Q3 2023 Ensign Energy Services Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Ensign Energy Services, Inc. Third quarter 2023 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 immediate assistance. Please press star zero.
Further this call is being recorded on Friday November <unk> to 'twenty to 'twenty three I would now like to turn the conference the virtue Nicole Romanow Investor Relations. Please go ahead.
Thank you Julie.
Good morning, and welcome to Ensign Energy services third quarter conference call and webcast.
On our call today, Bob Geddes, President and CEO, and Mike Gray Chief Financial Officer will review enzymes third 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.
Actors that could cause results to differ materially include but are not limited to political economic and market conditions.
Oil and natural gas prices foreign currency fluctuations weather conditions, the company's defense of lawsuits the ability of oil and gas companies to pay accounts receivable balances or other unforeseen conditions, which could impact the demand for services supplied by the company.
Additionally, our discussion today may refer to non-GAAP financial measures such as adjusted EBITDA.
Please see our third quarter earnings release, and SEDAR filings for more information on forward looking statements in the company's use of non-GAAP financial measures.
With that I'll pass it on to Bob.
Nicole and welcome everyone enzyme had a steady quarter into what we see as a developing construct for the land based drilling business moving forward worldwide. We saw static margins in North America through the third quarter and an increase in our margins in our international business unit through the third quarter.
Oil and gas prices remain relatively strong while activity in the back half of 2023 was challenging this in.
Segment as a consequence of record M&A activity and continuing balance sheet discipline by the oil and gas companies now.
Nonetheless, whilst we see some buffer on activity in the third quarter continuing into the fourth quarter and sinus clip to another $54 million of debt in the quarter and as well on the path to reducing debt $800 million through to the end of 2026, I'll turn it over to Mike for some details. Thanks, Bob enzymes results for the first nine months of 2023.
Positive improvements to oilfield services day rates and 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.
I would like to point out that subsequent to the quarter. The company obtained a three year 369 million term facility and extended the existing $900 million credit facility to October 2026.
The company expects its blended interest rates the federal reserve banks hold interest rates at current levels to be approximately 8%, which will allow us to continue to reduce our interest expense going forward and further reduce our interest expense with continued debt reduction and improving debt metrics.
This will solve the near term debt maturities and as an overall positive for the company. The senior notes will be redeemed in Q4 of 2023 and utilizing the term facility and liquidity on hand.
Now to discuss the quarter overall operating days declined in the third quarter of 2023 Canadian operations recorded 3262 operating days, a decrease of 19% U S operations recorded 3581 operating days, a 27% decrease in international operations recorded 1260 <unk>.
Five days, a 27% increase compared to the third quarter of 2022.
The company generated revenue of $444 4 million in the third quarter of 2023, 3% increase compared to revenue of $432 6 million generated in the third quarter of the prior year.
For the first nine months ended September 32023, the company generated revenue of $1 36, billion% to 23% increase compared to revenue of $1 1 billion generated in the same period in 2022.
Adjusted EBITDA for the third quarter of 2023 was $117 3 million, 11% higher than adjusted EBITDA of $105 4 million in the third quarter of 2022 adjusted EBITDA for the nine months ended September 30th 2023 totaled $361 2 million, 48% higher than adjusted EBITDA of two <unk>.
Third $43 $7 million generated in the same period in 2022.
2023 increase in adjusted EBITDA can be primarily attributed to year over year improvements to industry conditions and improving proving revenue rates.
Depreciation expense in the first nine months of 2023 was $229 6 million, an increase of 10% compared to $208 1 million in the first nine months of 2022. The increase is mainly related to foreign exchange rates.
Change rate on U S dollar translation Gen.
General and administrative expense in the third quarter of 2023 was three 1% of revenue a slight increase in the third quarter of 2022, which was two 9%.
General and administrative expenses increased as a result of annual wage increases and higher foreign exchange rate on U S dollar translation.
Total debt net of cash has been reduced by $143 7 million. Since December 31, 2020 to our debt reduction for 2023 as targets to be approximately $200 million and $600 from the beginning of 2023 to 2025 based on current industry conditions are.
Our debt to EBITDA metrics continued to improve with us exiting the quarter with $2 $5 seven total debt to EBITDA. This is the lowest metrics since Q1 2016.
In addition, we have reduced our net debt by $442 million from our peak net debt of 1.6 were $1 7 billion in Q1 of 2019.
Capital expenditures for the third quarter were $37 9 million, consisting of $1 9 million and upgrade capital and $36 million in maintenance capital during the third quarter of 2023. The company received sale proceeds of $8 9 million, resulting in net capital expenditures of $29 million.
Capital expenditures for the 2023 year, it's hard to be in line with prior guidance of approximately $157 million related to maintenance capital and $18 3 million in customer funded upgrade projects.
The company is also pleased to announce the appointment of call route to the company's board of directors effective November one 2023.
Mr. Reed, most recently served as President and Chief Executive Officer of the Calgary based energy services company until his retirement in 2021 on that note I will pass the call back to Bob.
Thanks, Mike.
Start with an operational update we've been running roughly 100 to 105 drilling rigs plus about 60 to 70, well service rigs daily through the third quarter and expect to bump up another Kevin Hern rigs on average through the fourth quarter to that 110 to 115 range and then peak at about 55% to 60 in Canada.
In the first quarter 45 to 50 in the U S in the first quarter.
One of our international fleet to 18 rigs active which should see is roughly a 120 rigs thereabouts active in the first quarter.
A challenge plaguing all contractors continues to be how to capture the value. We are creating as we continue to drill record wells. We continue to continually drill these record wells faster and more consistently than ever before with our equipment is being pushed to twice to work. During the same period of time, which means that our R&M costs on a per day basis are generally up 50%.
Over the last five years. These increased costs have not carried themselves up into the day rates not yet anyway.
We can report that our fleet is running with an industry, leading safety record with year over year improvements in that we continually drive to work environment with zero incidents.
So I look at North America for them, all that Canada. This summer and fall has been somewhat schizophrenic as we saw operators dropped 12 of our rigs mid summer while commodity prices were generous and improving again this talk to the continuing focus on debt levels and disciplined with budgets.
Canadian drilling has since summer popped up six rigs from 38 to 44 and had the largest week over week gain of any contract or getting to 5% market share in that week alone. The sales team is suggesting that we have 52 rigs contracted forward and which will start in the next month or two certainly before Christmas operators are already committing to water projects.
They ensure that they get the most efficient rigs Canadian well servicing is performing well and gaining market share quarter over quarter was steady and strong demand building into the winter.
In the U S. The same market dynamics have existed south of the border through the back half of 2023, so hanging onto market share in the U S takes on a whole of that challenge.
The effect of all the half a trillion dollars of M&A activity through the year.
We will take a few years to figure itself out at the expense of RFS activity in the short term currently with 42 rigs active in line of sight to 45 to 50 by year end operators are sticking to their budgets and we'll take any excess cash flow generated and put that against that.
<unk> is down about seven rigs year over year and currently has three active rigs today.
<unk> has six rigs active today with expectations to grow to seven to eight by year end and into 2020 for our U S. Southern business unit, which is Permian centric.
Well stay steady in the 30% to 35 rig range through the rest of 2023, and then first quarter 'twenty four with some expectation that this improves into 2024 U S well servicing a steady as she goes in our trucking division is really hitting its stride.
And expect to generate growing revenue year over year directional is right on budget and will be expanding into the Permian with a major client sponsorship just coming back to California, I will point out that we are on a.
Geothermal project there.
In the U S. A we always seem to have a one or two rigs working geothermal projects in U S. A.
Our small but growing part of our business on the international front, Australia, we have eight rigs active in Australia today with visibility to nine into the new year. Two large projects are underway with two majors and will generate very nice cash flows from this point forward for the next year or two.
On our <unk> continued to deliver ahead of schedule and safely on a performance based contract with a major in the country, Bahrain and Kuwait, we have two of our ADR two thousands had a long term contract in Bahrain operating on plan and our two ADR three thousands are running like a clock in Kuwait generally operating in the upper decile.
<unk> it looks like we.
We'll have one of our rigs going back to work in the new year for U S measure and some expectation for that to be followed up with a second rig before the end of 2024.
Drilling solutions front, our edge drilling rig control system continues to be installed at a pace of rig a month that we continue to see growing demand for our automated drilling systems, Ada es, which charges out to the $1000 a day in the third quarter alone we installed five additional edge drilling rig control system switch.
So its up to roughly 60 edge units installed worldwide today and generating revenue between 1000 to try $500 a day with margins in the 75% to 80% range.
With that I'll turn it over to the operator for questions.
Thank you ladies and gentlemen should you have a question. Please press the star followed by the one you touched on phone I should like to withdraw your question. Please press the star followed by the two if you're using a speaker phone. Please lift the handset before pressing any keys one moment. Please for your first question.
Your first question comes from Aaron Macneil from TD Cowen. Please go ahead.
Hey, good morning, and thanks for taking my questions.
Bob What's the current utilization of your AC triples in Canada.
You do have any of that are idle.
What sort of capital requirements do you think you need to incur to get them back to work.
Customer funded upgrades non negotiable and what sort of day rates do you think you can achieve.
Yeah. So it's.
We have about 70% utilization on our high spec triples in Canada.
Our highest spec triple fleet, we have three rigs.
Two of them are 2000 horsepower and one 3000 horsepower.
That we're basically constructed for the Horn river deep gas regions, they're harder to market.
When we when we exclude them, we're probably running about 75% to 80%. So we have capacity. We can we probably have capacity for seven of our highest spec triples.
To go to work, which we think will feed into what we see is developing.
Play for natural gas to fill the coastal link pipeline.
What you will.
Export one or two bcf into the future.
We as you know we.
This summer, we we contracted one of our.
1500 high spec triples out of the Rockies up into Canada, because it was a sister rig with another operator here in Canada we.
We signed that up into the mid Thirty's they paid for the full move.
There werent any modifications on that rig it was ready to go away and that's a two year contract. So that's kind of the anchor spot for pricing.
And anyone who wants to wear in current conversations with another client.
I bought another rig in Canada any modifications they require will be fully funded by the operator for sure.
Understood and then maybe moving to some of your other.
Rig categories in Canada.
Sort of exposure do you have in this.
Emerging manville opportunity and can you sort of give us an indication of the potential magnitude of the opportunity.
Yeah, I think it's.
It's an interesting.
Question and <unk>.
We are in the midst of.
Basically putting our finger on the perfect rig for that platform it'll of course turn into.
Much like the Clearwater.
Pad type configuration eventually theyre.
They are not big rigs, but they are highly mobile.
Powerful smaller rigs which would be.
Sure sure.
Your highest spec doubles your quick moving high spec doubles with pad moves and capability.
Or your high spec singles with larger pumps.
We've got lots.
Lots of capacity in the high spec double market as you would know so we're pretty excited about the opportunities in the manville.
Thanks, Bob I'll turn it back.
Yes.
Your next question comes from Keith Mackey from RBC. Please go ahead.
Hi, Good morning, just wanted to start out Bob you mentioned.
Producer M&A in the release and on the on the in the prepared remarks.
I appreciate that in the near term M&A generally means a reduction in activity as customers consolidate rigs and asset basis.
Can you just talk about perhaps your strategy.
To mitigate some of that effect what do you think your general exposure is now.
And just the final piece of it as well.
With the Exxon pioneer deal that <unk> been talking about longer and longer wells and it looks like you've drilled more than your fair share of.
<unk> III plus mile Horizontals in the Permian.
Do you think thats part of the strategy to mitigate it or how do you think about that these days.
Yeah, well you hit it on the head we participated with a certain client.
And drilling three plus mile laterals.
Almost all the time, we're doing a mile a day.
It seems that we've got.
And more than our fair share of three plus mile under our belt. So I think we're well positioned there.
That's super spec category with the ability to rack back 25000 feet.
It's we've seen through the back half of 2023 and move from the.
The pub code to the private COSE.
We're doing a lot more work for the private companies now.
And we.
For the very reason that you mentioned when two big companies get together, one plus one is never too.
Yeah.
In the short term. So we got ahead of that saw that coming started to.
Explore more of the private coast, we're doing more work for the private goes and we have in the past until the pepco settled out and figure themselves out.
But we're well situated to.
To.
And drill up those longer laterals for sure.
Okay. Thanks for that and can you just talk about the general trends.
Of how Q4 should shape up by now.
As general expectation for kind of flattish activity in Canada, maybe down a little bit in the U S. In Q4, how do you think that ultimately marries up with what your what your Q4 EBITDA does relative to Q3.
Yeah, well, we're seeing because we're worldwide, we're seeing some strong fourth quarter.
International and the U S fourth quarter will will mirror third quarter.
I'm pretty sure of that.
We don't have the seasonality effect down in the U S. Like we have in Canada, and Canada of course, a lot of operators are saying.
While we want to start up January one and we're growing well that's just not going to be possible. We've got people that are willing to take a rig.
Just before Christmas sort of later in November.
But they want to hang onto it for the full season, so youre going to have to get going early if you want to hang onto the rig or pay a standby.
They have that option.
I'm seeing that develop.
A little more seriously here into Canada.
Because of the seasonality effect so.
I think that the fourth quarter will be better for us in Canada in the third quarter in the U S. I would suggest it's static and international I would suggest that the fourth quarter might be.
Static to slightly better.
Okay. Thanks for that and one last one if I could sneak one in for Mike.
Good to see the debt refinancing done in Q4 here can you just talk about what you expect your interest expense to do in 2024 relative to 2023 any any specifics you can provide on the dollar magnitude of savings or.
Or to the extent that there are any would be helpful.
Yes, so our blended interest rate on the go forward will be about 8%.
Potentially if the federal reserve starts to reduce rates in 2020 for Italy.
The reduction on our side as well so.
You can kind of just do simple math, we exited year about $1. Two four net debt. We will continue to hit our target of 200 million for this year and then we're looking at $200 million next year. So essentially you can just do the math.
Based on those numbers, you can probably come to a fairly reasonable interest rate interest expense for 2024.
Okay.
Very much that's it from me.
Thanks Keith.
Your next question comes from Waqar Syed from ATV capital markets. Please go ahead.
Thank you for taking my question.
Mike any early thoughts on Capex for next year.
Going through budget season, coming up right away, but.
I think we're going to be similar to year over year around 150 on the maintenance capital that's going to exclude any sort of customer growth upgrades or <unk>.
Upgrades that we see but definitely the 150 is our I think our target for next year.
Okay.
And then.
Bob It looks like.
Australia activity continues to shift to the right that pick up.
Do you see anything change there in terms of your confidence in terms of these additional rigs being picked up.
Yes, absolutely what car.
Also seeing.
We're kind of exiting of the option years on some contract terms that were established three to four years ago. So we're kind of through that.
And now we're entering a new contracting phase into a relatively more.
Bullish market in Australia.
So.
Youll see Youll see our Australian business unit.
Starting to get some legs under it here.
Moving forward for sure.
And.
Similar vein in Venezuela.
Good to see that you use.
The one that could go back to work and we've seen certainly some policy changes in the U S. Government side is there anything any risks that still remain.
Still remaining from.
The gunman side, either from a U S government of Venezuela government.
Well it is Venezuela, so that risk always occurs I do see though that.
The SPR is down 250 barrels you got production coming off in the U S.
That Venezuela is a nice proxy for another 100000 barrels.
So I think that.
There isn't an area in the world, We don't run where there is some geopolitical risks I'm, sorry, but for Venezuela, we've been operating in Venezuela for 15 years.
We know it well we hung in there through through all Fac.
With some sense that at some point in time, it would open back up and here we go.
Okay, and then just finally.
On California.
Anything changed there you talked about the <unk>.
The geothermal wells, but.
Do you see any hope of activity picking up next year there.
Oh that is a key word yes, it's such a.
And then AG.
California, they continue to consume more gallons of gasoline every year, but they don't want to.
Yes, it's a permitting issue in California.
We're seeing and I don't I mean, we're seeing some light in the sense that operators are able to offset.
That now by maybe getting involved in geothermal and that's why you're starting to see some of it so.
Operators will find a way to make it work, it's a slow file.
But we've got a great operation in California, So maybe we can pick up a rig or two but I'm not looking for anything substantial there in 2024.
Okay.
Staying in the U S. Do you see the day rate environment kind of bottom out pricing bottom out or are you still seeing pressure on the downside.
Yeah, I think 2024 is going to be a flip to 2023 2023, we entered.
First half of 2023 with a strong 2022 contracts and then the back half turned over.
Front half of 2024 will be.
Riding 2023 back half contracts and then re contracting into the back half of 2024 will move up I mean, we're taking short term contracts usually.
Quarter to quarter type thing and we're not taking any long term contracts in the U S and if we are it involves capital provided by the operator, and we're getting north of $30000 a day.
Okay and in the in Canada do you expect.
Pricing gains next year.
Yes, I think theres going to be some quick pricing tension.
In the first quarter.
There's been a lot of operators that have hunkered down to secure the rig and the pricing to the end of first quarter that probably exists on half the fleet the other half of the fleet.
The shift came under some pricing tension.
We should be able to be market makers I think on some rig categories in the first quarter again as it tightens up.
You got to remember there is.
As I mentioned in one or two Bcf is going to have to sell.
Sometime in the end of 'twenty, three and then you've got.
You've got the Tms.
Opening up 800000 barrels a day, so that may squeeze a spread from 25 down to <unk>. So.
We're a little more.
Bullish on Canada in the macro.
Okay. Okay, great. Thank you very much appreciate the color.
Your next.
Question comes from call Terra from Stifel. Please go ahead.
Good morning, all.
Bob you made a comment on margins in North America being static sequentially are you able to differentiate at least directionally at all between Canada, and the U S and how we should be thinking about that into Q4.
Yes, the margins on both sides of the border were very similar.
Within one or 200 bps of each other.
I do think that the.
U S margins will stay static.
Q4 over Q3.
I think the Canadian margins.
Well move slightly upwards, because obviously, we have boilers and we're also have more days over a fixed overhead base. So the margin should creep up.
Okay got it that's all for me thanks.
Thanks, Paul.
Your next question comes from Joseph Scatter from scatter Energy Research. Please go ahead.
Good morning, and thanks for taking my questions.
First on the International you mentioned that there were two under utilized rigs that you move to the international which countries did you move those too.
I'm trying to think what the statement was made.
Thank you rich.
The company transferred to underutilized drilling rigs into its international operations Reserve fleet.
So that would just be the reserve fleet, so no longer marketed.
Okay. So theyre not in any specific country, where youre thinking that they might get taken down in use at some point.
No no no.
That term means that we put them into.
The first stage of a decommissioning.
Okay.
Now the going into Venezuela.
Did you have to do much upgrades to the rig that's working and then the one that you hope will start by the end of the year and how our day rates comparable.
Two others on your international side are you getting decent margins on those.
Yes, Venezuela is.
No one's brought any new equipment into Venezuela for a decade so.
Equipment.
As.
Arguably.
What you would run in North America, 10, or 20 years ago.
So the capex to bring the rig back up to two working order is basically just some re certifications items half a million dollars or less.
In a cumulative basis.
We have.
Yard in Venezuela.
Our secure yard that we basically had a couple of guys looking after the rigs over the last five years basically.
So the rigs are ready to go back to work.
With very little capital.
We have.
Two two of the probable arguably some of the best rigs in Venezuela.
The first one is going to work as I mentioned here.
First quarter 'twenty four.
Which we expect.
The operator will pick up the second rig.
It's a slow process because.
<unk>.
Of.
Well trained crews.
Not all of them are around they've they are dispersed over a five year period.
Venezuela is a very tough area to operate and to build back into but we've had a strong base and a good a good client there for some period of time on the margins.
Margins.
Or are right now not what they would be for example, compared to the middle East.
Margins are.
For the assets, we have invest in the company are good but on a per day basis. They wouldn't be what you would expect in the middle East.
Lastly for me.
Given we're getting optimistic comments from a number of the E&P companies about activity that they see for the second half of 'twenty four and then 25 on the natural gas side because of LNG, Canada, and then potentially the announcement of <unk>.
Second train are you starting to see conversations about locking up more equipment in.
In that North West, Alberta, and northeast B C side.
Yes, yes, we have started this summer nationally and.
I think it's starting to pick up ever so slightly.
It's.
Once you get over 80% utilization in any rig category.
Things go a little Crazy all of a sudden everyone goes. She is we should have started this conversation three months ago.
But operators have been a little spoiled with the ability to pick and choose over the last few years.
That may change into 2024.
Okay Super and then just from a comment.
Congratulations and resolving the debt and extending it to take that issue off the plate that's.
That's it for me and the team did a great job.
Thank you Ashley.
Ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by the one. Your next question comes from John Gibson from BMO Capital markets. Please go ahead.
Good morning, Al I, just had one on the debt reduction program and you're calling for $600 million exit 2025, I'm wondering what type of rig count environment. This assumes obviously youre on track to meet your targets for this year despite.
A pretty steep decline at least in the U S rig count so if rig counts move up to the rate could you look to exceed these levels.
Yes, we can maintain that expectation, writing 100 to 110 rigs everyday which is kind of where we're at so that's why we're very confident moving forward that we can deliver on that.
Okay, Great I'll turn it back thanks.
And there are no further questions at this time I will turn the call back over to Bob for closing remarks.
Thanks, operator.
So with WT is staying strong in the mid <unk> and natural gas solidly above three bucks the latest tension in the middle East provides yet another interesting set of possible energy supply disruption situations for the world to work through nonetheless, with generous cash flow is being generated by operators you would think that our industry would be talking about how much busier, we are getting and how rates are.
Working up while exactly the opposite has been happening in the back half of 2023 as operators stick to their budgets and continue to delever more rapidly.
With U S production is starting to come off rig efficiency plateaued.
Ducks hit their lowest levels in a decade and with the onset of more tier two inventory. This will certainly manifest itself into more rig demand moving forward. It's a nice construct for the future. We think that we will see a disciplined uptick in demand for our rigs and other services generally starting in early 2024, which will be followed with stronger pre.
Missing support manifesting in the back half of 2024.
With that.
I look forward to.
Sharing our fourth quarter 2003, and year end results with you on our next call in the new year. Thank you for listening.
Ladies and gentlemen, this concludes your conference call for today, we thank you for joining and you may now disconnect your lines. Thank you.
[music].
Yeah.
[music].