Q4 2022 Ensign Energy Services Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the Ensign Energy Services, Inc. Fourth quarter 2022 results conference call. At this time all lines are in a listen only mode. Following the presentation. We will conduct a question and answer session. If at any time during this call you require.
Your immediate assistance. Please press star zero for the operator this call is being recorded on Friday March three 2023.
I would now like to turn the conference over to Nicole.
Romano Investor Relations. Please go ahead.
Thank you Michelle.
Good morning, and welcome to Ensign Energy services fourth quarter and year end 2022 conference call or webcast on our call today, Bob Geddes, President and CEO and Mike Gray Chief Financial Officer will review <unk> fourth quarter and year end 2022 highlights and financial results followed by our operational update and outlook well then.
On the call for questions.
Our discussion today may include forward looking statements based upon current expectations and involve several business risks and uncertainties.
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 defensive lawsuits the ability of oil and gas companies to pay accounts receivable balances.
And 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 fourth quarter and year end 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.
So ensign as you know operates a fleet of 230 high spec drilling rigs in eight different countries around the world along with roughly a 100 well service rigs in North America. So we operate about $3 billion assets worldwide employing about 7000 people.
2022 was a year coming out of Covid, where we upgraded and reactivated 31 drill rigs, which were all covered with long term contracts with a payout of incremental capital in less than 12 months also in the fourth quarter, we divested our Canadian directional drilling business in exchange for shares of the publicly traded direction drilling consolidator, which.
As already doubled in value, we continue to see the drilling contractors space focus on margin over market share, which helps provide this industry better returns necessary to support new technology development and returns to our shareholders. In particular interest you will see in our press release regarding our policy of the payments to employees and management is capped at 5% of EBA.
Close to 30% of the stock is owned by management directors reinforcing. The fact that we are very aligned with our shareholders I'll turn it over to Mike for a summary.
Hey, Bob the outlook for oilfield services continues to be positive with year over year increases in oilfield services demand and activity inflation.
Inflation concerns have continued to prompt central banks to tighten monetary policies, leading to uncertainty for a global economic.
The economies.
Factors continue to impact global energy commodity prices and that uncertainty in the macroeconomic outlook over the short term. Despite these macro headwinds enzymes fourth quarter in 2022 year end results reflect meaningful improvements year over year, both operational as well as financially.
Total operating days were up in the fourth quarter of 2022 with Canadian operations reporting an increase of 21% United States operations, a 36% increase in international operations, a 14% increase in operating days compared to the fourth quarter of 2021.
For the year ended December 31, 2022 total operating days were up with the Canadian operations reporting a 51% increase United States operations, a 46% increase and an 11% increase in international operating days compared with the prior year.
The company generated revenue of $468 million in the fourth quarter of 2022, 58% increase compared with revenue of $296 2 million generated in the fourth quarter of the prior year for the year ended December 31, 2022, the company generated revenue of $1 6 billion or 58% increase compared with revenue of $996 million.
Generated in the prior year.
Adjusted EBITDA for the fourth quarter of 2022 was 130 million higher by $72 1 million and adjusted EBITDA was $57 9 million in the fourth quarter of 2021.
Adjusted EBITDA for the year ended December 31, 2022, with $373 6 million or 75% increase compared to adjusted EBITDA of $213 2 million generated in the prior year.
2022 increase in adjusted EBITDA is primarily due to improving industry conditions caused by a supportive commodity prices.
Adjusted EBITDA margins for the fourth quarter of 2022 was 27, 8%, which is a large improvement from the 19, 5% margins that we had in the fourth quarter of 2021, we continue to expect margins to increase into 2023.
G&A expense for the fourth quarter of 2022 was $12 8 million compared with $10 2 million in the fourth quarter of 2021.
G&A expense totaled $48 6 million for the year ended December 31, 2022, compared with $38 2 million for the same period in 2021.
G&A expense increased due to increased operational activity in reinstatement of salary rollbacks taken during the downturn and annual wage increases.
Further increasing the G&A expense was the negative foreign exchange translation translation on converting U S denominated expenses.
Net capital expenditures for the fourth quarter of 2022 totaled $40 6 million compared to net capital expenditures of $23 million in the corresponding period of 2021.
Net capital expenditures during the year ended 2022 totaled $126 8 million compared to $58 million in the corresponding period of 2021 or.
For 2023, Capex budget is set at $157 million, which primarily relates to maintenance capital.
Long term debt net of cash was reduced by $51 million since December 31 2021, our.
Our debt reduction target for 2023 is approximately $200 million and our expectation is to reduce debt by $600 million by the end of 2025 with industry conditions permitting.
Also to note during the fourth quarter the company sold its Canadian directional business to Cathedral energy services for $5 million.
Common shares which translate to approximately 7 million shares on that note I will pass the call back to Bob.
Alright. Thanks.
Today, we have Russ.
125 drilling rigs are roughly 55% of our worldwide drilling site active in under contract today.
We also have 55 of our well servicing rigs active in North America, which is about 60% of our marketed fleet of 100, well service rigs.
Starting with our largest business unit in the U S. We operate in various regions, California, the Rockies and our primary focus in the Permian.
We have 43 of our Super and high spec fleet active and they are all rich Permian today 10 in the Rockies and five in California.
I'll point out that we are not active in the Haynesville gas play and with very few of our U S rigs working on gas prospects, we're generally not seeing the effects of the challenging gas market on our rig activity today.
The Rockies continue to pivot over to more highlight power applications with our high spec AC rigs with this growing market, we see the opportunity to differentiate ensign further by applying a highlight power kits Ala carte coupled with our edge power management system. This helps to reduce emissions and fuel costs, California continues to be an enigma.
Give us more energy, but don't drill on buyback backyard is how it goes the infliction continues as drilling permits are restricted nonetheless, we see a path forward, where we will have a base of five rigs active through the rest of the year, possibly moving to add three or four more depending on permit flow leave.
Leading edge rates for our Super Super spec triples in the U S are close to $40 a day. When we include all the Ala carte items like pipe loaders edge automated drill rig control systems et cetera.
Canada, we have been steady with 50 high spec drill rigs operating and approaching breakup now we have seen strong demand for high spec rigs are high spec pad rigs over breakup, we expect to keep 20% to 25 of these high spec pad rigs running over breakup and then building up over breakup or I'm, sorry break the building up after <unk>.
Back to 50 rigs into the third quarter, and then 60 by year end happy to point out we just closed the deal with a large Canadian operator to tie up two of our high spec triples on two year contracts at rates all of them close to $40000. A day one of the rigs will be transferred up from our U S operation.
As it completes its contract there that's in the Rockies.
As you know we have the most diverse fleet in Canada with a fleet of 112 highest spec rigs ranging from 800 horsepower all the way to 303000 horsepower, sorry, and variations of high spec singles high spec doubles and high spec triples.
The Canadian well service fleet has 16 active today with growing business through the summer and rest of the year. We have a few of those rigs that are working on 24 day operations.
Moving to International Australia has 714 operating today, Australia has been somewhat of a disappointment through 2022 as costs continue to climb faster than the day rate increases on contract turnover is there still a very tough place to make a return in the fourth quarter and turning to Oman, we activated two of our high spec <unk> in our mind with us.
Third one starting up here in about a month.
These three rigs are tied up on five year long term contracts and they're also on performance based contracts, which enhance our margins.
We just re contracted our second highest spec 15 out of horsepower rig in Argentina, which provides full contract coverage out. Another 12 months, we're careful not to sign long term contracts over one year in Argentina, so as to be able to pass on rate increases and stay ahead of inflation.
You will recall, we have eight cold stacked rigs in Venezuela, it looks like one of our major clients. There may be starting up operations in the fourth quarter, which may see one of our drill rigs go back to work very preliminary stages at this point, Kuwait, Bahrain, where we have four rigs high spec 2003 thousand horsepower rigs on long term contracts they.
To run laptops with operational excellence in the top decile.
We also continue to expand our edge drilling solution technology on our rigs around the world and have a backlog today of about 15 systems to be deployed and installed.
Our average product revenue for <unk> is around $1500 per day, which was high margins typical of technology products is rapidly becoming a growing EBITDA generator for ensign year over year, so with that I'll turn the call 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 star followed by the one on your Touchtone phone.
You'll hear us retool them prompt acknowledging your request should you wish to decline from the polling process. Please press the star followed by the two.
If you are using a speaker phone please lift the handset before entering any keys one moment. Please for your first question.
Your first question comes from Aaron Macneil from TD Cowen. Please go ahead.
Good morning, all thanks for taking my questions.
Bob one of your competitors often speaks to being sold out on <unk>.
AC triples in Canada, I assume you're probably in the same level, but to the extent that we see incremental.
Incremental demand growth for this rig class over the coming years can you speak to how you might participate in any supply growth in the montney or other.
Hi.
<unk>, just given the blueberry River and I guess.
And LNG, Canada, I guess, what im getting at is is this something that you are expecting to invest in over the coming years ETF has started.
Sit on your hands given your debt reduction targets.
Yes, no I think that.
To be clear nothing has been released as far as.
The consequences of the blueberry decision.
There's a lot of conversation on how that will affect drilling prospects that will be positive in any event.
As you saw as I just mentioned.
And we have a.
Our Rockies gas rig that took 200 horsepower high spec rig that.
We're able to move forward after it finishes its contract put onto a two year contract up here close to $40000 a day.
We also have two other high spec rigs in Canada.
We're ready to go to work.
And could fill that demand so I would suggest that.
What is sold out of rigs mean in Canada.
We've got capacity for two more to put to work.
Would we would we invest in a new one no I think where we need to see rates.
Well over 50% closer to 55 before wanted to get their head around putting any investment in it. So we got a long way to go and you also.
I'm not worried about the <unk>.
Well into the <unk>.
Coastal link pipeline.
We have enough forward view with our clients that they seem to be pretty rational.
And what they need for a rig fleet moving forward. So I don't think candidate needs more rigs is where I'm going.
Understood.
Mike sticking with sort of the debt.
Can you walk us through what I've got.
Refinancing might look like.
In terms of bolt timing composition, if you want to be so bold any indications of water.
Blended cost of debt might look like.
Sure. So right now I mean, we're looking at all options.
And really looking at what's going to be the most beneficial to the company and shareholders going forward, what's going to have the lowest cost.
Cost of debt.
So I'd say, we have nothing specific we can share, but when we look at it there are several options out there it's definitely a high yield market has improved from where it was in the prior year. Our debt metrics are also really improved as well. So our belief was always to get a couple of good quarters under our belt as it's easier to do to have discussions with potential investors.
<unk>.
Debtholders on having.
Actual results in the inset of what things could be so with Q4 being operationally and financially quite strong and with Q1 2023, and the whole deemed quite operationally strong as well as financially.
We will really look to probably.
Potentially kick something I'll, probably and that May after the Q1 results just giving us another quarter of operational performance and like I said, our debt to EBITDA metrics have gone down substantially from where they were in early 2022 of over five times debt to EBITDA.
Two.
So for now until 2022, and then we will see it getting into the twos and 2023 so.
So it's a lot easier to get.
Behind you and then to go out and market off of the story and then instead of.
Having to say well this is what the future looks like so nothing specific we can get into but.
There's options out there that we're looking at.
Understood, maybe I'll sneak one more in Bob.
Could you give us a sense of.
What the potential lift could be in Australia in terms of the number of rigs you could put to work in.
The timing might look like.
Yeah I think.
As most of the gas that was supposedly.
Gas use for utility consumption and export so they've got a nice arbitrage on.
The government put a $12 cap on.
Which is.
It sounds like a nice number to put a cap on gas for internal consumption. So it's.
The interesting thing is.
As you know gas is a very.
Geographic specific situation, but.
Yeah, we just see it vary.
Normal there there is.
Very few clients in Australia, it's a tough place to do business.
Inflation has been pretty rapid it was the last one to come out of Covid. So there was a lot of cost there.
A lot of business frustration over the last three years there.
And Australia is.
Sometimes to me it feels.
Bureaucratically, a little bit like California, and not to the same extent they do like resources because they.
They exploit them and they consume them so.
Not to read too much into that but.
Australia, because it's gas is not seeing the same uptick like you see in other areas of the oily.
Understood.
Thanks, everyone I'll turn it over.
Thanks Aaron.
Thank you. The next question comes from coal.
Stifel. Please go ahead.
Good morning, everyone. So it's been about a month since a lot of your U S. Driller peers reported I'm. Just curious I mean, you mentioned you don't have a ton of gas exposure, but have you seen any weakening at all of our leading edge day rates in the U S.
No not any weakening as.
As you know, we are pushing up rates quarter over quarter, and we've kind of landed on the.
The low thirties mid <unk> as a base rate before any Ala carte items.
Our contracts have.
Been turning over.
Into those numbers consistently even as of yesterday, we signed another one up.
We're tending to.
Through the buildup in rates, we tend to term out.
On six month intervals as we move into where we see some stability in rates, we tend to term out in one to two year contracts.
To move term, we've probably added a $100 million of.
Of contract.
One 1 billion EBITDA of contract term forward over the last six months with that strategy. So no.
There are certainly not seeing any tension on bidding down now.
Got it and on the two Canadian rigs contracted any additional details you can give on that was that related to LNG work and you said one was for.
From the U S was the other just idle in Canada, and then what would any upgrade cost for those rigs be yes, yes.
Yes. Good question Paul the other rig was currently contracted with this particular, operator and so they wanted to extend its contract out two years and add an additional sister rig the sister rig to that rig which.
Was shipped out in the U S three or four years ago.
Was.
Canadian rig so it's kind of coming back to Canada, tying it up with the same client on a two year term with with rates as I mentioned to you there.
All in closer to $40000 a day as far as what its drilling its duvernay.
Duvernay staff so liquids.
It's not dry gas by any means now.
And to take Okay got it.
And then so I guess my takeaway from that would be that the high day rate is more.
To support the customer you know wanting to make sure. These rigs are available as opposed to supporting some kind of upgrade capex is that fair.
Correct. There is no there is no capex involved in any of these two rigs zero.
The operators paying for them.
Okay perfect.
And you know obviously a lot of talk about the high spec market in Canada, which means pretty healthy I mean, what are you.
Being in the double market right now I mean, obviously, it's it's not quite as tight but I assume are still somewhat positive.
Yes, absolutely.
There's just a lot more.
So a lot more conventional doubles and then the bridge into a high spec double.
Is.
As.
Defined by Southern 500, PSA operating system high torque top drive.
Ability to move as a pad rig.
That type of thing we're seeing.
Good demand in our highest spec doubles, we're signing those close to $25000. A day now so they are kind of filling in that.
The GAAP behind the.
The high spec triples.
Hi spec doubles.
Start to lap over into the bottom end of the high spec triples.
So you can see the arbitrage on the on the rates that's pulling our high spec double rates up and also as you see the Clearwater move more into pad type drilling.
Pad type drilling of course suggests that you want.
Spec double because you can rack back more capacity than let's say a high spec single, we only have four high spec singles, but we've got a lot of high spec double so we're in a pretty good position to to run that market a little bit.
Okay perfect.
Mike can you give any details on the split of the Capex and you know how many rigs you might plan to upgrade this year.
Yes, so our Capex budget was primarily maintenance capital.
We'll kind of look at growth capital opportunities as they come up but definitely conversations with customers as it has to be funded by them.
So yes, the $157 million is predominantly maintenance capital and then we will like I said.
So as we go throughout 2023.
Okay got it that's all for me, Thanks, I'll turn it back.
Paul.
Thank you once again, ladies and gentlemen, if you do have a question. Please press star one at this time.
The next question comes from Waco.
ETB capital markets. Please go ahead go ahead.
Thank you and good morning.
But since then.
Beginning of the year, how has your rig count in the U S changed.
It's been very stable.
The buildup was 2022.
Right now we're stable running about 60 rigs.
Give or take on any given day in the U S.
And what's your outlook for the next lets say you know.
Three to six months.
So as I mentioned.
We've been looking for term and re contracting.
And.
Understanding that there may be some gas rates.
We've been ahead of that.
We saw that coming so we have been tying up our clients on longer term contracts.
At current.
Current rates in the <unk> as we mentioned there.
I see the we go from California East, California of course is all dependent on on licensing.
And that seems to.
Be a little bit of a teaser there.
We think there'll be a clear path to.
Another three or four rigs there.
We have one of our.
One of our rigs out of California, It's an electric Super single that'll be deployed into the Rockies tied into high line power to do surface holes very efficient doing that.
And in the Rockies looks to be quite stable for us.
It'll be down one rig that we are deploying back to Canada, a 1500 horsepower Super spec rig and then the Permian, we're very steady with our client base in the Permian.
And we're seeing we're seeing some of the clients.
Actively.
Putting putting out.
One to two year contracts.
At these rates because they've seen quite an aggressive 2022 quarter over quarter rate increase and.
I think they are a little fearful that that might continue through 2023.
Plus they also want to.
Secure their best rigs that's the other thing they are doing.
Okay and in the Canadian market Bob.
How many super Triple rigs do you have.
Well in the Canadian market.
Little different like in Hain.
Permian Super spec Triple of course, as <unk>, III pumps, and a high torque top drive because youre drilling with five and a half inch pipe going out four miles you need the three pumps.
High torque top drive in Canada, we're not drilling out with those horizons with those those.
A hole diameters so.
The concept of the Super spec Triple in Canada.
Just isn't there the high spec triples.
Getting the same rates.
Without having to add a third pump and the fourth generator all of our all of our high spec rigs or triples in Canada have.
Our capacity to run both pumps full power in the high torque top drive and we're seeing more demand now in Canada for the <unk>.
Automated drilling rig controls.
So the <unk>, which is our.
Auto back as kind of an auto connection.
Of automation on the rig which drives consistent.
Connection times and back to bottom, which operators are saying, we don't need to go faster we need to be consistent much like.
So it's becoming it's taking a page out of manufacturing.
Where mark operators are more concerned about consistent.
Slips to slips and they are going faster slipstick slips, it's already going fast enough.
So how many of these are high spec Super Triple rigs do you have.
In Canada, we've got in the Triple side, we've got about 25.
And what's the utilization rate now for those.
Well it would be.
It would be one of them of course is a 3000 horsepower rig.
So it would be 22 to five by 'twenty five.
Okay, Mike what's that.
And then do you have.
So you have now one incremental thinking gaps that you'd get to 'twenty three with that and then you have more coming from the U S. Okay, correct. So you'll be going to just make sure I get the math right, so you'd be going to 'twenty pull it out of 26.
No we'd be going to 'twenty three I think one of your math is that.
One additional one coming out of the U S. The other one that's.
I mentioned in that two rig deal with with a major is already working so we will probably end up at 23 23 or 26.
Okay.
Yes.
That's good.
And.
As you look forward lets say if over the next.
12 months and that would go a little bit longer than you would describe for.
Between the other international markets, where do you see the most growth.
The most growth.
I would say.
We're back up and running in Oman.
And we had him on shutdown for about two or three years.
And we're starting to see.
Some more activity for our our ADR type are shallower ADR rigs there.
So that may improve.
Through the year of course early discussions or any capital would have to be funded by the operator or we're not interested in the deal.
Other than that I cannot I kind of look at 'twenty three is a year of running steadily 130 rigs and harvesting.
Okay.
And Mike.
Some of your.
He is the board daily drilling margins.
And.
Is that something that you can let us know.
Maybe directionally like how much incremental change there has been or maybe even absolute numbers.
Daily drilling margin is in dollars per rig day in the U S and Canada.
Oh, we could look at potentially adding some additional disclosure in the future but for this call know, we wouldn't be able to get into detail.
But definitely I mean in my statements I mean, EBITDA margins have increased from 19, 5% in 2022 of Q4 to 27, 8% of Q4 of this year. So.
Definitely we are seeing an increase and we'll see that probably get into I'd say the low thirty's into 2023.
With a target.
This business full cycle has to see peaks closer to 50%.
The rig margin Yep Yep.
Great. Thank.
Thank you very much thank.
Thanks Scott.
Thank you. The next question comes from Keith Mckey of RBC. Please go ahead.
Okay.
Hi, good morning, and thanks for taking my questions. The first one here is.
So if we assume that some of the haynesville rigs or gas rigs make their way to the Permian.
Bob Mike what do you think the breakeven point is for rates were.
It's worth it for you or another operator.
To let a rig go down versus accepting a lower rate to remain to remain utilized historically the rates would go down to a certain level and it's worth it to keep the rigs working that reprice in the fleet at that lower level, but how are you and your competitors you think thinking about.
That now is that as that breakeven rate changed will you lay down a rig if you can't get 35 versus 36000 per day or how does that how does that math work.
Yes, no it's.
We're just not.
Getting into those conversations we find that because we've been you know.
My experience has taught me a years over a year that.
A lot of money for an operator to change to change horses Youre on a pad you got to complete the pad you've.
<unk> got a team of the rig the directional crew.
The operators drilling staff and it becomes a finely tuned.
Team. So you know I've always had.
Clients talk to us and say you know what they would have to see a $5000 a day drop before they would even consider making a change. So it's really it's really a non issue.
In our mind as far as.
Our breakeven point.
If we if we're making at <unk>.
Close to 30% margins.
If there was some suggestion that someone would drop that rate.
By 30% to breakeven to get work I don't see that happening at all I mean, the high spec and Super spec triples youth.
Usually anything over 60% utilization you can continue to hold price and get it. So it would be it would be very awkward for four contractor too.
Drop as rates, he would probably be more likely to.
Drop the rig and be just down one rig and what the sales staff and to go and find work for it.
Got it understood now just on the on the debt pay down 200 million or.
Year.
Are you contemplating that.
Repaying.
That with a 100% of your free cash flow like I guess the question is is that 200 million, while free cash flow forecast for 2023 or is there some cushion in there for holding cash on the balance sheet.
There are definitely some cushion so like I said there are some selective upgrade capital. It makes economic sense, we would have the ability to look at that as well so.
That's a target based on what we're seeing with our forecast to be able to.
They start to Delever, but also give us some flexibility to look at opportunities as they arise.
To add to Mike's comment, we don't look at upgrade capital it doesn't pay out in Alaska.
Less than one year, and we target six months.
Okay. Thanks very much.
Thank you.
Thank you there are no further questions I will turn the call back to Bob Geddes for closing remarks.
Thank you operator once again.
We saw 2022 as being the year, where enzyme deploy capital to upgrade and reactivate 31 rigs, which along with the rest of our active fleet will provide us a fleet of 130 rigs active every day generating strong cash flow, which will provide as Mike pointed out unnecessary free cash flow to pay down roughly $600 million of debt over the next three years.
Pending on the market of course I'd like to thank all of our employees around the world, whom without this focus and hard work. None of these strong results would have materialized I would also like to thank you the shareholders for your support and look forward to sharing our first quarter 'twenty three results on our next call. Thank you.
Ladies and gentlemen, this does conclude the conference call for today.
You for your participation and ask that you. Please disconnect your lines.
Okay.
Okay.
Yes.
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Yes.
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