Q1 2023 Ensign Energy Services Inc Earnings Call

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Good afternoon, ladies and gentlemen, and welcome to the Ensign Energy Services, Inc. First quarter 'twenty results conference call. At this time all lines are in listen only mode. Following the presentation, we will conduct a question and al.

Answer session. If at any time during this call you require me to be assistance. Please press star zero for the operator. This call's being recorded on Monday May eight 2023, I would now like to turn the conference over to Nicole Romanow Investor Relations. Please go ahead.

Thank you joelle.

Good morning, and welcome to Ensign Energy services first quarter 2023 conference call and webcast on our call today, Bob Geddes, President and COO.

Great Chief Financial Officer will review and Science first quarter highlights and financial results, followed by our operational update and outlook.

Well then open the call for questions.

Our discussion today may include forward looking statements based upon current expectations and.

Involves thorough 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 defensive 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.

Refer to non-GAAP financial measures such as adjusted EBITDA. Please see our first 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 on to Bob.

Thanks, Nicole good morning, everyone I'll just start with a quick summary.

Before Mike gets into some of the details so a strong quarter with increasing margins year over year and quarter over quarter as tightness in certain rig type classes continues to support the rate increases or the industry realized to the back half of 2022 and into the first quarter 'twenty three <unk>.

Every one of our operational areas U S, Canada and international delivered significant operating day increases the quarter had a few timing drags for projects that were scheduled to start in Q1 have been delayed until the second quarter EBIT.

EBITDA margin jumped another 5% and gross margins on our highest spec rigs jumped about 15%.

<unk> continues to manage its balance sheet spending only $41 million in planned maintenance capital to maintain the high spec fleet in the first quarter the target for Capex maintenance and upgrade is still around 157 million for the year and the focus is reducing debt by $600 million over the next three years I'll turn it over to Mike for a detailed summary of the quarter.

Thanks, a lot yeah look for oilfield services continues to be constructive despite fluctuating global energy commodity prices and macroeconomic headwinds.

Recessionary pressures inflationary concerns financial sector stress and the potential for slowing economies continued to weigh on commodity prices over the short term, however, oilfield services activity and revenue rates continue to be steady year over year.

<unk> first quarter 2023 results reflect meaningful operation operational and financial improvements year over year with it being our best first quarter since 2014.

Operating days were up in the first quarter of 2023 with Canadian operations experiencing a 2% increase the United States, a 25% increase and international operations, showing a 26% increase compared to the first quarter of 2022.

The company generated revenue of $484 1 million in the first quarter of 2023, or 46% increase compared to revenue of $332 7 million generated in the first quarter of the prior year.

EBITDA for the first quarter of 2023, and was $127 3 million and 82% increase from adjusted EBITDA of $70 million in the first quarter of 2022.

The 'twenty 'twenty through 'twenty three increase in adjusted EBITDA can be primarily attributed to improved industry conditions, increasing both drilling and well servicing activity.

Depreciation expense in the first three months of 2023 was $77 9 million, 11% higher than $70 million in the first three months of 2022.

Increase was primarily driven by year over year increase in the United States dollar.

G&A expense in the first quarter of 2023 was $3 4 million higher than the first quarter of 2022.

G&A expense increased due to the sport of increased operational activities annual wage increases and higher foreign exchange rate on the United States dollar translation on a per operating day G&A was up about $200 per day year over year.

Net capital purchases for the quarter were $49 7 million purchase purchases consisted of $8 3 million and upgrade capital and $41 6 million in maintenance capital for a total of $49 9 million offset by sales proceeds of approximately.

200000.

Total debt our total debt net of cash was reduced by $29 1 million since December 31 2022.

Our debt reduction for 2023 of them is targeted to be approximately $200 million.

Target that reduction for the period beginning of 2023 to the end of 2025 is expected to be approximately 600 million the Finnish industry conditions change those targets could be increased or decreased rigor.

Regarding the refinancing of the balance sheet, we do not have any additional news to share our commentary and views are similar to the last quarter discussion. We continue to look at southern options that will best serve the company on a go forward basis overall, our debt metrics continue to improve substantially at the year end 2021, our total net debt to EBITDA was $5 nine eight decreasing to $3 76.

In 2022 and is further decreased to $3 one eight as of March 31 2023.

We'll continue to see this decrease the levels, we have not seen in many years on that note I will turn the call back to Bob.

Thanks, Mike.

So let's walk around the world with an operational update most of you on the call are well aware that Ensign operates a high spec fleet of 232 high spec drill rigs and over 90, well servicing rigs, which employ over 4000 highly trained crews in eight countries around the world.

Yes, Canada, Kuwait, Bahrain, Oman, Australia, Argentina.

And Venezuela.

Let's start with the U S, which provides over half of our EBITDA. We continue to run 55 to 60 rigs in the U S with a strong position in the Permian with 45 rigs active today.

With the Haynesville play softening due to gas prices or sales team has been very active churning rigs over on to new contracts and.

In most cases, where rigs have come off 2022 contracts, we have been able to raise prices to current market prices above of approximately $2000. A day on the contract turn so the margin run rate for the second quarter will be marginally above the first quarter run rate in the U S. In some cases and on Mark current negotiations were more likely to hold.

Rates for six to 12 month term.

Our California business unit continues to get frustrated with ongoing challenges with drilling permits in that state. Our U S team has plans to pull a few of these rigs over into the Rockies for surface hole projects. These light agile highlighting capable electric rigs are great for those type of projects.

We maintain a 7% market share in the lower 48 and see this stabilizing over the rest of 'twenty twenty-three, albeit they're negotiations so tougher today than they were six months ago.

We also see the Permian rig count stable at around 350 drilling rigs active wear.

We're also starting to see operators to drill more into their tier two acreage, which means that to maintain production and not grow just maintain production they will need to drill more wells.

We have close to 25% of our active U S fleet on an enzyme emissions reduction strategy, which is a combination of high line powered rigs and also natural gas engine rigs with best systems battery energy storage.

With the arbitrage between diesel fuel and gas.

The argument becomes more compelling.

As a result, we will continue to see expansion in this area, which not only reduces emissions that provides inside a high margin incremental revenue stream.

Our U S well servicing business had one of the slowest starts out of the gate in 2023 purely due to operator project timing, but we are back up to 285% utilization today and look to stay strong through the rest of the year with no rate degradation, our directional drilling business, mostly Rockies centric continues to deliver with steady work on numerous pre.

Rejects.

Turning to Canada, Canada had a strong operational quarter, but fell short of expected days as the team pushed rates hard into the fourth quarter, which impacted the first quarter activity. We would expect it to get closer to 65 rig out rigs active in the first quarter. The second quarter is already looking much stronger as we will maintain 22 of our high margin high spec rigs over break.

And then grow that to 50 end of July .

Our high spec triples are running well over 70% utilization, which provides continued strong pricing and we're starting to see most of the high spec doubles attract work after breakup with no rate degradation.

We also signed up two of our highest spec triples, one coming off contract in the U S Rockies entre to take or pay contracts in the mid thirties, that's a base rate.

Our Canadian well servicing business here is expecting to get back up to 18 rigs active after breakup and a few of those would be 24 operations.

We still have for say, a roughly $30 million to $40 million of redone, it real estate and miscue, which when sold will go towards debt reduction.

International it's steady as she goes generating steady predictable free cash flow and long term projects. We just commissioned our third rig in Oman onto a five year contract. The other two started up later in 2022, all three rigs are performing well out of the gate. These rigs are all on performance based contracts.

Kuwait, Bahrain, where we have four of our largest rigs continuing to execute in the top decile of our contracting peer group in these countries.

Australia is the first quarter results were frustrated with the delay of two large projects that were delayed until the second quarter. This affected the first quarter results, but will benefit the second quarter results.

In Argentina, we have two super spec triples on long term contracts with day rates moving 10% to 15% on their next turn midyear the.

The situation in Venezuela changes daily, but we're expecting that we may have one of our workover rigs on a drilling rig working by the end of the year.

But don't hold your breath.

On the technology front, our edge drilling solutions product line continues to expand with a lot of the supply chain issues behind us with respect to computer hardware access as a result of the pandemic. We're in the middle of deploying and commissioning another 10 of our edge drilling control systems on our high spec rigs. This.

This attracts roughly 1000 to $500 a day of incremental high margin technology to the rig.

We will have edge actively engaged on most of our super spec and high spec triples by the third quarter with the obvious arbitrage between diesel and natural gas notwithstanding the obvious emission reductions when using high line or natural gas power, we're seeing growing demand for edge emissions reduction strategy.

The product offering ranges from the high line power substation, which rents for $2000 a day to the Standalone best for about the same rate to the full blown natural gas power system with bass and E. M. S engine management system for around $5000. A day. These are all high margin opportunities and they help reduce emissions by as much as 50%.

We have about 10% of the North American fleet on one of these strategies and when we include dual fuel applications, we have roughly a quarter of the fleet on an emissions reduction strategy.

Our a D S. Our automated drill system, which delivers consistent slips slips and automates the routine for the driller has been fully tested and have now commissioned on 10 rigs in the U S. A.

D S charges out for about $1000 a day Ala carte.

So I'll turn it back to the operator for some questions.

Thank you ladies and gentlemen, we will now begin the question and answer session did you have a question. Please press star followed by the one on your Touchtone phone.

Here three Tom prompt acknowledging your request no questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by two if you are using a speakerphone. Please lift the handset before pressing any keys one moment. Please for your first question.

Your first question comes from Aaron Macneil with TD Cowen. Please go ahead.

Good morning, and thanks for taking my questions. Bob I can appreciate you had no meaningful U S gas exposure, but.

Several of your larger competitors do.

I think if not all in all plenty to do.

Declining rig count throughout Q2, so I guess you.

Do you see a rig count declining at all in Q2.

And are you at all concerned about the knock on effects to heightened competition for rigs in the event.

A decrease in activity and I guess, maybe finally, what might be your approach to pricing and if that does play out.

Yeah, No a fair question Eric.

I mean, we started seeing some impact three or four months ago. Some of those rigs in those areas are tied up on term contracts.

You know with the there kind of a tier one contractors are maybe having some etfs.

Things like that but.

We've been able to in the last.

Two to three months anyway turnover about 20 of our rigs onto.

Other contracts.

So we got ahead of it turned them up a little bit more.

As you know we had very little gas exposure.

But it did provide.

At defense of situation, which means and we weren't able to raise rates much. We did have some contract turn where from the prior contracts, we were able to move them up a couple thousand dollars a day to a more of a leading edge, but I would suggest that the you know the leading edge has probably has probably degraded a little.

And people are looking for some term as a defensive strategy, California is a little bit of a unique situation. All by itself. I mentioned, you know we've got at least one rig and one of them.

Our electric 80 yards smaller rigs moving over into the Rockies to do some shallow a surface hole projects.

And who knows whenever if California a.

Well start to straighten up but it is steady I'll say that in California, but.

We're probably down about four or five rigs from where we expect it to be in the first quarter.

Which which you know had some effect on our first quarter results.

Understood Mike maybe one for you I realize there is nothing specific in the disclosures, but on the prior conference call you did suggest that youre going to kick off our.

Debt refinancing following Q1 results and so you know maybe just a bit of an update there or is that still the case can you walk us through the potential timeline and maybe what we can expect from you over the coming weeks and months.

Yeah for sure no concrete sort of additional information to share. So we will definitely look at.

Reaching out to the different areas and looking at what's going to be the best approach going forward. So like I said, our debt metrics have improved quarter over quarter as well as year over year. So.

We think that's gonna be a strength going into this type of market, but.

Yeah, No. We continue to look at a bunch of different options and will slightly options I would give the company the best maneuverability going forward.

Not to pin you down to a specific timeline, Mike, but like do you think.

I'll be asking the same question on the next conference call or do you think you'll have.

I can't say for sure I mean, the facility we will have to go after the deal was something by Elyse October So I'd say in the next few months for sure. It will we'll be moving things, along but like I can't commit to a firm timeline.

Fair enough Alright, I'll turn it over thanks guys.

Okay.

Your next question comes from Keith Mackey with RBC capital markets. Please go ahead.

Hi, good morning, and thanks for taking my questions just maybe to start out in the international.

Bob or Mike can you kind of just give us a bit more color on the impact of the delays in Australia and then what what you think a good run rate for Q2 will be given those projects starting up as well as the old one Rick.

Yes.

Yeah.

The Australian projects, probably affected our Q1 by a couple of million dollars, so that will push into Q2.

The third of mine rig was.

It came on on stream on as scheduled so the our first quarter results weren't necessarily too impacted by that although we we thought we may have got going a month earlier, we were ready to go but the operator wasn't so you know we've got a good steady run rate and in the second quarter.

I'm not sure Mike if you want to expand on what effect that has Oh boy, what Oman youre going to see one additional rig for the full quarter pretty much the full quarter of Q2, and then we should see sort of two of our rigs start up in Australia over the next month or two.

So for a minute.

And operating standpoint should be probably one and a half to two kind of net new additional rigs for Q2 of 2023.

Okay got it thanks for that and maybe just a little bit on Canada.

So operating days didn't really grow much from 2021 to 2022 or 2022% in 2023 in Q1 can.

You mentioned pushing rates hard in Q4 as part of the reason for that can you just give us a little bit more detail on the discussions that you've had bandwidth clients and and what what that'll mean for the for the second half of the year.

Right right. So the I mean, the first quarter is always prefaced by what happens in the October November bidding cycle.

Before that and.

We are as we started pushing rates and holding rates are into the first quarter.

On certain red categories. We found some of the competition are not not as aggressive on pricing.

And we lost eight to 10 beds, basically which put us down about seven or eight rigs into the into the first quarter and it's it's hard to claw that back when you're going into the first quarter. So that was a that was a bet that we made of course the other rigs are benefited from our fleet benefited from that.

Hold on on on.

On rates or a push and depending on the rig category.

We're down at 22 rigs currently we've got contracts that will take us to 50 rigs by July So you see us you'll see US go from about 100 rigs.

Currently to back up to about 125.

Here quickly.

July so.

So we're not we're not going to be reducing the number of rigs that we have active.

When we look at the end of the first quarter as compared to the end of the second quarter were back up real quick.

As compared to some of our peers.

Who may see some degradation, we're seeing some clients.

We use some other operator or other contractors are through the winter coming back to us and saying Hey.

You know, we went with a lower price for the winter.

Have you got this rig available after breakup. So there are there.

Yeah.

They werent too I guess the performance wasn't as expected in the first quarter with some of the other.

Contractors, but anyway will.

We'll be back up to 50 again by July here.

Got it and just maybe to follow on that what are you seeing now in the Canadian market.

Yes.

Is most of the competition and I know, it's always priced but has it.

Clearly impacted how things went in Q1 has the conversation shifted at all from.

Customers looking for the lowest price to okay. Now, it's more about operational execution and availability or or you know or are you still finding that whatever work. There is youre, losing a similar portion due to price.

Yeah, well we're.

You know, we're always price sensitive obviously, we misread.

The market in certain rig categories going into the first quarter.

Being aggressive into the fourth quarter for first quarter pricing, but you know, we're we're definitely seeing.

Price is always.

Factor, but operational excellence and performing with less downtime is as always a key we represent less than a third of the operation on on a daily basis. So the operator.

Is is willing to take.

Take a lower price, sometimes but not always it depends on the performance that he picks up so it's a combination of both I would suggest that.

We've been able to now get our price in the second quarter that were bidding into the fourth quarter.

It's created some first quarter frustration, so the market's kind of coming back to us and here's an example in the last 10 bids. We've won eight of the last 10 bids here in the last two weeks.

Okay. Thanks for the color I'll turn it back.

Your next question comes from coal Pereira with Stifel. Please go ahead.

Good morning, all Bob you talked a little bit.

U S drilling margins improving into Q2.

You know a lot of your U S peers have talked about their margins sort of flattening out from there.

Kind of what we should expect a with enzyme just given some of the dynamics in the current market.

Yeah, I think that's fair.

A lot of it has to do with contract cadence.

Their call so.

We're certainly not able to push pricing in some cases, you're having to throw a few things and to to hold the market because you've got a tier two contractor.

Kevin Nipping at your heels, there, but yeah generally I would say that.

You know, we will see some rate progression because of the contract turnover.

From the first quarter in the second quarter, but it'll probably normalize through the third quarter and we'll see what happens in the fourth quarter.

Got it thanks and.

Can you just add some commentary around what you're seeing in the pricing environment for Super spec rigs in Canada, just in terms of the supply and demand fundamentals and how how rates are moving as a result.

Yeah.

You know there is a big.

Big bifurcation of course, the the high spec triples.

Our our very tight markets still those rates are not going down at all on any contract turnovers, we're seeing.

That go out three to $5000 a day in some cases it depends on the number of rigs that are being offered.

On the high spec doubles as I mentioned before we're starting to.

See the price that we put out there in the fourth quarter that that felt some resistance now get traction because operators are going you know what.

We want that kind of rig.

On the on the more conventional rigs, it's a very tough and type business still.

Okay.

Got it thanks.

Mike just on the on the interest expense side I mean.

Cash interest costs relatively high this quarter anything one time in there or is that kind of a reasonable run rate.

For the credit facility and and how should we also be thinking about lease payments for 2023.

For the interest we've dropped about 100 bips.

Starting from.

Starting in Q2.

Our facility. So you saw sort of a full fully priced facility.

In Q1.

So your answer Scott start to trend downwards.

So I wouldnt, probably use a full run rates I probably include probably 100 to 150 bps decrease overall for 2023.

For lease cost.

We expect that to normalize kind of in Q2 Q3 to the historically, what we have and we had some leased equipment that.

We had in Q4 and Q1.

And then that's going to normalize for the remainder of the year.

Okay perfect. Thanks, and just one last quick one I mean, what are you guys seeing in terms of the impact of wildfires are on your operations so far.

Yeah, Yeah. It's.

Having some effect we've got three rigs that have been evacuated four rigs on watch.

Of course, all the rigs are on standby without crews.

We're monitoring it hour by hour.

It is cooling off and there has been some rain so let's knock on wood.

The worst is probably behind us.

No incidents with respect to our personnel.

And at this point and no impact on on any of our rig assets.

Got it Okay. That's all for me, Thanks, I'll turn it back.

Thanks, Paul.

Your next question comes from weak car side with <unk> capital markets. Please go ahead.

Thank you.

Bob You mentioned that there were 10 bids that you've one the last two weeks could you maybe talk about what the rates were for these winning bids versus.

The rates that they realized in the <unk>.

In the last quarter.

Yeah there.

As I mentioned there they are the same they havent gone up or down.

On the high spec triples, they went up by about $3000 a day, but.

Our average run rate for the highest spec double and the.

At the high spec level, specifically are about the same a conventional rigs so probably stepped down a little bit.

Okay.

And then.

You mentioned.

I missed a little bit you said with the length of the wild Wild fires there were three three rigs that were evacuated.

And then there was how many one rig on watch what would you say.

Yeah, we had three rigs evacuated and four rigs are on watch where they are the fires within 50 50 kilometers. So their that's that's kind of a radius that they are.

Pending on the wins of course, they and keep an eye on.

Any thoughts on how many rigs have been affected our industry rigs have been affected because of wildfires.

Oh. Good question. If you look at the map of where all the wildfires are it seems to be where all the industry activity is is kind of interesting situation, but.

There's yeah, I would say probably half of them.

Okay.

I mean, the wildfires are spotty, all over west and north of Edmonton and.

North and west of Calgary more more northern West of Drayton Valley, I'd say yeah.

Okay, and then in terms of California look you you mentioned a few things you're moving one rig.

What's the is it so you have now what five or six rigs running in California, what's the number.

Correct.

And how do you I know, it's got a phone yourself is very difficult to predict where the rig count could go but anything changing from a permitting perspective are you seeing any progress there.

And anything that you could add.

Not really just as soon as something changes it ends up in the athletic Court.

<unk> Court I'm, sorry, and.

Everything stops again right.

Yeah. It's.

It stop go stop go stop go the well servicing side got hit hard in the first quarter.

And California didn't come out of the gate as hard as we thought but we're back up to 85% utilization with our well service rigs so.

That part is coming back strong.

And at the same kind of pricing level as before.

Oh, yeah yeah.

Yeah, we haven't had to reduce our pricing at all.

No.

The fund has always been an issue with <unk> is it particularly bad now is it getting worse or is it just like you know the periodic issues that you see every couple of years.

Well the the permitting of the operators there are building on a construct of of.

If we can drill the well emissions free can we accelerate our permit and that's getting some traction so.

All of a sudden you know rigs that have high line capability or.

Perhaps.

Our our hydrogen.

Emission free project May get some momentum again.

Nicole's on top of that.

So we'll see but it is California.

Yeah.

[laughter].

Thank you very much so appreciate the color. Thanks Waqar.

Alright.

Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by one your next question comes from Joseph.

Scatter with scatter Energy Research research. Please go ahead.

Good morning, Bob.

And.

Mike and Nicol.

Going a little more on the wildfires.

Nothing happens and the ones that are on watch how quickly do you need to get the equipment taken down and moved and is that something that.

You guys have.

<unk> for that and places where you would move the rigs to it have you got those kind of yeah.

Yeah.

Yeah, we have an emergency response plan in and truckers on.

On standby for our high value modes.

The challenge is always Hum access to the rig and forestry will shut down roads and not allow any access into it.

That's the situation on three of our rigs.

Every every morning, we're able to.

Get a shop or a small plant in there along with the operator to kind of take a look at what's going on in the site. It seems that the worst is behind us.

Cause it's gotten cooler a little wind and we've had some rain so.

You know that's that's the situation as I mentioned, we Havent had any of our assets are affected by any degree a couple of shacks here or there on per on the peripheral perimeter.

But that's about it.

Okay. Okay.

And the safety of all the crews manpower and correct, absolutely our first and foremost.

On the number of marketed rigs you've gone from $2 47 to $2 32 down to 15 are those rigs now are ones that you have sold or are they being taken and used parts for other rigs or what.

Is this a permanent decline of 15 rigs.

Yeah Yeah.

It's a it's been an evolution of a move towards Upgradable highest spec rigs as we worked through the market.

Every year, we decommission.

Roughly yeah.

5% of the fleet.

If you think of it.

Having a 20 to 30 year actuarial.

Lifespans so.

15 rigs are they get decommissioned the spare parts get harvested we generally cut upset the mast and subs. So they have they basically have no more further use and they don't end up in the market.

A tier two or tier three application that we may compete against somewhere else in the world.

So they they serve their useful life and they they just get decommissioned.

Alright, that's it from me thanks very much.

Your next question comes from weaker side with ATB capital markets. Please go ahead yeah.

Yeah. Thanks.

Getting you back in the queue I forgot to ask you above in terms of the you know if if the rigs are evacuated because of wildfire how does the contract work.

Do you still get paid for those days when the rig is down our customer can declare force majeure and not pay how does it work.

Yeah. It's.

Generally starts off standby without crew.

And then it can turn into a position where it's a force measure.

But you.

You know generally the client works with us and it's standby without crew.

Of course, the rigs are fully insured.

But where we're hoping we don't get to that position.

Sure Okay.

Thank you very much.

Alright.

There are no further questions at this time. Please proceed.

Thank you operator, so just to wrap up the macro construct for the oil business remains strong for the back half of 2023 for gas it'll be well into 2024 before we see demand for gas wells increasing again.

Flipping commodity prices is generally put a pause in activity growth and rate momentum in general, but certain rig type classes still remains very tight and no rate degradation.

Especially in Canada, and unexpected to be running around 125 rigs in 50 to 60, well service rigs into the third quarter and remaining part of the year and <unk> seen leading edge price stabilize and we continue to build out term to help derisk the future and reinforce our debt reduction targets and design is $1 6 billion of contracted revenue.

Forward with 60% of the fleet tied up under contract and over 30% of the active fleet on long term contract of six months or greater the.

The weighted average contract tenure is about one year and the average age of the fleet is roughly 11 years old with another 20 years of economic life ahead of it and design is fully committed to the target of quickly delevering.

Reducing $600 million of debt over the next three years, we look forward to our next call in three months.

Thank you.

Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and I say you. Please disconnect your lines.

Okay.

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