Ensign Energy Services Inc. Reports 2014 First Quarter Results

CALGARY, May 12, 2014 /CNW/ –

Overview

Revenue for Ensign Energy Services Inc. (“Ensign” or the “Company”) for
the first quarter of 2014 was $624.2 million, an increase of seven
percent from first quarter 2013 revenue of $581.1 million.  Operating
earnings, expressed as Adjusted EBITDA (defined as earnings before
interest, income taxes, depreciation, share-based compensation expense
(recovery) and foreign exchange and other), totaled $160.1 million
($1.05 per common share) in the first quarter of 2014, three percent
lower than adjusted EBITDA of $164.4 million ($1.08 per common share)
in the first three months of 2013.  Net income for the first quarter of
2014 decreased seven percent to $60.4 million ($0.40 per common share),
compared to net income of $65.0 million ($0.43 per common share) for
the first quarter of 2013.  Adjusted net income (defined as net income
before share-based compensation expense (recovery) and foreign exchange
and other, tax-effected using an income tax rate of 35 percent), for
the first quarter of 2014 was $54.0 million ($0.35 per common share),
19 percent lower than adjusted net income of $66.6 million for the
first quarter of 2013 ($0.44 per common share).  Funds from operations
decreased two percent to $137.0 million ($0.90 per common share) in the
first three months of 2014 from $139.8 million ($0.92 per common share)
in the first three months of the prior year.  Operating days in
Canadian operations were lower in the first quarter of 2014 when
compared to the first quarter of 2013, while results from the United
States and the eastern hemisphere operations were higher due to
increased demand and upgrades in recent years to the Company’s
equipment fleets in these areas.  A strengthening of the United States
dollar against the Canadian dollar positively impacted United States
and international financial results on translation to Canadian
dollars.  The average United States exchange rate for the first three
months of 2014 increased nine percent, compared to the first three
months of 2013.

Gross margin decreased to $182.2 million (29.2 percent of revenue) for
the first quarter of 2014 compared with gross margin of $183.9 million
(31.7 percent of revenue) for the first quarter of 2013.  The decrease
in gross margin in the first quarter of 2014 compared to the first
quarter of 2013 was primarily attributed to weaker Canadian activity
levels, higher costs related to ongoing maintenance and start-up costs
of international rigs preparing for work later in 2014.

Working capital at March 31, 2014 was a deficit of $81.0 million,
compared to a deficit of $71.1 million at December 31, 2013.  Available
borrowings at March 31, 2014 were $36.9 million compared to $70.7
million at December 31, 2013 as additional draws were used to support
first quarter activity levels; the first quarter dividend payment; and
the ongoing new build and major retrofit program that delivered one new
ADR^® drilling rig and completed two major retrofits to existing drilling
rigs during the first three months of 2014.

First Quarter Highlights

• Revenue for the first three months of 2014 was $624.2 million, up 16
  percent from the fourth quarter of 2013 and seven percent from the
  first quarter of 2013.
• One new ADR^® drilling rig was added to the Company’s United States drilling fleet in
  the first quarter of 2014.  The new build and major retrofit program
  also completed two major retrofits to existing drilling rigs: one
  transferred from the United States to Canada and one transferred from
  Canada to Australia.
• First quarter revenue by segment:
• Canada – 36 percent;
• United States – 40 percent; and
• International – 24 percent.
• Adjusted EBITDA for the first quarter of 2014 was $160.1 million, a
  three percent decrease from adjusted EBITDA of $164.4 million for the
  first quarter of 2013.  Funds from operations for the first quarter of
  2014 decreased two percent to $137.0 million from $139.8 million in the
  first quarter of the prior year.
• Canadian drilling recorded 4,792 operating days in the first three
  months of 2014, a 10 percent decrease from 5,329 operating days in the
  first three months of 2013.  Canadian well servicing hours decreased by
  one percent in the first quarter of 2014 compared to the first quarter
  of 2013.
• United States drilling recorded 5,673 operating days in the first
  quarter of 2014, a three percent increase from 5,504 operating days in
  the first quarter of 2013.  United States well servicing hours
  increased by 27 percent in the first three months of 2014 compared to
  the first three months of 2013.
• International drilling recorded 3,152 operating days in the first
  quarter of 2014, a 16 percent increase from 2,712 operating days
  recorded in the first quarter of 2013.
• The Company declared a quarterly cash dividend on common shares of
  $0.1175 per common share payable July 4, 2014.
• The Company’s construction in progress currently includes 11 new ADR^® drilling rigs, one new well servicing rig and eight major retrofits to
  existing drilling rigs.  In addition, due to increases in customer
  demand for the Company’s ADR^® drilling rigs, the Company’s Board of Directors has approved a
  pre-committed new build program that will deliver 1 ADR^® drilling rig a month in the first and second quarters of 2015 and 1.5
  ADR^® drilling rigs per month in the third and fourth quarters of 2015.

Revenue and Oilfield Services Expense

Revenue recorded in the first quarter of 2014 totaled $624.2 million, an
increase of seven percent from the first quarter of 2013 and was the
second highest quarterly revenue in the Company’s history.  As a
percentage of revenue, gross margin for the first quarter of 2014
decreased to 29.2 percent from 31.7 percent for the first quarter of
2013.

The Company continued to upgrade and grow its equipment fleet throughout
2013 and the first quarter of 2014 which led to stronger revenue in the
current year first quarter when compared to the first quarter of 2013. 
During the first three months of 2014 the Company added one new build
ADR^® to its United States drilling fleet and completed two major retrofits
to existing drilling rigs; one in Canada and one in Australia.  In
addition, the United States dollar strengthened by nine percent in the
first three months of 2014 compared to the first three months of 2013
and contributed to the higher revenue levels.  Offsetting these
positive impacts to consolidated revenue was uneven demand levels in
certain areas in Canada and continuing challenges in Venezuela during
the first quarter of 2014, as discussed further below under
“International Oilfield Services”.

Canadian Oilfield Services

Revenue decreased 12 percent to $226.5 million for the three months
ended March 31, 2014, from $256.0 million for the three months ended
March 31, 2013, but was 43 percent higher than the immediately
preceding quarter as the seasonal winter drilling season peaked in the
first quarter.  Canadian revenue accounted for 36 percent of the
Company’s total revenue in the first quarter of 2014, compared with 44
percent in the first quarter of 2013. Demand for the Company’s Canadian
oilfield services was mixed as some areas experienced higher activity
levels in the current quarter compared with the prior year first
quarter while others, particularly the oil sands coring division, saw
decreases in the current quarter when compared to the first quarter of
2013.  Through the current new build and major retrofit program the
Company is continuing to transition its Canadian drilling fleet from
shallow drilling rigs to deeper drilling rigs as the industry shifts
toward deeper, longer reach drilling.  The expansion of the Company’s
Canadian directional drilling business and oilfield rental business
through the 2013 second quarter acquisitions of substantially all of
the assets of Departure Energy Services Inc. (“Departure”) and EGOC
Enviro Group of Companies Ltd. (“EGOC”) helped to partially offset the
year-over-year reduction in Canadian drilling revenue.

The Company recorded 4,792 drilling days in the first quarter of 2014, a
10 percent decrease from the 5,329 drilling days recorded in the first
quarter of 2013, but up 39 percent over the immediately preceding
quarter.  Canadian well servicing hours were mainly consistent with the
prior year, decreasing only one percent in the first quarter of 2014 to
34,680 operating hours, compared with 35,137 operating hours in the
corresponding period of 2013.

During the three months ended March 31, 2014, the Company added one
retrofitted drilling rig transferred from the United States fleet to
the Canadian fleet; decommissioned 13 inactive drilling rigs and four
inactive well servicing rigs; and transferred two drilling rigs to the
oil sands coring fleet and one retrofitted drilling rig to Australia. 
In addition two drilling rigs have been removed from the Canadian fleet
and are undergoing major retrofit for the Australian market.

United States Oilfield Services

The Company’s United States operations recorded revenue of $248.4
million in the first quarter of 2014, a 24 percent increase from the
$200.5 million recorded in the corresponding period of the prior year. 
The Company’s United States operations accounted for 40 percent of the
Company’s revenue in the first quarter of 2014, compared to 35 percent
in the first quarter of 2013.  Drilling rig operating days increased by
three percent to 5,673 drilling days in the first quarter of 2014 from
5,504 drilling days in the first quarter of 2013.  Well servicing
activity increased by 27 percent in the first quarter of 2014 to 28,861
operating hours from 22,777 operating hours in the first quarter of
2013.

Activity levels and revenue rates in United States oilfield services
began to pick up late in 2013 after a slowdown earlier in the year. 
This combined with the positive translational impact of a stronger
United States dollar and upgrades to the United States fleet throughout
2013 and the first quarter of 2014 resulted in higher revenue in the
current quarter compared to the first quarter of the prior year.

In 2013, the Company added three new build ADRs and one new well
servicing rig to the United States fleet.  An additional ADR^® was added in the first quarter of 2014.  The Company also
decommissioned six inactive drilling rigs and transferred one
retrofitted drilling rig to Canada in the first quarter of 2014.

Current quarter results from the Company’s United States operations were
positively impacted on translation to Canadian dollars by a
strengthening United States dollar against the Canadian dollar.  In the
first three months of 2014 the United States dollar increased by nine
percent when compared to the same period of the prior year.

International Oilfield Services

The Company’s international operations recorded revenue of $149.4
million in the first quarter of 2014, a 20 percent increase from $124.7
million recorded in the corresponding period of the prior year. 
International operations contributed 24 percent of the Company’s
revenue in the first quarter of 2014, compared with 21 percent in the
same period of 2013.  International operating days for the three months
ended March 31, 2014 totaled 3,152 drilling days, compared with 2,712
drilling days in 2013, an increase of 16 percent.

Changes to the Company’s international fleet in the latter half of 2013
and in the first quarter of 2014 helped to drive international revenue
up when compared to the first quarter of the prior year.  Late in 2013,
the Company expanded its operations into Kurdistan with one drilling
rig being deployed there, resumed operations with an additional
drilling rig in Libya and transferred a retrofitted drilling rig to
Australia from the Company’s United States fleet.  In the first quarter
of 2014 an additional retrofitted drilling rig was transferred from the
Canadian fleet to Australia.  Two additional retrofitted drilling rigs
are currently in transit from Canada to Australia and are expected to
begin working in the second quarter of 2014.

Similar to the Company’s United States operations, international
operations were positively impacted from the strengthening United
States dollar versus the Canadian dollar on translation into Canadian
dollars for reporting purposes in the first quarter of 2014 compared to
the first quarter of the prior year.

As part of the Company’s international operations, it provides oilfield
services in Venezuela pursuant to long-term contracts. Many of these
existing contracts are due to expire in 2014 and as a result of the
current political unrest in Venezuela, there is and there can be no
assurance that the Company will be able to renew all of such contracts
on terms acceptable to the Company or at all. In addition, as at March
31, 2014, the Company had net accounts receivable of approximately
$37.4 million for work performed in Venezuela and, due to the
continuing political unrest in Venezuela, there is and there can be no
assurance that the Company will be successful in collecting all or any
of such outstanding balance.

Depreciation

Depreciation expense increased 28 percent to $73.3 million for the three
months ended March 31, 2014, compared with $57.2 million for the three
months ended March 31, 2013.  Higher depreciation expense in the
current quarter when compared to the first quarter of 2013 was
attributable to the utilization of higher-valued equipment during the
current quarter, the additions to the Company’s global fleet throughout
the latter half of 2013 and in the first quarter of 2014, the impact of
the 2013 second quarter acquisitions of assets from EGOC and Departure
and the negative translational impact of a stronger United States
dollar on United States and international depreciation in the current
quarter.

General and Administrative Expense

General and administrative expense was $22.1 million (3.5 percent of
revenue) for the first quarter of 2014 increasing 13 percent, compared
with $19.6 million (3.4 percent of revenue) for the first quarter of
2013.  The increase in general and administrative expense reflects the
negative translational impact of a stronger United States dollar on
United States and international administrative expenses in the current
quarter and increased costs to support growing international
operations.

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 March 31, 2014, share-based compensation
(recovery) expense was a recovery of $0.9 million, compared with an
expense of $6.4 million recorded in the first quarter of 2013.  The
decrease in the share-based compensation expense in the first quarter
of 2014 was a result of the change in the fair value of the share-based
compensation liability primarily resulting from a decrease in the price
of the Company’s common shares during the first three months of 2014. 
The closing price of the Company’s common shares was $16.34 at March
31, 2014 ($17.32 at March 31, 2013), compared with $16.73 at December
31, 2013 ($15.37 at December 31, 2012).

Interest Expense

Interest is incurred on the Company’s $10.0 million Canadian-based
revolving credit facility (the “Canadian Facility”), the $400.0 million
global revolving credit facility (the “Global Facility”) and the United
States dollar $300.0 million senior unsecured notes (the “Notes”)
issued in February 2012.  The amortization of deferred financing costs
associated with the issuance of the Notes is included in interest
expense in both quarters.

Interest expense in the first quarter of 2014 increased over interest
expense in the first quarter of 2013 due to increased draws on the
Global Facility and the negative translational impact of a stronger
United States dollar on United States and international interest
expense in the current quarter.

Foreign Exchange and Other

Included in this amount are foreign currency movements in the Company’s
subsidiaries that have functional currencies other than Canadian
dollars.  During the three months ended March 31, 2014 the Australian
dollar strengthened by approximately four percent against the United
States dollar causing a foreign currency gain on translation of the
Company’s United States dollar denominated debt into Australian
dollars.  In general the United States dollar was stronger in the first
three months of 2014, compared to the first three months of 2013 when
compared to other world currencies.

Income Taxes

The effective income tax rate for the three months ended March 31, 2014
was 34.0 percent, compared with 35.5 percent for the three months ended
March 31, 2013.  The decrease in the effective income tax rate in the
current quarter compared to the first quarter of the prior year was due
to the tax impact of the currency devaluation in Venezuela that
occurred in February 2013 being included in the prior year quarter.

Financial Position

The following chart outlines significant changes in the consolidated
statement of financial position from December 31, 2013 to March 31,
2014:

Funds from Operations and Working Capital

During the three months ended March 31, 2014, the Company generated
funds from operations of $137.0 million ($0.90 per common share),
compared with funds from operations of $139.8 million ($0.92 per common
share) for the three months ended March 31, 2013, a decrease of two
percent.  This decrease was due to reduced operating and financial
results for Canadian oilfield services and higher first quarter
spending on continuing equipment maintenance that the Company generally
expenses as incurred, offset by stronger results in the United States
and the eastern hemisphere in the current quarter.

At March 31, 2014, the Company’s working capital totaled a deficit of
$81.0 million, compared to a deficit of $71.1 million at December 31,
2013.  The decrease in working capital in the first three months of
2014 was mainly related to spending on the ongoing new build and major
retrofits construction program that as at March 31, 2014 is anticipated
to deliver an additional 26 new build ADR^® drilling rigs, one new well servicing rig and eight major retrofits of
existing drilling rigs.  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 borrowings of $410.0
million, of which $36.9 million was available at March 31, 2014.

Investing Activities

Purchases of property and equipment during the first quarter of 2014
totaled $120.8 million (2013 – $62.8 million).  The purchase of
property and equipment relates predominantly to expenditures made
pursuant to the Company’s ongoing new build and major retrofit program.

Financing Activities

The Company’s available operating lines of credit consist of a $400.0
million Global Facility and 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.

Net draws of the operating lines of credit were mainly used to fund the
ongoing new build and major retrofit program that added one new ADR^® drilling rig to the Company’s United States fleet in the first quarter
of 2014; as well as completed two major retrofits to existing drilling
rigs, one in Canada and one in Australia.  As of March 31, 2014, the
operating lines of credit are primarily being used to fund the
completion of the most recent new build and major retrofit program and
to support international operations.

During the first quarter of 2014, the Company secured a $20.0 million
uncommitted facility, solely for issuing letters of credit, primarily
used for bidding on contracts in the normal course of business.

The Board of Directors of the Company has declared a second quarter
dividend of $0.1175 per common share to be payable July 4, 2014 to all
Common Shareholders of record as of June 20, 2014.  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 and Major Retrofits

During the three months ended March 31, 2014, the Company commissioned
one new ADR^® drilling rig in the United States; retrofitted one drilling rig
transferred from the United States to Canada; and retrofitted one
drilling rig transferred from Canada to Australia.

In response to contracts and advanced bid activity for Ensign’s higher
technology drilling rigs, the Company has ramped up its new build
program and plans to deliver 26 new ADR^® drilling rigs through to the end of 2015.  In Canada the Company is
continuing to transition from shallow drilling to deeper drilling,
building new ADRs and upgrading existing drilling rigs for deeper
resource plays in the northwest part of the Western Canada Sedimentary
Basin.  In the United States the Company builds new ADRs for specific
resource plays and has been upgrading existing drilling rigs for pad
drilling operations.  Internationally, the Company has been increasing
its capabilities, through a combination of new ADRs and major retrofits
of existing drilling rigs, to meet the requirements of specific
markets.  In addition, the Company is in discussions with numerous
customers for the possible supply of a number of additional new
drilling rigs that may be constructed and delivered into operations
between now and December 31, 2015, beyond these 26 new ADR^® drilling rigs currently set for delivery.

The estimated delivery schedule for new ADRs and major retrofits of
existing drilling rigs currently under construction at March 31, 2014,
and as approved by the Company’s Board of Directors, is as follows:

Outlook

The Company continues to believe that the global economy is improving,
despite flattening economic growth in China and uncertainty in some
other regions of the world. Less volatile energy prices are starting to
provide support for increased development activities. Current
geopolitical tensions are giving rise to concerns about global crude
oil supply disruptions. Minor supply issues for natural gas in North
America may emerge after a cold winter ended with unusually low storage
levels. Except for delivery infrastructure development delays, downside
factors for energy commodity prices currently appear limited for the
next year or two. In particular, Canada’s energy prices have recently
been positively affected by a weaker currency and narrower
transportation differentials.

Canadian exploration and development activities trended upward slightly
in the first quarter of 2014, and capital investment activities may
increase further in the second half of the year, based on increased
industry cash flows from higher commodity prices. The trend is toward
only a slightly higher well count, but with increased depths and longer
reaches, particularly in key resource plays. Ensign’s Canadian fleet
utilization improved in the first quarter, with positive prospects for
the balance of the year, as the Company continues with the fleet
modernization program to more closely match industry demand.

Land-based drilling continues to expand in the United States, albeit at
a slow and steady pace, as illustrated by weekly changes to the
industry drilling rig count.  Oil and natural gas liquids projects
continue to be preferred, but dry natural gas prospects are starting to
improve, due to planned LNG exports. Typical with prior years, the
Company’s United States fleet activities were fairly flat with those in
the immediately preceding quarter. The Company expects improving
operating and financial results for the balance of the year.

The Company’s international revenue and operating days were stronger in
the current quarter compared to both the immediately preceding quarter
and the prior year quarter, despite challenges in certain African and
Latin American countries. The Company’s activity levels are expected to
continue to expand throughout 2014, particularly as drilling rigs are
added or as existing rigs are repositioned into the international fleet
to fulfill contracts.

The demand for higher technology drilling rigs, such as the Company’s
ADR^®, remains robust.  Accordingly, current plans for the remainder of 2014
and 2015 include the addition of 26 new ADR^® drilling rigs and one new well servicing rig, with eight major drilling
rig retrofits planned for 2014 and 2015.  The Company has the ability
to ramp up new build activity as future customer demand dictates.

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, the Company’s defense of lawsuits and
the ability of oil and natural gas companies to pay accounts receivable
balances and 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 first quarter
2014 results at 2:00 p.m. MST (4:00 p.m. EST) on Monday, May 12, 2014. 
The conference call number is (647) 427-7450 (in Toronto) or
1-888-231-8191 (outside Toronto).  A taped recording will be available
until May 19, 2014 by dialing 1-416-849-0833 (in Toronto) or
1-855-859-2056 (outside Toronto) and entering the reservation number
36001986.  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.