Ensign Energy Services Inc. Reports 2012 Third Quarter Results

CALGARY, Nov. 12, 2012 /CNW/ –

Overview

Ensign Energy Services Inc. (“Ensign” or the “Company”) recorded revenue
for the third quarter of 2012 of $525.7 million, 10 percent higher than
revenue of $475.7 million recorded in the third quarter of 2011. 
Revenue for the nine months ended September 30, 2012 was $1,667.2
million, 27 percent higher than revenue of $1,312.4 million for the
nine months ended September 30, 2011.  Net income for the third quarter
of 2012 decreased 30 percent to $44.8 million ($0.29 per common share)
compared to net income of $64.0 million ($0.42 per common share) for
the third quarter of 2011.  Removing the large quarterly year-over-year
swing in share-based compensation, adjusted net income for the third
quarter was $47.2 million, a decrease of nine percent from adjusted net
income of $52.1 million recorded in the third quarter of 2011.  Net
income for the nine months ended September 30, 2012 increased six
percent to $169.0 million ($1.11 per common share) compared to net
income of $159.8 million ($1.05 per common share) for the first nine
months of 2011.    EBITDA, defined as “income before interest, income
taxes, depreciation, and share-based compensation expense (recovery)”,
totaled $135.6 million ($0.89 per common share) in the third quarter of
2012, 22 percent higher than EBITDA of $111.5 million ($0.73 per common
share) in the third quarter of 2011.  For the first nine months of
2012, EBITDA was $431.3 million ($2.82 per common share), 24 percent
higher than EBITDA of $346.9 million ($2.27 per common share) for the
first nine months of 2011.  Funds from operations increased nine
percent to $123.9 million ($0.81 per common share) in the third quarter
of 2012 from $114.2 million ($0.75 per common share) in the third
quarter of the prior year.  For the nine months ended September 30,
2012, funds from operations increased 14 percent to $383.4 million
compared to $335.1 million for the nine months ended September 30,
2011.

Increases to the Company’s credit facilities in 2012 resulted in an
increase in available borrowings to $137.3 million as of September 30,
2012 compared with $10.1 million at December 31, 2011.  Long-term debt
at September 30, 2012 was reduced to $293.2 million compared to $406.0
million at December 31, 2011 and consists of USD $300.0 million of
senior unsecured notes, issued in February 2012.  The senior unsecured
notes consist of: USD $100.0 million in five year notes with an
interest rate of 3.43 percent; USD $100.0 million in seven year notes
with an interest rate of 3.97 percent; and USD $100.0 million in ten
year notes with an interest rate of 4.54 percent.  Proceeds from the
issuance of the senior unsecured notes, along with the Company’s credit
facilities and funds generated from operations, were used to fully
repay the USD $400.0 million term loan, incurred to finance the
September 2011 acquisition of the land drilling division of Rowan
Companies, Inc. (“Rowan Land Drilling”, subsequently referred to as
“Ensign US Southern”), in the first half of 2012.

FINANCIAL AND OPERATING HIGHLIGHTS

($ thousands, except per share data and operating information)

¹ EBITDA is defined as “income before interest, 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 percent”.  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
provide 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 Excludes coring rigs.
⁵ Includes workover rigs.

Revenue and Oilfield Services Expense

Revenue for the three months ended September 30, 2012 increased 10
percent to $525.7 million compared to $475.7 million for the comparable
period in 2011.  Revenue for the nine months ended September 30, 2012
increased 27 percent to $1,667.2 million over revenue of $1,312.4
million recorded for the nine months ended September 30, 2011.  As a
percentage of revenue, gross margin for the three and nine months ended
September 30, 2012 decreased to 28.9 percent (2011 – 31.3 percent) and
29.8 percent (2011 – 30.5 percent) respectively.  Pricing pressures
inherent in reduced demand for oilfield services negatively impacted
gross margins for the current quarter for the Company’s North American
operations.

Despite downward pressure on the demand for North American oilfield
services, revenue continued to grow in the three and nine months ended
September 30, 2012 over the comparable periods of the prior year as a
result of the Company expanding and upgrading its rig fleet.  The
acquisition of Rowan Land Drilling in the third quarter of 2011 added
30 drilling rigs to the Company’s United States fleet, with an
additional 10 ADR^® drilling rigs and 16 well servicing rigs added to the Company’s
consolidated fleet in 2011, all through the new build program.  As at
September 30, 2012, the new build program delivered an additional 12
ADR^® drilling rigs and 11 well servicing rigs to the Company’s consolidated
fleet in the current year.

Canadian Oilfield Services

Revenue decreased 15 percent to $164.1 million for the three months
ended September 30, 2012, from $192.7 million for the three months
ended September 30, 2011. For the nine months ended September 30, 2012,
revenue increased seven percent to $597.8 million compared to $561.0
million for the same period in 2011. Canadian revenues accounted for 31
percent of the Company’s total revenue in the third quarter of 2012,
compared with 40 percent in the third quarter of 2011, and during the
nine months ended September 30, 2012, Canadian revenues were 36 percent
of total revenue (2011 – 43 percent).  Demand for Canadian oilfield
services decreased in the current quarter when compared to the prior
year which weakened operating and financial results.  Stronger pricing
in the earlier months of 2012 compared to 2011 generally offset this
decrease for the nine months ended September 30, 2012.

The Company recorded 4,551 drilling days in the third quarter of 2012,
compared to 6,443 drilling days for the third quarter of 2011, a 29
percent decrease.  For the nine months ended September 30, 2012
drilling days were 14,263 compared to 16,750 for the nine months ended
September 30, 2011, a 15 percent decrease.  The reduced operating
activity in 2012 was due to reduced demand for oilfield service
equipment when compared to the stronger levels seen in 2011.  Canadian
well servicing hours decreased by eight percent to 35,098 operating
hours in the third quarter of 2012 compared with 38,076 operating hours
in the corresponding period of 2011.  For the nine months ended
September 30, 2012 well servicing hours were similar to those of the
prior year, decreasing one percent to 105,924 operating hours compared
with 106,557 operating hours for the nine months ended September 30,
2011.

During the nine months ended September 30, 2012, the Company added five
newly constructed ADR^® drilling rigs to its Canadian fleet, including one added in the third
quarter of 2012.  An additional three new ADRs and six new well
servicing rigs are scheduled to be added to the Company’s Canadian
equipment fleet over the next three quarters.

United States Oilfield Services

The Company’s United States operations recorded revenue of $237.1
million in the third quarter of 2012, a 25 percent increase from the
$189.2 million recorded in the corresponding period of the prior year.
During the nine months ended September 30, 2012, revenue of $730.9
million was recorded, an increase of 49 percent from the $490.9 million
recorded for the nine months ended September 30, 2011. The Company’s
United States operations accounted for 45 percent of the Company’s
revenue in the third quarter of 2012 (2011 – 40 percent) and 44 percent
of total revenue in the nine months ended September 30, 2012 (2011 – 37
percent).  Drilling rig operating days increased by 13 percent to 6,170
drilling days in the third quarter of 2012 from 5,478 drilling days in
the third quarter of 2011.  For the nine months ended September 30,
2012 drilling days increased by 32 percent to 18,671 drilling days from
14,156 drilling days in the nine months ended September 30, 2011.  Well
servicing activity increased by 61 percent in the third quarter of 2012
to 33,029 operating hours from 20,537 operating hours in the third
quarter of 2011.  For the nine months ended September 30, 2012 well
servicing activity increased 65 percent to 93,669 operating hours from
56,894 operating hours in the first nine months of 2011.

The upgrading of the Company’s United States drilling and well servicing
rig fleets resulted in improved operating results for the three and
nine months ended September 30, 2012 compared to similar periods in the
prior year despite a softening in the demand for United States oilfield
services in the current quarter.  The 2011 third quarter acquisition of
Rowan Land Drilling added 30 drilling rigs to the fleet while the
Company’s new build program added a further eight ADR^® drilling rigs and 12 well servicing rigs throughout 2011; and five ADR^® drilling rigs and 11 well servicing rigs during the first nine months
of 2012.  An additional four new ADRs are scheduled to be delivered
over the next 12 months pursuant to the Company’s new build program.

Despite the United States dollar weakening against the Canadian dollar
at the end of the current quarter it strengthened during the three and
nine month periods ended September 30, 2012 compared to the same
periods in 2011, positively impacting the operating results of the
Company’s United States operations on translation to Canadian dollars. 
In the first nine months of 2012 the average United States dollar
exchange rate increased by two percent to 1.002, when compared to the
same period of the prior year.

International Oilfield Services

The Company’s international operations recorded revenue of $124.5
million in the third quarter of 2012, a 33 percent increase from $93.8
million recorded in the corresponding period of the prior year.
International revenues for the nine months ended September 30, 2012
increased by 30 percent to $338.6 million from $260.5 million recorded
for the nine months ended September 30, 2011. International operations
contributed 24 percent of the Company’s revenue in the third quarter of
2012 (2011 – 20 percent) and 20 percent of the Company’s revenue in the
first nine months of 2012 (2011 – 20 percent). International operating
days for the three months ended September 30, 2012 totaled 2,960
drilling days compared with 2,781 drilling days in 2011, an increase of
six percent.  For the nine months ended September 30, 2012
international operating days totaled 8,602 drilling days compared with
8,050 drilling days for the nine months ended September 30, 2011, an
increase of seven percent.

Higher revenue rates across the Company’s Latin America and Eastern
Hemisphere operations, combined with higher activity levels in both
regions, led to improved operating results for the three and nine
months ended September 30, 2012 compared to the three and nine months
ended September 30, 2011.  Prior year results from the Company’s
Australian operations were also weakened due to flooding in certain
regions during the first half of 2011.  The Company delivered two new
ADR^® drilling rigs into the international market during the nine months
ended September 30, 2012.  Similar to the Company’s United States
operations, international operations benefited from the strengthening
of the United States dollar over the Canadian dollar on translation
into Canadian dollars for reporting purposes in 2012 compared to the
prior year.

Depreciation

The Company uses the unit of production method of calculating
depreciation for the majority of its property and equipment. 
Depreciation expense totalled $57.6 million for the third quarter of
2012 compared with $44.5 million for the third quarter of 2011, an
increase of 29 percent.  Depreciation expense for the first nine months
of 2012 was $166.2 million, an increase of 38 percent over the $120.4
million recorded for the first nine months of 2011.  Increased
depreciation reflects the impact from the growth of the Company’s fleet
through the addition of Ensign US Southern in the third quarter of 2011
and recent additions from the Company’s new build program.

General and Administrative Expense

General and administrative expense decreased 10 percent to $19.1 million
(3.6 percent of revenue) for the third quarter of 2012 compared with
$21.2 million (4.5 percent of revenue) for the third quarter of 2011.
For the nine months ended September 30, 2012, general and
administrative expense totaled $59.2 million (3.6 percent of revenue)
compared with $49.4 million (3.8 percent of revenue) recorded for the
nine months ended September 30, 2011, an increase of 20 percent.  The
overall increase in general and administrative expense for the nine
months ended September 30, 2012 compared to the prior year was to
support the increased operating activity during the first nine months
of 2012, including the impact from the addition of Ensign US Southern
in September 2011, and also includes the negative translational impact
of a stronger United States dollar on United States and international
administrative expenses in the current periods.

Share-Based Compensation Expense (Recovery)

Share-based compensation expense (recovery) 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, 2012, share-based compensation
expense (recovery) was an expense of $3.7 million compared with a
recovery of $18.3 million recorded in the third quarter of 2011. For
the nine months ended September 30, 2012, share-based compensation was
a recovery of $2.6 million compared with a recovery of $1.6 million for
the nine months ended September 30, 2011.  The change in share-based
compensation expense (recovery) in the three and nine months ended
September 30, 2012 compared to the same periods of the prior year
reflects the change in the fair value of the share-based compensation
liability primarily resulting from fluctuations in the Company’s share
price.  The closing price of the Company’s common shares was $15.10 at
September 30, 2012 ($13.75 at September 30, 2011), compared with $14.00
at June 30, 2012 ($19.12 at June 30, 2011), $14.91 at March 31, 2012
($18.26 at March 31, 2011) and $16.25 at December 31, 2011 ($15.03 at
December 31, 2010).

Interest Expense

The Company increased its global revolving credit facility (the “Global
Facility”) by $150.0 million to $400.0 million in the second quarter of
2012 and repaid the USD $100.0 million remaining balance of the term
loan during the first half of 2012.  Interest is incurred on the
Company’s $10.0 million Canadian-based revolving credit facility (the
“Canadian Facility”), the $400.0 million Global Facility, the USD
$300.0 million senior unsecured notes issued in February 2012 and the
USD $100.0 million term loan outstanding during the first half of
2012.  The amortization of deferred financing costs associated with the
issuance of the Company’s long-term debt are included in interest
expense in the three and nine months ended September 30, 2012.

The increase in interest expense in the first nine months of 2012
reflects the additional debt incurred by the Company in connection with
the Rowan Land Drilling acquisition, completed in September 2011.

Foreign Exchange and Other ((Gain)/Loss)

Included in this amount is the impact of the conversion of the
Australian operations from Australian dollars to United States
dollars.  The Australian currency strengthened in the current quarter
but weakened in the three and nine months ended September 30, 2011 with
the movement much greater in 2011 compared to 2012.

Income Taxes

The effective income tax rate for the three months ended September 30,
2012 was 35.5 percent compared with 23.6 percent for the three months
ended September 30, 2011. The effective income tax rate for the nine
months ended September 30, 2012 was 33.2 percent compared with 29.3
percent for the nine months ended September 30, 2011. The effective
income tax rate was higher in the current quarter and for the nine
months ended September 30, 2012 due to a smaller proportion of income
earned in Canada, in combination with higher proportions of income
earned in higher tax rate jurisdictions.

Financial Position

The following chart outlines significant changes in the consolidated
statement of financial position from December 31, 2011 to September 30,
2012:

Funds from Operations and Working Capital

¹ Comparative figure as of December 31, 2011.

During the three months ended September 30, 2012, the Company generated
funds from operations of $123.9 million ($0.81 per common share)
compared with funds from operations of $114.2 million ($0.75 per common
share) for the three months ended September 30, 2011, an increase of
nine percent. For the nine months ended September 30, 2012, the Company
generated funds from operations of $383.4 million ($2.51 per common
share), an increase of 14 percent over funds from operations of $335.1
million ($2.19 per common share) generated in the first nine months of
2011.  Increased funds from operations in 2012 compared to 2011 is
mainly due to growth of the Company’s operations across all regions
through the addition of Ensign US Southern in the United States in
September 2011 and additions from the new build program to the
Company’s North American and Australian equipment fleet throughout 2011
and 2012.

At September 30, 2012, the Company’s working capital totaled negative
$3.8 million, compared to negative $10.2 million at December 31, 2011. 
The improvement in the Company’s working capital position in the
current year reflects the expanded operations of the Company, offset by
use of internally generated cash flows and the recently expanded credit
facilities to repay the remaining balance of the USD $100.0 million
term loan; paid off in full in the first half of 2012.  The Company
expects funds generated by operations, combined with current and future
credit facilities, to fully support current operating and capital
requirements.  Existing revolving credit facilities provide for total
borrowing of $410.0 million, of which $137.3 million was available at
September 30, 2012.

Investing Activities

Purchases of property and equipment during the third quarter of 2012
totaled $69.8 million (2011 – $71.6 million).  Purchases of property
and equipment during the first three quarters of 2012 totaled $226.4
million (2011 – $252.6 million).  The purchase of property and
equipment for the three and nine months ended September 30, 2012 relate
predominantly to expenditures made pursuant to the Company’s ongoing
new build program.

In September 2011, the Company completed the acquisition of Rowan Land
Drilling, comprised of 30 drilling rigs in the southern United States,
for USD $510.0 million.  The purchase was funded with existing cash
balances and expanded credit facilities.

Financing Activities

The Company’s Global Facility was increased by $150.0 million during the
second quarter of 2012 to a new limit of $400.0 million.  Additionally,
the Company has available a $10.0 million Canadian Facility.  The
Global Facility is available to the Company and certain of its
wholly-owned subsidiaries, and may be drawn in Canadian, United States
or Australian dollars, up to the equivalent value of $400.0 million
Canadian dollars.  The amount available under the Canadian Facility is
$10.0 million or the equivalent in United States dollars.

The change in the operating lines of credit for the three and nine
months ended September 30, 2012 reflects operating cash flows generated
by the Company’s operations in excess of capital expenditure
requirements in the current quarter and the repayment of the USD $100.0
million remaining balance of the term loan during the first half of
2012.  As of September 30, 2012, 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 February 2012, the Company completed the private placement of USD
$300.0 million of senior unsecured notes (the “Notes”), with the
proceeds from the issuance being used to repay a portion of the term
loan.  The Notes consist of: USD $100.0 million in five year notes with
an interest rate of 3.43 percent and a maturity date of February 22,
2017; USD $100.0 million in seven year notes with an interest rate of
3.97 percent and a maturity date of February 22, 2019; and USD $100.0
million in ten year notes with an interest rate of 4.54 percent and a
maturity date of February 22, 2022.  The Notes rank equally with the
Company’s Global Facility.

On June 14, 2012 the Company received approval from the Toronto Stock
Exchange to acquire for cancellation up to three percent of the
Company’s issued and outstanding common shares under a Normal Course
Issuer Bid (the “Bid”).  The Company may purchase up to 4,596,397
common shares for cancellation.  The Bid commenced on June 18, 2012 and
will terminate on June 17, 2013 or such earlier time as the Bid is
completed or terminated at the option of the Company.  As at September
30, 2012, no common shares have been purchased and cancelled pursuant
to the Bid.

The Company previously had a Bid that commenced on June 7, 2011 and
terminated on June 6, 2012, under which no common shares were purchased
and cancelled.

The Board of Directors of the Company has declared a fourth quarter
dividend of $0.110 per common share, a 4.8 percent increase over the
previous quarterly dividend rate of $0.105 per common share.  The
Company has increased its dividend by a compound annual growth rate of
17 percent since it first started to pay a dividend in 1995, with the
dividend rate increasing every year.  The fourth quarter dividend is
payable January 4, 2013 to all Common Shareholders of record as of
December 21, 2012.  The dividend is pursuant to the quarterly dividend
policy adopted by the Company.  Pursuant to subsection 89(1) of the
Canadian Income Tax Act (“ITA”), the dividend being paid is designated
as an eligible dividend, as defined in subsection 89(1) of the ITA.

New Builds

During the nine months ended September 30, 2012, the Company
commissioned five new ADR^® drilling rigs and 11 new well servicing rigs in the United States; five
new ADR^® drilling rigs in Canada; and two new ADR^® drilling rigs in Australia.

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

Outlook

As expected, third quarter activity levels in Canada fell below the
activity levels of the comparable quarter of the prior year.  Operators
delayed or reduced programs due to decreased levels of cash flows and
continuing uncertainty with respect to global economic conditions and
the resulting impact on the supply and demand fundamentals for crude
oil and natural gas.  The fourth quarter has continued this softening
trend but the Company expects that fourth quarter oilfield service
activity levels will improve, subject to weather conditions, over
activity levels in the recently completed third quarter.  The general
weakness in the Canadian market has resulted in a softening of rates
for certain equipment classes resulting in reduced margins compared to
the prior year.  Current expectations for strong, seasonal levels of
demand for the upcoming winter drilling season should enable the
Company to improve pricing from current levels and approach margins
similar to those experienced in last year’s winter drilling season. 
Future Canadian operations will be further bolstered by the delivery of
three new ADRs and six new well servicing rigs over the next several
quarters.

The United States market continued to soften in the third quarter as
various regions saw a slight decrease in the level of oilfield services
activity as measured by the operating drilling rig fleet.  While there
are still just under 1,800 drilling rigs operating in the United States
land-drilling market, oil and natural gas fundamentals continue to put
downward pressure on the demand and revenue rates for oilfield
services.  The Company has experienced a reduction in activity levels
and pricing, particularly for conventional drilling rigs.  That said,
the four new ADR^® drilling rigs that are being delivered under term contracts into the
United States market pursuant to the Company’s current new build
program will have a positive impact on activity levels and margins
going forward.

The Company’s international operations continue to improve as two new
ADRs were delivered into Australia in the third quarter and operations
resumed in Libya with the start-up of one drilling rig in September. 
The Company anticipates that operating activity and financial
contributions from the international segment will continue to
moderately improve in future quarters.

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
2012 results at 2:00 p.m. MST (4:00 p.m. EST) on Monday, November 12,
2012.  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 19, 2012 by dialing 1-416-849-0833 (in Toronto) or
1-855-859-2056 (outside Toronto) and entering the reservation number
43355202.  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.

SOURCE: Ensign Energy Services Inc.

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