
Okay got it that's helpful. Thanks.
Some comments earlier on upgrade Capex should I be thinking that theres, maybe a little bit of a cushion in the $50 million budget for that or would that be incrementals for that $50 million spend.
Yes at this point in time, our plan is to stay within the.
The the.
The $50 million.
We've got.
Some cases operators are covering the cost.
With the notional increase in day rate on top of that in other cases, we're weaving it and we had we had plans that debt.
Some expectations that theres of becoming with certain operators and we budgeted for that so the plan is to stay.
Right into that number of $50 million.
Okay, Great. That's helpful. Thanks, Mike.
Mike as we think about debt repayment acknowledging you're a little limited with.
With the credit facility update can you just talk about how youre thinking about prioritizing.
Buying back more nodes for paying down the credit facility.
Yes, I think of our methodology hasn't changed from sort of the prior year. So if there is a potential opportunity to buyback multiple look at the other opportunities to continue to reduce our facility.
We do have that $25 million limit. So we do have some limitations on what we can do.
Also I would say the bond market has really tightened up in the last two months.
The bond trading in the 30 to 40 of the Bill.
Most of the eighties known soon.
Like I said, we will continue managing the balance sheet like we have over the last.
Basically for quarters.
Okay got it that's all for me, Thanks, I'll turn it back.
Thank you for your next question will come from Keith Mackey of RBC. Please go ahead.
Hi, Thanks for taking my questions I, just wanted to maybe start off on the performance based contracts tied to the <unk> in the U S WCS in Canada, and so forth.
Would those be set on.
The breakeven at current rates.
Current day rates, rather or or how did those how do those contracts step just curious.
The presenters.
Okay.
Bob for you there.
Okay.
Yes.
Hey, John.
Hey, guys I wanted to just repeat that question of equipment.
Yes, just the contracts tied to.
The <unk> and WCS in Canada for for the performance based contracts just curious in how you set those is it.
Like are they meant to breakeven with just using a standard day rate.
At <unk>, our prices currently sit or or just how did those contracts step through the different pricing range of if you can provide any color there that'd be great.
Yeah sure so.
I mean, the base level of still going on of margin and that's the.
It's going to be of the WTO increases the time of day rate goes up.
The small margin going for us because you would assume there'll be some cost inflation and everything like that so I'd say the base raised on behalf of.
Isn't the breakeven the Theres margin on there and then the margin increases of the price of the <unk> items.
Yes.
Got it Okay and one more question just on the on the edge autopilot.
Is it still of pilot phase now like can you run.
Basically one one rig with that now or how many could you actually we actually start to operate if the.
If there is demand for it.
The part of the project went quite well so I think.
The customers start to ask for them, we can definitely start to roll it out of two additional rigs.
Got it and that would just require any capital to do that or.
All of the some of the capital.
Some additional sort of the mountain power.
Got it okay. That's it for me thanks very much.
Your next question will come from John Gibson of BMO. Please go ahead.
Good morning.
In the release, you mentioned potential for Canadian early terminations.
I'm wondering if.
If you could provide some specific color on the class of rigs youre, referring to that could be subject to.
Of these types of care.
On the early terminations of would be sort of mix with the highest Mcdonald's too.
For the high spec vessels.
Okay.
And then can you give any guidance around.
Future expectations for early termination of an ABC revenue in both international and the U S regions.
So I would say the.
The sort of and since about November and discussing the the kind of go down a third from the third so Q1 will have probably about a third of of what we saw in.
In Q4, and then really by the Q2, I think pretty much all of that.
And the early channel will be wrapped up.
Okay.
When you.
Going back to the pricing discussions of North America I'm, just wondering if the general conversations have improved over the last few weeks given the better commodity prices of laden specifically producers are generating quite.
But a bit better in terms of free cash flow in this environment.
Im just wondering if it's just general sentiment has picked up.
No.
An increase not to happen until the back half of the year, but just where sentiment is right now.
Yes, I'd say its increased I think a lot of the produce all of them still.
Hey, Bob for you Buck.
I'm back somehow the phone disappeared.
For the last question I heard was from Keith on.
On the auto pilot.
We probably moved on from that.
Yes for just asking a settlement with customers in North America with the pricing increases.
Yeah, Yes, just two for his keeps still on the line.
He is still on the call but his line is closed now okay. I just wanted to come back to the autopilot question.
The other pilot is going to be our platform, which will get pushed out to all of the rigs it's basically us.
Our software and hardware applications that is easily installed on the rigs. It becomes basically are it becomes like Microsoft office out of the rig we're.
All of our other applications reside and coordinate.
So that's the way to look at it so.
It pulls all of the other apps like the optimizer in <unk> and then everything else.
So it looks like auto tool face together.
What we are calling the auto pilot suite, so the way to look at it as much like much like Microsoft office. So it'll go out on all of the rigs eventually over time and debt.
We can remotely turn it on or off from Houston from our control Center there.
As we see fit and operators.
Some requested some don't some we have tight we'll tighten the performance based contracts.
I will turn it on and we'll make our money true.
Performance metric Kickers so.
I just wanted to come back from that for clarity.
Sorry, so the current question on the table is I'm, sorry again, Mike.
Just on the customer sentiment with the increase in the <unk> in North America.
Yeah well.
They certainly like it down there are certain points first of all first of all I mean, they're there.
The.
Sure.
Moving to clean up the balance sheets. They are not looking to grow production if you.
The starting to grow more than 5% production youre going to get hammered.
So they are they are they are starting to collect the.
The cash flow.
They are starting to make plans into.
Into the back half of the year for sure we're starting to see that in our book.
So it's coming along.
Okay, Great I appreciate the color I'll turn it back.
And again, if you have any further questions. Please press star one on your telephone keypad. Your next question will come from Mccarthy of ATB. Please go ahead.
Thank you good morning.
Bob you mentioned that in the back half of the year.
It'd be incremental rigs based on your conversations.
Could you maybe.
Talk about it in the U S. How many incremental rigs do you think you could have running in the fourth quarter.
Versus your current activity levels.
Yes, I think.
No.
How we're seeing it right now I think that the fourth quarter.
We'll probably see 50% bump.
Current levels in both the U S and Canada in.
In the fourth quarter.
It will build up through the summer into the third quarter and the fourth quarter.
With a bunch of 50% increase I think we will probably exit the year with one of 100 rigs running.
Would the would be my sense right now and we're currently running 70.
I think it will dip down to about 60, as we come out of breakup of them through the summer of the U S of slowly.
The matching that.
Rig out per rig down.
And but it will slowly start building from about June to the end of the year up to.
The fourth quarter, I'm thinking closer to 100 rigs.
Do you think in Canada, you could have more rigs running in the fourth quarter on average than you have in the first quarter.
Now I think that it'll be very closely.
I think it would be very close.
Well that's pretty impressive.
And then.
Bob.
In the fourth quarter of 'twenty the last quarter.
In International markets, you had $9 nine rigs that you reported working on average could you break that number down like reasonably how did that kind of stack up.
Yes.
Seven plus one in Australia out of the one is on the standby.
We have two in Kuwait and one in Bahrain.
Zero in them on one in Argentina, the zero in Venezuela.
Okay.
So right now then you have seven.
<unk>.
In Australia, two into invest in Middle East of force of 11, and then the one in Argentina, the 12 rigs working.
Correct.
Revenues Okay.
And then by the end of the year, you think you could have maybe a couple of more.
Yes, I think the Oman as I mentioned, we are currently zero rigs running in the mind right now.
Scott.
Two or three bids out for.
Some of our rigs there so we'll nail one of them.
I expect that half of our rigs in Oman should go back to work like all of it by the end of the year.
Fourth quarter of let's say.
And how what's your G&A cost kind of <unk>.
And going forward.
Well.
As I mentioned in the call we never let a crisis go to waste.
We're basically kind of overhead and have in April and we run a pretty lean machine in the first place and we focused on systems efficiency and Mike and his team.
Basically.
A lot of this was.
Kind of for us through people working at home and Covid and all of those other things there was a lot of discoveries.
May cleaning up streamlining systems basically building the companies again.
Where we can run.
We can continue to add rigs without adding any.
Office staff and that's the whole purpose of the exercise here through 2020 was too.
Right out to our rig manager of where we've got the rig manager portal. The rig manager does all of the business out of the rig we found that.
Yes.
Two years ago, we did a study and we found that rig managers, 70% of their time.
Okay, I'm sorry, 50% of their time was spent doing paperwork for the benefit of the office. So we turned that around.
Felt the complete new rig manager portal system, where the rig managers business is done out of the field.
A quarter of the time that frees up his time to do more training et cetera, which is supposed to the one for Rick.
So I think anytime we add five or six rigs will probably have to add as superintendent for supervision, but other than that our fixed cost model low fixed cost model continues to drive.
The more efficiency on a G&A per operating day basis into the future. So we.
We took advantage of 2020 to get that nailed down.
Yes.
But there are also some.
The salary cuts that put implemented.
I would assume that some point those would start to come back on.
So based on that do you see the overall G&A that you report.
The numbers to go up.
There'll be some inflation as the market improves.
Yes, probably but.
It's not going to be significant at all.
Fair enough. Okay, and then just last question anything on the ESG front that you could talk like what are your customers asking for and then in terms of.
The use of <unk>.
Line of electricity Dude fueled or anything.
Yeah, Nicole do you want to handle that.
Hi require yes, our customers are.
Yes.
Biofuel kits in the field, we have our hybrid rig down in the U S and we have another breakout actually operating with natural gas. So we are seeing our customers focus on predominantly I feel a lot of trend right. Now in particular, we are seeing interest pick up with our hybrid rig setup.
So that is the battery management system, along with the natural gas set up.
Is it mostly just still of the U S side are you seeing interest in Canada, and the international markets as well.
International was the little quieter I'd say on this front, Canada, we are seeing more interest, particularly in the biofuels.
In Canada, we were running about 11.
11, 11 biofuel rigs.
On average and we're seeing interest pick up in that particular market.
Okay.
Great. Thank you very much appreciate it.
Thanks Scott.
We have no further questions at this time I will now turn the call back over to the presenters for any closing remarks.
Yeah.
Thanks again, everyone for chiming in.
We'll look forward to our next call. The here in three months time. Thank you.
This concludes today's conference call. Thank you very much for joining you may now disconnect.
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