Q1 2021 Ensign Energy Services Inc Earnings Call
Ladies and gentlemen, this is the operator.
Today's conference is scheduled to begin momentarily.
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Ladies and gentlemen, thank you for standing by and.
And welcome to the Ensign energy services first quarter 2021 results conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
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I would now like to hand, the conference over to your first speaker today.
Nicole Romanow. Please go ahead.
Thank you Amy.
Morning, and welcome to Ensign Energy services first quarter 2021 earnings conference call and webcast on our call today, Bob Geddes, President and C O O and Mike Gray Chief Financial Officer will review and Science first quarter, 2020, one highlights and financial results followed by our operational update and outlook. We'll then open the call for.
Questions.
Our discussion today may include forward looking statements based upon current expectations and involve several business risks and uncertainties.
And 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 lawsuits.
Ability of oil and gas companies to pay accounts receivable balances or other unforeseen conditions, which could impact the demand for the services supplied by the company.
Additionally, our discussion today and they're for each non-GAAP financial measures such as adjusted EBITDA.
Please see our first quarter earnings release, and SEDAR filings for more information on forward looking statements and the company's use of non-GAAP financial measures.
I'll pass it on.
Thanks, Nicole good morning, everyone and welcome for the first quarter 'twenty, one and I'm, sorry, and then just services uptick.
Update and earnings call well the effects of the pandemic are certainly still with US. We are however, starting to see some light at the end of the tunnel that was global demand starts to ratchet back all while the reality of accelerating decline which shut in.
The oil and wanting to settle and the mid Sixty's and natural gas close to three Bucks WCS sits at about 50, 110, and this morning or a 65 CAD.
And so the product pricing is there in spite of the headwinds with Jim and Ensign and generated and the first quarter and about $50 million and EBITDA, we paid down an additional 12 and a half million net debt.
By 273 million net and the last year from first quarter 'twenty I'll, let Mike Gray expand on that a little bit more.
And I'll say, we did all that and industry leading safety record.
Yeah.
The U S continue.
Continued to deliver a strong operating days and the quarter. We did have some one time redeployed and caused some cold stack rigs on about five of those starting up which received expenses and the quarter international and delivers consistent cash flow streams and benefiting from its long term contract runway.
And brain despite enormous crew labor challenges due to COVID-19 deliveries as forecasted.
Missing a beat Canada had a softer forecast or I'm, sorry, Canada had a softer first quarter and expected with industry, peaking at about 186 for instance, what we thought we might get to 250 rigs from Canada, Canada.
And a dismal.
Vaccine procurement plan or lack thereof has continued to keep the economy on pause and created some challenges a west coast feel paper.
I'll turn it over to Mike Gray for more specific details, but before that I want to mention that we are pleased to have Mr. Gray.
And and CFO role and so for the foreseeable future I for one and comfort to have Mike settled back and see this as we move forward into this.
Interesting market forward over to you Mike.
Thanks, Bob.
Over the first quarter of 2021 oil and natural gas industry fundamentals, including for the mountain for crude oil and natural gas and crude oil and commodity prices continued to improve and recover from the significant impacts from the COVID-19 pandemic improving fundamentals coupled with the commencement of COVID-19 vaccine distributions are expected to drive improvements to oilfield service.
Activity year over year.
Over the short term.
Financial and operating results continued to be negatively impacted by and are recovering from significant fallout of the COVID-19 pandemic on the oil and gas industry.
Operating days were down and the first quarter of 2021 with Canadian operations experience and a 40% decrease.
And it stays at <unk> 50 per cent decrease and international operations, showing a 40 per cent decrease compared to the first quarter 2020.
The company generated revenue of $218 $5 million and first quarter of 2021 43 per cent decrease compared to revenue of $383 9 million generated and the first quarter of the prior year adjusted.
Adjusted EBITDA for the first quarter of 2021 was $49 9 million or 45 per cent decrease from adjusted EBITDA of $91 2 million and the first quarter of 2020.
The 2020, one decrease and adjusted EBITDA can be primarily attributed to the macroeconomic and industry conditions seen since March of 'twenty, and 'twenty, including but not limited to the impact of COVID-19, pandemic and declines in demand for crude oil over the course of the 'twenty 'twenty year.
Depreciation expense from the first three months of 2021 was 71 million a 21% decrease from $89 8 million for the first three months of 2020. The decrease relates to assets that have now been fully depreciated nonrecurring and depreciation expense on a go forward.
G&A expense from the first quarter of 2021 was 22% lower than the first quarter of 2020 G&A expense decrease was a result of cost saving initiatives.
Momentum in March of 'twenty, and 'twenty the wage subsidy received from the government of Canada reductions in personnel and organizational restructuring and management will continue to look to reduce reduce costs on a go forward basis.
Net purchases of property and equipment for the first quarter of 2021 totaled $9 6 million the purchase of property equipment and the first three months of 'twenty 'twenty. One consists of $7 2 million and maintenance capital and $3 6 million and upgrade capital.
For the first quarter of 2021.
The company purchased U S $16 6 million face value of senior notes.
And the open market for open market for cancellation, recognizing a gain of $5 3 million total debt decreased by $20 9 million and the first quarter of 2021 from $1 83 billion at December 31, 2020 to $1 33 billion at March 31, 2021 and.
Year over year debt decreased by $279 9 million to $1 36 billion at March 31st from 1.64 billion at March 31st 2020, and that note I will pass it back to Bob.
Thanks, Mike.
So just a quick overview as you know and <unk>.
Your line runs.
And eight different countries around the world with about $3 billion of assets, implying about 3000 people, specifically 223 drilling rigs around the world and.
About 100 service range.
Let's start with the U S. Currently we're running 35 drilling rigs and the U S are trending towards 40 over the next few months as we move into the third quarter.
Rates have definitely bottomed out and rate increases a notional rate increases of 500 per $1000 a day are happening.
More importantly.
Now that we have our edge autopilot product commercialized and being rolled out systematically on all of our AC rigs and worldwide, we're getting product traction auto pilot Corp.
And about $240, a day and a complete autopilot package share with apps peaks out at $2600 a day and in fact, we were just recently.
And recently after the beta testing on a couple of rigs and the.
Fourth quarter have successfully signed up for a completed autopilot package.
At $2600 a day with a major.
And the U S.
U S well servicing has expanded up to an average of about 24 wall service rigs working daily some of those on 24 hour operations. We successfully were awarded a large P&A program and Rockies, which a steady book over the next year.
Our directional drilling units as for the six jobs working mostly on turnkey wells.
And the Rockies region.
And Canada, we operate 92 drilling rigs and 50, well service rigs currently running 10 rigs peaked at 33 and the first quarter, we thought that.
The industry would pay close and the 250, it actually picked up from 186.
We thought we would get a 40 to 45 as a peak we ended up at 33 is the peak and I will share in line with the industry the other and other.
And as I mentioned, we're currently running 10 rigs are it looks like we've got a good visibility up to 20 rigs here and the next two to three months, which is where I think and let's see the third quarter's idle and and then move north of that and the fourth quarter. What is important is that a weighted than raising rates coming out.
The break up $5000, a day and Notionally, we've had some conversations with some clients over the fall closer to the 2000 dollar a day increases.
We have 50, well service rigs and Canada were running about 10 of them today I think we'll get up to about a 15, perhaps 20, where.
And we were successful on getting prequalified with OWS and it starts to see more of that business coming our way.
So as I mentioned before though Canada, those habits, nacco vaccine issues and Lockdowns and so the fact areas.
And everyone is having some challenge getting entry level people to come to work and we have a government that is willing to pay them.
To stay at home.
And that of course creates some labor inflation labor inflation of course gets pushed through to the operator.
And it was always there.
Nonetheless, $65 oil and $3 gas flow a lot of boats.
Internationally outside of COVID-19 flare ups and rotation and travel issues in certain regions. Our international team has been steady with their long term contract fairways.
And Kuwait are both on a per cent utilized and study.
Oh, two and Bahrain, two and Kuwait.
Australia, and the middle of a new bid cycle, which we expect should provide us increased activity up from currently six moving to seven and two eight or nine and the back half for the year, Argentina is and the middle of and negotiating a one year contract extension.
And with its current operator on our 2000 horsepower and you see high spec rig there.
As I mentioned and the technology front.
And we've kind of packaged it all up now with a beta testing behind us on the auto drilling.
Opponents, you, you'll see that our auto pilot is our product platform.
And that we add apps and different technology to it.
Depending on the level of sophistication of the Wellbore and the client.
As I mentioned before we've recently signed up a major with our edge autopilot and apps for the combined price got $2600 a day.
The other the other thing we're finding is hum.
And do some more clarity between.
<unk> control systems, and real time operating center.
Our rollout of Oh directional guidance to the rig by that I mean are there is becoming a clear.
Understanding on day, one of the real estate starts and stops with respect to rent controls and I think over the last few years, that's been a little blurry now there seems to be a better understanding of that which is good and it provides clarity and what the product does and what it provides and we also tie into a performance based contracts and about 10 per cent of Barbara.
And so North America run on a performance based contract type.
And they provide the optics of anywhere from two to $3000 a day.
Margin per margin based on performance metrics with no risk attached.
On the Capex side, we anticipate our planned maintenance capex to come and as we forecast, a plus and minus $50 million and the incremental capex for redeploying cold stack rigs into a busier market well have incremental day rates applied.
Or the operator provides a capex for the upgrades if required and that's always remain opportunistic opportunistic planning the balance with debt reduction and EBITDA growth.
With that I'll turn it back for the operator for our Q&A.
Ladies and gentlemen, other people would like to ask a question and his team. Please go ahead and press star and the number one and your telephone keypad.
Again, Thats star one to ask a question.
If he would like to withdraw your question you May press the pound key.
Your first question comes from the line and Keith and Mackay.
Alright, sorry, Mackie from RBC. Please proceed with your question.
Hi, good morning, and thanks very much.
And I, just hey, I just had a question about.
You mentioned some ads come up in Canada through the second half of the year. Just curious if you can speak to where you expect those rigs to be added and you'll see more cardium and Viking focused or or most of those going to be montney deep basin type rates.
Yeah, well, it's it's actually all of the above something that Carty and Hum a few and the Viking, but I would say most of the Cardium and a couple of upticks and to the.
Montney and Duvernay.
Okay got it thanks for that.
And maybe just in the U S can you talk a little bit about.
Some of the potential reactivation costs, you might expect to see on an upcoming and rig there and whether whether or not and we should expect that to have.
And noticeable impact on your on your gross margin through the rest of the year relative.
Relative to the 26% you put up in Q1.
Yeah no sure.
And.
So as you recall recall and and prior quarters as we put rigs into a cold stacked basis, meaning that we didn't see any foreseeable work for those rigs, but they were part of it still of our active marketed fleet, we would harvest the consumables off to break into it she can bring them back to the.
To the other warehouse and then we would deploy them for the brakes that we're running to keep the operating costs are down and consumers.
Cold stacked rig consumables as you turn those rigs back up around of course, you have to a leap.
And we furnished them with the consumables and.
And are those typically we're talking to return and $50000 are involved and that process.
Got it okay. Thanks very much.
Okay.
Cool.
And again, ladies and gentlemen, and that is star one to ask a question.
Your next question comes from the line and quick cash that with ATB capital market. Please.
Please proceed with your question.
Thank you for taking my question.
Those things for us.
First of all these price increases and the U S. A bump that you mentioned five and in 2000 daughters and these are kind of net price increases are these are also some reimbursements for your input cost inflation that labor or others.
No that would be that would be a.
Net incremental increase for.
We're not seeing any labor.
And in the U S at the moment and we.
We and <unk>.
Safe to say, we haven't seen any consumable or product pricing increases.
There there are steel increases up to everyone and starting to see that will probably affect your operators more on casing and things like that it doesn't affect us much.
Okay.
Fair enough.
Now there was a comment made by one of your competitors and the U S that day, they talk to only a handful of Super spec rigs were idle and the U S debt could be reactivated and that 202 and $50000 kind of cost that you mentioned and that beyond <unk>.
Those handful of rigs and the cost to reactivate super spec rigs would be materially higher.
And do you agree with that.
And do you know.
And again of a different view on that.
No I would I mean, obviously everyone's fleet has a different perspective, but I would say generally that is true I think what they.
And they were probably referring to is.
And for <unk>.
High spec rigs, where they may want and additional pump or generator it that day.
It doesn't exist on the rig currently.
That would involve another level of new capital.
Okay, and all the rigs that you expect to put back to what by the end of the year and the.
U S.
But when.
And the order book over the last nine to 12 months.
Generally most of the rigs that we're putting back to work and.
And have certainly worked and the last 18 months for let's say, a whether or not they worked and the last year and the.
The last year has been quite a pause for everyone, but certainly and the last year and a half when we put rigs are when we stack rigs. So we cold stacked and we've got a rigorous protocol.
Where they're put away properly and theyre ready to go plus we have a team that occasionally it goes by and.
And checks from out.
And you know checks are oil checks for and <unk>.
It makes it may come in for certain parts of the rig that type of thing.
Okay.
And do you expect any I B C revenues are and the early term revenue contribution in Q2.
Yeah, just to standby revenue.
And there's some but it's it's diminishing there is some and Canada.
On on a couple of reps and there is a few rigs still on the U S, but it's diminishing as contracts roll off and we.
Basically are looking at putting them to work or re contracting them onto new contracts.
Okay.
And then the demand and the U S is the <unk>.
Would you characterize that between private e&ps and public E&ps.
So the yeah I would say the calls from the private e&ps are increasing at a more rapid pace and the majors.
Yeah.
And.
And from our perspective as a base and is it still primarily in the Permian and are you seeing it more.
And around the U S.
Yeah, I would say the Permian and it's got our biggest beta right now or the Rockies and it's been fairly steady.
Tough, but steady.
Slight slight increases but.
And there's more and geopolitical headwinds.
And the Rockies, but but steady there, California.
Quite steady.
And as Hasnt always says.
So the the biggest the beta is in the Permian correct.
Okay.
And then just one final question any guidance with respect to you know what.
And our working capital changes could look like and Q2 in terms of cash inflow or outflow.
Mike do you want to handle that.
Well I'll tell you the overall fairly moderate.
And activity and the U S. We will see the accounts receivable buildup for the decrease in activity in Canada, we usually see that AUR and collections from Q Q1 roll and so on and I think for the most part as we should be fairly muted and additional capex and <unk>.
Trucking along at that 40 to 45 million of which $10 million was spent in the quarter and so I don't see any big draws or where big buildups.
Okay.
Thank you very much appreciate the answers.
Thanks for that.
Thanks.
Your next question comes from the line of Jeff.
Peter from Cowen. Please proceed with your question.
Good morning, everyone on the international side.
And of the commentary and the release for boats seeing an improvement and rig count and the second half for the year is that entirely related to Australia or are there other markets.
It would be Australia, Jeff that's correct.
We're fully utilized and Bahrain, and Kuwait and when they have another opportunity to add an additional rig and to bring but we're not quite sure at this point vendors.
Venezuela of course is Venezuela and Argentina.
We may be adding another rig here in the back half of the year debt that has about a 50% opportunity at this point.
And the Australian side, what type of rigs do you expect to add.
The other the Australia rigs.
You know, we've got a mix of the.
The smaller ADR or Super single type breaks and then we've got the 60 and.
And under type rigs and it'll probably be and the 1500 category.
Okay.
On the Ed on the edge side.
Do you have with debt operating platform deployed across it today.
We have three rigs with the auto pilot platform currently installed we have about 50 rigs with the D edge.
Some sort of our edge automation on it.
We are the way to look at the auto pilot, it's like Microsoft Office.
You get a computer and you have Microsoft office loaded onto it and then and you decide to turn on and XL word.
Teams etcetera etcetera.
The <unk> and Microsoft office, as our auto pilot platform and so they're all a pilot platform well start rolling out and every one of our AC rigs from there.
You know and the sales and the operations can easily turn on and we can turn this on with base at all and most of it remotely out of Houston, and occasionally and we have to make a field visit with one of our technicians for a couple of days to tune and the rig and help educate and and <unk>.
Tune up the driller.
To utilize our new function much like well get tuned up on excel and having the office. So that's a very very analogous to that.
Platform. So now that we have that we can we can start to rollout, but we have it on three <unk>.
Commercial platform for three rigs with this platform on current accounts.
What do you expect the cadence of incremental.
And could be.
Well, we are we past the team with coming back with a schedule on that.
We've got a very.
Barry.
And agile and small team that works around the world and and some cases, we have.
We have our technicians in the certain areas like Australia et cetera, I would suggest that.
We're probably looking at a cadence so that you know by the end of the year.
I think we'll have it on another 10 rigs easily between now and the end of the ear and maybe maybe 20.
Okay.
And then just a clarification and the U S side.
So.
To go from the 35 rigs today to 40 or so.
And it seems that the reactivation and redeployment costs will be in that range of 250000 per rig that you mentioned earlier.
Correct.
And with the standby and early termination payments and how meaningful do you expect those would be and Q2 and how quickly do you think they tail off.
And are there.
Yeah, I think that.
And Mike have you've got some visibility on that runway and.
And on the top of my head no.
Yeah, I'm I'm thinking of some of the rig contracts on the on the top of mind that.
I now go to the end of the year and probably half of them will continue through to the end of the year and and the other half will probably Peter out Oh and.
And then the third quarter.
Fourth quarter type thing.
Yeah, I think that'd be a good assumption.
And that you're reactivating a decent portion of them are not ones that are currently contracted.
Correct.
Okay.
Thanks, I appreciate the color and those things.
Thanks, Jeff.
Your next question comes from the line of John Gibson with BMO capital markets. Please.
Please proceed with your question.
Good morning, Thanks for taking my questions.
First just on the note repurchases can you maybe walk through some other moving parts and allow you to go over and above.
Covenant thresholds for debt repurchases and and secondly, our additional share repurchases or sorry, no repurchases priority number one going forward.
Or where do you like.
So the new credit agreement that was signed at the end of the year allows for up to $25 million of notes the repurchase.
So thats the not the face value for the actual cash value and so when you look at how much cash response, it would be closer to the 25 million. So.
Under the broad basket and a $25 million.
And I'd say from pretty much topped out theres a little bit left.
The credit agreement does allow for additional no purchases to take place with the just with certain liquidity thresholds.
And so.
And so dispositions taking place.
So potentially down the road and we would be able to.
Go back to the market.
Debt repayment and general and still priority number one so it will not be able and if we're not able to purchase stock and our notes will be putting it towards our credit facility zone will be one or the other.
Okay, great. Thanks for that and just second one from me. So you are looking candidates somewhat softer relative to your commentary last quarter I'm. Just wondering if this is more customer conversation driven or is it.
More based on just sort of other softer rig count to start the year and maybe some correlation to the back half.
Yeah, I think that.
We're expecting a stronger first quarter, we thought the industry would pick other $2 50, as I mentioned and picked up 186 correspondingly.
We thought we'd be in the low forty's and we ended up at 33 so.
I do think though that we'll pick it up and the back half.
We're seeing.
As I mentioned I think we will be going from 10 to 20, plus spreads here going into third and fourth quarter.
There is.
A lot of.
And there's a lot of pausing with them, but with COVID-19 and the lockdowns and the ability of clues.
And the provincial challenges so some of those are our headwinds.
But.
And as I mentioned, $65 oil and $3 gas those slowed a lot of boats, but.
Canada has still some some macro issues I I think it is pointing in the right direction.
It's not reacting as quickly as it is and the U S. Though and you know when I when I look around the world.
Because we're operating in eight different countries and we have a perspective from the areas differently.
Okay, Great I appreciate the response I'll turn it back.
Thanks, John.
Your next question comes from the line of Aaron Macneil with TD Securities. Please proceed with your question.
Hey, guys. Thanks for taking my question just a quick one for me you mentioned and the press release that you expect a more meaningful increase in U S activity and the back half of the year, We're obviously and I'll say through Q1 reporting at this point and on balance E&ps are still.
Talking about capital discipline and at least the public ones. So I guess, what gives you confidence to guide to that increased activity is it just as simple as a call and the commodity or are there specific customer conversations that youre, having that are giving you that confidence.
Yes, no we're seeing we're seeing a real book increase and we are we are booking rigs and contracted rigs.
And.
And having real conversations.
There there is a paradox of course here.
And between companies like EOG, they announce that theyre not going to increase our drilling program and their stock bumps up 8%.
So you know, there's a lot of things going on as the the reality.
The cash flow with it people and investors wanted to get the money paid back for them.
Please so and then and then depletion and depletion.
Every company has slightly different deploy.
Depletion rates.
So.
We're also finding that.
A lot of the private codes.
And having to necessarily deal with that.
Noise at that level.
Our are wanting to increase production to fill that gap.
You know the day.
Permian depletion rate is probably.
And the thirties, maybe closer to 40, so theres nothing like stop and drilling over the last two years to fix.
Drilling business and and here we go but there is some.
Hum.
Kind of a buffering upside that.
Compared to how we used to see this for five years ago.
You know it would be we'd be bang on the way we go again, but.
It's slowly coming back and or references with the reality of bookings and contracts.
Understood. All my other questions have been answered I will turn it over and thanks guys.
Thanks Aaron.
And there are no further questions in queue I turn the call back to the presenters for any closing remarks.
Okay. Thank you operator.
And thanks, again, everyone chime and get on the call and as we as we climb out of this COVID-19 macro issue and see demand.
Come back as the world needs to drive low cost and efficient car.
Carbon neutral energy.
And we'll be there to do that look forward for our next call and the second quarter. Thanks, everybody.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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