Q3 2021 Ensign Energy Services Inc Earnings Call
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Okay.
Good morning, and afternoon, ladies and gentlemen, and welcome to Ensign Energy Services, Inc. Third quarter 2021 results conference call.
At this time all lines are in a listen only mode.
So in the presentation, we will conduct a question and answer session.
And if at any time during this call you require immediate assistance. Please press star zero for operator also note that this call is being recorded on Friday November 15, 2021, and I would like to turn the conference over to Nicole Romanow. Please go ahead.
Thank you Sylvia.
And welcome to Ensign Energy services third quarter 2021 earnings conference call and webcast.
On our call today, Bob Geddes, President and COO, and Mike Gray, Chief Financial Officer, who will review enzyme third quarter 2021 highlights and financial results.
All led 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 that involve several 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 supplied by the company.
Additionally, our discussion today may refer to non-GAAP financial measures such as adjusted EBITDA.
Please see our third 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.
Thanks, Nicole good morning, everyone.
And I know as.
As you know it was an energy services company that operates in eight countries around the world we employ about 3000 people.
We've got $3 billion of assets 260.
High spec drill rigs and other ball service rates.
The third quarter produced strong results with $60 million EBITDA in the quarter. This includes the benefits of the two months of the neighbors, Canada acquisition.
August and September which went very seamlessly.
Effect of the rate traction mid summer should.
So a positive gross margin growth in the quarter enzymes firm stance on Covid protocol that being proof of vaccination or onsite rapid test has provided worker protection at the rig site and has resulted in essentially no shutdowns. We continue to keep a tight rein on capex in the quarter and had been pushing most upgrades over to the.
Operator at cost in the quarter, we had seven.
Excuse me seven cold stacked rigs.
Southern Division they were reactivated about 500000.
$500000 per rig on average.
In the quarter, we had 3 million of standby revenue, which is affirmation that our clients don't want to let the best rigs go and are prepared to keep the best rigs under contract while they prepare for the next project.
Also had $5 million of ETF on one particular rig, which we expect to be re contracted here in the next month.
The team also delivered on another great safety results for the quarter in spite of all the COVID-19 related challenges and distractions the numbers really speak for themselves and with that I'll turn the call over to Mike Gray, our CFO for some detail Mike.
Thanks, Bob the outlook and demand for oilfield services continues to improve tight supply and demand fundamentals for crude oil and natural gas continue to support strong commodity prices supporting the recovery of oilfield services and driving activity and pricing improvements year over year.
Overall operating days increase in the third quarter of 2021 Canadian operations recorded 2846 operating days, an increase of 2116 days.
U S operations recorded 3074 operating days, an increase of 1006 hundred 37 operating days and international operations recorded 929 days and 18% increase compared to the third quarter of 2020.
For the nine months of 2021.
Operating days were higher with the Canadian operations experiencing a 38% increase offsetting a 3% decrease in the United States operations and a 10% decrease in the international operations when compared to the same period in 2020.
The company generated revenue of $268 6 million in the third quarter of 2021, 71% increase compared to revenue of $156 9 million generated in the third quarter of the prior year for the first nine months ended September 32021, the company generated revenue of $699 4 million a 5% decrease.
Compared to revenue of $735 6 million generated in the same period of 2020.
Adjusted EBITDA for the third quarter of 2021 was $59 8 million, 51% higher than adjusted EBITDA $39 $5 million in the third quarter of 2020 adjusted EBITDA for the nine months ended September 32021 totaled $155 3 million, which was 18% lower than adjusted EBITDA of $188 8 million.
Generated in the first nine months of 2020.
The third quarter increase in adjusted EBITDA was predominantly due to increased activity in Canada, and the United States, partially offset by lower termination fees during the third quarter of 2021, when compared to the same period in 2020.
Nine months decrease in adjusted EBITDA was due to lower early termination fees. During the nine months ended September 32021, when compared to the same period in 2020.
Depreciation expense in the first nine months of 2021 was $214 million, a decrease of 23% compared to $278 4 million for the first nine months of 2020.
G&A expense in the third quarter of 2021 was 9% higher than the third quarter of 2020 G&A expense increased as a result of increased activity, which was partially offset by cost saving initiatives wage subsidies overall reductions in personnel and organizational restructuring. The company continues to focus on it and we'll manage costs going forward.
Net capital purchases for the third quarter of 2021 were $134 3 million during the third quarter of 2021. The company acquired a fleet of 35 land based drilling rigs located in Canada, as well as related equipment and certain real property for $117 9 million the remaining purchases consisting of $8 5 million in maintenance capital.
And $9 5 million and upgrade capital offset by proceeds of $1 7 million from disposals.
Planned capital expenditures for 2021 year is expected to be between $60 to 65 million of which approximately $20 million will be targeted to capital upgrade projects tied to contracts on that note I will turn the call back to Bob.
Thanks, Mike.
That's right around the world.
For an operational update starting with Canada, Canada, We ran 125 drill rigs, which includes 35 nabors rigs as Mike had mentioned.
We also ran about 50 well service rigs.
Drilling has 43 rigs currently contracted and running today with visibility at 50 rigs by year end Canadian drilling.
Has set a 10% quarter over quarter rate increases for each of our rig categories going into the third quarter.
And also into the fourth quarter, an additional 10% quarter over quarter increase basically the rate increases reflect roughly at $2000 a day.
Increased to cover off one the loss of wage subsidies and whats that bumped up $1500 a day to the bottom line.
While industry utilization is still subject per cent generally there are pockets such as the high spec triples, where utilization is above 70% accessibility to cruise is the anchor point now for pushing rates crew utilization is more important today than fleet utilization and driving rates up.
Rates still have a long way to come back in this an elastic demand market recall, we used to get $30000 a day for high spec triples high spec 1500 horsepower rigs are not that long ago.
Well servicing our Canadian well service business unit is currently running at 30% utilization and should peak close to 45% to 50% in first quarter 2022 like drilling we are pushing rates up 10% to 15% quarter over quarter and getting it.
In directional drilling we have five directional drilling jobs running today with visibility to double that year end and into first quarter 'twenty two.
In the U S. We run 93 drilling rigs and a 50, plus well service rigs our U S business units has 46 of our high spec rigs currently on the payroll today with visibility to 50 by year end.
And I can continuing up from there into 2022, we currently have nine running in California, and the Rockies 28 in the southern Permian Haynesville et cetera, with a wider distribution of competitors in the Permian specifically, we saw our competitors jockey to recapture market share first.
Now everyone seems settled in with their market share and what type crew availability and bids coming in strong everyone is raising rates about $500000 every month now.
Servicing had another strong quarter out of our U S well servicing team our PNA rigs.
I'll start.
We will start to pick up again in the fourth quarter after crop season ends.
Horizontal completion work also picking up Rockies of 18 to 20 rigs out every single day in California about the same route 18 rigs as well are running about 36 of our seven.
Well service rigs in the U S.
Our U S directional drilling business works closely with drilling team in the Rockies on all of our turnkey projects, having the directional driller is under the same roof helps deliver excellent project margins.
Moving to international starting with Australia, We ran 42 rigs in international.
International is about 20% of our business.
Australia has some COVID-19 related issues.
Another statement those COVID-19 related issues have hampered the buildup of rigs that had projects planned through 2020, one that'll get pushed into 2022, we operate a figure of 16 rigs. We currently have seven running today that we expect it will be up to eight by the end of the year pushing towards our tenants.
'twenty two.
And the Middle East, we have our two quite a 3400 horsepower rigs and remain under contract until the end of 2024, they continue to be a top decile performance.
Our two rigs in Bahrain remain under contract and I fully expect it to be renewed later in 2022.
In Oman, we are shortlisted on a couple of projects, but we have no rigs active today in Oman.
In Latin America, we operate 16 rigs we have six in Argentina, two in Mexico and Venezuela.
In Argentina, we have one rig working for a major I'd get a long term contract are well into 2022.
We're shortlisted on a second rig, which we expect to start up in the first quarter second quarter 2022.
Mexico, We've got two or 330 400 horsepower rigs are the rigs that mimic the rigs in Kuwait.
They're perfect for the teammates take tender, but we may start bidding those ought to extended reach deep wells in the U S.
It's whaler, where we're waiting on the November election behavior out in the IMS willingness to support Venezuela moving forward.
It is looking somewhat encouraging.
Generally we're currently running 102 rigs worldwide, we expect to grow that are about 10% quarter over quarter and rate increases 10% quarter over quarter debt reduction remains priority one capex for 2020, one should come in around $60 million to $65 million right as planned and as we react.
Eight rigs moving forward, we anticipate the cost to reactivate will of course increase but not significantly rate increases will continue to stay ahead of any cost increases.
We also are now commercial on their edge autopilot rig controls platform with 30 installs under our belt in one to two installs per month moving forward. We also developed new product called the auto down, making app, which allows operators with real time operating centers send instructions to our to our driller just hear the rotary States terrible Assembly.
Which inputs right into our edge autopilot controls platform that goes Ala carte at $300 a day.
We're expecting by the end of 2022 will have all of our high spec AC fleet with our edge autopilot rig controls platform installed and drillers highly trained.
Its trailers that go out and actually train.
Almost like pilots.
Our auto pilot system.
Our revenue per operating day for our edge suite of drilling optimization products is compounding at about 10% to 15% every quarter.
With that I'll turn it back to the operator for some Q&A.
Thank you, Sir ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone.
We'll then hear Tom prompt acknowledging your request and if you would like to withdraw your question simply press Star followed by two and if you're using a speaker phone. We do ask that you. Please lift the handset before pressing any Keith. Please go ahead and press Star one now if you have any questions.
And your first question will be from Aaron Macneil with TD Securities. Please go ahead.
Hey, good morning, all thanks for taking my questions.
Bob can you speak to the specifics of the contract cancellation in Canada.
Candidly I'm surprised to see anyone cancel a contract in light of the.
The rig count.
Yes.
Yeah it ties into.
The rig was a basically an on standby without crews for the longest period of time as they were developing.
Our second program in the second program never came together and they didn't want to let the rig go but they finally got to a position where.
Okay.
Well, we'll buy out the contract and let the rig go out.
The market so are.
We benefited both ways we got.
Lump sum for an ETF and we also have the rig back and it's it's out on two bids right now so it'll it'll be going back to work before Christmas here.
Got it.
Can you give us an update on your performance based contracts and I guess in light of that.
Increased automation adoption on your rigs what kind of appetite would you have to pursue this model more broadly.
While we are in the U S. As we're as we're adding rigs for a certain couple of clients, they're all of them.
Performance based contracts.
Probably have 20% of its fleet in the U S.
Walnut space.
Contract.
I have some mechanism.
Canada, we've got.
Probably.
10% of the fleet on contracts with performance metrics.
And R.
Our our contract performance based contracts are constructed differently.
Differently with different clients Department.
But the specific needs are.
Sickly ware.
Focused on.
Also non drilling time events, Oh, you know definitely I P. O P is things like that but the total the total rig spec.
Spectrum.
And because.
In most cases, we're also getting our Gyropilot platform on in addition to all of that in some cases. It's included in our in the day rate and we make a benefit on the performance based contracts signed up with $3000 a day.
So it's.
It's it's it's continuing to develop and evolve.
But I would look at it as a you know roughly a 20% or.
Eight to 10 rigs in the U S.
Three to four in Canada right now.
Okay great.
Maybe a question for Mike can you speak to the.
Go forward expectations for stuff like reactivation costs labor cost inflation or any.
Other.
Supply chain or transitory cost pressures that youre seeing.
On the rig Activations I mean.
It's coming in line with what we were expecting we did activate seven rigs in the U S.
During the quarter and looking to activate another five plus so it's coming in line between that sort of two to let's say $500000.
On the labor side I mean, we are seeing some increases but those do flow through predominantly through.
To the customer.
So we're I would say slightly protected on outside.
Supply chain I mean, it's definitely you can see it getting tighter. So we are making sure that we have the inventory in the spare capital as required. So it doesn't have an impact on operations, but our supply chain is doing a.
A very good job in maintaining and making sure that we're seeing minimal to no increases where possible.
Yeah.
Understood. Thanks, guys I'll turn it over.
Thank you next question will be from Colby <unk> at Stifel. Please go ahead.
Hey, good morning, everyone.
So one of your peers.
<unk> talked about you know are.
That they see a drilling demand in Canada next year, reaching 2018 levels. I mean is that consistent with with what Youre seeing at this point and obviously labor is going to become a huge issue I mean, how confident are you that you can sort of mitigate any labor constraints over the next few quarters in <unk>.
Uh huh.
Yeah, well two questions there.
When you say 2018 levels are you talking about a number of rigs operating is that what you mean or you are.
Our percent utilization.
I think number of rigs operating.
Yeah. So.
I think Oh, I think will the industry will have challenge getting to those levels.
Hum, but I think that we're going to be working at higher rates.
Then we were back at those levels as we run through 2022. The constraint is a I think it was a couple of things. One is I mean capital is just not getting thrown at the business. Thank god like it used to be and it's more of a.
Sold a ramp up.
The other big issue is people Mike touched on the fact that any inflation on the peoples side with.
Cruise is passed on to the operator.
I mean, we are drilling wells faster.
Every year so.
So we are creating true value.
Yeah.
The crews.
Have to be attractive and are trained.
To be the biggest challenge the industry has over the next over the next year for sure.
So where.
We're seeing a lot of our competitors as well bid their rigs based on their crew availability.
You know, we're running about 40% utilization is in the industry I've got people are starting to go Hey, I tapped out on cruise. This we've got $2000 a day premiums for hot rigs. If we have a rig that's got a crew in his heart and it's something that has a window, an operator wants to pick it up or raised the rate quarter over quarter.
Pause if it's hot another $2000 a day because it pays for itself very quickly.
Okay perfect. That's helpful. Thanks, and is maybe on the on the debt side obviously.
There was kind of minimal availability on the credit facility.
You generate some free cash flow into Q4.
But also balance out with the need for working capital investments I mean are you.
Are you fairly confident that you'll get a bit more breathing room in that in that realm by the end of the year.
Yes for sure I mean, we've seen this fitzgerald before and then we manage our balance sheet quite effectively so.
The accounts receivable picks up and collections are coming in we will have some outflows the AEP, but definitely we will start to go into the deleveraging mode. The neighbors acquisition did take a bite into our liquidity, but with the the rigs that we picked up in the EBITDA potential from those rigs I think we're definitely going to see some.
So I'm a cash flow generation from them.
Okay perfect. That's helpful. Thanks, I guess maybe.
Thinking about the Canadian rig fleet I'm, obviously, you kind of increase your your montney position.
Meaningfully with that acquisition and then so if we think about 2022 I guess you know obviously, there isn't a ton of visibility at this point, but with both oil and gas very strong I mean, how do you see the rig composition in Canada evolving between the different players do you think it stays relatively similar to current levels.
Well I think.
Gas is such a different market than that in a while you drill a gas well and it will stay strong for 15 years.
<unk> declines.
Different than they're all spectrum.
But higher gas prices will increase higher.
Demand for the product so.
We're starting to see some demand for 2000 horsepower rigs.
Come back mostly down in the U S are down in the Haynesville area. We've got one of our 2000 horsepower rigs that's about to go back to work here.
So that's an indication obviously are the Henry hub is driving that.
And in Canada coastal pipeline.
Yeah, It's gotta get fed by something that's I think a 1.2 tcf.
Tcf.
I would take away capacity not mistaken but.
Anyway, Yeah, it's it's a more and more conversations about putting deeper rigs to work and northeast B C.
And.
Some of the challenges are getting resolved.
It's coming along yes.
Okay perfect. Yeah, that's all for me I'll turn it back thanks.
Alright. Thank.
Thank you.
Next question will be from Keith Mackay RBC capital markets. Please go ahead.
Hi, good morning, and thanks for taking my questions.
First one I just wanted to start on in Canada for Q1, how are you thinking about that.
Peak rig count for your fleet as far as Paul.
The demand is and then what you can actually supply.
Uh-huh.
Yeah, well, it's we're already having a what we expect to be up to around 50 rigs by the end of the year and probably tickets.
Nice quarter.
We're already having conversations with our clients about.
Picking up get them going and.
Not slowing down to Christmas new years.
You know in the past.
What would a move a rig on and not shut down the 15th of December come back on January themselves.
We're pushing clients hard to say you know, what you're going to need to get your program drilled.
We want to hang onto cruise they'll probably get some special bonuses over the Christmas period, but.
We're finding that the crews we have want to work and so I think we're going to see that happen, but we'll probably get to 50 by the end of the 61st quarter I'm thinking.
Got it thanks for that and just as you think about your rig count footprint.
In Canada, and the U S. Obviously, it's changed a little bit.
In the last quarter are you still relatively happy with where you've got your your high and Super spec rigs or could you see some of those moving around a little bit as as demanded.
Supply in various areas kind of kind of shifts.
Yeah, No I think what we're kind of happy where they've all landed and they've landed there for a reason we're.
We're seeing some uptake in the Jonah Gasfields and a Rockies Division, we've got you now.
Lots of bass, that's something we're running 102 out about 260 Greg's worldwide.
Those are all red so can go to work and turn to the right.
So we've got the capacity we've got you know over the years, we've put the right rigs into the right place.
We've got we're a little different than our competitors, we've got a more diverse rig fleet size so different.
Jack's sometimes require different types of rigs.
So we're quite comfortable with.
Where our rig type.
And that capacity is positioned here currently.
Got it Okay and one final one just on the balance sheet with the with the credit facility are highly utilized is there any thought or or inclination to.
Maybe terms some of that debt out into.
Longer time in the future or are you comfortable having the flexibility to pay it all off as as cash comes in.
Yes, we're comfortable where we are right now I mean, we'll definitely look into intuit as we kind of go into this market in the future years, but I think for right now the credit facilities.
It's a good way of being able to deleverage because you can just put cash towards that where if you do terminal that you do have some limitations of being able to deleverage into the future. So for from our perspective right now sort of we'll hold the course with what we're doing.
This activity increase cash flow and put that towards the balance sheet.
Got it okay. That's it for me thanks very much.
Thanks Keith.
Thank you.
Our next question will be from Richard site at ATB. Please go ahead.
Okay. So that's waqar sad.
So.
Got a couple of questions here.
Bob.
You know in the well servicing business do you expect any seasonality in Q4 this year with lake stoppages around.
Thanks, giving and Christmas are you seeing the same kind of trends that are playing out in the debt.
The drilling rig business.
Well in the in the U S. For example around the Rockies, we always have crop season, which.
Starting to get over that so.
So that's about that that happens every year, that's kind of cyclical, but we're <unk> or.
Or back out into the fourth quarter here and Canada, I'm not seeing any.
Abnormal cyclicality for Thanksgiving or anything like that certainly in Canada.
Well servicing is probably less likely to work over Christmas on a drilling rig out because of the nature of its work.
I'm not expecting anything abnormal.
Okay.
Then.
Mike.
You know as I look at your receivables Q3 versus Q2, they went up by about $44 million.
Payables went up by about 60.
As we get into Q4.
Do you see working capital to be a source of cash or do you think there'll be.
More bleeding from working capital as you catch up on your payables.
Okay.
Well it can be I think a bit of a blend. So I mean, we're definitely seeing activity pick up into Q4, so with the rig Activations, we saw in the U S. A.
That will come to fruition in Q4, while the cash flow from there, where we had the AP AR kind of buildup in Q3 related to that so well.
It will probably be somewhat neutralized on it but I think definitely we will see I think some excess working capital to come back to the balance sheet as we continue to work through this.
And continue to go from there so I would say, it's probably going to be slightly muted but.
Definitely into Q1 into Q2, we'll see the.
The fruits of the labor from that.
Okay.
And Bob.
Just a big picture question.
And then we hear from drilling contractors, and even bumpers and others. The feeling is that service pricing could be up meaningfully next year and certainly on the drilling side it looks to be year over year, well in excess of 10% now when you hear talk to the E&P.
Nice.
Most of them are budgeting.
Somewhere around 10% kind of you know we get price increases.
So.
Could you help us reconcile these two different views between the service industry in the E&P industry.
Yeah, well, it's it's the classic case isn't it.
I think what they're doing is they're they're increasing their well cost total well costs and our projects by 10% keep in mind that you.
Year over year.
Clip another 5% of efficiency. So if you think of the 510 15.
So.
When they if they're talking specifically they expect day rates on rigs still only move up 10%, they're underestimating it absolutely right.
Yeah, but do you expect efficiencies to improve next year or actually come down because typically we see in the industry.
It just seems most efficient when activity is low and as activity continues to increase and you have more green labor into the to the workforce efficiencies actually come down.
That's generally true keep in mind that we've been running 40 rigs are most of the summer here going up to 50, and then by the end of the year and then moving up to maybe 60.
You're absolutely correct. There is more of a a notion to keep projects going then to come up and down but there will always be the winter push it.
I've never seen a winter where it hasn't been a lot of the push.
You are correct that.
The first quarter is where the most inefficient wells get drilled there's no question about that green crews colder weather other logistics issues things like that so I think the other operators may be underestimating that.
Under.
Okay.
Alright, Thank you very much thanks for your answers.
Thanks Roger.
Thank you as a reminder, ladies and gentlemen, if you do have any questions. Please press star followed by one on your Touchtone phone.
And your next question will be from John Gibson of BMO. Please go ahead.
Good morning, all first one for me just given the tightness of the Canadian High spec market would you maybe look to move some rigs or crews from the U S to Canada as we move into 'twenty, two where you kind of happy where were the balance sits right now.
Yeah.
We're well it's.
I don't think there is.
Availability of crews in the U S.
We have Oh, the same issue in the U S attracting crews come with longer exits and the last thing.
The entry level roughneck wage it used to be.
Four times minimum wage today, it's about two times the minimum wage.
And.
So I I don't think the.
Notion I'll bring U S cruise up the kind of the as ever crossed our mind at this point.
Okay got it thanks.
Second one just given the first full quarter of the neighbor rig integration are you seeing some additional synergies or maybe some other positive aspects of the deal or I guess, maybe just provide some color on how the first quarter went and particularly increased market materially.
Yeah, well it was our 65th acquisition in it.
What's so seamlessly well that.
That was starting to get worried of what I was missing, but the team did a great job, Mike and his team and the operations a little cold show on our group in Canada.
We also added to the 15 rigs that they had contracted when we acquired them.
We've since added four more rigs on top of those roads.
Contracted rig great culture, Hum very similar to ours safety oriented performance oriented.
And yeah just more.
Extremely well for us.
Got it and then last one from me, it's kind of a two part I guess when you look at the Capex increase is the incremental growth capital, mostly going to go to your North American platform and then.
As we look into 2022 can we maybe assume.
Similar level of growth capex or it could just push you a bit higher just given your outlook for next year.
Yeah, it's a it's not going to be too much different for sure. It's not going to give much different we continue to have conversations where operators wanted specialties tunnels of drill pipe pushing that onto the operator or where they want us to buy it where we're arranging for it. So it gets paid in one year's EBIT that type of thing.
So you know, we'll always well continue to do good deals that makes sense, but are the capex will be up but just notionally I expect.
Okay, Great I'll turn it back thanks.
Sean.
Thank you and at this time Mr. <unk>, we have no further questions. Please proceed.
Thank you.
So closing remarks, the market buoyed by strong commodity prices is not overreacting with a capital infusion we saw in the last cycle. This is a good thing.
We can continue to drive cost efficiencies and safe delivery of our services and drive much higher returns in the near future through higher utilization of our high spec gave you our fleet and with our advanced rig controls and drilling automation features look forward to our next call.
Three months from now thank you everyone for attending.
Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.
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