Q1 2024 Ensign Energy Services Inc Earnings Call
We're generating strong EBITDA margins and free cash flow today.
They usually busy Canadian first quarter winter somewhat muted by the effect of abnormally cold weather, which affected operations, we had a weak afforded below and we are seeing a paradox develop in the U S for record oil production extremely low levels of <unk> combined with decline rates not translating into rig activity more on this later.
This quarter's results emphasize the benefits of being a global player while the U S and Canada were off in the quarter more so than the U S and Canada, Our international business segment was up in the quarter year over year. Once again, our global footprint helps to de risk the company and provide lower beta risk on any geopolitical or a specific commodity pricing.
<unk>, which may occur in different places around the world.
The.
<unk> of the <unk> will lead to increased activity in the western Canadian sedimentary basin due to compressed differentials, but gas pricing remains a challenge worldwide with Europe emerging from a two sigma warm winter and the storage is 60% full at the end of April.
I would be remiss, if I didn't mention that the excellent operational performance in the first quarter was achieved with a reduction in incidents year over year and with the team delivering the second best safety record in enzymes history. So I'll turn it over to Mike <unk>, our CFO for a deeper dive into the financial results for the quarter. My thanks, Bob fluctuating commodity prices and customer consolidation had been headwind.
Mike: Impacting Amazon's operating and financial results over the short term. However, despite these short term headwinds the outlook for oilfield services is constructive in the operating environment for the oil and natural gas industry continues to support steady demand for services.
Mike: Total operating days were lower in the first quarter of 2024, with the United States and Canadian operations recording a 32% and a 1% decrease respectively.
Mike: While our international operations saw a 19% increase compared to the first quarter of 2023. The company generated revenue of $431 3 million in the first quarter of 2024, 11% decrease compared to revenue of $484 $1 million generated in the first quarter of the prior year.
Mike: Adjusted EBITDA for the first quarter of 2024 was $117 5 million.
Mike: An 8% decrease from adjusted EBITDA of $127 3 million in the first quarter of 2023. The decrease in adjusted EBITDA was primarily due to the decrease in activity across our North American operations.
Mike: Depreciation expense in the first three months of 2024 was $88 3 million, 13% higher than $77 9 million for the first three months of 2023.
Mike: Depreciation expense increased because of drilling rigs being moved from the marketed fleet into the reserve fleet in 2024.
Mike: G&A expense in the first quarter of 2024 was 4% higher than the first quarter of 2023, G&A expense increased due to annual wage increases and higher nonrecurring fees.
Mike: Net capital purchases for the quarter was $51 5 million with $54 8 million of purchases offset by $3 3 million in sales proceeds our capex budget for 2024 is 147 million.
Mike: Interest expense in the first quarter of 2024 was $26 5 million a decrease of 23% for the first quarter of 2023. This is a result of lower debt levels and improved interest rates based on improving debt metrics. The company expects its blended interest rates with the federal reserve banks hold interest rates at the current levels to be approximately 8%.
Mike: Total debt net of cash was reduced by $13 6 million since December 31 2023.
Mike: Our debt reduction target for 2024 will be approximately $200 million our debt reduction for the period 2023 to the end of 2025 is approximately $600 million.
Mike: Industry conditions change this target to be increased or decreased.
Mike: On that note I will turn the call back to Bob.
Thanks, Mike.
There are macro before we get into the divisional.
Bob: MS units as mentioned before we saw first quarter in Canada with activity only off 1%, while industry was off closer to 4% year over year, implying market share gain by ensign, but we experienced a more serious drop in the U S with a 32% drop in drilling activity year over year. Once again, our international business unit on the other hand was up 19%.
Bob: On operating days.
Bob: Record M&A activity in the U S over the last year or seriously muted activity as competitors falling to hang onto market share. Our thesis is that this will manifest itself into higher activity, but not until very late in 'twenty four but certainly in the 25. It's currently break up in Canada. So our global rig count is down into the 80% to 85 seasonal.
Bob: The range of 50 to $55 range and I will all service business segment focused in North America, let's start with the United States.
Bob: State.
States market seems to have now stabilized with disciplined pricing and everyone holding their market share, but we will still see some pricing pressure anecdotally. We currently have 38 rigs active today in the U S. But we feel that it's more likely to stabilize with perhaps a few more rigs dropping off next few months, but building back slowly in third and into fourth quarter.
Bob: <unk>, while our call was at the back half of 'twenty four would start to see an uptick in activity. We have moved that call for the fourth quarter post election, California, and the Rockies is still plagued with permitting challenges.
Bob: With that we expect to run between eight to 10 rigs in those areas. It's ironic that Paul California's Chinese permits the state will be taking Canadian crude most likely drilled by an enzyme rig in Canada by the TNX pipeline to California refineries.
Bob: The Permian seems to be seems to have bottomed out at just north of 300 rigs active today, but seems stuck here for at least another few quarters, we're seeing rates struggled to get back to the <unk> for the Super spec triples, but expect that logjam to release itself in the back half of the year closer to the fourth quarter, our well servicing business unit, which is focus.
Bob: Primarily in the Rockies and California is still very active with 42 of our 47 rig fleet active on any given day.
Bob: Our directional drilling business in the Rockies continues to build market share in the motors supply part of the business.
Bob: Moving to Canada in Canada, we're of course in the middle of breakup, we expect Canada to climb up from its current activity of 28 rigs to 35% to 30 to 35 post breakup and then 50 to 55 mid late summer building up to 60% and fourth quarter I'll point out that we are about.
We're up about 50% year over year and activity true breakup and we gained market share exiting the way to earn into breakup, we have transferred up.
Bob: Two of our ADR of three hundreds from our U S, California business unit.
Bob: And have placed both these highly versatile rigs onto long term contracts and with the operator, covering the mobe and retrofit retrofit costs required for their specific projects.
Bob: Operators are finding our ADR of three hundreds the most flexible and efficient of the Super spec designs. Currently available we still find the super spec triples in the low mid thirties, and the highest spec double in the low mid twenties, depending on the rig configuration, where.
Bob: We're contracting our super spec ADR of three hundreds in the low twenties with strong demand for our flexible Super spec ADR at 300 designed for the Clearwater Manville plays.
Bob: Our well servicing team continues to see visibility back close to 20, well service units active post breakup and currently have 11 out on jobs today.
Bob: The rentals business unit continues to run with high rental utilization on its assets and sees a growing opportunity for drill pipe rentals as drilling contractors moving to put drill pipe on the outside of day rate contracts due to accelerated where another nuances.
On the international side, our international business unit at 17 rigs active today down one in Argentina from our last call Australia remains steady with eight rigs active with increasing bid activity Oman, which has three of our ADR three hundreds operating on an ITM project is performing extremely well and has been earning increasing margins due to the.
Bob: PVA contracts these rigs are tied up well into 2027.
Bob: Kuwait remains steady with two rigs active with both rig contracts extended out into mid 2025.
Bob: Our two rigs in Bahrain continue to operate in the top tier operationally and are contracted into mid 2000 22025.
Bob: As mentioned, we had one of our Super spec Triple rigs in Argentina come down for a short period, we fully expect this rig to be back up and running later in the third quarter or beginning of the fourth quarter, we have one rig up and running in Venezuela today and has signed the contract to start up a second rig which should start up later in the third quarter.
Bob: On the technology side, our drilling solutions business unit, we continue to grow this technical automation AI component of our business by 15% year over year, our edge autopilot drilling rig control system continues to be installed at a pace of a rig a month and we continue to see demand for our automated drill system, what we call, our aes, which charges out of.
Bob: Dollars a day on top of the enzyme basic core which is $6 25 a day.
Bob: So again, we continue to see demand for that edge autopilot platform with all the bells and whistles the charges out at about $2400. A day. We're currently backlogged out at least four months on our <unk> installs.
Bob: We're also starting to put our edge autopilot platform in some of our middle East rigs.
Bob: On the environmental product line, we have four products that are available are ensign rigs on which to deliver high margins and significantly reduce emissions.
Bob: Also commissioned a few more new and natural gas best systems battery energy storage systems, which charge out in the $5000 a day range and helped to reduce emissions by 60% best systems, Our battery energy storage systems as I mentioned that helps store at modulate electrical power delivery on natural gas engine applications. The best systems on an hour.
Bob: Card basis charge out in that 2700 to $2000 range.
Bob: Our investment in a leading best manufacturer has provided enzymes are secure reliable and cost effective access to best units into the future.
Bob: And power substation arrived and is being rigged up on a job as we speak the enzyme substation will drive further emission reductions while generating a solid ROI for all electric rigs connected on highlighting projects.
Bob: These units charge out about two to $2500 a day.
Speaker Change: So with that I'll turn it back to the operator for questions.
Speaker Change: Thank you ladies and gentlemen did you have a question. Please press star one if you would like to withdraw your question. Please press star one moment. Please for your first question.
Speaker Change: Your first question comes from Aaron Macneil from TD Cowen. Please go ahead.
Aaron MacNeil: Hey, good morning, I appreciate the time to take questions first one is for Mike.
Aaron MacNeil: I'm going to start to see the credit facility get reduced in Q2, and then again in Q4.
Aaron MacNeil: No you're soaked up a lot of cash in Q1 on Capex and working capital.
Aaron MacNeil: Should we think about working capital flows into the second quarter.
Mike: Can you give us any updates in terms of how you're engaging with the syndicated or if you even need to or if you see any issues there as the year progresses.
Speaker Change: No. Thanks for the question.
Speaker Change: When we look at it so we ended the quarter with 878 on a facility. So we don't have to be at $28 million reduction to get to the 50, we have a term loan payments of 28 million, so essentially $56 million of debt reduction needs to take place in.
Speaker Change: In Q2 of this year, if you look in the prior year, we did close to 84 million in debt reduction in Q2.
Speaker Change: That's a very let's say heavy cash flow input.
Comparison to Q1, where you have a lot of capex.
Speaker Change: Operating expenses, so when we look at it I think we're in good shape for for that to take place. You also look at our interest payments Q.
Speaker Change: Q2 of last year, we had about $41 million in cash interest payments our bonds were due.
Speaker Change: Due in April as well as in October for interest So, we'll see cost savings on the interest expense.
Speaker Change: Again, we had about 132 million.
Cash interests are interest expense in 2023, we're expecting that to be a sub 100. So when we look over year over year, we're seeing about $32 million in interest savings.
Speaker Change: Can go towards debt reduction.
Speaker Change: Our capex spend last year was $175 million compared to about $147 million. This year, so theres about $28 million in savings there.
Speaker Change: All in all when you put those parts together, we're confident on the 200 million debt reduction and then confident on the reduction in the facility as well as the term payments.
Speaker Change: Total sense, Bob I think you mentioned in your prepared remarks.
Our pricing below $30000 per day in the Permian.
Speaker Change: In the absence of a higher rig count do you see pricing further deteriorating for the balance of the year or do you generally see your competitors acting disciplined on that.
Speaker Change: And far between.
Speaker Change: Uh huh.
Bob: Yes, I mean, we're seeing some stabilization, but anecdotally, we see some of the smaller players taking a crack at.
Bob: At <unk>.
Bob: Some of our and others' consistent.
Clients, which encourages a little bit of conversation.
We turn that conversation over into.
Our performance based contracting.
Bob: If there is some pressure on rates.
Speaker Change: We'll take you up on that but we also wanted to ask quid pro quo.
Speaker Change: On a performance based contract some cases, we've been able to actually increase our net de rate per day with the performance based incentives, but we're we're kind of.
Speaker Change: Normalizing that with those conversations over the last few months.
But I would say that.
Speaker Change: There is still some pressure on pricing.
Speaker Change: As we go into the summer.
Speaker Change: And we're not we're.
We're not seeing anyone, saying, hey, I want to tie up for two years.
Speaker Change: Which always tells us that the operators are.
Still rolling up their sleeves, a little bit.
On an.
Speaker Change: On pricing.
Speaker Change: Got it.
Thanks, guys I'll turn it back.
Speaker Change: Thanks, Eric.
Speaker Change: Your next question comes from Keith Mackey from.
Keith MacKey: From RBC. Please go ahead.
Keith MacKey: Yeah, Hey, good morning, just wanted to retouch on the debt certainly certainly one of the things we've been getting questions about his.
Keith MacKey: Covenants and it looks like you're getting fairly close on that senior debt to EBITDA Covenant and Mike can you just kind of walk us through the pieces for Q2 of how that works I'm, assuming EBITDA will be a little bit lower but it looks like debt reduction for Q2 will also come down significantly. So can you just kind of talk to that specifically and some of the pieces there.
Keith Mackey: Yes.
Mike: No no for sure I mean, when we reset the balance sheet back in October.
Mike: We did it in a sense that.
Mike: Everything is achievable so when we look at it.
Mike: There is no concerns on those covenants.
Mike: All of our debt structure is right now is senior debt, where before it would have a mix between senior and the unsecured which would have went to the total debt. So when we look at you do like once again to Aaron's question on the free cash flow in Q2 will be quite significant.
Mike: It will give us the ability to reduce our facility as well as make the term loan payments the.
Mike: The term loan payments once again reduces your senior debt.
Mike: And once again, we will improve that covenant so when we look at it.
Mike: Quite confident on.
Mike: On everything going as planned so from our perspective, just with Q2 works with the cash inflow will reduce interest expense and like I said Q1 is always heavy capex.
Mike: Don't see any issue. So we'll see that covenant ratio will continue to go down.
Mike: Thats the one benefit of the term loan is up.
Mike: And stayed off there's about $110 million that will be paid off this.
Mike: This quarter or this year, which once again, we will reduce that.
Mike: <unk> ratio.
Mike: As we continue to.
Mike: Based on performance.
Speaker Change: Yes, thanks for that.
Speaker Change: Can you just talk a little bit about Canada, Q1 down about 1% year over year in terms of.
Speaker Change: Rig days can you just talk about how youre thinking about the second half of the year on a year over year basis in Canada.
Speaker Change: Yes.
Speaker Change: As I mentioned, we've got 50.
50% more rigs running through breakup than we did last year, we had about 17 last year, Keith we have 28 this year.
Speaker Change: And we're starting to build up.
Speaker Change: The 30% to 35 range post breakup.
Speaker Change: Should be back to 50 by end of summer.
Speaker Change: Got contracts and disability for that.
Speaker Change: Also got the $2 ADR three hundreds that we brought out from California there.
Speaker Change: Retrofitted over the over the winter to the operators specific requirements there theyre ready to go out the door as soon as soon as we can get them out.
Speaker Change: On the road bans and.
Speaker Change: And then were.
Speaker Change: I think we're seeing indications from operators.
Speaker Change: Wanting to make sure that they grab their best rigs going into into the fall so for us.
Speaker Change: It's quite a different year than last year.
Speaker Change: We started grabbing some more market share as we entered breakup gaining market share through breakup and I think we will continue that.
Speaker Change: Through.
Speaker Change: 2024.
Speaker Change: Okay. That's it for me thanks very much.
Speaker Change: Thank you.
Speaker Change: Your next question comes from Waqar Sayed from ATB capital markets. Please go ahead.
Waqar Mustafa Syed: Thanks, guys good morning.
Waqar Mustafa Syed: Mike.
The guidance before DD&A for Q2 and the following quarters.
Waqar Mustafa Syed: Well, we don't really give guidance on that some I mean, historically, we ran between that $75 million to $85 million in depreciation so.
Waqar Mustafa Syed: But it would probably be the ballpark.
Mike: Okay. So this pick up in in Q1 for accelerated depreciation that additional bond is just one quarter.
Mike: <unk> is that it has some lingering impact the course of the year.
Mike: There'll be some lingering impacts of the course of the year.
Mike: Sure.
Mike: Okay.
Mike: And.
Mike: Bob could you talk about the geothermal side in California, what's the outlook there do you see some incremental drilling.
Bob: Yeah Yeah.
We're having more and more discussions on beds on geothermal projects, we've got a few underway now.
I think we have three.
Bob: Two two underway right now.
Speaker Change: But yes, it's more of a conversation.
Drilling more geothermal wells in California, and that West Coast area.
Speaker Change: All the way even up into into Oregon.
Speaker Change: <unk>.
All while the irony is all while Canadian it all comes down to the <unk> in the California.
Speaker Change: Two.
Speaker Change: Increasing demand for gasoline at the pumps, but yeah, that's where we are on geothermal.
Speaker Change: Okay, and then in Venezuela, when did you say.
Speaker Change: Second rig could start up.
Speaker Change: We're thinking end of third quarter, so it'll be it'll be the end of this summer.
Speaker Change: Okay.
Speaker Change: And have you received the go ahead from the operator to start preparing the rig or you're still waiting for that.
Speaker Change: Now we have a contract signed and forwarded the monies for the upgrade on the rig.
Speaker Change: Okay.
Speaker Change: Great and then in terms of the Canadian market I think there was some expectations of price increases there might be maybe up to about 5%.
Speaker Change: Is that still a possibility or not.
Speaker Change: Not really now.
Speaker Change: Yes for sure.
Speaker Change: Generally, we're putting out our highest spec doubles.
Speaker Change: With that level of increase and our high spec triples in that range or higher.
Speaker Change: As the market continues to tighten up in the fourth quarter third quarter I am sorry.
Okay.
Speaker Change: Great. Thank you very much that's all for me.
Speaker Change: Thanks Waqar.
Speaker Change: Ladies and gentlemen, as a reminder, should you have a question from Chris Star one.
Speaker Change: Next question comes from Josh Jennings from Danielle Energy Partners. Please go ahead.
Speaker Change: Thanks first one could you please speak to the opportunity set for consolidation within the United States.
Josh Jennings: Well service sector, and specifically do you see much on the market.
And if you do how would you characterize the quality of those businesses.
Speaker Change: Good question.
Speaker Change: The well service business in the U S is certainly a lot more fragmented and area specific than what you would find north of the border for example.
Speaker Change: Where there has been some consolidation.
Speaker Change: I would I would suggest that.
Speaker Change: Again, the activity focuses on different areas consolidation.
I'm not seeing.
Are not are not hearing of any consolidation efforts.
Speaker Change: I can't I can't.
Speaker Change: Expand on that other than other than.
Speaker Change: We're fairly active in the areas, we are which is focused on Rockies in California, with our well servicing.
Speaker Change: But as far as consolidation.
Speaker Change: Im not thinking consol.
Speaker Change: Consolidation as necessary in the well servicing area as it might be perhaps in the Permian drilling area for example.
Speaker Change: Okay.
Speaker Change: And then maybe a follow up on the U S drilling side.
Speaker Change: You noted in your release, 80% of your rigs that are contracted today.
Speaker Change: Sort of roll off in the.
Speaker Change: At six months.
Speaker Change: Six months in the U S you talked about.
You talked about the decrease in day rates are customers in the U S still wanting to sign up term contracts today and are you seeing.
Are you seeing them Opportunistically look at term potentially maybe more so than they were six months or nine months ago.
Speaker Change: Not yet not yet.
Speaker Change: We're still running six month type contracts, which is.
Speaker Change: Fairly typical.
Speaker Change: We haven't seen a discussion for people, saying, Hey, we want to sign you up for one to two year contracts when that starts to happen of course.
Speaker Change: It's starting to turn.
Speaker Change: Yeah.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you.
Speaker Change: There are no further questions at this time I will turn the call back over to Bob Geddes for closing remarks.
Thanks, everyone for joining us again.
Robert H. Geddes: Continuing current geopolitical tensions in various places around the globe and the world's conflicts and with a desire to reduce emissions all while expressing a desire for a better quality of life with the expanding demand for the hydrocarbon molecule along with record M&A activity bump behind us demand for continuing record U S production, coupled with record low DUC.
Robert H. Geddes: Tori and continuing decline rates. We believe this will manifest itself into steady drilling activity uptick through late 2024 and into the future gas is a completely different story. It will take some time to figure itself out natural gas co. Gen plants will grow as the world moves off call. It gets on to clean burning natural gas and long.
With that natural gas demand is expected to rise 50%. The next 15 years in the meantime gas oversupply will plague the gas side of the business and China has a fleet of over 200 high spec drill rigs ranging from 200000 pound to $1 5 million pound hook load capacity, along with a fleet of close to 100, well service rigs are varying capacity Sichuan.
Robert H. Geddes: In eight different countries around the world already to perform safely and profitably.
State laser laser focused on delivering best in class performance, which will provide sufficient free cash flow to maintain our fleet in top condition and keep to our debt reduction targets of $200 million of the year. Thank you and look forward to our next call in the summer.
Speaker Change: Ladies and gentlemen. This concludes today's conference call you may now disconnect. Thank you.
Robert H. Geddes: Yes.
Robert H. Geddes: Okay.
Robert H. Geddes: [music].
Robert H. Geddes: Yes.
Robert H. Geddes: Sure.
Robert H. Geddes: With regard.