Q2 2022 Ensign Energy Services Inc Earnings Call

so as to maximize debt reduction in the period.

The second quarter results were somewhat muted by the fact that only half of those 24 RICs were actually commissioned in the back half of the second quarter, essentially contributing only one month of high margin cash flow to second quarter results. Obviously the third quarter and onward will see the benefit of an additional 12 RICs significantly enhanced margin and operating days.

We currently have 124 ricks running today, 61 in US, 49 in Canada, 14 internationally. And we have visibility to give or take, get up to 150 ricks by year end.

65 to 70 in the US, 60 to 65 in Canada, and 15 to 20 internationally.

We have guided with CAPEX for the year close to 165 up which 115 million is attributed to maintenance CAPEX and nominal reactivation cause on the additional 50 plus rigs, which will be reactivated through 2023 to feed the uptick in the market. The other 50 million of CAPEX is growth CAPEX targeted on client sponsored upgrading of RICS at enhanced rates of $5,000 a day or greater. In some cases we have recovered the CAPEX via elevated MOATFEE.

but I'll point out that in all cases, with respect to the approximate 50 million of upgrade projects, mostly on the drilling side, but also some on the well-servicing side, that these projects will pay a well within the 2022 fiscal period. Again, finding that delicate balance of respecting the balance sheet within the fiscal period, while at the same time taking advantage of the up swing market and the opportunity to upgrade rigs, with quick payouts on incremental capital.

So when the smoke clears at the end of the year, we will have upgraded close to 30 rigs and where these rigs will command superior rates in the low 30s in which we'll all be on long-term contracts. Also important to understand is that over half of the contract fleet today will be rotating over onto new contracts at significantly higher rates through the back half of the year. And then an additional 30 plus for executive in the back half will all be at much higher rates. And then the back half will all be at much higher rates.

I'll turn it over to Mike for a more deep dive into the analysis or into the results. Mike? Thanks, Bob.

Despite the recent pullback in commodity prices, the operating environment for oil and natural gas industry continues to support demand for oil field services. Ensign's results for the first half of 2022 reflect positive improvements to oil field service activity, day rates and financial results year over year.

Overall operating days increased in the second quarter of 2022. Canadian operations recorded 2,369 operating days, 124% increase from the priority.

US Operations Recorded 4277 Operating Days of 48% Increase in Inter-Altional Operations Recorded 1,030 Days of 22% Increase compared to the second quarter of 2021.

The company generated revenue of 344.1 million in the second quarter of 2022, a 62% increase compared to revenue of 212.3 million generated in the second quarter of the prior year. For the first six months ended June 30th, 2022, the company generated revenue of 600 and 76.8 million, a 57% increase compared to revenue of 430.9 million, generated in the same period of 2021.

Adjusted EBITDA for the second quarter of 2022 was 68.3 million, 50% higher than adjusted EBITDA of 45.6 million in the second quarter of 2021. Adjusted EBITDA for the six months ended June 30th, 2022, totaled 138.2 million.

3 million, 45% higher than the just the EBITDA of 95.5 million generated in the same period in 2021. The 2022 increase in the just EBITDA can be attributed to improved industry conditions and as a result of the company's acquisition of 35 rakes in Canada in the second half of 2021. The 25 rakes in Canada in the second half of 2021.

Depreciation expense in the first six months of 2022 was 138.7 million, a decrease of 1%, compared to 140.7 million for the first six months of 2021. General and administrative expense in the second quarter of 2022 was 38% higher than the second quarter of 2021. The GNA expense increase due to increase operating activity as well as the end of the wage subsidies and full reinstatement of salary rollbacks and annual wage increases.

Further increase in the G&A expense is a negative foreign exchange translation on converting US dollar denominated general administrative expenses into Canadian dollars.

That capital expenditure is for the quarter, we're 50.1 million. The capital budget for 2022 is estimated to be now 165 million. Part of the increase with eight to two drilling rigs that will be reactivated in the fourth quarter in the Middle East, as well as other select vibrate projects.

Long-term debt net of cash has decreased 83 million since December 31st, 2021. And on that note, I'll turn the call back to Bob. Thanks, Mike. So let's run around the world and do an operational update starting in the U.S. We have upgraded and reactivated nine rigs since our last call.

which brings our current head to recount today to 61 bricks in the US.

We expect a few more rigs in the Rockies and also southern, which should get us close to 70 by year end. Some of that dependent on whether California permit challenges get resolved before year end.

We have three or four of each in California waiting on the outcome of permit delays.

Our high-spec rigs are being north for 30,000 a day and in all cases, especially pipe like the five and a half inch drill pipe, for example, is being rented out at close to $5,000 a day to the operator. We're also pushing services that do not attract a margin back over to the operator in the contract. This is the idea that it's like trucking, etc. high dollar amounts that are a drag on our cash and generate no margin. Our well-servicing division in the U.S. is running close to 40 rigs at 80% utilization.

and continues to expand their highly profitable rental side of the business.

Our directional drilling team, while small, is a tactical team that supports our turnkey projects and has three kids in the hole today. Our turnkey project has three kids in the hole today.

Turning up to Canada, we have 49 rigs on the payroll with visibility to 55 by September and 60 to 65 by year end. As mentioned previously, of the nine rigs that are being upgraded, four of them were commissioned in the last month of the quarter of June . Then we had two in July and the other three are scheduled to be commissioned in August . Our Canadian fleet is predominantly high spec doubles and high spec triples. High spec triples.

are of course highly utilized and are getting north of $30,000 a day on leading rates.

with respect to the high spec doubles, with 32 of them in our Canadian fleet, Enzyme has the largest fleet of these newer high spec doubles in Canada. We currently have.

About a third of them under contract today, and while this Rictide category has been muted when compared against the high-spec triples over the last 12 months, we are seeing very strong demand and the greatest opportunity for our high-spec doubles against the clear water in shallow or motiny regions. The Rictide category has been in the clear water in shallow or motiny regions.

Being we have excess capacity in this rig type, and with the market in this rig type getting tighter, we have been able to raise rates up to $5,000 a day. The remaining 20 plus high-spec doubles we have are ready to go with essentially no capital required to start them up. We are now bidding our high-spec doubles in the low, and the mid-20s with specialty drill pipe outside. The mid-20s with specialty drill pipe outside.

We see another 5 to 10 of our high-spec doubles going back to work before your end. We're already getting calls to book into first quarter 23.

Our Canadian wall service team has 15 wall service for executive today and has visibility to 20 by September and as much a 25 by year end.

the Canadian directional drilling business, despite some consolidation, still remains a low entry level business for the most part and as such, while getting busier, has had difficulty moving pricing.

On the international front, we have 15 active today, nine in Australia, two in Kuwait, two in Bahrain, two in Argentina. As mentioned earlier, we have successfully landed two, possibly three rigs on long-term contracts in Oman. The roughly five million in capex required to reactivate and upgrade the two rigs will all be recovered via upfront MOPE fees, which will occur late in the fourth quarter.

The team also successfully recontracted our two rigs in Bahrain and has recontracted both our rigs in Argentina that are currently operating both with $5,000 day rate increases. In Australia, where we see the effects of COVID related issues.

We recontracted one of our high spec triples with the major where approximately five million dollars of upgrades Requested by the operator are all being recovered in the MELB fee This rig is expected to start drilling on the project in the fourth quarter We're also in the middle of recontracting half the active fleet in Australia with rate increases

in the $3,000 per day range.

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

Thank you.

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touchtone phone. You will hear a three tone prompt acknowledging your request and your questions will be pulled in the order that they are received. Should you wish to decline from the polling process, please press the star followed by the number two, if you are using a speakerphone, please leave the handset before you present any keys.

One moment please for your first mission.

Your first question comes from Aaron McNeill from the Securities Israel.

Hey, good morning all. Thanks for taking my questions. Bob, are there any additional details you'd be willing to provide on the reactivation in Oman? I guess I'm specifically thinking about contract term, day rates. What would an Oman rig, like what would the capital cost be?

Turn out screw o right like so.

So we've got two types of rigs in them on.

the 1500s and the smaller ADR rigs which were sent over there about 10 years ago and successfully drilled up the Mackayesna field. Two of those and probably a third one, two for sure, are being refitted.

on to a more mule project in a month on three to five-year contracts, minimum three with two-win-year options. The rates are typical for that size of rig is about low 30s.

High 20s depending on what's in and what's out. Again, our focus on making sure that...

Capital outlay is matched in a current fiscal period. We put all the upgrades into the MOPE fee, so they all get recovered. That MOPE will probably happen in November , certainly before the end of the year.

Understood. And similar questions for the high-spec doubles in Canada. Like, what does a contract look like in terms of duration and with low to mid 20s pricing? And what's your daily margin for that over in that asset class? And what's your daily margin for that over in that asset class?

So through the summer we've been careful not to contract our high spec doubles past October 1st. We're already starting to see a traction in the low 20s on those. And if you think of a high spec double as needing a five man crew at $8,500 a day and let's say $3,000 a day of R&M.

You're at, you know, 11.5 and so you've got about a $10,000 a day margin.

The point is, of course, when we bought Trinidad...

We went after mostly Ford's high-spec double market in Canada. They had a lot of, they had the biggest portion of high-spec doubles in Canada at the time. The Cardium fell apart, everything else fell apart. And it's been the last category to come back. But it's coming back strong. The clear water is moving over to pad drilling from the singles-type drilling over the last couple of years. You're seeing operators wanting to go a little further, putting pads. So the high-spec doubles are coming into play.

The point is that we've got 32 of these, only 11 of them are running today, and none of them are contracted purposely past October because we're raising rates, and we're going to see another five to ten of those, I think, get contracted before the end of the year, certainly in the first quarter of 2023.

That's very helpful, more than I thought I'd get from you on that question. Mike, maybe I'll ask you one too. Sorry, Aaron. All good.

So Mike, you're today's, the usually 10 reduction of 83 million is noted, but the credit facilities practically fully drawn, laboratory issues are still elevated. You bump the capital program here, which makes sense, give them the outlook. I assume you're also going to have to direct some cash towards working capital into that cash, but...

Do you think we'll see enzyme add a little breathing room on the line of credit in the near future? Can you maybe just give us a sense of how you're looking at capital allocation and debt reduction as we look ahead?

Yeah, for sure. So I think, I mean, we see in the first half of the year, we had a vote.

About 80 million worth of capital, of which now those rigs are going to be generating free cash flow going into Q3 and Q4.

We'll see that liquidity on the facility continue to increase the remainder of the year. So we look at our accounts or see a world and everything like that. I think we'll see more and more liquidity being added onto the balance sheet for the remainder of the year. And then I think that will continue to expand. We'll definitely continue to expand into 2023. So I think from operational cash flow, we'll see continued devourage.

Thanks, Blake. I'll turn it over.

Turn.

Thank you.

Now your next question comes from Keith Marie from RBC Capital Markets. Please go ahead.

Again, morning. And thanks for taking my questions. Just wanted to start out on the gross margin in the second quarter. How much were that impacted by any op-x reactivation costs? And where should we expect to see the gross margin trend through the second half of the year? Sure, the second half of the year.

We would have saw probably 200 dips maybe on sort of the margin of compression on the reactivation. So I mean, you have a lot of costs just to the re-higher, getting people drugged out, so people associated to the rig and everything like that. So we would have saw an increase on labor that we won't see going forward with lots of our reactivations coming up pretty quick. So I'd expect margins to increase.

I would say quite stanchly into Q3 and going into Q4 where

The Bob's point before you have the contract, the re-contracting taking place, so you'll see a higher day rate on the rigs going forward, and then we won't see that reactivation of... and then we won't see that reactivation of...

Sort of the consumable build up and everything that you see when the rigs go back out to the field. So definitely in Q2 you will have a bit of a decrease and then you will see that increase going into Q3 and Q4.

Perfect, thanks Mike. And just to maybe follow up on the laborer. So how many of the rigs you expect to get out in the second half of the year? And you already got staffed up. And maybe if you can just talk a little bit about staffing trends in general, that'd be helpful too.

Sure, sure. Yeah, it's, we always say, and it's true. It's tight, but what we're finding is that more people are getting out of their basement and needing to go to work. There's been significant increases at the field level on pay over the last six months. One pay over the last six months.

Now, we always say, and it's true, it's tight, but what we're finding is that more people are getting out of their basement and needing to go to work. There's been significant increases at the field level on pay over the last six months.

you know, drillers or I'm sorry, roughnecks can make about $90,000 a year now either side of the border. We're starting to fill those gaps on an as-needed basis. We're also seeing the turnover slow down on both sides of the border. Australia has always been a little bit of a challenge. They're still kind of caught up in COVID fever, excuse the pun, but...

You know, there's a lot of industry in mining and offshore, attracting personnel. It's a little tighter. But we're able to find the crews. In the U.S., in a period of two months, we ramped up nine rigs, and each rig requires about 20 guys. So there's a couple of hundred people that we're able to successfully go out and acquire. A third of them had experience in the business.

which was quite interesting. We are attracting people back to the business. Our good safety record puts us ahead of our, some of our competitors in that regard. You know, we'll always like to work with safe companies. We've got a rigorous training. It's almost mimics a trade program. Call our global skill standards. So when we introduce people, we bring them up the ladder relatively quickly with great competencies.

So we're not, it's tough, but it's not causing us any operational concerns.

Perfect. I'll leave it there. Thanks very much.

Thank you.

Thank you. Your next question comes from Col Perriere from Steve Hill. Please go ahead.

Hi, good morning everyone. So it sounds like you have visibility to add additional nine rigs in the US before the end of the year. I'm just wondering how much of those would be called Tier 1 rigs in the 33 to $35,000 a day range. And have you had many conversations in the US with regard to 2023 and just any color you can share on how those have been going would be helpful thanks.

Yeah, probably half of the nine rigs would be the high spec triples, the other half would be uh...

For instance, in California, their rigs don't require any upgrades. They're the mid-sized type. And the other ones in the Rockies and the US Southern area would be not our super-spec triples, but our high-spec triples, which are getting in the 25,000 per day. The back after your question, I'm sorry, was again related to...

Just what visibility you have regarding 2023 and if you've been having any customer conversations with just any color be helpful

Yeah, absolutely. We've already started some conversation.

in the Rockies and Southern with clients. They've got some visibility in their 2023 budget. Maybe not quantifiable, but certainly they know they want to make sure they hang on to the best rigs and they have some rigs where they may want to consider some upgrades to that they're willing to pay for. Those are the kind of conversations we've been purposely contracting as we've moved up the ladder on pricing in six-month intervals sometimes.

increase over time here as inflation occurs.

Okay, great. That's a helpful thanks. And maybe building on Keith's question a little bit. So based on your guidance and what some of your competitors have said, through Q3 in Canada, it seems like it's going to be sort of a steady climb, peaking at call at the end of Q3. I mean, is the biggest factor there just labor? Is it other logistics headwinds or is it really just the timing of customer programs?

Just the latter, the timing of customer programs. The summer is always quiet in Canada and Calgary had a real stampede this year. So brain cells, it takes a while for them to recoup and people to get back to thinking of their program. Plus September , things get very dry and it's easy to start the access to land. So, you know, so does the given one gets back to school and gets at it. So, you know, I think we'll see, you know, the usual third.

Thank you.

Thank you. Your next question comes from Vokars yet from 80V capital markets. Please go ahead.

Thanks for taking my question.

Bob, Mike, even if the leading edge day rate does not increase here in the US.

When will all your rigs have repriced to be at leading edge rates?

I would say certainly into the fourth quarter they will evolve in a reset.

So then following up on an earlier question on the gross profit margins, I believe they were about 23.4% in Q2. And you mentioned, Mike, that you expect a substantial bump.

Is substantial in that 400 basis point kind of range would there be a substantial enough or not substantial enough for you?

So I think that would be substantial enough. I guess he was getting into the high 20s to... I guess he was getting into the high 20s to...

To low 30s going into 2023, just as the rigs turn over to the higher day rates, we are seeing some cost inflation on certain items, but the day rates are definitely inaccessible. We're seeing on those increases, and then we're not seeing the sort of startup costs that we've seen with recruitment and getting the rigs out the door. So I'd agree with that number.

Okay, great. Thank you. And then Bob, in terms of supply chain challenges,

Thank you. And then Bob, in terms of supply chain challenges, you know, you should think about like...

You know normal maintenance kind of stuff engines mud pumps drill pipe things like that could you maybe talk about like how easy it is to secure that equipment?

Yeah, it's...

It's a very good question, Mark. The drill pipe, we're always buying a securing drill pipe for delivery six to 12 months out. So we have a good handle on drill pipe. The challenge with drill pipe is always picking what's going to be the trendy size and tool joint. As we drill out further, we're seeing 5.5 inch drill pipe being used more often on our super.

program where we're buying a certain amount of mud pumps every month rotating them over and rebuilding them. We also have mud pumps in our tier one fleet, tier two fleet that can be accessed. So it's the consumable things like drill line as a perfect example where drill line is twice as expensive as it was a year ago and we're going through it twice as fast because we're drilling twice as fast.

with higher ton miles on it. So that's just one anecdote on a supply chain area that has had rapid inflation. And we're seeing, you know, probably 10% year over year inflation on some of the major components. But it seems to have settled out a little bit. You know, shipping is moving, things are getting around.

30% of our rigs that we have running today are running on a low emission, either high line power or natural gas power. We have a lot more conversations now with respect to the natural gas engines with battery energy storage systems. We've got one large client in Canada where we're starting to turn the fleet over onto natural gas engines.

where the capital is fully funded by the operator. They're getting the benefit of the emissions reduction and we have the benefit of not having to go out and buy natural gas engines. We just have to look after them without a reduction in our day rate. So that is continuing to get addressed with the majors, the mid cap and the smaller guys really not so much.

Thank you very much.

Thanks, Ricardo.

Thank you. Your next question comes from John Gibson from the AMO Topal Markets. Please go ahead.

Right, just wondering where leading edge day rates would be including all your ancillary apps for things like Ensign Edge and then

Maybe including all these things where we're leaving edge field bars and SPF.

On the high spec triples it would be 35 and on the high spec doubles it would be

closer to 25.

And then lots of for me, just on the CAPEX increases, is it fair to say that your outlook for rig demand has improved quite substantially relative to your last call? Yes.

Does the full 165 million assume you'll get to that 150 rig totally talking to our slope and two? I totally talking to our slope and two. I totally talking to our slope and two.

Yeah, yeah, exactly. A lot of this was identified earlier in the year. It takes three or four months to upgrade and reactivate a rig. And as I mentioned earlier in the call, we had plus some weather in the second quarter. We had eight rigs in Canada, for example, already upgraded, reactivated, ready to go to work, but we were delayed on weather almost a month and a half.

They hit the ground in July , so we're having a very strong July already in Canada. We just muted the second quarter results.

Got it. I appreciate the color. I'll turn it back.

kadarSINGING

Thank you. Please, and you may as a reminder, I'm sure you have a push-and-please-prezistar full of item number one.

I think your next question comes from WCARCIA from ADV Kapil markets. Please go ahead.

Hi, I did just a follow up question might as well ask. I know it's still early, but direction could you point to where you think CAPEX could be for next year?

Yeah, good.

Maintenance cap backs and there's going to be less growth.

upgrade CAPEX because most of that's kind of been done in 2022, or I would think of 2023 as being no more than 2022. The maintenance CAPEX usually, you know, between recertifications and noional upgrades on current active fleet. It's usually $800 to $1 million of rigs over running 150 rigs. It'd be about 150 million bucks.

Oh right, Mike. Yeah.

All right, Mike. Yep, that would be. OK.

That's great, thank you very much.

Great, thank you very much.

Mr. Guedes, there are no further questions at this time. Please proceed.

Thank you.

Just to wrap up, so it's clear that with the Ukraine war risk premium trading off and coupled with hints of a recession that oil is down, but the important note is that WTI remains strong and is essentially trading at pre-invasion pricing. One could argue that with prices coming off to the pre-invasion pricing that reduced demand shed will be muted. Also the price of the fuel of the future, natural gas, is down.

This will be required to generate electricity in the future, is rising steadily. A point out we rarely see strong oil and gas pricing occurring at the same time. This will create even more demand for our rig fleet globally. This will create even more demand for our rig fleet globally.

I'm also happy to report that we continue to do our part reducing emissions by converting more rigs over to cleaner burning fuels such as natural gas. Currently we have 30% of our actively today on either high line or natural gas power.

In fact, we are involved in a venture where we will drill a zero emissions well. We will use green hydrogen with hydrogen fuel cell engines to power one of our rigs to drill a zero emissions well. More on that in our next call in three months time. Anyway, we continue to be price makers in the market. We continue to focus on debt reduction while being opportunistic on quick six month or less payout on incremental upgrades. And most importantly our professional crews continue to operate.

at the highest levels of safety. Thank you and look forward to our next call.

Thank you ladies and gentlemen, this concludes your conference for today. Please thank you for participating and as you please disconnect your lines. Thank you for participating and as you please disconnect your lines.