Ensign Energy Services Inc. Reports 2012 Second Quarter Results

Overview

Ensign Energy Services Inc. (“Ensign” or the “Company”) recorded increased revenues and profits in the three and six months ended June 30, 2012 over comparable periods in the prior year.  Revenue for the second quarter of 2012 was $463.9 million, 39 percent higher than revenue of $334.4 million recorded in the second quarter of 2011.  Revenue for the six months ended June 30, 2012 was $1,141.5 million, 36 percent higher than revenue of $836.7 million for the six months ended June 30, 2011.  Net income for the second quarter of 2012 increased 16 percent to $18.7 million ($0.12 per common share) compared to net income of $16.1 million ($0.11 per common share) for the second quarter of 2011.  Net income for the six months ended June 30, 2012 increased 30 percent to $124.2 million ($0.81 per common share) compared to net income of $95.8 million ($0.63 per common share) for the first six months of 2011.  EBITDA, defined as “income before interest, income taxes, depreciation, and share-based compensation expense (recovery)”, totaled $84.5 million ($0.55 per common share) in the second quarter of 2012, 30 percent higher than EBITDA of $65.1 million ($0.43 per common share) in the second quarter of 2011.  For the first six months of 2012 EBITDA was $295.7 million ($1.94 per common share); 26 percent higher than EBITDA of $235.4 million ($1.54 per common share) for the first six months of 2011.  Similarly, funds from operations increased 24 percent to $82.5 million ($0.54 per common share) in the second quarter of 2012 from $66.4 million ($0.43 per common share) in the second quarter of the prior year.  For the six months ended June 30, 2012, funds from operations increased 17 percent to $259.5 million compared to $220.9 million for the six months ended June 30, 2011.

Consistent with prior years, the Company’s Canadian operations were negatively impacted in the second quarter of 2012 by spring break-up weather conditions which restricted activity levels for much of the quarter. Allowing for the impact of the 2011 third quarter acquisition of the land drilling division of Rowan Companies, Inc. (“Rowan Land Drilling”), subsequently renamed Ensign US Southern Drilling LLC (“Ensign US Southern”), activity levels in the Company’s United States and international operations were comparable to similar periods of the prior year.  A stronger United States dollar versus the Canadian dollar for the three and six months ended June 30, 2012 helped to improve the operating results of the Company’s United States and international operations when translated into Canadian dollars for reporting purposes.

During the current quarter, increases to the Company’s credit facilities resulted in an increase in available borrowings to $87.2 million as of June 30, 2012 compared with $10.1 million at December 31, 2011.  Long-term debt at June 30, 2012 was reduced to $303.6 million 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 million term loan in the first half of 2012.

FINANCIAL AND OPERATING HIGHLIGHTS

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

Revenue for the three months ended June 30, 2012 increased 39 percent to $463.9 million compared to $334.4 million for the comparable period in 2011.  Revenue for the six months ended June 30, 2012 increased 36 percent to $1,141.5 million over revenue of $836.7 million recorded for the six months ended June 30, 2011.  As a percentage of revenue, gross margin for the second quarter of 2012 decreased slightly to 23.8 percent (2011 – 23.9 percent) and increased slightly to 30.2 percent for the six months ended June 30, 2012 (2011 – 30.1 percent).  Second quarter gross margins were negatively impacted by expenditures incurred to perform planned major maintenance during the break-up quarter.

Revenue growth in 2012 over the prior year was a result of the expanded operations of the Company through the addition of Ensign US Southern in the third quarter of 2011 and additions to the Company’s rig fleet through the new build program.  The Company added 10 ADR^®-style drilling rigs and 16 well servicing rigs in 2011, all through the new build program.  As of June 30, 2012 seven additional ADR^®-style drilling rigs and six additional well servicing rigs have been delivered to the Company’s North American operations.  Overall pricing increases in the Company’s North American operations also improved financial results in 2012 over the prior year while international operating results were higher in 2012 as comparative results in 2011 were negatively impacted by regional flooding in the Company’s operations in Australia.

Canadian Oilfield Services

Revenue increased 17 percent to $108.8 million for the three months ended June 30, 2012, from $93.1 million for the three months ended June 30, 2011. For the six months ended June 30, 2012, revenue increased 18 percent to $433.7 million compared to $368.3 million for the same period in 2011. Canadian revenues accounted for 23 percent of the Company’s total revenue in the second quarter of 2012, compared with 28 percent in the second quarter of 2011, and during the six months ended June 30, 2012, Canadian revenues were 38 percent of total revenue (2011 – 44 percent). Revenue growth in Canada in the three and six months ended June 30, 2012, compared to the prior year was primarily a result of improved pricing for Canadian oilfield services as activity levels decreased slightly in the three and six months ended June 30, 2012 over similar periods of the prior year.

The Company recorded 2,281 drilling days in the second quarter of 2012, compared to 2,380 drilling days for the second quarter of 2011, a four percent decrease, due to wet weather setbacks in the latter half of the quarter.  For the six months ended June 30, 2012 drilling days were 9,712 compared to 10,307 for the six months ended June 30, 2011, a six percent decrease.  The reduced operating activity in 2012 over 2011 was due to a longer spring break-up period which limited mobility of the Company’s equipment.  Canadian well servicing hours increased by six percent to 30,691 operating hours in the second quarter of 2012 compared with 28,960 operating hours in the corresponding period of 2011.  For the six months ended June 30, 2012 well servicing hours increased by three percent to 70,826 operating hours compared with 68,481 operating hours for the six months ended June 30, 2011.

During the six months ended June 30, 2012, the Company added four newly constructed ADRs to its Canadian drilling rig fleet, with one added in the second quarter of 2012.  The Company also decommissioned three inactive drilling rigs in the first quarter of 2012 and disposed of 14 inactive oil sands coring rigs in the second quarter of 2012.

United States Oilfield Services

Bolstered by the addition of Ensign US Southern in the third quarter of 2011, the Company’s United States operations recorded revenue of $244.4 million in the second quarter of 2012, a 60 percent increase from the $153.2 million recorded in the corresponding period of the prior year. During the six months ended June 30, 2012, revenue of $493.8 million was recorded, an increase of 64 percent from the $301.7 million recorded for the six months ended June 30, 2011. The Company’s United States operations accounted for 53 percent of the Company’s revenue in the second quarter of 2012 (2011 – 46 percent) and 43 percent of total revenue in the six months ended June 30, 2012 (2011 – 36 percent).  Drilling rig operating days increased by 40 percent to 6,188 drilling days in the second quarter of 2012 from 4,412 drilling days in the second quarter of 2011.  For the six months ended June 30, 2012 drilling days increased by 44 percent to 12,501 drilling days from 8,678 drilling days in the six months ended June 30, 2011.  Well servicing activity increased by 61 percent in the second quarter of 2012 to 30,491 operating hours from 18,907 operating hours in the second quarter of 2011.  For the six months ended June 30, 2012 well servicing activity increased 67 percent to 60,640 operating hours from 36,357 operating hours in the first six months of 2011.

Increased revenue and operating activity in the Company’s United States operations was mainly a result of an expanded rig fleet through the 2011 third quarter acquisition of Rowan Land Drilling, which added 30 ADR^®-style drilling rigs to the fleet, and additions from the Company’s new build program.  In 2011 eight new ADR^® drilling rigs and 12 new well servicing rigs were added through the new build program, with a further three new ADR^® drilling rigs and six new well servicing rigs added in the first half of 2012.  In addition, the Company decommissioned six inactive drilling rigs in the first quarter of 2012 and disposed of one well servicing rig in the second quarter of 2012.

A strengthening United States dollar against the Canadian dollar in the first six months of 2012 further improved operating results from the Company’s United States operations on translation to Canadian dollars.  In the first six months of 2012 the average United States dollar exchange rate increased by three percent to 1.01 when compared to the same period of the prior year.

International Oilfield Services

The Company’s international operations recorded revenue of $110.7 million in the second quarter of 2012, a 26 percent increase from $88.2 million recorded in the corresponding period of the prior year. International revenues for the six months ended June 30, 2012 increased by 28 percent to $214.1 million from $166.7 million recorded for the six months ended June 30, 2011. International operations contributed 24 percent of the Company’s revenue in the second quarter of 2012 (2011 – 26 percent) and 19 percent of the Company’s revenue in the first half of 2012 (2011 – 20 percent). International operating days for the three months ended June 30, 2012 totaled 2,845 drilling days compared with 2,604 drilling days in 2011, an increase of nine percent.  For the six months ended June 30, 2012 international operating days totaled 5,642 drilling days compared with 5,269 drilling days for the six months ended June 30, 2011, an increase of seven percent.

Higher revenue and activity levels for the three and six months ended June 30, 2012 compared to similar periods in the prior year were mainly a result of increased revenue rates across the Company’s Latin America and Eastern Hemisphere operations as well as increased activity from the Company’s Australian operations compared to the first half of 2011 when Australian activity levels were reduced due to flooding in certain regions.  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 the second quarter of 2012 compared to the second quarter of the prior year.

The Company uses the unit of production method of calculating depreciation for the majority of its property and equipment.  Depreciation expense totalled $50.4 million for the second quarter of 2012 compared with $35.1 million for the second quarter of 2011, an increase of 44 percent.  Depreciation expense for the first six months of 2012 was $108.6 million, an increase of 43 percent over the $75.9 million recorded for the first six months of 2011.  Increased depreciation reflects the impact from the growth of the Company’s North American 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 increased 57 percent to $20.7 million (4.5 percent of revenue) for the second quarter of 2012 compared with $13.2 million (3.9 percent of revenue) for the second quarter of 2011. For the six months ended June 30, 2012, general and administrative expense totaled $40.1 million (3.5 percent of revenue) compared with $28.2 million (3.4 percent of revenue) recorded for the six months ended June 30, 2011, an increase of 42 percent. The overall increase in general and administrative expense was to support the increased operating activity during the first half of 2012, including the impact from the addition of Ensign US Southern in the third quarter of 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 (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 June 30, 2012, share-based compensation (recovery) expense was a recovery of $3.3 million compared with an expense of $4.4 million recorded in the second quarter of 2011. For the six months ended June 30, 2012, share-based compensation was a recovery of $6.2 million compared with an expense of $16.7 million for the six months ended June 30, 2011.   The decrease in share-based compensation expense in the three and six months ended June 30, 2012 compared to similar periods in the prior year was a result of the change in the fair value of share-based compensation liability primarily resulting from a decrease in the price of the Company’s common shares during the first half of 2012.  The closing price of the Company’s common shares was $14.00 at June 30, 2012 ($19.12 at June 30, 2011), compared with $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).

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.  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 remaining balance of the term loan which was repaid in full in the second quarter 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 six months ended June 30, 2012.

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

Included in this amount is the impact of the conversion of the Australian operations from Australian dollars to United States dollars.  The Australian currency weakened against the United States dollar during the first half of 2012 but strengthened during the first half of 2011.

The effective income tax rate for the three months ended June 30, 2012 was 41.4 percent compared with 36.9 percent for the three months ended June 30, 2011. The effective income tax rate was higher in the current quarter due to a higher proportion of income earned in high tax-rate jurisdictions.  The effective income tax rate for the six months ended June 30, 2012 was 32.4 percent compared with 32.7 percent for the six months ended June 30, 2011. The effective income tax rate in both the first half of 2012 and 2011 was comparable to the expected annualized income tax rate for the Company.

Financial Position

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

During the three months ended June 30, 2012, the Company generated funds from operations of $82.5 million ($0.54 per common share) compared with funds from operations of $66.4 million ($0.43 per common share) for the three months ended June 30, 2011, an increase of 24 percent. For the six months ended June 30, 2012, the Company generated funds from operations of $259.5 million ($1.70 per common share), an increase of 17 percent over funds from operations of $220.9 million ($1.44 per common share) generated in the first half of 2011.   This increase was primarily attributable to the Company’s expanded operations in the United States through the addition of Ensign US Southern in the third quarter of 2011 and additions from the new build program to the Company’s North American equipment fleet throughout 2011 and 2012.

At June 30, 2012, the Company’s working capital totaled negative $44.0 million, compared to negative $10.2 million at December 31, 2011.  In the second quarter of 2012 the Company repaid the remaining balance of the USD $100.0 million term loan using internally generated cash flows and the recently expanded credit facilities which put downward pressure on working capital.  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 $87.2 million was available at June 30, 2012.

Purchases of property and equipment during the second quarter of 2012 totaled $76.1 million (2011 – $114.3 million).  Purchases of property and equipment during the first half of 2012 totaled $156.6 million (2011 – $181.0 million).  The purchase of property and equipment for the three and six months ended June 30, 2012 relate predominantly to expenditures made pursuant to the Company’s ongoing new build program.

The Company’s Global Facility was increased by $150.0 million during the second quarter 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 United States dollars.

Net draws of the operating lines of credit in the second quarter of 2012 were mainly the result of the repayment of the USD $100.0 million remaining balance of the term loan.  As of June 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 June 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 third quarter dividend of $0.105 per common share to be payable October 5, 2012 to all Common Shareholders of record as of September 20, 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 six months ended June 30, 2012, the Company commissioned three new ADR^®drilling rigs and six new well servicing rigs in the United States; and four new ADR^® drilling rigs in Canada.

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

Outlook

The softening in crude oil prices that began in the second quarter of 2012 has weakened the cash flows of exploration and production companies and caused many of them to reassess projects planned for the remainder of the year.  Natural gas prices have improved slightly due to hotter than normal weather conditions throughout much of North America, but prices and the outlook for natural gas have not recovered sufficiently to encourage expanding natural gas-directed oilfield service activity.  The headline price for crude oil is, generally, still supportive of development of many of the oil and liquids rich natural gas plays within North America; however, concerns remain regarding the impact of generally soft global economic conditions on the outlook for crude oil demand and crude oil prices, and the impact of reduced commodity prices on the cash flows of the exploration and production companies.  In particular, reduced cash flow levels have negatively impacted the ability of the small to intermediate sized exploration and production companies to finance planned development programs.  Historically, such smaller companies have often spent in excess of their internally generated funds, making up the shortfall using a combination of bank debt and funds raised in capital market transactions.  While the banks appear supportive of the industry, recent reductions to the price deck for oil and natural gas have resulted in reduced levels of borrowing capacity.  Additionally, the capital markets are less attractive alternatives at current prices as many investors appear to be waiting on the sidelines for general economic fundamentals to improve.  Against this backdrop, the Company expects that activity levels within North America could experience some downward pressure through the remainder of 2012.

Activity levels in the Company’s Canadian operations during the second quarter of 2012 were generally comparable to the second quarter of the prior year, but wet weather in the latter stages of the current year’s second quarter hampered the ability to resume many oilfield operations.  The rig count in Canada started to improve at the start of the third quarter as weather and field conditions improved, but activity levels remain below the levels of the prior year.  Exploration and production companies appear to be delaying or reducing oilfield activity in response to reduced levels of commodity prices against a challenging global economic backdrop.  The margin levels for oilfield services have also fallen slightly as the Company’s revenue rates have been reduced to maintain market share in an increasingly challenging oilfield services market.  The Company’s ADR^® drilling rigs remain fully committed as demand weakness has thus far been directed towards other rig categories.  The Company is currently completing three new ADRs and four new well servicing rigs that will be deployed into the Canadian market pursuant to the current new build program.

The Company’s United States operations during the recently completed second quarter were up compared to the second quarter of 2011, due to the positive impact arising from the September 2011 acquisition of Rowan Land Drilling. Industry activity levels, as measured by the industry active drilling rig count, appear to have leveled off as the decrease in the natural gas directed drilling rig count has been mostly offset by increases in crude oil and liquids rich natural gas directed drilling activity.  The Company believes there may be some downside risk to such activity levels through the remainder of 2012 in light of the recent pull back in crude oil commodity prices and the resultant impact on customer cash flows and expected demand for oilfield services.  At present, activity levels remain fairly strong, especially for ADR^®-style drilling rigs.  An additional five new ADRs and five new well servicing rigs will be delivered by the Company into the United States market under the current new build program.  The last of these new builds will be delivered in the third quarter of 2013.

International operations continue to be influenced not only by global fundamentals, but also by specific geopolitical influences in each country.  The Company expects international operations to remain steady through the remainder of 2012 as long-term contracts remain in place in many of its key markets.  Latin America remains a challenge and operations in Libya have not yet recommenced.  These under-performing areas continue to be a focus of the Company.  Two new ADRs have recently been completed for Australia and the first of these rigs will be operational before the end of the third quarter.

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 second quarter 2012 results at 2:00 p.m. MST (4:00 p.m. EST) on Monday, August 13, 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 August 20, 2012 by dialing 1-416-849-0833 (in Toronto) or 1-855-859-2056 (outside Toronto) and entering the reservation number 43349364.  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.

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SOURCE: Ensign Energy Services Inc.