Q2 2021 Ensign Energy Services Inc Earnings Call

Good morning, and afternoon, ladies and gentlemen, welcome to the Ensign Energy Services, Inc. Second quarter 2021 results conference call. At this time of notes that all participants are in a listen only mode with the following the presentation. We will conduct a question and answer session.

And if at any time during this call you require me to the assistance. Please press star zero for the operator also note. The call is being recorded on Friday August 6.2021, and I would like to turn the conference over to the Cold Romano. Please go ahead.

Thank you Sylvia good.

Morning, and welcome to the Ensign Energy services second quarter 2021 earnings conference call and webcast on our call today Buck as it get as President and C of O L and Mike Gray Chief Financial Officer will review of enzyme second quarter 2021 highlights and financial results, 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 several business risks and certainties the.

The factors that could cause results to differ materially include the parent on limited to political economic and market conditions crude oil and natural gas prices.

Foreign currency fluctuations weather conditions, the company's defense lawsuits the ability of the oil and gas companies to pay accounts receivable balances.

The other unforeseen conditions, which could impact the demand for our services supplied by the company.

Additionally, our discussion today may refer to non-GAAP financial measures such as adjusted EBITDA.

Please see our second quarter earnings release, and SEDAR filings for more information on forward looking statements in the company's use of non-GAAP financial measures.

With that I'll pass it onto Bob's ex <unk>.

Nicole and good morning, everyone. Thanks for joining the call today.

Once again, its exciting to see the solvents turn off the bottom for industry as we help the we'll get back the business and for Ensign to play its part in delivering cost effective and emission sufficient energy.

We had a great second quarter, which Mike Greg will expand on at the moment, we've got lots to talk about after that on what we've been doing or what we've been up to and where we think the market is going.

Hello.

And to.

Ex kind of on zions participation in that will follow up with the Q&A at the end of that with that I'll turn it over to Mike or Bob.

So over the first half of 2021, we continue to see improvements on the industry conditions supporting the recovery of the oilfield services and driving activity improvements year over year rising COVID-19 vaccination rates in several nations of 8 of the recovery of crude oil demand. This in combination with the economic commodity prices continuing to drive the recovery of oil and natural gas industry from <unk>.

And the adverse impacts of the COVID-19 pandemic.

Overall operating days were higher in the second quarter of 2021 Canadian operations recorded 1058 operating days in the second quarter, an increase of 681 operating days.

The United States record of 2899 operating days from the second quarter of 2021, an increase of 31% and international operations record of 844 days of 20% increase compared to the second quarter of 2020.

For the 6 months of 2021 operating days were lower with the the Canadian operations experiencing of 17% decrease the United States operations of 25 per cent decrease and international operations, showing a 20% decrease compared to the first 6 months of 2020.

The company generated revenue of $212.3 million on the second quarter of 2021 of 9% increase compared to revenue of $194.8 million generated in the second quarter of the prior year for.

For the first 6 months of 2021 of the company generated revenue of $430.9 million of 26% decrease compared to revenue of $578.6 million generated in the first 6 months of the prior year.

Adjusted EBITDA for the second quarter of 2021 was $45.6 million, 21% lower than adjusted EBITDA of $58.1 million in the second quarter of 2020.

Adjusted EBITDA for the first 6 months of 2021 totaled $95.5 million, 36% lower than adjusted EBITDA of $149.3 million generated in the first 6 months of 2020.

The 3 and 6 months of 2021 decrease in adjusted EBITDA was predominantly due to lower early termination fees. During the first half of 2021 when compared to the same period in 2020.

Depreciation expense in the first 6 months of 2021 was $140.7 million a decrease of 23% compared to $182 million for the first 6 months of 2020.

G&A expense in the second quarter of 2021 was 17% lower than the second quarter of 2020 G&A expense decrease was the result of cost saving initiatives implemented in March of 2020, and the wage subsidy received from the government of Canada. The company continues to focus on and we will continue to manage costs on a go forward basis.

The debt for the second quarter of 2021 decreased by $30.3 million to $1.33 billion as of June 32021 from.

From 1.3 dollars 6 billion as of March 31, 2021, net capital purchases for the second quarter of 2021.

$11.8 million, consisting of $9.5 million in maintenance capital of 4 million and upgrade capital offset by proceeds of $1.8 million from disposals planned capital expenditures for the 2021 year remains at $50 million.

On July 29th from 2021, the company acquired neighbors fleet of 35 land based drilling of eggs located in Canada, as well as the related equipment and certain real estate for $117.5 million.

The company funded the purchase price with cash on hand and available credit facility on the.

The notes I'll turn the call back to Bob Thanks, Mike.

And just to just to come back to some some highlights on the on the second quarter and year to date.

We are amidst this of this COVID-19 distraction, we had a safety performance our record safety performance and the company.

So hats off to the operations team.

Just in the U S. We saw U S drilling what day.

On mute, it's still true of second quarter, but it seems just from the last few weeks, we've seen operators start to book various more pace.

Just in the last week, we've picked up 6 more contracts for stacked rigs to go to work are.

Our U S wall of servicing continues to deliver record performance with a record EBITDA of for a second quarter in the first 6 months of any year in our U S well servicing history and we're currently running about 75% capacity, Canada has exited the break up stronger than expected activity, both drilling on and I'm, sorry, well servicing 2 and a half times year over year.

For the second quarter and delivered the strongest second quarter in the last 5 years.

The international has had a delayed resurgence of activity in Australia, and Argentina, due to Covid, well middle East business units, Kuwait, and Bahrain have been maintaining operations by the incremental corn team costs have affect financial results year to date.

Our edge rig controls now is on 57 rigs with the edge autopilot platform now rolled out on 19 rigs edge apps generating incremental margin on average of about $700 of day on 33 rigs to date happy to report that we completed our first fully commercial 4 well pad with a major.

In the U S using our edge autopilot and we share of 20% off the well plan and $3 million after ASC and we're getting a full $2600 per day for edge autopilot Max on this contract all of span all of them are on on our rollout plan with that we also introduced the new product called the ALS the enhanced location lighting system.

It helps our safety on location during dusk and evening non glare of system and we charge out of.

Ala Carte.

We also as Mike pointed out we were.

We're busy doing the neighbor is kind of the asset deal, which closed on July 29th again. It added 35 rigs 16 of them high spec of which 14 of our active today of doubles our market share in the Montney 1 of the busiest areas of consolidated the market continues to drive cost synergies, which will enjoy.

Third quarter 'twenty, 1 on what to expect commodity prices are bouncing around 70, and $4 of heiko, improving operator's cash flow will spill over to higher activity in the second half 'twenty, 1, but with some hesitation to accelerating any of 'twenty to work into fourth quarter of 21. The U S. Currently at 33 rigs.

We will add another 6 here in September and we're starting to see signaling the signaling that fourth quarter 'twenty, 1 should get to plus or -50 rigs with rates starting to move up 2 to $3000 a day cash.

Canada also currently at 44 rigs active.

The 50 rigs plus fourth quarter, 'twenty, 1 and what sort of 10% quarter over quarter rate increase as contracts roll over into the fall.

Failure of forecast the pick up in the fourth quarter of 'twenty, 1 supported by significant date activity in the last few months.

On unlikely to receive any awards that will provide work in the second half 'twenty 1 at Covid will continue to hamper operations of effect cost.

Costs worldwide because of the high migratory work force in the Middle East of the restrictions of our tightest in those areas.

The tightest turning as operators cue for the best rigs as we enter fourth quarter 'twenty 1 of 22.

And as I mentioned, the edge autopilot installs that we're moving that up 2 of 2 to 3 install per month.

On the backs of the success of our edge autopilot Max on our first commercial application.

And we also were able to confirm that our edge portal, which is part of the.

The auto pilot product can be used interface seamlessly with an operator's real time operators operating center and the downlink carrier of rotors gerbil assemblies.

I was hoping to of a world of opportunity with operators to engage our edge autopilot Max true with our portal on either of day rate for a performance based contract.

On our.

Long term Rick.

Yeah.

But we have our international carrying the bulk of our long term contract book moving forward.

This is quite by design as we purposely do not want to tie in current low rates Friday of term in North America as we raise the rates quarter over quarter. We will continue to avoid any long term contracts in order to maximize our pricing opportunities.

1 of the thing about the business the drilling business in an up cycle, we have lots of torch, we've seen it before and we generate lots of cash flow through the cycles for.

For example, if we were to raise rates and increased day rates by 10% across the board we generated on an additional $110 million of EBITDA.

That's a 10% on rates of 10% on days equals $110 million of EBITDA.

What we're seeing for developing trends emission reduction solutions have moved from a notion to of reality.

The discussions with clients today involved how to move off diesel and on to at least of biofuel discussion with many operators looking for natural gas produced or a compressed and with a few of looking at how to run high line powered of the pad site Ensign has been a pioneer in the bes the battery energy storage system for over 8 years now Ensign has partnered with cash.

Over the last 7 years and recently showcased at Ensign rig with the catbird system in Houston the.

<unk> attracted strong interest from our client base, the notion of reducing diesel fuel costs and reducing emissions by 25% is attractive.

Ensign has been since the non rigs currently earning $2600 a day.

And then the developing trend.

I'm, sorry still back on the ESG of front, we published our inaugural sustainability report. This June we continue to explore enhanced ESG metrics and disclosure to showcase our ESG performance over time with the neighbors acquisition, we acquired an additional 17 emission friendly rigs to high line 15 biofuel <unk>.

Those rigs approximately 1 third of our marketed fleet is equipped with emission reducing solutions with the majority of our fleet excellent candidates for upgrades and the half of 'twenty and the first half of 2021, approximately 20% of our active fleet operated with reduced emissions, resulting in approximately 23000 tons of carbon dioxide saved.

Equating to removing 5000 cars off the road, we continue to explore of fuel and power of alternatives with a focus on hybrid and electric technology, and our best system, particularly in Canada and the U S. We are seeing interest from our customers and this is an area of enzyme is quite of bit of experience and expertise to share.

With our best system as we've pointed out we not only achieved a reduction of emissions, but superior performance with enhanced power transition and reduce cost of fuel savings that now cover the cost of the best system.

We've also discovered or discussed our auto pilot on etch platforms. There are numerous benefits of this technology, including eliminating waste optimizing resource use and drive the operational efficiencies that make our operation overall more sustainable environmentally friendly.

And other developing trend as labor labor rates are under pressure everywhere as we come out of Covid cycle of labor has become used to the concept of the.

Universal basic income of some sort of with that the threshold to attract entry level personnel of the jumped up roughly 10% to 15%.

All of our contracts are covered with the escalation clauses. So these are pass through of offense, but it does raise the other cost of doing business on a net debt basis.

So with that I'll turn it back to the operator for Q&A.

Thank you.

Ladies and gentlemen, if you do have any questions. At this time. Please press star followed by 1 of you touched on from you will then hear a sweet home prompt acknowledging your request and if you would like to withdraw your question simply press Star followed by 2 and if you are using a speaker phone. We do ask that you. Please lift the handset before pressing.

Any keys. Please go ahead on press Star 1 now if you have any questions.

1 moment please.

Yeah.

And your first question will be from the cost side of ATB. Please go ahead.

Thank you for taking my question.

Bob at the end.

The Q2 total liquidity stood at around.

16 point something million dollars, while the neighbors deal is also worth about $117 million.

So does the liquidity stand today and other any.

Negotiations going on too.

The increased the revolver.

How do you intend to manage the liquidity.

In Q3 and in the coming quarters.

Yes, Mike do you want a hell of it yes sure. So definitely the neighbors deal did reduce our liquidity from our perspective. This is a high variable low fixed cost business of which we generate free cash flow quarter over quarter. So from our perspective over the next 2 quarters and beyond we will continue to clip off of our accounts.

Receivables and working capital to.

Add additional liquidity to work on the credit facility in hands of our balance sheets from our perspective, we do have some real estate of as available for sale and so we've done on assets. The 1 of the or monetize will add additional liquidity to the balance sheet. So from our perspective we're.

We're not in any discussions.

To do anything other than to collect accounts receivables and generate free cash flow.

So what do you expect in terms of cash.

Cash inflow from working capital in the in Q3.

I don't have a specific number on the outflow will continue to harvest a lot of it depends on collections.

On timings of outflows.

Fair enough, but could you give us kind of some bookends in terms of when it could be.

Currently no.

Okay.

Uh huh.

Well and on.

Australia, you mentioned that there could be activity increases could you maybe talk about the magnitude of.

Increases in the active rigs.

Yes, Waqar, we're currently running 7 rigs.

Covid has.

The frustrated a lot of the startup of some of those rigs.

Got it.

The visibility for another 2 getting us up to 9 and.

With the bid activity, we see strong opportunity maybe to go north of that but certainly where we're going on where we're starting to see it play up again.

So these 2 rigs.

Could they be reactivated by the end of this year on in Q3 of Q4.

Oh, yes, yes, no there'll be there'll be reactivated in Q3 end of Q3.

Okay.

And the 6 recent contracts of 6 rigs.

The mentioned.

You mentioned when do you expect those rates to be up and running.

It will be up and running in early September.

And all of these with the.

Public E&ps of private E&ps.

The combination of both and I'll also point out that all 6 will have the edge autopilot installed.

The recent success, we've had with 1 of the measures down there and the ability to tie back into a real time operating center and control of the rotary steer of whole Assembly has opened up a lot of eyes down there.

So point out debt.

Whereas just on our call. This morning, where we are.

Putting our autopilot on those 6 rigs.

And how does the.

This range for these 6 reactivation.

Compared to.

Hot rigs.

Hey.

They are moving into the same space there was a bidding process in the in the second quarter for third quarter work, where people were a bit.

Bidding down to put cold rigs are in offering a discount for a cold rig.

We're not anymore, we're offering the <unk>.

Hi per rig rate for the cold, Greg that's starting up.

And there with clients. We're currently working for.

Okay.

Great. Thank you very much.

Thanks Waqar.

Thank you as a reminder, ladies and gentlemen, if you do have any questions. Please press star.

Followed by 1 on your Touchtone phone.

And your next question will be from John Gibson at BMO capital markets. Please go ahead.

Good morning, all of it.

I just.

I'd like to start in Canada wondering if you could maybe talk about the tightness in the high spec market.

And we've seen some rig moves from the us to Canada.

Maybe talk about where your utilization and pricing is at least moving on these rigs.

Yeah, Yeah, well the.

The the Montney.

Is probably 1 of the highest utilization areas.

And with high spec rigs with the neighbors acquisition, we basically doubled our montney market share we have about 35 per cent of the market.

Other player has 40% so.

The 2 of us have 75% of the market share in the Montney.

The high hurdle to get into the Montney I mean, these are $2000.25 million rigs.

With the experience that we're just starting to.

You introduce the the rig control automation to these types of rigs into that of that area.

So the the.

The opportunity to.

Move prices well, we will continue obviously, where we've come a long way down from where we were.

I pulled out of appreciate from 2013.

On our highest spec electric rigs with high torque top drives.

And heavyweight drill pipe and we were at $23000 of day back in 2013.

Those rigs got down too.

The around $15000.

On an active spot market bid so you see where the opportunity is to get back.

Where we were before.

We've put the guidance towards the sales team, we wanted to see 10% quarter over quarter increases and those types of markets.

To get back to back to where we were.

Almost 7.8 years ago interestingly so.

The market is tightening up our high spec fleet.

And the busiest market has doubled.

It's a good fleet of the rig controls that.

They have we've nicely.

With our offering as well so it's a seamless transit transition.

And it's working working very well.

And then.

Just following on to your ear.

Comments about the labor market, obviously, the state of everywhere, but are you seeing more tightness in Canada or the U S or the pretty similar.

Very similar.

While we have governments are willing to pay people to stay at home. So they can get reelected.

That is the challenge there is no there is no.

There's no.

Shortage of jobs those are the shortage of people willing to go and take those jobs.

But that threshold of course.

Has overcome.

With some movement in wage rates.

And just explaining to people that this is the fact youre your 3 times safer working on the rigs and driving to the rig those of the safety facts.

Got it thanks, just moving to the neighbors acquisition and of all of his view.

You might have mentioned from the preamble it.

Could you give some sort of guidance around an asset sale number are expected going forward.

And asset sale number while the property on the property, yes, so the facility up and ask you the as part of the acquisition.

Moving out of our facilities.

The being marketed for on that $15 million. So you could sort of range between 10 to 15 over the 6 the let's say 20 months.

Yes, we've moved everyone out to our facility in the SKU.

So we will be putting that facility up for sale.

Got it thanks, and then last 1 from me.

Again with the name of its purchase can you give an estimated synergy number and.

If so how fast do you expect to realize the synergies.

So.

Yes.

The.

When you back into the day rate numbers.

You get some understanding of I mean, they compete in a similar market.

Can we do in these areas.

I'll, let you guys.

The kind of figure out where you think it's going but we typically don't try and provide forward guidance.

But these these rigs 14 of them hit the ground running last Friday.

So I.

I think you can probably do some proportioning and come up with some numbers.

We'd probably be pretty close in the ballpark.

Got it thanks, I'll turn it back.

Okay. Thanks, Sean.

Thank you once again, ladies and gentlemen, if you do have any questions. Please press star followed by 1 on you touched on the phone.

Thank you and at this time, Sir It appears we have no further questions. Please proceed.

Alright. Thanks.

With that we'll wrap up the second quarter call.

As I mentioned, we're looking for it as we move on uptick into what appears to be.

On a good strong stretch on the.

Demand side and the continual depletion on the supply side.

On bringing the need for drilling rig back into play in a strong way.

On the neighbors of acquisition, we feel quite timely into the Canadian market.

Hum.

On doubling down in certain rig categories, we'll look forward to.

To moving that long end of the future and thanks for joining the call.

Thank you, Sir ladies and gentlemen, this does indeed conclude the conference call for today. Once again. Thank you for attending at this time, we do ask that you. Please disconnect your lines have a good weekend.

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