09 Nov Ensign Energy Services Inc. Reports 2009 Third Quarter Results
CALGARY, Nov. 9 /CNW/ –
Overview
Ensign Energy Services Inc. (“Ensign” or the “Company”) recorded net income of $16.9 million ($0.11 per share) for the third quarter of 2009, a decline of 77 percent compared with net income of $72.1 million ($0.47 per share) recorded for the third quarter of 2008. Net income for the nine months ended September 30, 2009 totaled $102.8 million ($0.67 per share), a decrease of 45 percent from net income of $186.1 million ($1.22 per share) recorded in the first nine months of 2008. The Company’s operating and financial results for the three months and nine months ended September 30, 2009 deteriorated compared to the prior year as the oilfield services industry continues to be oversupplied in the face of reduced levels of demand for services owing to generally weak oil and natural gas supply and demand fundamentals.
Revenue for the third quarter of 2009 was $232.5 million, a 47 percent decrease from the $435.2 million for the third quarter of the prior year. The Company recorded revenue of $858.9 million for the nine months ended September 30, 2009, a 31 percent decrease from revenue of $1,245.1 million for the nine months ended September 30, 2008. Continued weak natural gas fundamentals negatively impacted oilfield service activity levels in Canada and the United States. Additionally, international results were lowered due to the voluntary termination of contracts in Venezuela as the Company worked to resolve issues with its major customer. The 2009 financial results from both the United States and international business segments were also negatively impacted on translation by the strengthening of the Canadian dollar compared to the United States dollar.
Gross margin decreased in the third quarter of 2009 to 28.2 percent compared to 30.8 percent recorded in the third quarter of 2008. The gross margin for the nine months ended September 30, 2009 was 32.2 percent (2008 – 34.0 percent). Gross margin deteriorated in the third quarter as additional rigs were put to work in the spot market in Canada. Spot prices for uncontracted oilfield services equipment continued to weaken in the quarter due to low demand and an oversupply of equipment in Canada and the United States. The six new drilling rigs delivered by the Company into the international market during the first nine months of 2009 and the continuation of previously contracted rigs in the United States market combined to maintain the year-to-date gross margin at a higher level than would otherwise be expected in the current over-supplied environment.
Adjusted net income for the third quarter of 2009 was $16.4 million ($0.11 per share), a decrease of 73 percent from adjusted net income of $61.0 million ($0.40 per share) for the third quarter of 2008. During the nine months ended September 30, 2009, adjusted net income decreased by 43 percent to $109.7 million ($0.72 per share) from $192.9 million ($1.26 per share) recorded for the corresponding period in 2008. Adjusted net income is defined as net income before the tax-effected stock-based compensation expense. Stock-based compensation recovery for the third quarter of 2009 was $0.7 million (2008 – $17.0 million); and for the nine months ended September 30, 2009, stock-based compensation expense was $10.6 million (2008 – $10.5 million).
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FINANCIAL AND OPERATING HIGHLIGHTS
($ thousands, except per share data and operating information)
————————————————————————-
Three months ended Nine months ended
September 30 September 30
————————————————————————-
% %
2009 2008 change 2009 2008 change
————————————————————————-
Revenue 232,463 435,186 (47) 858,893 1,245,144 (31)
————————————————————————-
EBITDA(1) 53,238 121,785 (56) 241,804 383,775 (37)
EBITDA per
share(1)
Basic $ 0.35 $ 0.80 (56) $ 1.58 $ 2.51 (37)
Diluted $ 0.35 $ 0.79 (56) $ 1.58 $ 2.48 (36)
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Adjusted net
income(2) 16,444 61,025 (73) 109,677 192,926 (43)
Adjusted net
income per
share(2)
Basic $ 0.11 $ 0.40 (73) $ 0.72 $ 1.26 (43)
Diluted $ 0.11 $ 0.39 (72) $ 0.71 $ 1.25 (43)
————————————————————————-
Net income 16,900 72,071 (77) 102,798 186,129 (45)
Net income
per share
Basic $ 0.11 $ 0.47 (77) $ 0.67 $ 1.22 (45)
Diluted $ 0.11 $ 0.47 (77) $ 0.67 $ 1.20 (44)
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Funds from
operations(3) 55,667 90,450 (38) 199,596 297,217 (33)
Funds from
operations per
share(3)
Basic $ 0.36 $ 0.59 (39) $ 1.30 $ 1.94 (33)
Diluted $ 0.36 $ 0.58 (38) $ 1.30 $ 1.92 (32)
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Weighted average
shares – basic
(000s) 153,156 153,122 – 153,145 153,083 –
Weighted average
shares – diluted
(000s) 153,692 154,881 (1) 153,427 154,647 (1)
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Drilling
Number of
marketed rigs
Canada
Conventional 157 169 (7) 157 169 (7)
Oil sands
coring/coal-
bed methane 28 28 – 28 28 –
United States 80 75 7 80 75 7
International(4) 49 44 11 49 44 11
Operating days
Canada 2,994 7,578 (60) 9,394 19,509 (52)
United States 2,251 5,289 (57) 7,247 15,316 (53)
International 1,567 2,458 (36) 5,391 7,421 (27)
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Well Servicing
Number of marketed
rigs/units
Canada 112 118 (5) 112 118 (5)
United States 18 16 13 18 16 13
Operating hours
Canada 24,260 37,907 (36) 76,007 111,356 (32)
United States 8,275 10,481 (21) 24,654 27,912 (12)
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(1) EBITDA is defined as “income before interest expense, income taxes,
depreciation and stock-based compensation 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
stock-based compensation plan. EBITDA and EBITDA per share as defined
above are not recognized measures under Canadian generally accepted
accounting principles and accordingly may not be comparable to
measures used by other companies.
(2) Adjusted net income is defined as “net income before stock-based
compensation 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 stock-based compensation
plan, net of income taxes. Adjusted net income and adjusted net
income per share as defined above are not recognized measures under
Canadian generally accepted accounting principles 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 shareholders and potential investors with 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 Canadian generally accepted accounting
principles and accordingly may not be comparable to similar measures
used by other companies.
(4) Includes workover rigs.
Revenue and Oilfield Services Expense
Three months ended Nine months ended
September 30 September 30
——————————————————–
% %
($ thousands) 2009 2008 change 2009 2008 change
————————————————————————-
Revenue
Canada 80,217 193,939 (59) 313,439 562,767 (44)
United States 93,964 161,621 (42) 316,285 453,761 (30)
International 58,282 79,626 (27) 229,169 228,616 –
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232,463 435,186 (47) 858,893 1,245,144 (31)
Oilfield services
expense 166,884 301,233 (45) 582,674 821,412 (29)
——————————————————–
65,579 133,953 (51) 276,219 423,732 (35)
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Gross margin 28.2% 30.8% 32.2% 34.0%
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Canada
——
The Company recorded revenue of $80.2 million in Canada in the third quarter of 2009, a 59 percent decrease from $193.9 million recorded in the third quarter of 2008. Canadian revenue was $313.4 million for the nine months ended September 30, 2009, a 44 percent decrease from $562.8 million recorded in the nine months ended September 30, 2008. Canada accounted for 35 percent of the Company’s revenue in the third quarter of 2009 (2008 – 45 percent); and for 36 percent of the Company’s revenue in the first nine months of 2009 (2008 – 45 percent). Following the second quarter, when spring break-up and wet weather conditions hinder the Company’s ability to move heavy equipment and access Canadian drilling locations, the overall results for Canada reflect continued weakness in the third quarter which experienced declines in revenues and gross margins when compared to the same period in the prior year. The oversupply of oilfield service equipment has negatively impacted utilization and margins in the Canadian market. Competitive conditions will not improve until the underlying oil and natural gas commodity fundamentals improve to a level that encourages additional investment in oil and natural gas development.
Drilling days recorded by the Canadian division in the third quarter of 2009 decreased by 60 percent from the comparable period of the prior year. During the nine months ended September 30, 2009, Canadian drilling days decreased 52 percent from the same period of the prior year. Similarly, Canadian well servicing hours decreased by 36 percent in the third quarter of 2009 and by 32 percent in the nine months ended September 30, 2009 with respect to the corresponding periods in the prior year. The Company continues to look for ways to improve profitability in this challenging environment and is positioned to operate effectively at such lower levels of utilization for as long as it takes for the industry to recover.
United States
————-
The Company’s United States operations recorded revenue of $94.0 million in the third quarter of 2009, a 42 percent decrease from the $161.6 million recorded in the corresponding period of the prior year. United States revenue was $316.3 million for the nine months ended September 30, 2009, down 30 percent from revenue of $453.8 million for the first nine months of 2008. The United States accounted for 40 percent of the Company’s revenue in the third quarter of 2009 (2008 – 37 percent); and 37 percent of the Company’s revenue in the first nine months of 2009 (2008 – 36 percent). The Company’s United States results continue to benefit from greater long-term contractual coverage of the United States oilfield services equipment fleet compared to the Canadian fleet. Much of the Company’s construction program over the last couple of years has been directed at adding new equipment to the United States market, and these high performing ADR(TM) drilling rigs built for the United States market have been subject to multi-year take-or-pay contracts. Three new ADRs were commissioned into the United States market in the third quarter. At September 30, 2009, a total of two contracted ADRs were still under construction for delivery before the end of the year.
The United States industry land-drilling rig count has recently started to slowly recover from its lows experienced in the first half of 2009. The Company’s United States operations have also showed a slight increase in operating days in the third quarter of 2009 compared to the previous quarter. However, a very competitive market has resulted in reduced margins for the rigs going to work in the spot market. The number of drilling days recorded by the United States division in the third quarter of 2009 decreased 57 percent from the same period of the prior year. United States drilling days for the first nine months of 2009 decreased 53 percent from the prior year. United States well servicing hours in the third quarter of 2009 were down 21 percent compared to the prior year and well servicing hours for the nine months ended September 30, 2009 were down 12 percent compared to the nine months ended September 30, 2008. The weakening United States dollar relative to the Canadian dollar further eroded contributions from the United States segment.
International
————-
The Company’s international operations recorded revenue of $58.3 million in the third quarter of 2009, a 27 percent decrease from the $79.6 million recorded in the third quarter of 2008. International revenue totaled $229.2 million for the nine months ended September 30, 2009, which is consistent with revenue of $228.6 million for the first nine months of 2008. The international division contributed 25 percent of the Company’s revenue in the third quarter of 2009 (2008 – 18 percent); and 27 percent of the Company’s revenue in the first nine months of 2009 (2008 – 19 percent). The Company’s international operations struggled in a few key areas during the third quarter as the Company worked through geopolitical issues affecting operations in Africa and Latin America.
Drilling days recorded by the Company’s international operations in the quarter ended September 30, 2009 decreased 36 percent from the third quarter of 2008, while drilling days recorded in the nine months ended September 30, 2009 decreased 27 percent from the same period in 2008. The Company’s operations in Latin America and Africa have experienced reductions in demand for oilfield services in 2009. The Company believes that these areas should improve before the end of the year and in the 2010 fiscal year. Partially offsetting these regional weaknesses has been the successful deployment of six new ADR(TM) drilling rigs in the first nine months of the year. Building on the Company’s established geographic diversification will continue to be a focus for Ensign.
Depreciation
Three months ended Nine months ended
September 30 September 30
——————————————————–
% %
($ thousands) 2009 2008 change 2009 2008 change
————————————————————————-
Depreciation 24,364 33,987 (28) 76,158 89,705 (15)
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Depreciation expense totalled $24.4 million for the third quarter of 2009 compared with $34.0 million for the third quarter of 2008. Depreciation expense decreased to $76.2 million for the nine months ended September 30, 2009 compared with $89.7 million for the nine months ended September 30, 2008. The change in depreciation reflects decreased consolidated operating activity levels, partially offset by increased depreciation on higher valued equipment added to the Company’s drilling rig fleet over the course of 2009. In addition, effective July 1, 2008, the Company began applying a depreciation charge for drilling and well servicing rigs that have not operated within the last 12 months based on the estimated useful life of such equipment, resulting in additional depreciation expense in the nine months ended September 30, 2009.
General and Administrative Expense
Three months ended Nine months ended
September 30 September 30
——————————————————–
% %
($ thousands) 2009 2008 change 2009 2008 change
————————————————————————-
General and
administrative 12,504 13,371 (6) 39,821 42,514 (6)
% of revenue 5.4% 3.1% 4.6% 3.4%
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General and administrative expense totaled $12.5 million (5.4 percent of revenue) for the third quarter of 2009 compared with $13.4 million (3.1 percent of revenue) for the third quarter of 2008, a decrease of six percent. General and administrative expense totaled $39.8 million (4.6 percent of revenue) for the nine months ended September 30, 2009 compared with $42.5 million (3.4 percent of revenue) for the nine months ended September 30, 2008, a decline of six percent. As a percentage of revenue, 2009 general and administrative expenses are higher due to the reduction in operating activity on a period-over-period basis.
Stock-Based Compensation Expense
Three months ended Nine months ended
September 30 September 30
——————————————————–
% %
($ thousands) 2009 2008 change 2009 2008 change
————————————————————————-
Stock-based
compensation (701) (16,993) (96) 10,583 10,457 1
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Stock-based compensation expense arises from the intrinsic value accounting associated with the Company’s stock option plan, whereby the liability associated with stock-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 quarter-ended September 30, 2009, the majority of the stock-based compensation recovery of $0.7 million is due to a decrease in the Company’s common share price during the quarter. For the nine months ended September 30, 2009, stock-based compensation expense consists of $0.8 million for the vesting of additional stock options and $9.8 million associated with an increase in the price of the Company’s common shares. The price of the Company’s common shares was $16.24 at September 30, 2009 compared with $17.00 at June 30, 2009, and $13.22 at December 31, 2008.
Interest Expense
Three months ended Nine months ended
September 30 September 30
——————————————————–
% %
($ thousands) 2009 2008 change 2009 2008 change
————————————————————————-
Interest 138 1,458 (91) 1,064 5,402 (80)
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Interest expense is incurred on the Company’s operating lines of credit and promissory note payable, and is shown net of interest income earned on the Company’s cash balances. The decrease in interest expense for the three and nine months ended September 30, 2009 compared to the prior year is due to the decline in interest rates in the first nine months of 2009 compared to the same period in 2008. Further, the interest expense for the nine months ended September 30, 2008 includes upfront fees related to the new operating lines of credit that were negotiated during the second quarter of 2008. The Company’s effective interest rate for the nine months ended September 30, 2009 was approximately 1.1% compared to approximately 5.4% for the corresponding period of the prior year.
Income Taxes
Three months ended Nine months ended
September 30 September 30
——————————————————–
% %
($ thousands) 2009 2008 change 2009 2008 change
————————————————————————-
Current income
tax (5,334) 27,364 (119) 32,919 72,885 (55)
Future income tax 17,871 3,898 358 18,282 19,197 (5)
——————————————————–
12,537 31,262 (60) 51,201 92,082 (44)
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Effective income
tax rate (%) 42.6% 30.3% 33.2% 33.1%
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The effective income tax rate for the third quarter of 2009 was 42.6 percent compared with 30.3 percent in the third quarter of 2008. For the nine months ended September 30, 2009, the effective income tax rate was 33.2 percent compared with 33.1 percent for the nine months ended September 30, 2008.
The Company’s effective income tax rate on a quarter-over-quarter basis increased due to an increase in the Canadian effective income tax rate arising from partnership timing differences and a greater proportion of taxable income being generated by the Company’s United States operations. The slight increase in the effective income tax rate for the nine months ended September 30, 2009 compared with the nine months ended September 30, 2008 is due to an increase in the proportion of taxable income being generated in the United States, which has a higher effective income tax rate.
Financial Position
The following chart outlines significant changes in the consolidated balance sheet from December 31, 2008 to September 30, 2009:
($ thousands) Change Explanation
————————————————————————-
Cash and cash equivalents 47,088 See consolidated statement of cash
flows.
Accounts receivable (161,064) Decrease due to a decrease in
operating activity levels in the
third quarter of 2009 compared with
the fourth quarter of 2008.
Inventory and other (3,665) Decrease due to normal course
consumption of operating supplies
and spare parts.
Property and equipment (63,340) Decrease due to increased
depreciation on higher-value
equipment.
Accounts payable and (108,373) Decrease due to a decrease in
accrued liabilities operating activity levels in the
third quarter of 2009 compared with
the fourth quarter of 2008.
Operating lines of credit (34,895) Decrease due to net repayments of
the operating lines of credit.
Promissory note payable (20,000) Decrease due to payment of the
promissory note in June 2009.
Stock-based compensation 2,208 Increase due to an increase in the
price of the Company’s common
shares as at September 30, 2009
compared with December 31, 2008.
Income taxes payable 2,465 Increase due to the current income
tax provision for the period, net
of tax instalments.
Dividends payable 3 Increase due to a slight increase
in the number of outstanding common
shares compared with the fourth
quarter of 2008.
Future income taxes 12,100 Increase due to the current period
increase in the Canadian effective
income tax rate.
Shareholders’ equity (34,489) Decrease due to the net income for
the period being offset by the
impact of foreign exchange rate
fluctuations on net assets of
foreign self-sustaining
subsidiaries and the amount of
dividends declared in the period.
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Working Capital and Funds from Operations
Three months ended Nine months ended
September 30 September 30
——————————————————–
% %
($ thousands) 2009 2008 change 2009 2008 change
————————————————————————-
Funds from
operations 55,667 90,450 (38) 199,596 297,217 (33)
Funds from
operations per
share $ 0.36 $ 0.59 (38) $ 1.30 $ 1.94 (33)
Working
capital(1) 128,212 93,001 38 128,212 93,001 38
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(1) Comparative figure as at December 31, 2008.
During the three months ended September 30, 2009, the Company generated funds from operations of $55.7 million ($0.36 per common share) compared with funds from operations of $90.4 million ($0.59 per common share) for the three months ended September 30, 2008, a decrease of 38 percent. Funds from operations totaled $199.6 million ($1.30 per common share) in the first nine months of 2009, a decrease of 33 percent compared to $297.2 million of funds from operations ($1.94 per common share) generated in the nine months ended September 30, 2008.
The decrease in funds from operations in both the third quarter of 2009 and the nine months ended September 30, 2009 compared to the same periods in 2008 is due to the continued deterioration of oilfield services market conditions, primarily in the Company’s Canadian and United States divisions, resulting in lower activity levels. Additionally, the Company’s international operations experienced a reduction in contributions from its South American operations in the third quarter of 2009 as all of the drilling rigs in Venezuela were stacked pending further negotiations with a major customer. The decline in operating activity is slightly offset by contributions from the newly constructed ADRs placed in operation in the United States and international markets under term contracts during the first nine months of 2009. The significant factors that may impact the Company’s ability to generate funds from operations in future periods are outlined in the “Risks and Uncertainties” section of the Management’s Discussion and Analysis contained in the Company’s 2008 Annual Report.
During the third quarter of 2009, the Company increased its working capital to $128.2 million, up $21.2 million from December 31, 2008. As of September 30, 2009, the Company continues to operate with no long-term debt and operates with sufficient liquidity to meet its obligations as they come due.
Investing Activities
Three months ended Nine months ended
September 30 September 30
——————————————————–
% %
($ thousands) 2009 2008 change 2009 2008 change
————————————————————————-
Net purchase of
property and
equipment (44,870) (128,149) (65) (117,652) (206,672) (43)
Net change in
non-cash working
capital 16,306 48,845 (67) (2,558) 43,589 (106)
——————————————————–
Cash used in
investing
activities (28,564) (79,304) (64) (120,210) (163,083) (26)
————————————————————————-
Net purchases of property and equipment during the third quarter of 2009 totaled $44.9 million compared with $128.1 million for the third quarter of 2008. Net purchases of property and equipment for the nine months ended September 30, 2009 totaled $117.7 million compared with $206.7 million for the nine months ended September 30, 2008. The net purchase of property and equipment relates predominantly to expenditures pursuant to the Company’s new-build program as all other non-critical capital expenditures were tightly controlled or suspended during 2009. Additional details regarding the new-build program are provided in the “New Builds” section below.
Financing Activities
Three months ended Nine months ended
September 30 September 30
——————————————————–
% %
($ thousands) 2009 2008 change 2009 2008 change
————————————————————————-
Net increase
(decrease) in
operating lines
of credit 4,368 39,618 (89) (34,895) (3,155) 1,006
Net increase
(decrease) in
promissory note
payable – 20,000 (100) (20,000) 20,000 (200)
Issue of capital
stock 116 488 (76) 268 899 (70)
Dividends (13,019) (12,632) 3 (39,053) (37,889) 3
Net change in
non-cash working
capital 1 4 (75) 3 10 (70)
——————————————————–
Cash used in
financing
activities (8,534) 47,478 (118) (93,677) (20,135) 365
————————————————————————-
Net repayments of the operating lines of credit were the result of operating cash flows generated by the Company’s Canadian and United States oilfield services divisions in excess of capital expenditure requirements. As of September 30, 2009, the operating lines of credit are primarily being used to fund the new-build program and to support international operations. The $20 million promissory note due July 2011 was paid in full during the second quarter of 2009. Currently, the Company has no long-term debt.
Other financing activities during the third quarter of 2009 include the receipt of $0.1 million on the exercise of employee stock options and the payment of dividends in the amount of $13.0 million ($0.085 per share). For the nine months ended September 30, 2009, cash received on employee stock option exercises totaled $0.3 million (2008 – $0.9 million) and dividends paid totaled $39.1 million (2008 – $37.8 million). During the first nine months of 2009, the Company declared year-to-date dividends totaling $0.255 per common share compared with $0.2475 per common share during the first nine months of 2008. All dividends paid by the Company subsequent to January 1, 2006 qualify as an eligible dividend, as defined by subsection 89(1) of the Canadian Income Tax Act (“ITA”).
The Board of Directors of the Company has declared a fourth quarter dividend of $0.0875 per common share, a three percent increase over the previous quarterly dividend rate of $0.085 per common share. The Company has increased its dividend every year since it first started to pay a dividend in 1995. The fourth quarter dividend is payable January 5, 2010 to all Common Shareholders of record as of December 21, 2009. The dividend is pursuant to the quarterly dividend policy adopted by the Company. Pursuant to subsection 89(1) of the ITA, the dividend being paid is designated as an eligible dividend, as defined in subsection 89(1) of the ITA.
New Builds
As of November 9, 2009, 12 ADRs have been completed and two remain under construction. The two remaining rigs under construction are ADR(TM)-1500 models that will be delivered into the United States market in the fourth quarter of 2009. Of the 14 ADRs included in the construction program, two are ADR(TM)-250 models, two are ADR(TM)-300 models, four are ADR(TM)-350 models, four are ADR(TM)-1000 models, and two are ADR(TM)-1500 models. Upon completion of this new-build program, the Company will have a total of 62 ADRs in its fleet. The well servicing rig new-build program consisted of seven well servicing rigs: four for the Canadian market and three for the United States market, all of which have been completed.
The new-build delivery schedule, by geographic area, is as follows:
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Actual Forecast
—————————————————–
Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Total
—————————————————–
ADRs
United States 1 1 1 3 2 8
International – 2 4 – – 6
—————————————————–
Total 1 3 5 3 2 14
————————————————————————-
Well Servicing Rigs
Canada – 1 2 1 – 4
United States 1 2 – – – 3
—————————————————–
Total 1 3 2 1 – 7
————————————————————————-
Outlook
The steady improvement in the price of crude oil since the start of the year and recent improvements in natural gas prices have created some sense of optimism within the industry that has been absent throughout most of 2009. However, it appears that many of the Company’s customers share Ensign’s skepticism with respect to the current level of commodity prices as there has not yet been a meaningful increase in demand for oilfield services. The North American oilfield services industry remains challenged by too much equipment chasing too little work. Even the international market is stagnant, at best, as various regions cope with specific geopolitical issues that are holding back levels of development of oil and natural gas resources. The Company does not expect demand for oilfield services to improve until global economic conditions improve in a way that meaningfully influences the underlying fundamentals of oil and natural gas supply and demand. There currently appears to be an ample supply of both commodities to meet expected short term demand and until that changes, the Company generally expects future activity levels to bump along at current historically low levels of activity.
The upcoming Canadian 2009/10 winter drilling season will, at best, meet the levels of the 2008/09 winter drilling season. Bookings are currently behind the levels of one year ago and although prices are expected to improve modestly for the winter drilling season, overall pricing will be lower than the rates of last winter. The bright spots for the Canadian market remain the Bakken play in southeast Saskatchewan, the Montney and Horn River shale plays in northeast British Columbia and the ongoing development in the various heavy oil markets of western Canada. Demand for newer, deeper and specialized equipment to service these active areas remains strong and will be reflected in the margins. Activity levels in Alberta continue to struggle against the backdrop of the Province of Alberta’s ill-conceived royalty regime. Ensign’s other service lines reflect the drilling activity levels. Lower utilization and lower margins are expected to be the norm for the foreseeable future as 2009 ends and 2010 begins.
The land drilling rig count in the United States appears to have reached its bottom. In recent weeks the United States land drilling rig count has slightly improved, but until natural gas prices improve to a level to make the conventional plays economic it is difficult to see a meaningful improvement in overall levels of demand and profitability. The Company is fortunate to have a relatively large portion of its fleet covered by term contracts as a result of the new build program undertaken over the last couple of years. However, a number of these contracts will terminate in the next year and unless industry conditions improve, these rigs will be entering a very competitive market. The advantage they will have is that they are the newest ADR(TM) designs and, as such, there is a preferential demand for this type of equipment that is well suited to many of the newer shale play areas of the United States. Ensign will expand its United States coverage area as customer demand continues to evolve.
International operations are expected to improve through 2010 as currently weak areas begin to turn around. Notably, Venezuela and Libya are expected to show meaningful improvement as pent up demand results in the reactivation of drilling rigs that are currently inactive for mainly geopolitical reasons. The Middle East and Australasia areas are expected to remain active as the Company continues to operate under favorable long-term contracts. Additionally, Ensign continues to leverage off of its established international operations and search for new growth markets for the Company.
It is difficult to be optimistic given all of the uncertainty around the fundamentals influencing the supply and demand for crude oil and natural gas. While there have been some encouraging signs, the Company believes that a meaningful industry recovery is still a ways off. Accordingly, it remains prudent to continue to control costs and preserve cash. Ensign has a very strong balance sheet that will enable it to succeed and grow in this very challenging market. The Company’s enviable financial position clearly puts it in control of its destiny. Not many others in the oilfield services industry can make that claim.
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 results at 2:00 p.m. MDT (4:00 p.m. EDT) on Monday, November 9, 2009. The conference call number is 1-800-732-0232. A taped recording will be available until November 16, 2009 by dialing 1-877-289-8525 and entering reservation number 4145514 followed by the number sign. 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.
CONSOLIDATED BALANCE SHEETS
As at September 30, 2009 and December 31, 2008
(Unaudited, in thousands of Canadian dollars)
September 30 December 31
2009 2008
————- ————-
Assets
Current assets
Cash and cash equivalents $ 142,993 $ 95,905
Accounts receivable 199,422 360,486
Inventory and other 57,159 60,824
Future income taxes 1,687 1,040
—————————
401,261 518,255
Property and equipment 1,647,241 1,710,581
—————————
$ 2,048,502 $ 2,228,836
—————————
—————————
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 127,711 $ 236,084
Operating lines of credit 134,548 169,443
Current portion of stock-based compensation 6,156 3,538
Income taxes payable (8,385) (10,850)
Dividends payable 13,019 13,016
—————————
273,049 411,231
Promissory note payable – 20,000
Stock-based compensation 693 1,103
Future income taxes 258,098 245,351
—————————
531,840 677,685
—————————
Shareholders’ Equity
Capital stock (note 3) 169,903 169,485
Accumulated other comprehensive loss (100,235) (1,583)
Retained earnings 1,446,994 1,383,249
—————————
1,516,662 1,551,151
—————————
$ 2,048,502 $ 2,228,836
—————————
—————————
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For the three and nine months ended September 30, 2009 and 2008
(Unaudited, in thousands of Canadian dollars – except per share data)
Three months ended Nine months ended
September 30 September 30
2009 2008 2009 2008
——————————————————-
Revenue
Oilfield services $ 232,463 $ 435,186 $ 858,893 $ 1,245,144
Expenses
Oilfield services 166,884 301,233 582,674 821,412
Depreciation 24,364 33,987 76,158 89,705
General and
administrative 12,504 13,371 39,821 42,514
Stock-based
compensation (701) (16,993) 10,583 10,457
Interest 138 1,458 1,064 5,402
Other (163) (1,203) (5,406) (2,557)
——————————————————-
203,026 331,853 704,894 966,933
——————————————————-
Income before
income taxes 29,437 103,333 153,999 278,211
Income taxes
Current (5,334) 27,364 32,919 72,885
Future 17,871 3,898 18,282 19,197
——————————————————-
12,537 31,262 51,201 92,082
——————————————————-
Net income for the
period 16,900 72,071 102,798 186,129
Retained earnings
– beginning of
period 1,443,113 1,262,996 1,383,249 1,174,195
Dividends (note 3) (13,019) (12,632) (39,053) (37,889)
——————————————————-
Retained earnings
– end of period $ 1,446,994 $ 1,322,435 $ 1,446,994 $ 1,322,435
——————————————————-
——————————————————-
Net income per
share (note 3)
Basic $ 0.11 $ 0.47 $ 0.67 $ 1.22
Diluted $ 0.11 $ 0.47 $ 0.67 $ 1.20
——————————————————-
——————————————————-
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three and nine months ended September 30, 2009 and 2008
(Unaudited, in thousands of Canadian dollars)
Three months ended Nine months ended
September 30 September 30
2009 2008 2009 2008
——————————————————-
Cash provided by
(used in)
Operating activities
Net income for
the period $ 16,900 $ 72,071 $ 102,798 $ 186,129
Items not
affecting cash:
Depreciation 24,364 33,987 76,158 89,705
Stock-based
compensation,
net of cash
paid (3,468) (19,506) 2,358 2,186
Future income taxes 17,871 3,898 18,282 19,197
——————————————————-
Cash provided by
operating
activities before
the change in
non-cash working
capital 55,667 90,450 199,596 297,217
Net change in
non-cash working
capital (note 5) (40,562) (67,669) 61,379 (91,254)
——————————————————-
15,105 22,781 260,975 205,963
——————————————————-
Investing activities
Net purchase of
property and
equipment (44,870) (128,149) (117,652) (206,672)
Net change in
non-cash working
capital (note 5) 16,306 48,845 (2,558) 43,589
——————————————————-
(28,564) (79,304) (120,210) (163,083)
——————————————————-
Financing activities
Net increase
(decrease) in
operating lines of
credit 4,368 39,618 (34,895) (3,155)
Net increase
(decrease) in
promissory note
payable – 20,000 (20,000) 20,000
Issue of capital stock 116 488 268 899
Dividends (note 3) (13,019) (12,632) (39,053) (37,889)
Net change in
non-cash working
capital (note 5) 1 4 3 10
——————————————————-
(8,534) 47,478 (93,677) (20,135)
——————————————————-
(Decrease) Increase
in cash and cash
equivalents during
the period (21,993) (9,045) 47,088 22,745
Cash and cash
equivalents –
beginning of period 164,986 33,730 95,905 1,940
——————————————————-
Cash and cash
equivalents – end
of period $ 142,993 $ 24,685 $ 142,993 $ 24,685
——————————————————-
——————————————————-
Supplemental
information
Interest paid $ 372 $ 1,521 $ 1,789 $ 5,585
Income taxes
paid $ 6,831 $ 17,794 $ 30,454 $ 93,027
——————————————————-
——————————————————-
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three and nine months ended September 30, 2009 and 2008
(Unaudited, in thousands of Canadian dollars)
Three months ended Nine months ended
September 30 September 30
2009 2008 2009 2008
——————————————————-
Net income for
the period $ 16,900 $ 72,071 $ 102,798 $ 186,129
Other comprehensive
income (loss)
Foreign currency
translation
adjustment (61,719) (11,800) (98,652) 29,292
——————————————————-
Comprehensive (loss)
income for
the period $ (44,819) $ 60,271 $ 4,146 $ 215,421
——————————————————-
——————————————————-
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS
For the three and nine months ended September 30, 2009 and 2008
(Unaudited, in thousands of Canadian dollars)
Three months ended Nine months ended
September 30 September 30
2009 2008 2009 2008
——————————————————-
Accumulated other
comprehensive loss
– beginning of
period $ (38,516) $ (56,496) $ (1,583) $ (97,588)
Foreign currency
translation
adjustment (61,719) (11,800) (98,652) 29,292
——————————————————-
Accumulated other
comprehensive loss
– end of period $ (100,235) $ (68,296) $ (100,235) $ (68,296)
——————————————————-
——————————————————-
See accompanying notes to the consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine months ended September 30, 2009 and 2008
(Unaudited, in thousands of Canadian dollars, except share and per share
data)
The interim consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles
(“Canadian GAAP”), and include the accounts of Ensign Energy Services
Inc. and its subsidiaries and partnerships (the “Company”), substantially
all of which are wholly-owned. The interim consolidated financial
statements have been prepared following the same accounting policies and
methods of computation as the consolidated financial statements for the
year ended December 31, 2008. The disclosures provided below are
incremental to those included with the annual consolidated financial
statements. These interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and the
notes thereto in the Company’s annual report for the year ended
December 31, 2008.
1. Recent accounting pronouncements
The Canadian Institute of Chartered Accountants (“CICA”) Accounting
Standards Board (“AcSB”) confirmed in February 2008 that International
Financial Reporting Standards (“IFRS”) will replace Canadian GAAP in
2011 for profit-oriented Canadian publicly accountable enterprises.
As the Company will be required to report its results in accordance
with IFRS starting in 2011, the Company is assessing the potential
impacts of this changeover and developing its plan accordingly. When
finalized, it will include project structure and governance,
resourcing and training, and an analysis of key differences between
IFRS and Canadian GAAP.
As of January 1, 2011, the Company will be required to adopt the
following CICA Handbook sections:
(a) CICA Handbook Section 1582 “Business Combinations” will replace
the existing business combinations standard. The new standard
requires assets and liabilities acquired in a business combination
and contingent consideration to be measured at fair value as at
the date of the acquisition. Acquisition costs that are currently
capitalized as part of the purchase price will be recognized in
the consolidated statement of income. The adoption of this
standard will impact the accounting treatment of future business
combinations.
(b) CICA Handbook Section 1601 “Consolidated Financial Statements”
and Section 1602 “Non-controlling Interests” will replace the
former consolidated financial statements standard. These standards
establish the requirements for the preparation of consolidated
financial statements and the accounting for a non-controlling
interest (previously referred to as minority interest) in a
subsidiary. The new standard requires non-controlling interest to
be presented as a separate component of equity and requires net
income and other comprehensive income to be attributed to both the
parent and non-controlling interest. The adoption of this standard
is not expected to have a material impact on the Company’s
consolidated financial statements.
2. Seasonality of operations
The Company’s Canadian oilfield services operations are seasonal in
nature and are impacted by weather conditions that may hinder the
Company’s ability to access locations or move heavy equipment. The
lowest activity levels are experienced during the second quarter of
the year when road weight restrictions are in place and access to
wellsites in Canada is reduced.
3. Capital Stock
Authorized
Unlimited common shares
Unlimited preferred shares, issuable in series
Outstanding
Number of
Common Shares Amount
———————————————————————-
Balance at January 1, 2009 153,135,006 $ 169,485
Issued under employee stock option plan 25,500 418
———————————————————————-
Balance at September 30, 2009 153,160,506 $ 169,903
———————————————————————-
Options
A summary of the status of the Company’s stock option plan as of
September 30, 2009, and the changes during the nine-month period then
ended, is presented below:
Number of Weighted Average
Options Exercise Price
———————————————————————-
Outstanding at January 1, 2009 10,445,962 $ 18.09
Granted 11,000 11.33
Exercised for shares (25,500) (10.50)
Exercised for cash (1,361,572) (10.69)
Forfeited (117,600) (21.45)
———————————————————————-
Outstanding at September 30, 2009 8,952,290 $ 19.19
———————————————————————-
Exercisable at September 30, 2009 4,417,790 $ 17.83
———————————————————————-
Options Outstanding Options Exercisable
———————————————————————-
Average Weighted Weighted
Vesting Average Average
Options Remaining Exercise Options Exercise
Exercise Price Outstanding (in years) Price Exercisable Price
———————————————————————-
$9.45 to $11.33 723,590 0.06 $ 10.52 712,590 $ 10.51
$13.50 to $18.85 1,792,100 0.86 14.17 1,174,600 13.89
$19.88 to $23.33 6,436,600 1.90 21.56 2,530,600 21.72
———————————————————————-
8,952,290 1.54 $ 19.19 4,417,790 $ 17.83
———————————————————————-
Common share dividends
During the nine months ended September 30, 2009, the Company declared
dividends of $39,053 (2008 – $37,889), being $0.2550 per common share
(2008 – $0.2475 per common share).
Net income per share
Net income per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the
period. Diluted net income per share is calculated using the treasury
stock method, which assumes that all outstanding stock options are
exercised, if dilutive, and the assumed proceeds are used to purchase
the Company’s common shares at the average market price during the
period.
The weighted average number of common shares outstanding for the nine
months ended September 30, 2009 and 2008 are as follows:
2009 2008
———— ————
Weighted average number of common
shares outstanding – basic 153,145,021 153,083,329
Weighted average number of common
shares outstanding – diluted 153,426,523 154,646,906
———— ————
Stock options of 6,735,100 (2008 – 4,390,000) were excluded from the
calculation of diluted weighted average number of common shares
outstanding, as the options’ exercise price was greater than the
average market price of the common shares for the period.
4. Segmented information
The Company operates in three geographic areas within one industry
segment. Oilfield services are provided in Canada, the United States
and internationally. The amounts related to each geographic area are
as follows:
Three months ended September 30, 2009
———————————————————————-
Canada United States International Total
———————————————————————-
Revenue $80,217 $93,964 $58,282 $232,463
Property and
equipment, net $806,058 $500,551 $340,632 $1,647,241
Capital
expenditures, net $6,563 $28,081 $10,226 $44,870
Depreciation $11,801 $7,563 $5,000 $24,364
———————————————————————-
Three months ended September 30, 2008
———————————————————————-
Canada United States International Total
———————————————————————-
Revenue $193,939 $161,621 $79,626 $435,186
Property and
equipment, net $765,665 $453,479 $356,763 $1,575,907
Capital
expenditures, net $3,980 $56,526 $67,643 $128,149
Depreciation $18,348 $8,109 $7,530 $33,987
———————————————————————-
Nine months ended September 30, 2009
———————————————————————-
Canada United States International Total
———————————————————————-
Revenue $313,439 $316,285 $229,169 $858,893
Property and
equipment, net $806,058 $500,551 $340,632 $1,647,241
Capital
expenditures, net $7,774 $74,110 $35,768 $117,652
Depreciation $35,637 $24,170 $16,351 $76,158
———————————————————————-
Nine months ended September 30, 2008
———————————————————————-
Canada United States International Total
———————————————————————-
Revenue $562,767 $453,761 $228,616 $1,245,144
Property and
equipment, net $765,665 $453,479 $356,763 $1,575,907
Capital
expenditures, net $9,489 $85,706 $111,477 $206,672
Depreciation $46,176 $22,035 $21,494 $89,705
———————————————————————-
5. Supplemental disclosure of cash flow information
The net change in non-cash working capital for the three and nine
months ended September 30, 2009 and 2008 is determined as follows:
Three months ended Nine months ended
September 30 September 30
——————————————-
2009 2008 2009 2008
——————————————-
Net change in non-cash
working capital
Accounts receivable $(8,440) $(63,440) $161,064 $(45,216)
Inventory and other 2,827 1,576 3,665 (649)
Accounts payable and
accrued liabilities (6,478) 33,469 (108,373) 18,342
Income taxes payable (12,165) 9,571 2,465 (20,142)
Dividends payable 1 4 3 10
——————————————-
$(24,255) $(18,820) $ 58,824 $(47,655)
——————————————-
Relating to
Operating activities $(40,562) $(67,669) $61,379 $(91,254)
Investing activities 16,306 48,845 (2,558) 43,589
Financing activities 1 4 3 10
——————————————-
$(24,255) $(18,820) $58,824 $(47,655)
——————————————-
6. Prior period amounts
Certain prior period amounts have been reclassified to conform to the
current period’s presentation.
%SEDAR: 00001999E
For further information: Glenn Dagenais, Executive Vice President Finance and Chief Financial Officer, (403) 262-1361