Q3 2024 Ensign Energy Services Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Ensign Energy Services, Inc. Third quarter 'twenty 'twenty four results conference call.
At this time all lines are in 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 for operator.
This call is being recorded on Friday November 1st 2024.
Speaker Change: I'd like to turn the conference over to Nicole Romanow Investor Relations. Please go ahead.
Nicole Romanow: Thank you Andrew.
Nicole Romanow: Good morning, and welcome to Ensign Energy services third quarter conference call and webcast on our call today, Bob Geddes, President and C O O and Mike Gray Chief Financial Officer will review <unk> third quarter highlights and financial results, followed by our operational update and outlook.
Nicole Romanow: Well then open the call for questions.
Nicole Romanow: Our discussion today may include forward looking statements based upon current expectations that involve several business risks and uncertainties and factors that could cause results to differ materially include but are not limited to.
Nicole Romanow: Political economic and market conditions crude oil and natural gas prices foreign currency fluctuations.
Nicole Romanow: Weather conditions, the company's defensive lawsuits the ability of oil and gas companies to pay accounts receivable balances.
Nicole Romanow: Or other unforeseen conditions, which could impact the demand for services provided 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 plus filings for more information on forward looking statements in the company's use of non-GAAP financial measures.
Speaker Change: With that I'll pass it onto Bob.
Bob Geddes: Thanks, Nicole and good morning, everyone.
Bob Geddes: So the third quarter boy.
Bob Geddes: Buoyed by strong and increasing demand for our high specs Ensign ADR Canadian rigs, especially our high spec singles doubles and triples.
Bob Geddes: Drove another strong quarter over quarter gains with a solid bump from second quarter results. The Canadian business unit led the charge it provided a substantial increase in activity year over year for the quarter.
This was however, tempered with a decrease in activity in our U S business here.
Bob Geddes: But with relatively steady margins, we saw a steady quarter over quarter and year over year and our highly active international business unit, where we have 17 universe 30 high spec rigs active today operating in six different countries around the world.
Bob Geddes: With steady margins and solid activity levels generally around the globe, we continue to execute on our plan in the quarter, we addressed another $45 million of debt reduction, which takes us to $135 million year to date.
And keeps us solidly on the path three years $600 million of debt over the next three years. This was built on a steady free cash flow stream into a solid forward book increasing margin construct.
Bob Geddes: Over to Mike for a summary of the third quarter, and then I'll come back to provide an operational update on each of the operating areas Mike. Thanks, Bob.
Mike Gray: Customer consolidation and volatile commodity prices have impacted Amazon's operating financial results over the short term. However, despite these headwinds the outlook for oilfield services, it's constructive and the operating environment continues to look stable.
Mike Gray: Overall operating days were consistent in the third quarter of 2024 and comparisons to the third quarter of 2023. The company saw a 14% decrease in the United States to 3065 operating days offset by Canadian operations, achieving 3861 operating days in the 18% increase.
Mike Gray: International operations recorded 1269 days consistent with one compared to the third quarter of 2023.
Mike Gray: For the first nine months ended September 32020 for overall operating days declined with the United States recording a 27% decrease offset by an increase in Canada, and international with 9% and 6% respectively when compared to the same period in 2023.
Mike Gray: Company generated revenue of $434 6 million in the third quarter of 2024, 2% decrease compared to revenue of $444 4 million generated in the third quarter of the prior year for the nine months ended September 30th 2024. The company generated revenue of 1.26 billion, an 8% decrease compared to revenue of 1.36 billion generate.
Mike Gray: In the same period of 2023.
Mike Gray: Adjusted EBITDA for the third quarter of 2024 was 119 million, 1% higher than adjusted EBITDA of $117 3 million through the third quarter of 2023 adjusted.
Mike Gray: Adjusted EBITDA for the nine months ended September 30th 2024 totaled $336 7 million, 7% lower than adjusted EBITDA of $361 2 million generated in the same period in 2023.
Mike Gray: The 'twenty 'twenty four decrease in adjusted EBITDA can be primarily attributed to year over year declines in drilling activity, primarily in the United States.
Mike Gray: Depreciation.
<unk> expense in the first nine months of 'twenty 'twenty, four with $261 8 million, an increase of 14% compared to $229 6 million in the first nine months of 2023.
General and administrative expense in the third quarter of 2024 was 1% higher than in the third quarter of 2023.
Mike Gray: General and administrative expenses increased primarily as a result of annual wage increases.
Speaker Change: G&A was down 12% from Q2, 'twenty 'twenty four to Q3 'twenty 'twenty four.
Speaker Change: Interest expense decreased by 24% to $23 8 million from $31 3 million.
Speaker Change: The decrease was the result of lower debt levels can reduce effect of interest rates. Our interest expense will continue to decline as our debt level decrease in interest rates continued to be cut as their interest rate on our debt is floating.
Speaker Change: During the third quarter of 2024 to $44 7 million of debt was repaid and a total of $135 million was repaid during the first nine months of 'twenty 'twenty four.
Speaker Change: From January one 2023 to September 30th 2020 for a total of $352 6 million of debt has been repaid, leaving $247 4 million of the 600 million debt reduction target I expect it to be Ritchie achieved by the end of 2025. The company is on track to achieve its stated debt targets.
Speaker Change: Net purchases of property and equipment for the third quarter of 2024 totaled $33 5 million, consisting of 5 million and upgrade capital and $32 3 million of maintenance capital.
Speaker Change: Offset by disposition proceeds of $3 8 million capital expenditures for 2024 are targeted to be approximately 167 million primarily related to maintenance expenditures tubular purchases in selected growth and upgrade projects that have been funded by customers.
Speaker Change: That note I will turn the call back to Bob Thanks, Mike.
Bob Geddes: It's right around the world here in doing operational updates starting with Canada.
Bob Geddes: Combination of expanded pipeline capacity, both for oil and LNG.
Bob Geddes: LNG tightening differential and what's a low Canadian dollar the net effect is that more drilling will occur in the western Canadian sedimentary basin.
Bob Geddes: Safe to say that the demand for our high spec singles and I expect triples is at the highest it has been in quite some time at least a decade.
Bob Geddes: This has also helped to drive the highest spec double market to enjoy utilization of about 60%, which is a typical threshold for contractors able to move pricing almost one third of enzymes Canadian fleet at our high spec double so we have lots of product to feed into this construct.
Bob Geddes: Our fleet of high spec singles and high spec triples are essentially booked well into 'twenty twenty-five candidate is back to the first quarter levels of activity, which rarely happens in the Canadian market in the third quarter historically over a third of the operating days typically occur in the first quarter the winter drilling season.
Bob Geddes: Our Canadian drilling business unit has 50 rigs active today and looking steady through November with a drop off as we get closer to Christmas and operator shut down over the Christmas break.
Bob Geddes: After axis, we have visibility to quickly get back to 55 rigs, perhaps even picking at 60 rates for the highest spec singles and highest spec troubles troubled triples.
Bob Geddes: We'll be moving higher as utilization in these rig categories continues to be very strong notwithstanding day rates are still well below any newbuild metrics rates need to be in the fifties before we see newbuild Super spec triples, and for the highest spec singles and highest spec doubles rates will need to be in the very high thirties before investment could be made in new builds with her.
Reasonable rate of return that covers at least the cost of capital.
Bob Geddes: We're also seeing lots of interest in our auto pilot with specific apps such as C. D. S. C automated drill system, which charged out at $1000 a day being initiated on certain high spec triples are growing into Canada, while on the incremental revenue theme. We have also expanded certain apps from our edge autopilot platform onto our ADR high spec singles.
Bob Geddes: Again more opportunity to drive incremental revenue streams on existing active assets as mentioned, we have almost 90% of the current active JV. If we contracted until the end of the first quarter 2025.
Witnessed very competitive bidding into the third and fourth quarter, we did strategically place ratcheting rate increases compounding as we moved through the fall season and into the winter drilling season, Arcadian wall servicing business continues to have.
Bob Geddes: Our strong schedule ahead of for its rigs in the heavy oil area and is expected to pick up as we continue to capture more of the OWS work into 2025.
Bob Geddes: Our rental fleet of tubular is tanks and other high margin ancillary equipment continues to grow as more and more specialty equipment is called for it usually high torque tubular too attached to our high spec ADR drill rigs with.
Bob Geddes: With accelerated wearing issue on tubular is as a result of the high penetration rates is becoming the norm for tubular has to be charged separate from the rig rate and to recognize the consequence of accelerated were on full cycle tubular costs.
Bob Geddes: Moving to international we have a fleet of 30, plus drilling rigs that operate in six countries around the globe of which 17 are under contract today.
Bob Geddes: The middle East, we have 100% of our high spec ATR fleet actively engaged or long term contracts and with half of them on PPI contracts. So it's performance based contracts, we're able to get paid for the performance of our high performance drilling team provides when coupled with our edge autopilot drill rig control systems.
Bob Geddes: And the law, specifically, we drilled the project well ahead of schedule and as a result, we have two of the 380 hours on standby until year end at which time, they will pick right back up and get after the 20th twenty-five drilling campaign with a client in Argentina, we're running at 100% utilization with both our 2000 horsepower high spec ADR is operating and under long term.
Contracts, we have one of our drill rigs working in Venezuela with another ready to start up in the next month, Australia is staying steady with very little change moving to the United States. We have a fleet of 77 highest spec 80 ours in the U S stretching from the California market up into the Rockies, but the main focus back down into the Permian and West Texas.
Bob Geddes: We operate roughly 37 rigs today.
Bob Geddes: Which is what we ran on average through the second quarter.
We expect little change for the rest of 2024 with possibly upside of one or two rigs.
Bob Geddes: The challenging U S is that in addition to the depressed natural gas prices, we saw half a trillion of M&A activity in the last 18 months occur which has manifested itself into less work in the short term.
Bob Geddes: The natural gas story may take a little bit longer to correct itself.
Bob Geddes: The good news is that we have mainly been in oil focused drilling in the U S market.
Bob Geddes: Coming back to the effects of M&A until the combined entities get through a budget cycle and start addressing decline rates. We don't expect solid improvements in the U S market until late two five at the earliest.
Bob Geddes: Our U S business unit continues to expand its PV I contract base and now has over half the fleet at a tbi contract to some degree that builds off our high performance and highly trained field teams, coupled with our edge autopilot drilling rig control system technology.
Bob Geddes: [laughter].
Bob Geddes: Excuse me not only do we get a superior rate for edge autopilot technology, we captured the upside value generated to the operator performance metrics everybody wins.
Bob Geddes: <unk> delivers all bores for lower costs, and we help derisk that with our PBR contract for our U S. Well servicing business unit, which is focused primarily on the Rockies and California, while servicing market continues to enjoy high utilization in the upper eighties and delivered a record quarter.
Bob Geddes: Actual drilling business, which is essentially a mud motor rental business that utilizes proprietary technology. It continues to provide some of the best motors with high quality rebuilds in the Rockies. We're also expanding this into the Permian.
Bob Geddes: Let's move to the technology edge autopilot drilling rig control systems happy to report, we have successfully beta tested our ensign edge a T C.
Bob Geddes: H S EZ auto to face control. This paves the way for seamless control of automated directional drilling from those operators have utilized remote operating centers and utilize in house D. G S directional guidance systems.
We continue to grow and deploy a J autopilot onto our active rigs across the globe. We most recently installed and commissioned our rig or enzyme <unk> sonar, Bahrain rigs, which are starting to execute under PPA contracts, we continue to expand the edge apps up.
Platform on each of the rigs that already have our edge autopilot DRC technology as part of the business continues to grow at a rapid pace year over year.
Bob Geddes: Our results with reduced dwell times increased pay rates with reduced well tortuosity and help differentiate us from our competitors with that I'll turn it over to.
Speaker Change: The operator for questions.
Speaker Change: Okay.
Speaker Change: Thank you ladies and gentlemen.
Speaker Change: I'll begin the question and answer session.
Speaker Change: Do you have a question. Please press star followed by the one on your Touchtone phone.
You'll hear a prompt that Johan has been raised.
Speaker Change: Should you wish to decline from the polling process. Please press the star followed by the <unk>.
Speaker Change: If you're using a speaker phone please lift the handset before pressing any keys.
Speaker Change: One moment. Please for your first question.
Speaker Change: Your first question is from Aaron Macneil from TD Cowen. Please go ahead.
Hey, good morning, all.
Speaker Change: Bob.
Speaker Change: Prepared remarks, you mentioned you were essentially booked on the triples in Canada.
Speaker Change: Under the impression that you had a couple of idle rigs in the region.
Speaker Change: I guess is that still the case.
Speaker Change: As we look into.
Speaker Change: Yes.
Speaker Change: LNG, Canada coming into service how are you thinking about.
Speaker Change: Marketing.
Speaker Change: <unk> I guess.
In Canada or the U S.
Speaker Change: Or you think it costs to get them.
Speaker Change: So in Canada, we have.
Speaker Change: Today, we've got a.
A few that are ready to go to work no capital involved in putting them back to work they've got two or three bids out on them I fully expect they will be contracted as we go into the first quarter.
Speaker Change: So that's what we mean by that comment LNG the effects I think that Hum, you're probably gonna see more of that.
Speaker Change: Waiting itself into the into the back half I don't see any immediate response too.
Speaker Change: Phil pipeline capacity today on LNG, I think everyone's got the capacity to kind of filter into that.
Speaker Change: The question is how do they how do they keep that moving along and with some of the Debottlenecking and and pipeline efficiencies working through yeah, you're you're going to need.
Speaker Change: Steady.
Speaker Change: Platform of high spec triples to keep that are moving along so.
Speaker Change:
Speaker Change: And as I mentioned, the the cost to put a new rig together is right now a burdensome.
Speaker Change: Rates are and are not up into the fifties, where they would need to be to to support a $50 million Super spec Triple type rig, which is what the operators are.
Speaker Change: There are always wanting they they want the highest technology for the best price.
Speaker Change: Gotcha and maybe this one's for you and maybe it's for Mike I know, it's not specifically disclosed but can you speak to gross margins for your drilling rigs and it's not.
Speaker Change: Specific dollars than maybe the trend that you're observing.
Speaker Change: You know as you think about it.
Speaker Change: As well as sort of the prevailing cost structure.
Speaker Change: Yeah for sure I mean, we've seen some margin compression over the last couple of quarters, just with the sort of static to the flight activity in the U S.
Speaker Change: With idle rigs in other basins, but.
Speaker Change: The cost structure overall, it's been fairly static if.
If not slightly down the whole chain.
Speaker Change: The issues that came from COVID-19 seem to be alleviated.
So from our standpoint, the margin compression is really more on potential revenue rates than really on a cost basis, but we're seeing that being fairly flat to the static on a go forward basis.
Speaker Change: Very helpful. Thanks, guys I'll turn it back.
Speaker Change: Yeah.
Speaker Change: Your next question is from Keith <unk> from RBC. Please go ahead.
Keith: Hey, Thanks, and good morning, Mike can we can we start out on the Q4 free cash flow and liquidity, maybe if you could just walk us through the pieces of free cash flow for Q4, we know you've got some.
Keith: The mandatory debt repayments and now there is a credit facility liquidity coming in for Q4 can you just kind of walk through what we should expect on the free cash flow side to help keep you on the side of that.
Of the revised liquidity.
Speaker Change: Yes, no for sure I'll start off with I mean, we're definitely it would be on the right side.
Speaker Change: When you look at the consensus right now is about 120 million for EBITDA Capex with 167 for the quarter will probably be around that 30 million growth capex.
Speaker Change: Interest expense will be between that $20 to 25 million. So it leaves you about $65 million of free cash flow leftover for debt repayments.
Speaker Change: There is potential for some nonoperating cash inflows from some.
Speaker Change: Property and asset dispositions that could come into Q4, so when we look at the free cash flow based on where consensus is capex in Amtrust Oh, we should be in a pretty good position. We exited the quarter Q3 was $66 3 million in liquidity.
Speaker Change: So with the 75 million reduction in the facility and the $27 million term loan payment, we don't foresee any issues and we'll exit the year with liquidity going into Q1 with 2025 looking fairly stable to static on a year over year, we don't really see a big demand for capex or.
Speaker Change: Or anything like that so everything's looking like I said it would be on the right side going forward.
Speaker Change: Okay, that's very clear and just on 2025, I know you haven't given guidance yet but.
Speaker Change: What's what's sort of the ballpark, we should be thinking about for 2025 Capex at this point is it roughly a flat year given the rest of the activity level should be roughly flat.
Speaker Change: Yeah, what we're seeing is probably pretty flat year over year like I said, if you have activity in the U S picks up in the back half that might increase a little bit, but what we're seeing right now is a fairly static year over year, which.
Speaker Change: From a balance sheet perspective is quite good.
Speaker Change: Yeah got it and just just one final one for me on the Canada, Duvernay, specifically I know you've got.
Speaker Change: Pretty high utilization on years on your triple rigs as it is and you've been pretty active historically in the duvernay and I know that asset.
Speaker Change: One of the assets in the Duvernay Anyways has recently changed hands can you just talk maybe about some of the trends youre seeing in the Duvernay do you expect activity there to pick up.
Speaker Change: And the next one to two years or should things there stay relatively flat.
Speaker Change: My sense is I stay relatively flat.
With maybe.
Speaker Change: Small uptick but.
Speaker Change:
It seems that the Canadian market has moved away from this heavy first quarter drill your brains out settle down second quarter slowdown third quarter fourth quarter into a more stable and that's a lot to do with.
Speaker Change: The infrastructure has been more robust pretty built out and we have pad rigs that can drill right through breakup. So it's it's it's taken the seasonality out of it a little bit. So you are seeing.
Speaker Change: More common static approach so I would suggest static to maybe a one or two rigs.
Speaker Change: Got it okay. Thanks very much.
Speaker Change: Hey, Dave.
Speaker Change: The next question is from Macquarie Shaheed from <unk> capital. Please go ahead.
Speaker Change: And thank you for taking my questions I have a few of those.
Speaker Change: First of all on your EBITDA margins, they look to be up like 200 basis points year over year, which is really impressive.
Speaker Change: Is it on.
Speaker Change: The margin uplift is all being driven by Canada are drilling or is it also well servicing as well contributing as rod and internationally, because we know U S is probably perhaps down.
Speaker Change: Yeah, no. It's a combination of all the.
The Canadian market, while servicing than the international it's predominantly in Australia. So we're seeing a let's say margin ex margin on areas like that and then we're seeing like I said fairly static to slightly down on the U S side, just given some of the pricing constraints.
Speaker Change: No in Australia, you said also helping is it pricing is up in Australia.
Speaker Change: Generally it's fairly flat, we've got two large rigs on large.
They're almost integrated project management projects of a car that.
Speaker Change: Curdle lead the way and those results two out of the seven that we have running.
Kind of skewing those numbers a little bit.
Speaker Change: No.
Speaker Change: This is this is good that you know is the rig mix has shifted but it feels to me like.
Speaker Change: Over the last one year, Australia activity hasn't really picked up as a at least how.
Speaker Change: Oh I expected.
Speaker Change: What's going on there.
Speaker Change: Well they.
Speaker Change: A good question I mean, they seem to have falling into bacon drilling up to keep the 13 million LNG going off the coast and satisfy their internal needs, which are growing electricity needs are growing but we see.
Speaker Change: We see a growing construct there moving into the future there's always been a little bit of.
Speaker Change: Political challenges, Australia isn't avoided those but.
Speaker Change: Or more a more generous with our.
Speaker Change: The gas development I do think though that.
We think of it as a fairly static.
Speaker Change: No.
Speaker Change: No fundamental problems and and it will grow slowly over time, but we're not expecting any rapid jumps.
Speaker Change: Okay and.
Speaker Change: And now shifting to the U S market.
Speaker Change: In California, what skill mix in terms of drilling between geothermal and Florida hydrocarbons.
Speaker Change: And then do you see any opportunity for a rig activity.
In Nevada for a drilling for our.
Speaker Change: It can be bearing brines.
Speaker Change: We don't have any lithium wells underway today, we have one rig in California growing two.
Speaker Change: Two we will have one up in Oregon.
Geothermal.
Speaker Change: Most of it is oil and gas I mean geothermal doesn't make a market you get geothermal wells between other oil and gas wells, where the rigs are down, but you don't get geothermal projects back to back to keep a rig busy it's it's more anecdotal, but we've got we've got more experience than anyone drilling geothermal wells.
Speaker Change: Yes, and we've got a great team that understands what's required.
Speaker Change: So when the engineering teams that look after these gerald geothermal wells.
Speaker Change: We don't have any experience or very little experience in the area. We can help them de risked.
Speaker Change: <unk>.
Yeah.
Speaker Change: Have you.
Speaker Change: You know as any one of these lithium companies in Nevada approach you guys about future needs for drilling rigs are.
Speaker Change: Nothing as yet no talk as yet.
Speaker Change: Nothing that I'm aware of no.
Speaker Change: No no not that we're aware of a car.
Speaker Change: Okay.
Speaker Change: And then could you talk about your rig moves from a U S to the Canadian market have the audit happened.
Speaker Change: It happened Oh this did have some some rigs on the move.
Speaker Change: Yes, basically there there's one other one.
Speaker Change: Your way.
Speaker Change: Well we've itself in probably end of first quarter type of thing.
Speaker Change: And we had won 2000 horsepower rig that was built for the Horn River.
Speaker Change: Bye Bye, Trinidad, which drilled a few wells and then and then sat down for a period of time drilled.
Speaker Change: Drilling one or two wells after that it's moved into Oregon to drill a deep a geothermal well and then it's contracted into the Rockies after that.
Break says you know we're getting a.
Speaker Change: Deeper because of.
Four and five mile laterals and more racking capacity, so with 2000 horsepower rig all of a sudden.
Speaker Change: It becomes a little more desirable in certain markets.
Speaker Change: Yeah, but not the not the horn river market in Canada.
Speaker Change: Yeah.
Speaker Change: Well that's all for me. Thank you very much I appreciate the color. Thanks I.
Appreciate it.
Ladies and gentlemen, as a reminder, should you have any questions. Please press the star followed by the number one.
Speaker Change: Yeah.
Speaker Change: There are no further questions at this time. Please proceed with closing remarks.
Speaker Change: Thank you operator, so looking forward it continues to be an exciting time for enzyme as we build on last quarters robust Canadian and international market fundamentals.
Speaker Change: We are seeing an improving long term outlook in all our U S markets, but don't expect any meaningful growth until back half of 'twenty five or into 'twenty six with over $800 million of forward revenue booked under contract. We expect to continue to steady run rate of 100 to 110 enzyme drill rigs and roughly 60 to 70, well service rigs operating daily a third of those.
Speaker Change: They are on long term contracts with contract tenure of about a year and roughly 25% of those contracts are performance based contract or some sort of with that we have excellent visibility for a sustained free cash flow with consistent margins, which will provide the ability to continue executing on our debt reduction plan.
Speaker Change: As we said we'd do.
Speaker Change: With the application of edge autopilot combined with an expanding PBA contract base backed up with our superior performance drilling teams in the field enzyme is delivering value to operators, which supports rate increases moving forward again, the focus continues to be accelerating debt reduction into a steadily improving construct for the drilling and well servicing businesses.
Speaker Change: I'd like to thank our highly professional crews and all of our employees along with our customers for helping enzyme achieved the performance and industry milestones that enzyme that the industry recognizes us for look forward to our next call in about three months time stay safe. Thank you.
Speaker Change: Yeah.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today.
You for participating and ask that you. Please disconnect your lines.
Speaker Change: Yes.