Ensign Energy Services Inc. Reports 2011 Third Quarter Results

CALGARY, Nov. 7, 2011 /CNW/ –

Overview

Strong continuing demand for oilfield services in the third quarter and
first nine months of 2011 when compared with similar periods in the
prior year resulted in improved operating and financial results from
the Company’s Canadian and United States operations.  As expected,
improved field conditions in Canada allowed operators to address the
pent up demand for oilfield services after a particularly wet second
quarter through much of the Western Canadian Sedimentary Basin.  The
Company’s international operations continued the trend established in
the first half of the year in improving financial contributions in 2011
versus those in 2010.

The Company recorded revenue of $475.7 million in the three months ended
September 30, 2011, an increase of 39 percent from revenue of $341.3
million recorded in the third quarter of the prior year.  The Company
recorded revenue of $1,312.4 million for the nine months ended
September 30, 2011, a 38 percent increase over revenue of $951.7
million for the nine months ended September 30, 2010.  EBITDA (defined
as earnings before interest, taxes, depreciation, amortization, and
share-based compensation expense) totaled $111.5 million ($0.73 per
common share) in the third quarter of 2011, 38 percent higher than
EBITDA of $80.6 million ($0.53 per common share) in the third quarter
of 2010.  EBITDA for the nine months ended September 30, 2011 totaled
$346.9 million ($2.27 per common share), an increase of 57 percent from
EBITDA of $221.6 million ($1.45 per common share) recorded in the first
nine months of 2010.  Adjusted net income (defined as net income before
share-based compensation expense tax-effected using an income tax rate
of 35%) totaled $52.1 million ($0.34 per common share) in the third
quarter of 2011, 61 percent higher than Adjusted net income of $32.4
million ($0.21 per common share) in the third quarter of 2010. 
Adjusted net income for the nine months ended September 30, 2011
totaled $158.7 million ($1.04 per common share), an increase of 96
percent over Adjusted net income of $81.1 million ($0.53 per common
share) recorded in the first nine months of 2010.  Net income for the
third quarter of 2011 increased 98 percent over the comparable prior
year period to $64.0 million ($0.42 per common share) compared with net
income of $32.3 million ($0.21 per common share) for the third quarter
of 2010.  Net income for the nine months ended September 30, 2011
totaled $159.8 million ($1.05 per common share), an increase of 83
percent from net income of $87.2 million ($0.57 per common share)
recorded in the first nine months of 2010.  Funds from operations
increased 49 percent to $114.2 million ($0.75 per common share) in the
third quarter of 2011 from $76.7 million ($0.50 per common share) in
the third quarter of the prior year.  Funds from operations for the
first nine months of 2011 increased 60 percent to $335.1 million ($2.19
per common share) from $209.4 million ($1.37 per common share) recorded
in the corresponding period in 2010.

The acquisition of the land drilling division of Rowan Companies, Inc.
(“Rowan Land Drilling”) on September 1, 2011, the Company’s largest
acquisition in its history, has significantly expanded the Company’s
presence in the southern United States land-based drilling market.
Rowan Land Drilling owns and operates 30 deeper capacity electric land
drilling rigs in the southern United States. The purchase price of USD
$510 million was funded through the Company’s existing working capital,
available lines of credit and a new 18-month term facility of USD $400
million. Although the financing of the acquisition resulted in
long-term debt and negative working capital on the Company’s balance
sheet as at September 30, 2011, current and future credit facilities,
together with growing funds from operations, are expected to be
sufficient in supporting the Company’s growth initiatives, including
the current new build program, which upon completion will deliver an
additional 15 new state-of-the-art drilling rigs and nine well
servicing rigs over the next nine months.

¹ EBITDA is defined as “income before interest expense, income taxes,
depreciation and share-based compensation (recovery)/expense”. 
Management believes that in addition to net income, EBITDA and EBITDA
per share are useful supplemental measures as they provide an
indication of the results generated by the Company’s principal business
activities prior to consideration of how these activities are financed,
how the results are taxed in various jurisdictions or how the results
are impacted by the accounting standards associated with the Company’s
share-based compensation plans.  EBITDA and EBITDA per share as defined
above are not recognized measures under International Financial
Reporting Standards and accordingly may not be comparable to measures
used by other companies.
² Adjusted net income is defined as “net income before share-based
compensation (recovery)/expense, tax-effected using an income tax rate
of 35%”.  Adjusted net income and Adjusted net income per share are
useful supplemental measures as they provide an indication of the
results generated by the Company’s principal business activities prior
to consideration of how the results are impacted by the accounting
standards associated with the Company’s share-based compensation plans,
net of income taxes.  Adjusted net income and Adjusted net income per
share as defined above are not recognized measures under International
Financial Reporting Standards and accordingly may not be comparable to
measures used by other companies.
³ Funds from operations is defined as “cash provided by operating
activities before the change in non-cash working capital”.  Funds from
operations and funds from operations per share are measures that
provides additional information regarding the Company’s liquidity and
its ability to generate funds to finance its operations.  Management
utilizes these measures to assess the Company’s ability to finance
operating activities and capital expenditures.  Funds from operations
and funds from operations per share are not measures that have any
standardized meaning prescribed by International Financial Reporting
Standards and accordingly may not be comparable to similar measures
used by other companies.
⁴ Includes workover rigs.
⁵ Excludes coring rig operating days.

Revenue recorded in the third quarter of 2011 totaled $475.7 million, an
increase of 39 percent over $341.3 million recorded in the third
quarter of 2010.  Revenue was $1,312.4 million for the nine months
ended September 30, 2011, a 38 percent increase from $951.7 million for
the nine months ended September 30, 2010.  As a percentage of revenue,
gross margin for the third quarter of 2011 increased to 31.3 percent
(2010 – 25.4 percent) and 30.5 percent for the nine months ended
September 30, 2011 (2010 – 27.1 percent).

The Company continues to capitalize on increased demand for oilfield
services in the North American market leading to increased revenues in
both the three and nine months ended September 30, 2011 as a result of
higher activity levels and improvements in day rates.  Revenues from
the Company’s international operations also improved over the prior
year as the Company’s Latin American operations continue to see higher
activity levels as a result of improved demand for oilfield services
and the operations in Australia started to recover from temporary
weather setbacks present in the first half of 2011.

Gross margin increased to $148.7 million (31.3 percent of revenue) for
the third quarter of 2011 compared with $86.8 million (25.4 percent of
revenue) for the third quarter of 2010.  Similarly, gross margin
increased to $400.5 million (30.5 percent of revenue) in the first nine
months of 2011 compared to $257.7 million (27.1 percent of revenue) for
the corresponding period in 2010.  Higher demand for oilfield services
in 2011 compared to the prior year resulted in improved margins,
particularly in the Canadian and United States segments.  Major
maintenance costs partially offset the increases to gross margin in the
three and nine months ended September 30, 2011 due to higher costs
being incurred in 2011 compared to 2010 as a result of the additional
costs incurred on the equipment fleet to meet the higher activity
levels.

Canadian Oilfield Services

Revenue generated in Canada increased 52 percent to $192.7 million for
the three months ended September 30, 2011, from $126.8 million for the
three months ended September 30, 2010.  For the nine months ended
September 30, 2011, revenue increased 51 percent to $561.0 million
compared to $372.4 million for the same period in 2010.  In the third
quarter of 2011, Canadian revenues accounted for 40 percent of total
revenue (2010 – 37 percent), and during the nine months ended September
30, 2011, Canadian revenues were 43 percent of total revenue (2010 – 39
percent).  Increased revenues are a result of higher demand for
oilfield services which led to higher equipment utilization and
improvements to revenue rates.

Drilling days recorded by the Company’s Canadian operations in the third
quarter of 2011 increased 32 percent from the comparable quarter in the
prior year.  During the nine months ended September 30, 2011, drilling
days increased 29 percent from the same period of the prior year. 
Similarly, Canadian well servicing hours increased by 28 percent in the
third quarter of 2011 and by 14 percent in the nine months ended
September 30, 2011 compared to the corresponding periods in the prior
year.

United States Oilfield Services

The Company’s United States operations recorded revenue of $189.2
million in the third quarter of 2011, a 44 percent increase from the
$130.9 million recorded in the corresponding period of the prior year. 
During the nine months ended September 30, 2011, revenue of $490.9
million was recorded, an increase of 40 percent from the $350.5 million
recorded in the nine months ended September 30, 2010.

Although the United States dollar strengthened briefly towards the end
of the period against the Canadian dollar, it weakened during the three
and nine month periods ended September 30, 2011 compared to the same
periods in 2010, negatively impacting the operating results of the
Company’s United States operations upon translation to Canadian
dollars.  The United States dollar decreased approximately six percent
relative to the Canadian dollar in the third quarter of 2011 compared
to the third quarter of 2010.  The United States operations accounted
for 40 percent of the Company’s revenue in the third quarter of 2011
(2010 – 38 percent) and 37 percent of total revenue in the nine months
ended September 30, 2011 (2010 – 37 percent).

The number of drilling days recorded by the Company’s United States
operations in the third quarter of 2011 increased 37 percent from the
same period of the prior year.  Drilling days for the nine months ended
September 30, 2011 increased 28 percent from the comparable period in
the prior year.  United States well servicing hours in the third
quarter of 2011 were up 46 percent compared to the prior year and well
servicing hours for the first nine months of 2011 were up 51 percent
compared to the first nine months of 2010.

The third quarter of 2011 saw the expansion of the Company’s United
States operations with the September 1, 2011 acquisition of Rowan Land
Drilling and its fleet of 30 drilling rigs.  This acquisition, combined
with seven new drilling rigs and 10 additional well servicing rigs
added from the Company’s new build program, led to higher operating
activity and improved operating and financial results in the United
States segment.  Subsequent to the closing of the acquisition, Rowan
Land Drilling changed its name to Ensign US Southern Drilling LLC.

International Oilfield Services

The Company’s international operations recorded revenue of $93.9 million
in the third quarter of 2011, a 12 percent increase from $83.6 million
recorded in the corresponding period of the prior year.  International
revenue for the nine months ended September 30, 2011 increased by 14
percent to $260.5 million from $228.7 million recorded for the nine
months ended September 30, 2010.  International operations contributed
20 percent of the Company’s revenue in the third quarter of 2011 (2010
– 25 percent) and 20 percent in the first nine months of 2011 (2010 –
24 percent).

International drilling days for the three months ended September 30,
2011 increased seven percent over the comparable prior year period. 
International drilling days for the nine months ended September 30,
2011 increased 10 percent over the same period of last year.  The
Company’s international operations improved over the comparable prior
year periods as a result of higher activity levels in the Company’s
Latin American and eastern hemisphere operations as Australia began to
recover from temporary weather setbacks in the first half of 2011. 
Challenges in the Middle East and North Africa continue to occur as a
result of regional geopolitical issues, however the Company is hopeful
operations may restart in the near future.  Consistent with the
Company’s United States operations, the weakening of the United States
dollar relative to the Canadian dollar negatively impacted the
operating results of the Company’s international operations upon
translation into Canadian dollars.

Certain of the Company’s assets located in areas of the Middle East and
North Africa that are subject to civil unrest have not worked since
early 2011.  Based on recent physical inspections, the assets remain
intact; however, there is uncertainty as to when operations may
resume.  The carrying value of these assets is approximately $40.0
million and, at this time, the Company does not believe that any
significant impairment has occurred.  If on further physical inspection
of the assets a deterioration of the equipment has occurred, a write
down may be required.

Depreciation

The Company uses the unit of production method of calculating
depreciation for the majority of its property and equipment. 
Depreciation expense totaled $44.5 million for the third quarter of
2011 compared with $34.5 million for the third quarter of 2010. 
Depreciation expense for the first nine months of 2011 was $120.4
million, an increase of 23 percent over the $97.9 million recorded in
the first nine months of 2010.  The increase in depreciation expense is
mainly due to the increase in operating activity levels during the
three and nine months ended September 30, 2011 compared to the
operating activity levels in the corresponding periods of 2010.

General and Administrative Expense

General and administrative expense increased 44 percent to $21.2 million
(4.5 percent of revenue) for the third quarter of 2011 compared with
$14.7 million (4.3 percent of revenue) for the third quarter of 2010. 
For the nine months ended September 30, 2011, general and
administrative expense totaled $49.4 million (3.8 percent of revenue)
compared with $42.5 million (4.5 percent of revenue) recorded in the
nine months ended September 30, 2010, an increase of 16 percent.  The
increase in general and administrative expense reflects the expansion
of the Company’s operations in all regions in which the Company is
active and includes some one-time costs associated with the acquisition
and integration of Rowan Land Drilling.

Share-Based Compensation (Recovery) Expense

Share-based compensation (recovery) expense arises from the
Black-Scholes valuation accounting associated with the Company’s
share-based compensation plans, whereby the liability associated with
share-based compensation is adjusted for the effect of granting and
vesting of employee stock options and changes in the underlying price
of the Company’s common shares.

For the three months ended September 30, 2011, share-based compensation
recovery was $18.3 million compared with an expense of $0.1 million
recorded in the third quarter of 2010.  For the nine months ended
September 30, 2011, share-based compensation recovery was $1.6 million
compared with $9.4 million for the nine months ended September 30,
2010.  The change in share-based compensation (recovery) expense in the
three and nine months ended September 30, 2011 arises from the fair
value accounting under IFRS and the change in the price of the
Company’s common shares during these periods.  The closing price of the
Company’s common shares was $13.75 at September 30, 2011 ($12.63 at
September 30, 2010), compared with $19.12 at June 30, 2011 ($12.52 at
June 30, 2010), $18.26 at March 31, 2011 ($14.70 at March 31, 2010) and
$15.03 at December 31, 2010 ($15.00 at December 31, 2009).

Interest Expense

Interest is incurred on the Company’s global revolving credit facility,
that was increased by $50.0 million in the third quarter to a total of
$250.0 million, the $10.0 million Canadian-based revolving credit
facility and the Company’s new USD $400.0 million 18-month term loan,
incurred to partially fund the acquisition of Rowan Land Drilling. 
Transaction fees related to the Company’s recent debt financing and
renewal are also included in interest expense in the third quarter of
2011.

Foreign Exchange and Other ((Gain)/Loss)

Included in this amount is a foreign exchange loss on the conversion of
the Australian operations from Australian dollars to United States
dollars.  The Australian currency weakened against the United States
dollar during the three and nine months ended September 30, 2011, but
had strengthened during the three and nine months ended September 30,
2010.

Income Taxes

The effective income tax rate for the three months ended September 30,
2011 was 23.6 percent compared with 29.3 percent for the three months
ended September 30, 2010.  The effective income tax rate for the nine
months ended September 30, 2011 was 29.3 percent compared with 33.8
percent for the nine months ended September 30, 2010.  The decrease in
the effective income tax rate in the three and nine months ended
September 30, 2011 is primarily due to a larger proportion of taxable
income generated in Canada, in combination with reduced taxable income
from higher rate jurisdictions.

Financial Position

The following chart outlines significant changes in the consolidated
statements of financial position from December 31, 2010 to September
30, 2011:

Funds from Operations and Working Capital

¹ Comparative figure as of December 31, 2010.

During the three months ended September 30, 2011, the Company generated
funds from operations of $114.2 million ($0.75 per common share)
compared with $76.7 million ($0.50 per common share) for the three
months ended September 30, 2010, an increase of 49 percent.  For the
nine months ended September 30, 2011, the Company generated funds from
operations of $335.1 million ($2.19 per common share), an increase of
60 percent over $209.4 million ($1.37 per common share) generated in
the first nine months of 2010.  The increases in funds generated from
operations are a direct result of the increased demand for oilfield
services, primarily in North America, in the three and nine months
ended September 30, 2011 over the comparable periods of 2010 as well as
the expansion of the Company’s fleet as a result of the acquisition of
Rowan Land Drilling and completions under the new build program.

At September 30, 2011, the Company’s working capital was negative $12.7
million, compared to a positive working capital of $84.5 million at
December 31, 2010, a decrease of 115 percent. Financing of the
acquisition of Rowan Land Drilling during the latter half of the third
quarter of 2011 resulted in long-term debt and temporary negative
working capital on the Company’s statement of financial position as at
September 30, 2011.  Despite this recent shift in capital structure,
current and future credit facilities, together with funds from
operations, are expected to be sufficient in supporting the Company’s
current operating and capital requirements.

Investing Activities

Effective September 1, 2011 the Company acquired Rowan Land Drilling for
USD $510.0 million.  Rowan Land Drilling is comprised of 30 deeper
capacity electric land drilling rigs in the southern United States. The
purchase was funded with existing cash balances and expanded credit
facilities, including a new 18-month term loan of USD $400.0 million.

Purchases of property and equipment during the third quarter of 2011
totaled $71.6 million (2010 – $61.0 million).  For the nine months
ended September 30, 2011, purchases of property and equipment totaled
$252.6 million (2010 – $152.4 million).  The purchases of property and
equipment relates predominantly to expenditures made pursuant to the
Company’s ongoing new build program.

Financing Activities

The Company’s global revolving credit facility (the “Global Facility”)
was increased by $50.0 million during the third quarter to a new limit
of $250.0 million.  Additionally, the Company has available a $10.0
million Canadian-based revolving credit facility (the “Canadian
Facility”). The Global Facility is available to the Company and any of
its wholly-owned subsidiaries, and may be drawn in Canadian, United
States or Australian dollars, up to the equivalent value of $250.0
million Canadian dollars. The amount available under the Canadian
Facility is $10.0 million or the equivalent United States dollars.

Net draws of the operating lines of credit were the result of the
acquisition of Rowan Land Drilling which was completed on September 1,
2011.  As of September 30, 2011, the operating lines of credit are
primarily being used to fund the completion of the most recent new
build program and to support international operations.

In connection with the purchase of Rowan Land Drilling, the Company
entered into an unsecured term loan of USD $400,000. There are no
mandatory principal repayments and the debt matures on February 28,
2013.  The Company incurred financing costs associated with the term
loan that are being deferred and amortized using the effective interest
method.

On May 18, 2011, the Company announced its intent to file with the
Toronto Stock Exchange a Normal Course Issuer Bid (the “Bid”) to
acquire for cancellation up to five percent of the Company’s issued and
outstanding common shares. On June 3, 2011, the Company received
approval from the Toronto Stock Exchange to purchase up to 7,660,512
common shares for cancellation.  The Bid commenced on June 7, 2011 and
will terminate on June 6, 2012 or such earlier time as the Bid is
completed or terminated at the option of the Company.  As at September
30, 2011, no common shares have been purchased and cancelled pursuant
to the Bid.

New Builds

During the first nine months of 2011, the Company commissioned seven new
ADR^TM style drilling rigs and 10 new well servicing rigs in the United States
and one new ADR ^TM style drilling rig and four well servicing rigs in Canada.

The remaining new build estimated delivery schedule, by geographic area,
is as follows:

Outlook

Equity markets and oil and natural gas commodity prices weakened during
the third quarter over growing concerns of the possibility of global
recessionary conditions that could be triggered by worsening Eurozone
debt issues.  While it may be too soon to call a return to recessionary
economic conditions or an end to the latest debt crisis, at best there
appears to be a softening in global economic activity/growth.  Amid
this backdrop of rising concern over weakening global economic health,
oilfield service activity levels generally remained strong in the third
quarter of 2011.  Only time will tell whether the recent weakness in
the equity markets is but a temporary blip in reaction to another
potential financial crisis or if it is a precursor to weaker global
energy demand that will lead to a significant decrease in future demand
for oilfield services.

As expected, third quarter oilfield services activity in Canada picked
up substantially from the seasonally low activity levels of the second
quarter of 2011.  Improved field conditions allowed operators to
address the pent up demand for oilfield services after a particularly
wet second quarter through much of the Western Canadian Sedimentary
Basin.  Activity levels for the fourth quarter of 2011 and first
quarter of 2012, the Canadian winter drilling season, are expected to
remain strong and, subject to favorable weather and field conditions,
should be improved over the prior year for most rig classes.  The only
area of weakness right now appears to be with respect to shallow
drilling rigs where demand is not as strong as for other rig classes.
As these rigs are generally targeting shallow natural gas plays, the
Company believes the demand will not improve until natural gas prices
move meaningfully higher.

The United States oilfield services activity levels remained strong as
the industry active rig count remained close to 2,000 active drilling
rigs for the third quarter and has remained at that level for the start
for the fourth quarter.  The demand for oilfield services equipment to
address oil and liquids rich natural gas resource plays remain strong
at current crude oil price levels.  The Company’s recent acquisition of
Rowan Land Drilling addresses the equipment requirements of many such
resource plays in the southern United States.  The transaction closed
on September 1, 2011, and 90% of the 30 drilling rigs acquired are
scheduled to be active through the next several quarters.  As with
Canada, the demand for oilfield services in the United States is
directly related to the prices of crude oil and natural gas.

The outlook for the Company’s international segment improved in the
third quarter as the operations in Australia returned to normal after
having endured the impact of flood conditions in the first half of
2011; and certain areas of the Middle East and North Africa appeared to
be moving closer to resolving the civil unrest that has negatively
impacted operations since the first quarter of this year.  The Company
does not expect to resume operations in certain suspended areas until
security has been established and it is safe for personnel to return.
The other areas in the international segment are expected to remain
steady as the longer term approach to international energy investment
means that oilfield service activity levels should continue at current
levels in the face of short-term uncertainty with respect to crude oil
prices.

Risks and Uncertainties

This document contains forward-looking statements based upon current
expectations that involve a number of business risks and
uncertainties.  The factors that could cause results to differ
materially include, but are not limited to, political and economic
conditions, crude oil and natural gas prices, foreign currency
fluctuations, weather conditions and the ability of oil and natural gas
companies to raise capital or other unforeseen conditions which could
impact on the use of the services supplied by the Company.

Conference Call

A conference call will be held to discuss the Company’s third quarter
2011 results at 2:00 p.m. MDT (4:00 p.m. EDT) on Monday, November 7,
2011.  The conference call number is (647) 427-7450 (in Toronto) or
1-888-231-8191 (outside Toronto).  A taped recording will be available
until November 14, 2011 by dialing 1-416-849-0833 (in Toronto) or
1-855-859-2056 (outside Toronto) and entering the reservation number
15906624.  A live broadcast may be accessed through the Company’s web
site at www.ensignenergy.com.

Ensign Energy Services Inc. is an international oilfield services
contractor and is listed on the Toronto Stock Exchange under the
trading symbol ESI.

Glenn Dagenais, Executive Vice President Finance and Chief Financial Officer, (403) 262-1361.