Q4 2021 Ensign Energy Services Inc Earnings Call
Good morning, and afternoon, ladies and gentlemen, and welcome to the Ensign Energy services fourth quarter 'twenty 'twenty. One results conference call. At this time all lines are in listen only mode.
So in the presentation, we will conduct a question and answer session.
If at any time during this call you quite immediate assistance. Please press star zero for the operator. This call is being recorded on Friday March four 2022, I would now like to turn the conference over to Nicole Romanow. Please go ahead.
Thank you.
Good morning, and welcome to Ensign Energy services fourth quarter and year end 2021 conference call and webcast.
On our call today, Bob Geddes, President and COO, and Mike Great Chief Financial Officer will review <unk> fourth quarter and year end 2021 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 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 that could impact the demand for services supplied by the company.
Additionally, our discussion today may refer to non-GAAP financial measures such as adjusted EBITDA.
Please see our fourth 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.
Thank God 2021 and code for the most part is behind US on here, we are faced with another global crisis.
A different kind of referring obviously to have a terrible Ukraine crisis escalating day by day.
Back to Covid, we're truly learning to live with this virus and with most of the developed world having a high level of vaccination. We're in much less vulnerable position than a few years ago 2022 out of the gate as I mentioned before is already bringing a chair of geopolitical tension, which is causing rapid upward pricing in the commodities markets. This enhances the effect of half a decade of under.
Our investment in the oil and gas business worldwide. The perfect storm of increased demand restrict global supply and the resultant market price response for oil and gas commodities leads us into arguably the best fundamentals for drilling and well servicing contractor, but I've seen personally in the 30 years I've been in the business.
I'll provide you with an update on what we see currently in all of our markets around the World and also touch on what we see developing in the short term and longer term with respect to pricing torque and activity levels in the various areas, but first let's come back to the primary focus of this call reflect on the fourth quarter and the full year of 2021 I'll touch on some highlights.
'twenty, one was yet another challenging COVID-19 year, which enzyme executed extremely well on despite having headwinds related to COVID-19 related costs. The team generated strong EBITDA kept our maintenance capex in line with budget and reactivated roughly 25 rigs in the back half of the year. These reactivation led to one time fourth quarter expenses, which directly affected the <unk>.
Fourth quarter results also by continuing to implement innovative system solutions internally. The team also lowered its overhead costs, another 23% year over year.
And arguably the most sufficient oilfield service company from an overhead property day basis in 2021, we didn't sit back as we executed on the opportunistic acquisition of the neighbors Canadian assets I will say that with over 65 acquisitions under our belt over the last 30 years. This was one of the most seamless acquisitions, we've been involved with great assets great.
People help to make this a seamless transition in 2021, we doubled our edge autopilot platform now have our edge drilling automation controls package over 40 rigs worldwide.
The edge autopilot as the base platform from which our full suite of edge drilling solution products reside these products range Ala carte from 240% to $2500 a day with various apps.
We think of edge like Microsoft Office, we can turn on excel or word powerpoint or whatever best suits their needs. The focus is on rig process automation. These days this will be critically important as we train up newer drillers into a growing active rig market. So I will turn the call over to migrate a dive into the details.
For oilfield services continued to be constructive as the oil and natural gas industry continues its recovery from the adverse impacts of the COVID-19 pandemic.
Using of health restrictions in increasing global economic activity and mobility has supported the recovery of global crude oil demand supporting strong commodity prices and then for drilling and completion services.
Constructive industry fundamentals have resulted in meaningful activity improvements year over year total operating days were up in the fourth quarter of 2021 with the Canadian operator operations reporting an increase one.
795, operating days and United States operations, a 75% increase in international operations, a 4% increase in operating days compared to the fourth quarter of 2020.
For the year ended December 31, 2021 total operating days were up with the Canadian operations reporting a 60% increase United States operations, a 12% increase offsetting a 7% decrease in the international operations days compared to the year ended December 31 2020.
The company generated revenue of $296 2 million in the fourth quarter of 2021, a 47% increase compared to revenue of $201 3 million generated in the fourth quarter of the prior year.
For the year ended December 31, 2021, the company generated revenue of $995 6 million, a 6% increase compared to revenue of $936 8 million generated in the prior year <unk>.
Adjusted EBITDA for the fourth quarter of 2021 was $57 9 million, 10% higher than adjusted EBITDA of $52 7 million in the fourth quarter of 2020.
Adjusted EBITDA for the year ended December 31, 2021 was $213 2 million, a 12% decrease compared to adjusted EBITDA of $241 5 million generated in the year ended December 31 2020.
The 2021 decrease in adjusted EBITDA was primarily due to the decline in standby and early termination fees revenues earned in 2020 <unk>.
Depreciation expense for 2021 was $288 2 million, 23% lower than $374 7 million from the prior year.
G&A expense in the fourth quarter of 2021 was 14% lower than the fourth quarter of 2020 G&A for the year ending December 31, 2021 was 12% lower than the prior year as a result of cost saving initiatives.
Net capital expenditures for the fourth quarter of 2021 totaled $20 3 million compared to net capital expenditures of $3 $3 million in the corresponding period of 2020.
Net capital expenditures during the fiscal year, ending 2021 totaled $176 million compared to $18 $4 million in the corresponding period of 2020 and included the opportunistic acquisition of 35 drilling rigs in Canada for $117 5 million.
In the third quarter of 2021 and.
In the fourth quarter of 2021, the company amended and extended the existing 900 million revolving credit facility agreement with a syndicate of lenders. The amendments include an extension to the maturity date of the credit facility to the earlier of six months prior to the maturity date of the senior notes due in April 2024.
For November 21, 2020 for the amendments and extensions provide the company continued access to the revolver capacity and near term flexibility in a volatile oil price environment.
Sequencers to December 31, 2021, the company completed the sale of two drilling rigs that were cold stacked in Mexico for cash proceeds of $34 million U S.
The transaction resulted in a $23 9 million U S gain before taxes and has improved our liquidity position from year end on that note I will turn the call back to Bob.
Thanks, Mike So we'll.
Go around the world for an operational update and provide some outlook into what we're seeing and starting with our U S drilling operations in the U S. We operate a fleet of 88 drilling rigs at close to 75% being high spec and.
Super spec <unk> hundreds to 2000 horsepower class rigs today, we have about 50 rigs active with 33 of those in southern primarily Permian tenant.
And in the Rockies and seven in our California business unit market momentum is obviously carrying forward and just in the last few weeks, we have signed up another 10 rigs on contracts ranging from six months to one year. Some of these involve cold stacked rigs.
Where the incremental capital required to upgrade our reactivate the rigs as being covered well within the contract period.
Rates have moved quickly in the last month those operators call to ensure they are preferred rigs contracted.
We've seen our high spec <unk> hundred and our newly branded ADR 500, II for intermediate.
Capturing the three mile category. So we have the ADR 1500 on the two mile. The 1500, a three mile in the 1500 S for the four mile categories.
This along with our <unk>, our Super spec ADR 1500 S rigs are quoted out with leading spot prices and the 25 plus range. These are up about $5000 a day from fourth quarter 'twenty one prices.
U S well servicing operations, we operate 53 relatively new well service rigs in the U S servicing the Rockies, California, and West Texas markets.
Today, we have 40 or 75% of the fleet actively engaged with rates inching up as we re contract projects. While servicing is generally on a call out our project base so opportunities to move pricing can occur with a quicker cadence in the drilling fleet.
Directional drilling our directional drilling business in the U S has a 10 kit capacity, we generally focus on internal business by augmenting our drilling turnkey projects in the Rockies. These projects involve some execution risk so having our high performance directional drilling team on these projects helps to maximize our project margin we have three projects on the go today.
In Canada.
Our Canadian business unit, we operate with the recent neighbors acquisition of 35 rigs a fleet of 123 high spec drill rigs along with a fleet of roughly 50, well servicing rigs.
Also within our Canadian business unit, we have a mid sized directional drilling group with 30 kit capacity and also a corn and rentals group.
Today, we have 52 drilling rigs operating heading into breakup with about 25 expected to run over breakup on pad work once we get through breakup, we expect to rapidly get back up to 50 rigs over the summer and forecast close to 65% to 70 rigs active by year end, we've identified about 10 cold stacked and currently active rigs.
That operators have requested upgrades on and which have attracted contracts with roughly 20% to 25% rate increases pricing on the highest spec ADR 500 style rigs will be turning over in the spring on most of our highest spec 500 class rig contracts with roughly 5000 per day increases anticipated a lot of these rigs were tied up on.
Annual contract struck over a year ago, and which will come up for renegotiation in may or June of this year.
Internationally.
Our international business unit operates in three key areas, Australia, the Middle East and Latin America with a combined fleet of 34 drilling rigs Australia is one of the largest fleets in the country with 14 rigs and have seven rigs operating today with two to three more rigs coming on contract in the next three to six months the Middle East business unit is anchored with our <unk>.
Two high spec ADR 3000 horsepower rigs in Kuwait and are two high spec ADR 2000 horsepower rigs.
Briggs in Bahrain, all under long term contracts also we have a fleet of four rigs in Oman. None are currently operating we are very close to tying up work for at least two of those rigs and four plus year contracts.
Argentina has a four rig fleet.
With one under long term contract today with a major in another rig contracted to startup in the next quarter.
Our edge drilling solutions, which encompasses the technology for reduction of emissions that we apply on a worldwide fleet as I mentioned previously enzyme has now 40 of our high spec ADR drill rigs with edge autopilot installed the edge autopilot platform is critical to not only ensuring consistent wellbore construction, but also to efficiently.
<unk> integrated many of the emission reduction systems that are evolving today from natural gas applications with best systems to highlight power installations. Additionally, our drilling solutions team has formed a joint venture with another major oil company to drill a zero emissions test well using green hydrogen as the energy source and deploying current high.
<unk> fuel cell technology to drive our electric Greg.
With that I'll turn it back to the operator for questions.
Thank you, Sir ladies and gentlemen, let me now begin the question and answer session.
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Please for your first question. Your first question comes from Aaron Macneil with TD Securities. Please go ahead.
Good morning, all thanks for taking my questions just wanted to clarify a couple of things on the growth capex of $20 million.
Bob Youre speaking pretty quickly I heard 10 cold stacked rigs is that the majority of the $20 million or can you maybe give us a sense of how far you can stretch the budget.
In terms of the number of rigs that you tend to put back to work and maybe you could also highlight.
How many Idaho 1500 AC triple rigs you have.
It could be upgraded.
Right so.
Hi.
I'll address the last question first the high spec <unk> hundreds.
They fall into three categories.
We're finding clients that somewhat to drill two or three or four mile laterals.
Some of them have rigs that they want to make some specific upgrades to.
We're addressing that with.
Usually we don't want to get out more than a six month term on these contracts because of prices moving so quickly.
But we are raising our price of applying that when we think of.
Our capex budget of $90 million.
Maintenance Capex.
And some.
Some growth Capex in that incrementally there is $20 million that's mentioned here.
Identifies probably about about.
10 to 15 rigs in that range.
Anywhere from 1 million to $3 million of modifications required on those rigs.
And again, all attached to price increases ranging anywhere from three to $5000 a day.
Yeah.
Understood.
Several of your peers that reported a few weeks ago talked about Greg.
<unk>.
You talked about 25, and about which I guess.
Same but I guess I'm wondering.
They reported a few weeks ago pricing is pretty good dynamic.
Yes.
The pricing structure changed over the last couple of weeks or so.
Yeah, Yeah spin that dynamic.
In fact, I was just talking.
Our U S. Operation This morning, and we had some pricing out a month ago with the client and.
We're coming back and we are raising the price I mean, it's it's it's been happening that quick.
Certainly the Ukraine crisis has.
Influenced.
Everything in our thinking.
Our phone is basically kind of lit up the last two weeks on the sales side everyone's wanting to grab the rigs that.
They are familiar with <unk> or expand their rig fleet, one particular client.
We've almost doubled the number of rigs we have with them that they want coming up so it's.
It's happening pretty fast so we.
We have a lot of shovel ready projects, we call them, where we can.
We can incrementally reactivate and when we say upgrade the rig it usually involves a top drive upgrade.
Which we tie in with the recertification, while we're doing it at the same time, we take the opportunity. So there is there's a lot of moving parts, but the key point here is.
We're basically.
The last half of this year 2021, I'm talking about we reactivate we saw this coming a little bit we reactivated 25 rigs.
Into the market.
And then we just recently in the first quarter here have identified another.
10% to 14 I'll call it shovel ready rigs that can be reactivated for very little capital.
Understood.
One more question for me on the maintenance capital side, It does seem like a pretty.
A pretty big number.
Year over year, and even in the context of some of your peers.
I was wondering if you could maybe just break it down.
To kind of some of the major components.
Including kind of the day to day Aap's drill pipe if that's relevant.
Whatever else you think is relevant.
Yes, so on that I would say.
A large components would be related to the drill pipe.
Just given with the rig reactivation.
And the I would say under investments of the industry on drill pipe for last couple of years. So I think similar to our peers drill pipe.
It's quite large on it probably close to 20%.
Then there's the other stuff like recertification, so as rigs get reactivated or rigs that have been operating with recertification.
And then just sort of youre running the mill stuff like pumps and engines and things like that but definitely drill pipe is a larger component of this year's budget and comparisons to the prior years.
Understood. Thanks, guys I'll turn it over.
Thank you.
Thank you. Your next question comes from Waqar Syed with HEB capital markets. Please go ahead.
Thank you.
Yeah.
Mike.
When I look at your gross profit margins even excluding.
Some of the.
<unk>.
Revenues from Sean.
Shortfall revenues of contract termination revenues your margins actually fell quarter over quarter in Q4.
Now could you tell me why that is because some of your peers, probably you have the margins bottomed in Q3.
Is there anything particular for you guys that you're seeing.
Number two.
Think Q4 is the bottom in margins.
And then what kind of.
Trajectory should we see going forward.
So in the fourth quarter or certainly in the back half and mostly in the fourth quarter, we reactivated about 25 rigs.
So there was a lot of expense onetime expense what car going through the fourth quarter.
I see it is it's a lumpy quarter in that respect but.
The margins there is no there is no margin compression happening.
At all.
Youre seeing.
Price increases.
There is nothing to be alarmed about.
Yes.
Rig reactivation in the quarter were quite high for obvious reasons.
And what would you say it was the cost for those reactivation should we assume maybe like half a million per rig or something in that range.
It would make up quite a bit of the margin compression that you saw quarter over quarter. So I mean.
Would be probably around that 750 ish.
$750000 per rig.
Thereabouts, yes, okay.
Fair enough and then how many rig reactivation reactivation would then be in Q1.
Q1.
Yeah.
Gosh I would I would suggest.
Right most of the rig Activations of course happened leading into the busy Q1, we saw so there were there I think maybe five in Q1.
Sure.
We've got as we've.
Suggested here.
10 happening in the U S that we will see hitting the books with positive results in the third quarter for sure. It takes a few months to reactivate and upgrade these rigs were just getting after that now to meet the demand as I mentioned in the last month.
Sign up another 10 rigs.
So they will hit the third quarter results.
Yeah.
Okay. So so five rig reactivation in Q1, and then another 10 in Q3 that could hit.
The Opex Opex line is that right.
And the EBITDA line yet.
And then anything on the international side.
Yeah, Yeah in the first quarter is your question.
Yes first quarter are for like one what would be the cost like opex impact of rig reactivation of international markets.
<unk>.
What time, Peter do you think that those those hit.
Yeah, we didn't have any rig reactivation in the international market.
And.
The.
Four or five that we have coming up between now and the next six months all the reactivation costs are covered within the.
The mobilization fees, we don't we don't eat any of the reactivation costs on incremental rigs. So you won't see any of that pushing through.
So just to understand that the revenue and the cost for the reactivation would all hit the same quarter of the revenue will be spread out over the term of the contract.
Well it depends on the contract so there'll be a bit of a mismatch, but for the most part.
It will all wash out as a positive EBITDA bounce, but youll have a bit of a lump.
With some operating cost.
Some revenue so.
That's a bit of a mismatch, but on an annualized basis it will work out.
But to be clear.
Costs always cover at least 100% to 125% of the.
Of the.
The cost of reactivation costs.
Okay.
And then the.
The maintenance Capex per rig.
How is that running at between the U S, Canada and international.
Perfect basis.
Well I think given the rig specs in the us youll see sort of a higher maintenance costs in comparison to the Canada, which.
Sort of the triple doubles and singles.
So on a per rig basis, you'd be higher in the us and comparisons to Canada.
Internationally in particular in the sort of in Kuwait, and Bahrain and those are larger rigs as well. So your maintenance would be higher just given the size and spec without equivalent.
Okay, and how are these costs capex.
Capex costs kind of comparing year over year, what kind of inflation are you seeing there.
Yes.
We've got about seven or 8% inflation built into.
Product escalation across the board.
Okay.
Alright.
Yeah.
Okay. That's all I have thank you Sir.
Yeah.
Thank you Waqar.
Thank you. Your next question comes from Colin <unk> with Stifel. Please go ahead.
Good morning, everyone. Just wanted to start with the U S high spec rig market as.
Can you comment you had 88 rigs of which 75% or high spec so call that about 66.
Active currently it.
It sounds like you've got line of sight for maybe another 10 additions at least and I'm just curious if you'd be willing to comment.
Based on what you see today when you think you could exhaust your high spec rig capacity in the U S.
Yeah. So we've got.
I mean today, we are currently running.
About 33 of our high spec rigs in the U S southern market and we've got.
What are we going to get another 20 that we can put to work 10 of them you're going to see going to work here.
In the next few quarters, which leaves another 10 after that to identify as far as capacity goes.
Okay got you and I would assume you're relatively in line with your peers under the assumption that wants that.
Idle capacity in the market gets used up that you expect to see rates push up to the call. It U S $30000 a day range.
Yes, I would say that.
I mean, we've been there before and we will be there again once you get over 70% utilization in any rig category.
You certainly get traction and with the commodity price.
I was just stays there will continue to have the traction. So yes, I would say that 30000 by the end of the year is not not out of whack.
<unk> seen it just in the last month.
Quicker than Ive seen it move ever before I mean, it's.
It's moving quite fast.
Yes.
Got it so in Canada. It sounds like you see a peak in Q3 Q4 similar to peers.
Just curious what do you think is driving again that stronger Q3 versus Q1 is it just a lack of availability of drilling and completions equipment here in Q1.
Correct.
Q1 was of course still somewhat COVID-19 hampered.
And I've.
I've seen years.
We have had stronger Q3 s than Q1, and it has everything to do with what's going on in the world, but yeah.
Yes.
Point.
Q1 was somewhat crew constrained.
Operator.
Not wanting to get.
Too crazy with.
Trying to attract.
Labor any differently than they had in the past, but mostly covered related stuff now that we're coming out of that we shouldn't have those issues going into Q3 and theres lots of assets.
<unk>.
What 240 rigs.
Just a little less than 50% of the CA ADC fleet running so you've got capacity there to take up.
Okay got it that's helpful. Thanks.
I just wanted to go back to your comment on the phone lighting up so I mean kind of safe to say that it sounds like you've noticed a bit of a change in in E&P behavior, just in the last month alone.
I assume that's driven by a combination of continued improvements in economics and maybe.
Our concern on rig availability.
Yes, yes.
<unk>.
<unk>.
Exactly the rig type availability and.
Hot rigs with crews.
It's all of the above so yes, all of a sudden it's like the it's like the toilet paper shortage. There wasn't a shortage until everyone's got theyre going to run out of toilet paper right.
Okay got it that's helpful.
And just quickly on the Mexican rig sale just wanted to confirm based on your comments that this cash is coming through.
In Q1, and if you have any other idle assets in the portfolio that you think probably have a reasonable chance they could maybe actually be sold as well.
Yes, so the gas the deal closed in February so the cash has been received.
As for other assets.
Redundant real estate up in this new sort of throughout.
We will look to monetize that is available on the market.
Let's close to almost $40 million.
So I wouldn't say, it's going to move quickly, but I would say, it's probably monetize in the next 12 months to 18 months.
Okay got it.
Helpful. Thanks, That's all from me I'll turn it back.
Thanks, Paul.
Thank you. Your next question comes from Keith Mckey with RBC capital markets. Please go ahead.
Hey, good morning, and thanks for taking my questions just wanted to start off on the longer term contracts.
Just curious where your thinking is on that now it looks like you have.
Increased your long term contract proportion or total long term contracts from kind of six to 12.
From last last report to know can you maybe just talk about.
Where those where those prices have gone and was this the operators, particularly driving the driving the signing of the long term contracts.
Would you have preferred a shorter duration of these contracts or.
Sure.
Or is this sort of where things are going based on rig availability.
So.
Certainly in the last six months.
We have been knowing that we're going into an uptake market. We have moved our cadence closer to six months turnovers for obvious reasons, where there has been some large capital upgrades requested by the operator.
We've not only raise the price, but we insisted on one year contracts just to make sure that we've got some.
Insurance coverage on the.
On the.
And the cash flow stream, but.
It's always the situation where where are.
When operators start to tie you up for two year contracts are wanting to tie up for two year contracts is one use you say now and.
We've been turning over on one year contracts six month contracts and where we were the operator has historically put us under one year contracts, we'd come back and said well signed a one year contract, but after six months the rate is going up and here. It is so we have two intervals. So we're interval pricing on six month basis.
Got it okay, and just curious what type of uplift relative to that 25, K number youre getting on these longer term contracts.
They.
Probably two to $3000 a day on those.
Got it okay perfect. Thanks for that.
And just just a housekeeping item for me the $89 million and $20 million of growth Capex that is all.
That is growth growth Capex and then the proceeds you received from the.
From the Mexico rig sales would be.
It would come out of that number correct.
So the 89 would be maintenance and then there is $20 million in growth and then the Mexico rig sales would mean goes towards the balance sheet of what's done with fund.
Debt reduction as well as some of these growth capex.
Got it okay, yes, your net capex will be lower than 109.
Given the given the Mexico rig sales, it's not one of them.
Okay.
Yeah, Okay, perfect and as far as debt repayment goes.
The credit facility is is your priority for <unk>.
The direction of funds. These days is that correct yes.
Yes that is.
Okay perfect. That's it for me thanks very much.
Thanks.
Thank you no further questions at this time you May proceed.
Okay. Thanks, everyone for coming out on the call I'll, just wrap up 2022 will be defined uniquely much as the last two years have been defined but in a much different way Ensign has a fleet of 245 drill rigs are well service rigs worldwide and with only 50% utilization of our fleet today, we have <unk>.
It's a capacity to feed into that market.
Also having the benefit of a relatively young high spec asset base, we should have a long economic life ahead of US all of course dependent on commodity and other influences. Thank you and look forward to updating you once again in three months time.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a great day.
Yeah.