Ensign Energy Services Inc. Reports 2013 First Quarter Results

Overview

Revenue for Ensign Energy Services Inc. (“Ensign” or the “Company”) for the first quarter of 2013 was $581.1 million, a decrease of 14 percent from first quarter 2012 revenue of $677.7 million. Net income for the first quarter of 2013 decreased 38 percent to $65.0 million ($0.43 per common share) compared to net income of $105.5 million ($0.69 per common share) for the first quarter of 2012.  Excluding the impact of share-based compensation expense (recovery), adjusted net income for the first quarter of 2013 was $69.1 million ($0.45 per common share), 33 percent lower than adjusted net income of $103.6 million for the first quarter of 2012 ($0.68 per common share).  Operating earnings, expressed as EBITDA (defined as earnings before interest, income taxes, depreciation, and share-based compensation expense (recovery)), totaled $168.3 million ($1.10 per common share) in the first quarter of 2013, 20 percent lower than EBITDA of $211.1 million ($1.38 per common share) in the first three months of 2012.  Similarly, funds from operations decreased 21 percent to $140.6 million ($0.92 per common share) in the first three months of 2013 from $177.0 million ($1.16 per common share) in the first three months of the prior year.  Reduced operating activity in North America in the first three months of 2013, when compared to the first three months of 2012, negatively impacted operating and financial results for first quarter of 2013.  Partially offsetting this reduction was the positive impact of increased operating activity in Latin America and the eastern hemisphere and the positive impact on United States and international financial results from the United States dollar strengthening versus the Canadian dollar by approximately one percent during the three months ended March 31, 2013 compared to the three months ended March 31, 2012.

Gross margin decreased to $183.9 million (31.7 percent of revenue) for the first quarter of 2013 compared with gross margin of $234.3 million (34.6 percent of revenue) for the first quarter of 2012.  The year-over-year reduction in operating activity negatively pressured first quarter gross margins compared to the prior year, particularly in North America.

Working capital at March 31, 2013 was $67.6 million compared to $13.9 million at December 31, 2012.  Available borrowings at March 31, 2013 was $86.0 million compared to $164.3 million at December 31, 2012 as additional draws were used to support first quarter activity levels and the ongoing new build program which delivered two new ADR^® drilling rigs and two new well servicing rigs in the first quarter of 2013.

First Quarter Highlights

• Revenue for the first three months of 2013 was $581.1 million, up 10 percent from the fourth quarter of 2012 and down 14 percent from the first three months of 2012.  The reduction in revenue from the first quarter of 2012 to the first quarter of 2013 is maintly due to reduced operating activity in North America.
• Two new ADRs were added to the Company’s drilling fleet in the first quarter fo 2013: one in the Canadian market and one in the United States market.  The new build program also added two new well servicing rigs in Canada in the current quarter.
• First quarter revenue by segment:
  • Canada – 44 percent;
  • United States – 35 percent; and
  • International – 21 percent.
• EBITDA for the first quarter of 2013 was $168.3 million, a 20 percent decrease from EBITDA of $211.1 million for the first quarter of 2012.  Funds from Operations for the first quarter of 2013 decreased 21 percent to $140.6 million from $177.0 million in the first quarter of the prior year.
• Canadian drilling recorded 5,329 operating days in the first three months of 2013, a 28 percent decrease from 7,431 operating days in the first three months of 2012.  Canadian well servicing hours decreased by 12 percent in the first quarter of 2013 compared to the first quarter of 2012.
• United States drilling recorded 5,504 operating days in the first quarter of 2013, a 13 percent decrease from 6,313 operating days in the first quarter of 2012.  United States well servicing hours decreased by 24 percent in the first three months of 2013 compared to the first three months of 2012.
• International drilling recorded 2,712 operating days in the first quarter of 2013, a three percent decrease from 2,797 operating days recorded in the first quarter of 2012.
• The Company declared a quarterly cash dividend on common shares of $0.110 per common share payable July 5, 2013.
• Subsequent to March 31, 2013, the Company expanded its oilfield equipment rental fleet in Canada through the purchase of additional Canadian oilfield service rental assets, including rig matting and waste management equipment.

Revenue recorded in the first quarter of 2013 totaled $581.1 million, a decrease of 14 percent from the first quarter of 2012.  As a percentage of revenue, gross margin for the first quarter of 2013 decreased to 31.7 percent from 34.6 percent for the first quarter of 2012.

The continued softening of demand for North American oilfield services reduced operating and financial results overall for the Company in the current quarter compared to the first quarter of 2012.  Reduced activity levels, combined with downward pressure on revenue rates for Canada and United States oilfield services, led to decreased revenue in the current quarter compared to the first quarter of the prior year.  Increased demand for oilfield services in the Company’s international operations improved operating and financial results for the current quarter for that segment, when compared to the first quarter of 2012, partially offsetting some of the weakness experienced in North America.

Canadian Oilfield Services

Revenue decreased 21 percent to $256.0 million for the three months ended March 31, 2013, from $324.9 million for the three months ended March 31, 2012.  Canadian revenues accounted for 44 percent of the Company’s total revenue in the first quarter of 2013, compared with 48 percent in the first quarter of 2012. Reduced demand for oilfield services appeared to be attributable to unfavorable price differentials for Canadian commodities as well as increasing uncertainty in global economic conditions that began in the latter half of 2012 and continued into the current year.

The Company recorded 5,329 drilling days in the first quarter of 2013; this compares with 7,431 drilling days for the first quarter of 2012, a 28 percent decrease due to weaker demand for Canadian oilfield services.  Canadian well servicing hours decreased by 12 percent to 35,137 operating hours in the first quarter of 2013 compared with 40,135 operating hours in the corresponding period of 2012.

During the three months ended March 31, 2013, the Company added one newly constructed Automated Drill Rig (“ADR^®“) to its Canadian drilling rig fleet and two well servicing rigs.   Five inactive drilling rigs and 10 inactive well servicing rigs were decommissioned in the current quarter.  The Company also disposed of its non-rig manufacturing facility located in Calgary, Alberta.

United States Oilfield Services

The Company’s United States operations recorded revenue of $200.5 million in the first quarter of 2013, a 20 percent decrease from the $249.4 million recorded in the corresponding period of the prior year.  The Company’s United States operations accounted for 35 percent of the Company’s revenue in the first quarter of 2013, compared to 37 percent in the first quarter of 2012.  Drilling rig operating days decreased by 13 percent to 5,504 drilling days in the first quarter of 2013 from 6,313 drilling days in the first quarter of 2012.  Well servicing activity decreased by 24 percent in the first quarter of 2013 to 22,777 operating hours from 30,149 operating hours in the first quarter of 2012.

The slowdown in North American oilfield services that began in the second half of 2012 and continued into the start of 2013 negatively impacted United States operating and financial results in the current quarter, resulting in reduced operating activity and lower revenue rates.

During the three months ended March 31, 2013 the Company added one new ADR^® drilling rig to its United States fleet and decommissioned six inactive drilling rigs.

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 2013 the United States dollar increased by approximately one percent when compared to the same period of the prior year.

International Oilfield Services

The Company’s international operations recorded revenue of $124.7 million in the first quarter of 2013, a 21 percent increase from $103.4 million recorded in the corresponding period of the prior year.  International operations contributed 21 percent of the Company’s revenue in the first quarter of 2013 compared with 15 percent in the same period of 2012.  International operating days for the three months ended March 31, 2013 totaled 2,712 drilling days compared with 2,797 drilling days in 2012, a decrease of three percent.

The improved start to 2013 in the Company’s international operations was mainly a result of increased demand for oilfield services in Latin America and the eastern hemisphere and the addition of two new ADR’s and the relocation of an existing rig into the international market late in 2012, offset by the transfer of six drilling rigs from Mexico to the United States at the end of 2012.  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 2013 compared to the first quarter of the prior year.

During the three months ended March 31, 2013 the Company decommissioned one inactive drilling rig from its international fleet.

The Company uses the unit of production method of calculating depreciation for the majority of its property and equipment.  Depreciation expense totaled $57.2 million for the first quarter of 2013 compared with $58.2 million for the first quarter of 2012, a decrease of two percent.  Decreased depreciation reflects the reduced activity in North America for the first three months of 2013 compared to the first three months of 2012.  The impact from the decrease in activity levels was offset by higher valued equipment being added to the Company’s global fleet throughout 2012 through the Company’s new build program.

General and administrative expense was consistent for the first quarter of 2013 compared to the first quarter of 2012 increasing one percent to $19.6 million (3.4 percent of revenue) compared with $19.4 million (2.9 percent of revenue) for the first quarter of 2012.

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

For the three months ended March 31, 2013, share-based compensation expense (recovery) was an expense of $6.4 million compared with a recovery of $2.9 million recorded in the first quarter of 2012.  The increase in the share-based compensation expense in the first quarter of 2013 is a result of the change in the fair value of share-based compensation liability primarily resulting from an increase in the price of the Company’s common shares during the first three months of 2013.  The closing price of the Company’s common shares was $17.32 at March 31, 2013 ($14.91 at March 31, 2012) compared with $15.37 at December 31, 2012 ($16.25 at December 31, 2011).

Interest is incurred on the Company’s $10.0 million Canadian-based revolving credit facility, the $400.0 million global revolving credit facility and the USD $300.0 million senior unsecured notes issued in February 2012.  The amortization of deferred financing costs associated with the issuance of the Company’s long-term debt are included in interest expense in both quarters.

Interest expense in the first quarter of 2013 was comparable to the first quarter of 2012.

Included in this amount are foreign currency movements in the Company’s subsidiaries which have functional currencies other than Canadian dollars.  In general the United States dollar strengthened in the first three months of 2013 compared to the first three months of 2012 when compared to other currencies impacting the Company.

The effective income tax rate for the three months ended March 31, 2013 was 35.5 percent compared with 30.5 percent for the three months ended March 31, 2012. The effective income tax rate in the first quarter of 2013 was higher than that of the first quarter of 2012 due to a higher proportion of taxable income earned in international jurisdictions with higher tax rates, as well as the tax impact of the currency devaluation that occurred in Venezuela in February 2013.

Financial Position

The following chart outlines significant changes in the consolidated statement of financial position from December 31, 2012 to March 31, 2013:

During the three months ended March 31, 2013, the Company generated funds from operations of $140.6 million ($0.92 per common share) compared with funds from operations of $177.0 million ($1.16 per common share) for the three months ended March 31, 2012, a decrease of 21 percent.  This decrease is due to reduced operating and financial results for the current quarter compared to the first quarter of the prior year.

At March 31, 2013, the Company’s working capital totaled $67.6 million, compared to $13.9 million at December 31, 2012.  Slight improvements in North American operating results in the current quarter when compared with the immediately preceding quarter, as well as stronger operating results from operations in Latin America and the eastern hemisphere helped to improve 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 $86.0 million was available at March 31, 2013.

Purchases of property and equipment during the first quarter of 2013 totaled $62.8 million (2012 – $80.6 million).  The purchase of property and equipment relates predominantly to expenditures made pursuant to the Company’s ongoing new build program and is partially offset by the disposal in the current quarter of the Company’s non-rig manufacturing facility located in Calgary, Alberta.

The Company’s available operating lines of credit consist of a $400.0 million global revolving credit facility (the “Global Facility”) and a $10.0 million Canadian based revolving credit facility (the “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 were mainly used to fund the ongoing new build program, which added two new ADR^® drilling rigs to the Company’s fleet in the first quarter of 2013; one in Canada and one in the United States as well as two new well servicing rigs, both in Canada.  As of March 31, 2013, 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, with the proceeds from the issuance being used to repay a portion of the USD $400.0 million unsecured term loan.  The remaining balance of the term loan was repaid in full in 2012.

The Board of Directors of the Company has declared a second quarter dividend of $0.11 per common share to be payable July 5, 2013 to all Common Shareholders of record as of June 21, 2013.  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 quarter ended March 31, 2013, the Company commissioned one new ADR^® drilling rig in the United States, and one new ADR^® drilling rig and two new well servicing rigs in Canada.

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

Outlook

General economic conditions appear to be improving in North America, pointing to positive prospects for crude oil and natural gas prices and demand. However, growth in Asia has continued to moderate and persistent unemployment and debt issues weigh on Europe. Although the mix of positive and negative factors appears balanced overall, high volatility results in continued uncertainty. There is optimism regarding infrastructure developments, which are expected to reduce North American regional pricing differentials for crude oil, and a recent rebalancing of natural gas storage and firming prices are expected to have positive effects in the medium term. While we are optimistic about energy commodity prices, caution is warranted regarding drilling levels in the near term, as there is a relatively high backlog of previously drilled wells, and the impact of new technologies such as pad horizontal programs in resource plays is changing industry dynamics. We continue to believe it may take several quarters to restore stability in market forces.

Activity levels were down in the just completed winter drilling season in Canada compared to the prior year as customers reduced demand for oilfield services in the face of continued caution for an uncertain future.  Prospects for the Company’s Canadian operations during the remainder of 2013 mirror those of the industry as forecasted by the Canadian Association of Oilwell Drilling Contractors which is calling for essentially similar or slightly lower operating activity levels for 2013 compared with those of 2012. The Company’s ability to maintain margins for the remainder of the year will depend on prudent cost management.  While there has recently been an encouraging increase in inquiries for deeper new build drilling rigs, the Company currently plans to add one new ADR^® drilling rig and four new well servicing rigs to the Canadian fleet over the next three months in connection with the ongoing new build program.

Activity levels in the Company’s United States operations in the first quarter of 2013 were similar to those of the fourth quarter of 2012, but lower than those of the first quarter of 2012. Despite improving prospects for natural gas prices and general economic recovery, the drilling industry in the United States continues to face headwinds from regional energy development issues and a high backlog of drilled wells. The Company is cautiously optimistic that improving natural gas prices and stable prices for crude oil and liquids will support activity levels later in the year. The Company is constructing three new ADR^® drilling rigs under term contracts for delivery throughout this year.

Prospects for the Company’s international operations remain positive for the remainder of 2013, with some caution in relation to Latin America, where the impact of the recent very close presidential election in Venezuela and ongoing regional currency challenges persist. The Company’s new build program currently includes two new ADR^® drilling rigs to be added to the international fleet in the next nine months.

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 first quarter 2013 results at 2:00 p.m. MST (4:00 p.m. EST) on Monday, May 6, 2013.  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 13, 2013 by dialing 1-416-849-0833 (in Toronto) or 1-855-859-2056 (outside Toronto) and entering the reservation number 20530952.  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.