Q2 2023 Ensign Energy Services Inc Earnings Call
Okay.
Okay.
Okay.
Okay.
Okay.
[music].
Good day, ladies and gentlemen, and welcome to the Ensign Energy Services, Inc. Second quarter 2023 results conference call.
At this time all lines are in a listen only mode.
The presentation, we will conduct a question and answer session if.
If at any time during this call you require immediate assistance. Please press star zero for the operator. This call is being recorded on Friday August 4th 2023.
I'd now like to turn the conference over to Nicole Romanow. Please go ahead.
Thank you Michele good morning, and welcome to Ensign Energy services second quarter conference call and webcast on our call today, Bob Geddes, President and COO and Mike Gray Chief Financial Officer, who will review <unk> second quarter 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 lawsuits the ability of oil and gas companies to pay accounts receivable balances or other unforeseen conditions, which could impact the demand for the services supplied by the company.
Additionally, our discussion today may refer to non-GAAP financial measures such as adjusted EBITDA.
Please see our second quarter earnings release, and SEDAR plus filings for more information on forward looking statements in the company's use of non-GAAP financial measures.
With that I'll pass it onto Bob Thanks, Nicole good morning, everyone.
And Simon team delivered 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.
Industry realized through the back half of 2022 first quarter 'twenty three in its second quarter 'twenty, three but with some cost headwinds building up primarily from higher R&M costs. The result of high spec rigs continue to drill longer and longer reach laterals.
All operating days were fairly static year over year for the quarter, Our Canadian business unit was frustrated with 25% of its active fleet impacted by the wildfires and floods that affected operations in western Canada in the quarter. The quarter also had a few timing drags on projects that were scheduled to start in second quarter that had been delayed until the third quarter.
EBITDA margins improved quarter over quarter and gross margins improved.
<unk> continues to manage its balance sheet, only spending $53 million of planned maintenance capital to maintain the high spec fleet in the second quarter. As we have mentioned the focus continues with the goal to reducing debt by $600 million over the next three years I'll turn it over to Mike Gray for a detailed summary of the quarter, Mike Thanks, Bob and signs of results for the first six months of 2023 reflect.
Was it a improvements to oilfield services activity.
They raised some financial results year over year.
Despite the recent volatility in commodity prices the outlook is constructive in the operating environment for oil and natural gas industry continues to support demand for oilfield services.
Overall operating days remained consistent in the second quarter of 2023 Canadian operations recorded 2131 operating days a decrease of 10%.
U S operations recorded <unk> 4302, operating days and a 1% increase and international operations recorded 1247 days, a 21% increase compared to the second quarter of 2022.
For the first six months ended June 32023, overall operating days were higher with United States recording a 12% increase in international operations recording at 24% increase.
Which were offset by a 3% decrease by the Canadian operations when compared to the same periods in 2022.
The company generated revenue of $432 8 million in the second quarter of 2023, or 26% increase compared to revenue of $344 $1 million generated in the second quarter of the prior year for the first six months ended June 32023.
The company generated revenue of $916 8 million or 35% increase compared to revenue of 600, $676 8 million generated in the same period in 2022.
Adjusted EBITDA for the second quarter of 2023, and was $116 6 million, 71% higher than adjusted EBITDA of $68 3 million in the second quarter of 2020 to adjust.
Adjusted EBITDA for the six months ended June 30th 2023 totaled $243 9 million, 76% higher than adjusted EBITDA of $138 3 million generated in the same period in 2022 with.
For 2023 increase in adjusted EBITDA can be attributed to improved industry conditions.
<unk> drilling activity.
Depreciation expense in the first six months of 2023 was $152 7 million, an increase of 10% compared to $138 7 million in the first six months of 2022.
G&A expense in the second quarter of 2023 was 20% higher than in the second quarter of 2022, but lower on a total basis compared to revenue General G&A expenses increase in support of increased operational activity and as a result of annual wage increases higher foreign exchange on the U S dollar translation translation.
Net capital purchases for the second quarter of 2023, it was $53 1 million consisting of $3 $8 million in upgrade capital and $52 $7 million in maintenance capital.
Maintenance capital expenditures for 2023 is targeted to be approximately $157 million. In addition to the maintenance capital there are certain growth projects for our customers of which $18 3 million has been funded by our customers.
Total debt net of cash has been reduced by $112 5 million since December 31 2022.
Our debt reduction target for 2023 is approximately $200 million are targeted targeted debt reduction for the period beginning in 2023 to the end of 2025 is approximately $600 million if.
Industry conditions change these targets could be increased or decreased.
We exited the quarter with total net debt to EBITDA of $2 six nine which is a 28% reduction from year end 2022 of $3 76, and a 55% reduction from year end 2021, which was $5 nine eight this is our lowest net debt total net debt to EBITDA since Q1 of 2016.
The company is in discussions currently with our banking syndicate on extending their credit facilities and obtaining a term loan facility, which will be used to retire the senior notes due in 2020 for.
The company has not yet finalized such refinancing where the terms thereof.
If it is successfully completed it contemplates completion of such refinancing before the end of the third quarter of 2023 on that note I will turn it back to Bob.
Most of you on the call are well aware that Ensign operates a high spec fleet of 238 high spec drill rigs 90, well servicing rigs and a growing drilling rig control technology business unit, which employ over 4000 highly trained crews and technicians in eight countries around the world.
Let's start with the U S, which provides over half of our consolidated EBITDA with a commodity drag through the second quarter and the general slip in U S rig count Ensign is down about 10 rigs in the second quarter as compared to the first quarter.
And going into the third quarter, we have 47 rigs active today in the U S and with our strong position in the Permian, We have 36 of those rigs active today in that basin.
But the Haynesville play softening due to gas prices or sales team has been very active churning rigs over on to new contracts in most cases, where rigs have come off 2022 contracts. We are now seeing some bid tension in the market as a result of the rig count decline. So the margin run rate for the third quarter will probably be neutral quarter over quarter.
In most cases and on more current negotiations we are more likely to hold rates for a six month term when operators start asking us for more term. We will now it's time to raise pricing again, I think we're probably a few quarters away from that.
Our California business unit, where we have just three of our 16 rigs active today continues to get frustrated with ongoing challenges with drilling permits in that state It's California.
We maintain a solid 7% market share in the lower 48 and see this stabilizing over the rest of 2023.
We are also starting to see operators drill more into their tier two acreage, which means that to maintain production not grow just maintain they will need to drill more wells with that we predict that rig counts will start to move up in the fourth quarter, but probably not before that we have close to 25% of our active U S fleet on an enzyme emissions reduction strat.
G, which is a combination of high line powered rigs and also natural gas engine rigs with a battery energy storage systems, otherwise known as best systems to regulate peak power draws but the arbitrage between diesel and gas.
Natural gas that is the argument becomes more compelling as a result, we will continue to see expansion in this area, which not only reduces emissions. It provides insight into 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're back up to 85% 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 projects.
Turning to Canada, Canada had a strong operational quarter, but fell short of expected days as the wildfires directly affected 25% of our active fleet because of the wildfire wildfires added floods, we trough at only 16 rigs operating over breakup today, we are back up to 40 rigs active and expect to get to.
<unk> 50 later in the third quarter are high spec Triple fleet are running well over 70% utilization, which provides continued strong pricing was solid rate bumps expected in the fourth quarter and into 2024, we continue to see our high spec <unk> be considered for work later in the third quarter with rates relatively static still on the mid twenties.
The conventional fleet is staying active but rates have fallen defined bids over the summer. They should stabilize later in the year, our Canadian well servicing business unit has 14 active rigs today and with more O. W. A work ahead, we expect to get back to 18 rigs later in the third quarter with a few of those rigs operating on 24 hour operations.
We still have for sale roughly $40 million of redundant real estate miscue, which when sold will go obviously towards debt reduction international it's steady as she goes generating steady free cash flow and long term projects, we commissioned our third rig in Oman in the second quarter on a onto a five year contract. The other two started up later in 2022.
All three rigs performing well out of the gate. These rigs are all on performance based contracts and delivering well above expectations generating approximately $3000 a day an incremental margin.
Kuwait and Bahrain, where we have four of our largest rigs continue to execute in the top decile of our contracting peer group in these countries.
Australia is second quarter results were frustrated with the further delay of.
Two large projects that were delayed now until the third quarter. This affected the second quarter results, but will of course benefit the third quarter results in Argentina, we have two super spec triples on long term contracts with strong day rates terming out one to three years the situation of Venezuela changes daily, but we're expecting that we may have one of our drilling.
He is working by the end of the year, we'll see how that develops.
On a 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 we continue to deploy commission roughly one a month of our edge drilling rig control systems on our highest spec rigs worldwide. This attracts roughly $1500 a day of incremental high margin.
<unk> technology to the rig.
We will have edge actively engaged on most of our super spec and high spec triples by the end of 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, which includes best systems highlight power Substations the product offering ranges from the highline power substation, which rents for about $2000 a day.
<unk> to the Standalone best for about the same rate to the full blown natural gas power system with bass and engine and the Ensign edge and engine management system. It's a mouthful for around $6000. A day. These are all high margin opportunities and they help reduce fuel costs and 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.
R S automated drill system, which delivers consistent slips slips and automates the routine for the driller has been now fully tested and is now commissioned on 10 rigs in the U S charging out at $1000. A day, we just can't get these outbreaks fast enough.
So I'll turn it back to the operator for questions.
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.
Here are three Tom prompted acknowledging your request should you wish to remove yourself from the queue. Please press star two.
If youre using a speakerphone please lift the handset before pressing any keys one moment. Please for your first question.
The first question comes from coal.
Stifel. Please go ahead.
Hi, Good morning, Al I, just wanted to start on the refinancing.
Can you talk about where you are in the process I mean, I'm just wondering with Q2 results. So now could we see something relatively near term.
Well I can't add much color than what was in the press release. So we're like I said looking to leave us before the end of the quarter of Q3.
Gotcha fair enough.
And on on the wildfires in Canada.
More of an impact in some of your peers can you just add some color on that maybe the specific areas et cetera.
Yeah, Yeah. It was a lot of the.
Drayton Valley, North and west of that.
We had no impact to our equipment, which is the good news in all of our personnel everyone were evacuated safely.
So it had an impact on on about seven of the rigs that we had and it impacted.
Also because of some facility issues impacted by the fires.
Some planned projects were delayed a couple of months. So that's the impact it had.
But no no equipment or personnel impact, which was a good thing.
Got it and thinking about the U S drilling business can you just talk about how customer conversations with <unk> have been going over the past few call. It in weeks or months with regards to pricing more regulations et cetera, and are you seeing a big difference in terms of you know what what privates might want.
The demand from public.
Yeah, we're seeing a lot more privates are evolving.
That would suggest maybe the.
Capital markets are opening up a tiny bit for them.
The bigger companies are of course are staying to their plans staying to the project.
And continuing to work on operational efficiency.
But we are working for.
A lot of smaller companies that have raised capital in there.
Taking on different projects. So that tells me the capital markets have opened up.
To some extent for them.
Okay got it that's all for me, Thanks, I'll turn it back.
That's cool.
Thank you. The next question comes from Keith Mackey.
RBC capital markets. Please go ahead.
Hi, Good morning, just curious first off on the U S versus Canada rig market.
Do you see a material difference in the trajectory of where are the two markets go away does that lead you to potentially think about having to transfer more rigs.
Assuming from Canada from the U S to Canada, but.
Do you think there'll be more.
Rig transfers in in.
The next six to 12 months given your outlook for both of those markets.
Yeah. Good question, Keith I'm not thinking so there may be.
The odd rig that we.
We made.
Move from.
Based on like California, where there is under utilization on the smaller high spec single area to Canada.
You may you might see one of those but generally there won't be a large migration.
We think that you know the gas market picks back up in the back half of 2024 for the U S.
Canada, we're seeing.
Good bid level.
But we're also seeing a bunch of contractors that havent worked rigs in two or three months.
Going after the bid.
Yeah got it and there's some talk about.
Larger Canadian E&ps potentially dropping activity in the rig count did tick down. This week can you just talk about what youre seeing in terms of the rigs.
<unk> rig count expectations for the second half of the year do you think we will get to.
Match or beat last year's levels, given given all of these factors.
Yeah, well I think we are.
We continue to drill wells, a little bit faster.
So the the operators are sticking to budget number of wells planned.
And.
And I think they are waiting to see a quarter of of.
Cash flow buildup with the commodity price.
With a thought that perhaps a change there.
Their fourth quarter Bud.
Budget notion.
To some extent.
We haven't seen any any real notion of that where we're perhaps contemplating that that's how they reacted in the past but.
We have had some clients are on the high spec triples, and the highest spec signal singles, which are tighter rig type.
Scenarios.
Look a little further forward with that.
You've got the tightness in the selling.
Selling the coastal gas line that type of stuff.
And those rate categories only though.
Alright, thanks very much.
Thank you.
Thank you.
As a reminder, ladies and gentlemen, if you do have a question. Please press star one at this time.
The next question comes from Waqar Syed of ETB capital markets. Please go ahead.
Thank you for taking my question.
Well, it's always been.
I mean, it's difficult to guess, what's going to come next in California, but still.
You know what would be your best guess.
<unk> of any.
Permitting issue resolution activity pick up and number two.
Put rigs returning to work in California.
Can enzymes rig count pick up.
Late in the year next year.
Yeah I think.
We're thinking of the U S rigs.
Regardless of California.
Maybe a couple of rigs picking up in California, and what we're finding is.
There is.
<unk> pension and the permitting process that's being somewhat.
Subrogate it to some extent by operators, suggesting that they will normalize emissions another way.
And we've heard a couple of projects that they may be getting engaged on geothermal, which you got to drill a hole in the ground involves a drilling rig so one way or another we may be going to work.
Or emission reduction strategies in other areas of their business. So it is getting approached.
Because there is oil in the ground and they can make money with it.
And it's.
Some of this stuff is in an appellate court.
But it is grinding through it seems too.
The cloud seem to be still cloudy, but they seem to be breaking up a little bit in California.
Yeah.
And then you mentioned that you are.
Current rig count if I remember correctly.
37, <unk> in the U S. Currently active.
Do you have visibility do you have any.
Rig released notices that this.
Do you have in hand, and where do you think your rig count kind of bottoms and Cleveland.
Yeah, I think that.
I think we're kind of close to a bottom of the rig count has been dropping a little bit as you well know in the U S.
I think that what we're finding is our.
Our U S team has acquired where rigs coming off contract they've been very quickly able to re contracted.
So we may we may slip another couple of rigs where car, but I think we're pretty close to a trough.
Okay and in terms of the day rates for these super Triple of what they call Super spec rigs in the U S where do you see the leading edge day rates. These days.
So.
I would suggest that they have been.
Hanging in the low thirties, but.
We're seeing some people throw a level a few more ala carte items that used to be outside inside.
But.
There is not as much attention on the Super spec triples.
As it moved at all and maybe this one might look at you know the margins have maybe come off.
One to $2000 a day.
Okay.
And then you.
And then just last question.
There are some structural improvements happening in the Canadian market with the.
LNG coming up some.
Some egress issues being being resolved here.
How do you see the demand kind of changing Oh rig activity change even ahead of the basis for.
For the next.
Couple of years.
Well I think there is a as you point out.
If you are going to feed those lines in a basin, where you have decline rates youre going to have to drill to feed into it is pretty basic.
The pace is the question.
You know the delays in both pipelines.
Which.
Well aware of.
Continue but they are getting close to.
And getting a final final pipe to end.
Yes.
Okay. Thank you very much.
Thanks Scott.
Thank you.
There are no further questions I will turn the call back over to Bob Geddes for closing remarks.
Thank you Michelle.
While the commodity deck was weak for the industry in the second quarter the macro construct for the oil business looks stronger for the back half of 'twenty three and into 'twenty four.
While this is true the contradiction is at the rig count in the U S is still falling, albeit we feel almost at the bottom for gas it will be well into 2024 before we see demand for gas wells, increasing again, the recent uptick in commodity prices has generally established a floor. We believe on rates and it is expected that contractors will start to bid up for fourth quarter.
Your work and XI and expects to be running around 110 drilling rigs and 50% to 60, well service rigs into the third quarter and remaining part of the year and design continues to build out term to help derisk, the future and reinforce our debt reduction targets, while being strategic about term and pricing at the same time again, when we see operators start.
Asking for more term well know we've turned the corner, we're not there yet, but we feel we're not that far away from that turn the challenge as I mentioned in my opening remarks is that R&M costs are coming to roost and that rate increases needed to be applied to start recovering that the rigs are delivering well bores and an increasing pace and with consistency and.
Costs have to be covered in the rates somehow ensign has roughly $1 billion of contracted revenue forward with about half of that half of the fleet tied up under contract and over 30% of the active fleet on long term contract of six months or greater the weighted average contract tenure is about one year and the average age of the fleet is roughly 11 years old with them.
Our 20 years of economic life ahead of it and design is fully committed to the target of a quicker delivering and reducing $600 million of debt over the next.
Three years I look forward to our next call in three months. Thank you for attending the call.
Ladies and gentlemen, this does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
[music].