Ensign Energy Services Inc. Reports 2016 First Quarter Results

CALGARY, May 9, 2016 /CNW/ –

OVERVIEW

Revenue for the first quarter of 2016 was $258.5 million, a decrease of 42 percent from revenue for the first quarter of 2015 of $449.3 million. Revenue, net of third party, for the first quarter of 2016 was $226.9 million, a decrease of 43 percent from Revenue, net of third party, for the first quarter of 2015 of $398.6 million. Adjusted EBITDA totaled $59.6 million ($0.39 per common share) in the first quarter of 2016, 47 percent lower than Adjusted EBITDA of $112.3 million ($0.74 per common share) in the first three months of 2015. Net loss for the first quarter of 2016 was $14.9 million ($0.10 per common share), compared to net income of $15.4 million ($0.10 per common share) for the first quarter of 2015. Adjusted net loss for the first quarter of 2016 was $25.1 million ($0.16 per common share), compared to Adjusted net income of $27.7 million ($0.18 per common share) for the first quarter of 2015. Funds from operations decreased 50 percent to $55.2 million($0.36 per common share) in the first three months of 2016 as compared to $109.8 million($0.72 per common share) in the first three months of the prior year.

Operating days across the Company’s fleet were lower in the first quarter of 2016 when compared to the first quarter of 2015 due to weaker demand for oilfield services caused by low oil and natural gas commodity prices. In the quarter, a strengthening year-over-year of the United States dollar against the Canadian dollar positively impacted United States and international financial results on translation to Canadian dollars. The average United Statesexchange rate was 1.3748 for the first quarter of 2016 (first quarter of 2015 – 1.2411) versus the Canadian dollar, an increase of 11 percent, compared to the first three months of 2015.

Gross margin decreased to $76.2 million (34 percent of Revenue, net of third party) for the first quarter of 2016 compared to a gross margin of $133.8 million (34 percent of Revenue, net of third party) for the first quarter of 2015. The decrease in gross margin in the first quarter of 2016 compared to the first quarter of 2015 was primarily attributed to weaker activity levels and lower revenue rates across the oilfield service equipment fleet.

Working capital at March 31, 2016 was $3.6 million, compared to $144.2 million at December 31, 2015, largely due to a portion of long-term debt (USD $100.0 million of senior unsecured notes bearing interest at 3.43 percent, due February 22, 2017) maturing within the next 12 months. The Company’s bank credit facilities provide unused and available borrowings of $277.8 million at March 31, 2016, up by $57.7 million, compared to $220.1 million at December 31, 2015.

FINANCIAL AND OPERATING HIGHLIGHTS

(Unaudited, in thousands of Canadian dollars, except per share data and operating information)

 

FIRST QUARTER HIGHLIGHTS

• Revenue for the first quarter of 2016 was $258.5 million, a 42 percent decrease from the first quarter of 2015 revenue of $449.3 million.
• Revenue by geographic area:
  • Canada – $75.6 million, 29 percent;
  • United States – $100.1 million, 39 percent; and
  • International – $82.8 million, 32 percent.
• Canadian drilling recorded 1,569 operating days in the first quarter of 2016, a 43 percent decrease from 2,759 operating days (including coring days in Q1 2015) in the first quarter of 2015.  Canadian well servicing recorded 13,675 operating hours in the first quarter of 2016, a 27 percent decrease from 18,746 operating hours in the first quarter of 2015.
• United States drilling recorded 1,890 operating days in the first quarter of 2016, a 49 percent decrease from 3,723 operating days in the first quarter of 2015.  United States well servicing recorded 14,355 operating hours in the first quarter of 2016, a 27 percent decrease from 19,754 operating hours in the first quarter of 2015.
• International drilling recorded 1,790 operating days in the first quarter of 2016, a 30 percent decrease from 2,540 operating days recorded in first quarter of 2015.
• Adjusted EBITDA for the first quarter of 2016 was $59.6 million, a 47 percent decrease from Adjusted EBITDA of $112.3 million for the first quarter of 2015.  Funds from operations for the first quarter of 2016 decreased 50 percent to $55.2 million from $109.8 million in the first three months of the prior year.
• Total debt, net of cash, decreased by $65.3 million (nine percent) in the first quarter of 2016 from $753.7 million at December 31, 2015 to $688.4 million at March 31, 2016.
• One new ADR^® drilling rig was added to the Company’s United States equipment fleet.  Net capital expenditures for the calendar year 2016 are now targeted at $45.0 million compared to the original estimate of $60.0 million.
• The Company declared a second quarter cash dividend on common shares of $0.12 per common share, payable July 6, 2016.

REVENUE AND OILFIELD SERVICES EXPENSE

Revenue for the first quarter of 2016 totaled $258.5 million, a 42 percent decrease from the first quarter of 2015. As a percentage of Revenue, net of third party, gross margin for the first quarter of 2016 remained consistent at 34 percent when compared with the first quarter of 2015.

The continued decline in oil and natural gas commodity prices reduced demand for oilfield services, which resulted in lower equipment utilization rates and revenue rates in 2016 compared to 2015. Financial results from the Company’s United States and international operations were positively impacted upon translation, as the stronger United States dollar relative to the Canadian dollar in the first three months of 2016 served to reduce the impact of some of the revenue rate declines experienced during the quarter.

CANADIAN OILFIELD SERVICES

The Company recorded revenue of $75.6 million in Canada for the three months ended March 31, 2016, a decrease of 36 percent from $118.0 million recorded for the three months ended March 31, 2015. Canada accounted for 29 percent of the Company’s revenue in the first quarter of 2016, compared with 26 percent in the first quarter of 2015. Demand for the Company’s Canadian oilfield services was lower compared to prior quarters due to the decrease in oil and natural gas commodity prices.

The Company recorded 1,569 operating days in the first quarter of 2016, a 43 percent decrease from 2,759 operating days in the first quarter of 2015. Canadian well servicing hours decreased by 27 percent in the three months ended March 31, 2016, compared to the three months ended March 31, 2015. During the three months ended March 31, 2016, the Company disposed of one well servicing rig.

UNITED STATES OILFIELD SERVICES

The Company’s United States operations recorded revenue of $100.1 million for the first quarter of 2016, a decrease of 46 percent from the $186.4 million recorded in the corresponding period of the prior year. The Company’s United States operations accounted for 39 percent of the Company’s revenue in the first quarter of 2016, compared to 42 percent in the first quarter of 2015.

Drilling operating days decreased by 49 percent from 3,723 operating days in the first quarter of  2015 to 1,890 operating days in first quarter of 2016. Well servicing activity expressed in operating hours decreased by 27 percent in the first quarter of 2016 compared to the first quarter of 2015.

Overall operating and financial results for the Company’s United States operations were negatively impacted by the decline in demand for oilfield services due to falling oil and natural gas commodity prices.   Activity levels and revenue rates in the United States continued to decline in the first quarter of 2016.   The reduced activity and associated pricing declines were partially offset by a strengthening of the United States dollar, which increased 11 percent versus the Canadian dollar when compared to the first quarter of 2015. During the first three months ending March 31, 2016, the Company added one new build ADR^® drilling rig to the United States fleet.

INTERNATIONAL OILFIELD SERVICES

The Company’s international operations recorded revenue of $82.8 million for the first quarter of 2016, a 43 percent decrease from $144.9 million recorded in the corresponding period of the prior year. The Company’s international operations contributed 32 percent of the Company’s revenue in the first quarter of 2016, consistent with the same period of 2015.

The Company’s international operations recorded 1,790 operating days in the first quarter of 2016, a decrease of 30 percent from 2,540 operating days recorded in the first quarter of 2015.

Similar to the Company’s United States operations, international operations were positively impacted by the strengthening United States dollar year-over-year in the first quarter of 2016, versus the Canadian dollar, on translation into Canadian dollars for reporting purposes compared to the first quarter of 2015.

DEPRECIATION

Depreciation expense increased by 48 percent to $94.5 million for the three months ended March 31, 2016 compared with $63.8 million for the three months ended March 31, 2015. Depreciation expense was higher in the current quarter when compared to the prior year’s quarter, due to additional depreciation charges relating to idle equipment, the impact of higher dollar value equipment being utilized and the negative translational impact of a stronger United States dollar compared to the Canadian dollar on non-Canadian domiciled fixed assets. The increase was partially offset by the overall decrease in operating activity during the quarter.

GENERAL AND ADMINISTRATIVE EXPENSE

General and administrative expense decreased 23 percent to $16.6 million (6.4 percent of revenue) for the first quarter of 2016 compared to $21.5 million (4.8 percent of revenue) for the first quarter of 2015. The decrease in general and administrative expense arose from the Company’s initiatives to reduce costs in reaction to lower oil and natural gas commodity prices. The decrease was partially offset by the negative translational impact on non-Canadian operations of the strengthening United States dollar versus the Canadian dollar for the three months ended March 31, 2016 compared to the three months ended March 31, 2015.

SHARE-BASED COMPENSATION

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 market price of the Company’s common shares.

For the three months ended March 31, 2016 share-based compensation was a recovery of $0.4 million compared with an expense of $0.8 million for the three months ended March 31, 2015. The share-based compensation recovery for the first quarter of 2016 was a result of changes in the fair value of the share-based compensation liability, offset by amortization of stock options. The fair value of share-based compensation is impacted by both the input assumptions used to estimate the fair value and the price of the Company’s common shares during the period.  The closing price of the Company’s common shares was $5.98 at March 31, 2016 ($9.93 at March 31, 2015) compared with $7.38 at December 31, 2015 ($10.20 at December 31, 2014).

INTEREST EXPENSE

Interest is incurred on the Company’s $10.0 million Canadian-based revolving credit facility (the “Canadian Facility”), the $600.0 million global revolving credit facility (the “Global Facility”) and the United States dollar $300.0 million senior unsecured notes (the “Notes”) issued in February 2012.   The amortization of deferred financing costs associated with the issuance of the Notes is included in interest expense.

Interest expense increased by four percent for the first quarter of 2016 compared to the same period in 2015 despite overall net debt repayments of $32.7 million in the bank credit facilities in first quarter of 2016. The increased interest expense was due to the negative translational impact on United States dollar-denominated debt of a strengthening United States dollar versus the Canadian dollar on a year-over-year basis.

FOREIGN EXCHANGE AND OTHER

Included in this amount is the impact of foreign currency fluctuations in the Company’s subsidiaries that have functional currencies other than the Canadian dollar. During the three months ended March 31, 2016, the Australian dollar strengthened by approximately five percent  against the United States dollar causing a foreign currency gain on translation of the Company’s United States dollar denominated debt into Australian dollars, versus the Australian dollar weakening by approximately six percent against the United States dollar in the first quarter of 2015.

In March 2016, the Venezuelan government changed the country’s currency exchange regime, resulting in the official (“Venezuelan Central Bank”) rate of 6.3 Bolivars changing to a newly introduced “DIPRO” or “protected” non-floating rate of 10.0 Bolivars per United States dollar, applying to vital imports such as food and medicines. The “SIMADI” or Marginal Currency System rate of around 200 Bolivars per United States dollar was replaced by the “DICOM” or “complementary” fluctuating rate, initially at a rate of 206 Bolivars per United States dollar, which applies to all transactions not governed by DIPRO. The impact of these new currency rates, effective in the first quarter of 2016, had no material impact on the revenues and expenses of the Company.

INCOME TAXES

The effective income tax rate for the three months ended March 31, 2016 was 41.0 percent compared with 34.7 percent for the three months ended March 31, 2015. The effective tax rate in the current quarter was higher than the effective tax rate in the first quarter of 2015 due to tax rate increases in Alberta and Oman, further increased by the impact of foreign exchange gains for which effective tax rates vary from statutory rates.

FINANCIAL POSITION

Significant changes in the consolidated statement of financial position from December 31, 2015 to March 31, 2016 are outlined below:

FUNDS FROM OPERATIONS AND WORKING CAPITAL

Funds from operations totaled $55.2 million ($0.36 per common share) during the three months ended March 31, 2016, a decrease of 50 percent from $109.8 million ($0.72 per common share) generated for the three months ended March 31, 2015. The decrease in Funds from operations in 2016 compared to 2015 is due to the decline in demand for both North American and international oilfield services, attributed to the decline in global energy prices.

At March 31, 2016 the Company’s working capital totaled $3.6 million, compared to working capital of $144.2 million at December 31, 2015.  The decrease in working capital in the first three months of 2016, was mainly related to a reduction in operating levels by the Company in 2016 and the financial statement reclassification of the portion of long-term debt (USD $100.0 million of senior unsecured notes bearing interest at 3.43 percent, due February 22, 2017) maturing within the next 12 months to current liabilities. The Company expects funds generated by operations, combined with current and future credit facilities, to fully support current operating and capital requirements. Existing revolving credit facilities provide for total borrowings of $610.0 million, of which $277.8 million was undrawn and available at March 31, 2016.

INVESTING ACTIVITIES

Net purchases of property and equipment for the first quarter of 2016 totaled $14.7 million(2015 – $78.7 million). The purchase of property and equipment relates predominantly to expenditures made pursuant to the Company’s new build and major retrofit program, and for maintenance capital costs incurred in the quarter.

FINANCING ACTIVITIES

The Company’s available bank credit facilities consist of a $600.0 million Global Facility and a $10.0 million Canadian Facility. The Global Facility is available to the Company and certain of its wholly-owned subsidiaries, and may be drawn in Canadian, United States or Australian dollars, up to the equivalent value of $600.0 million Canadian dollars. The Global Facility expires in June 2017. The amount available under the Canadian Facility is $10.0 million or the equivalent in United States dollars.

In addition, the Company has a $20.0 million uncommitted facility, solely for issuing letters of credit, primarily used for bidding on contracts in the normal course of business.

The Board of Directors of the Company has declared a second quarter dividend of $0.12 per common share to be payable July 6, 2016 to all Common Shareholders of record as of June 22, 2016. The dividend is pursuant to the quarterly dividend policy adopted by the Company. Pursuant to subsection 89(1) of the Canadian Income Tax Act (“ITA”), the dividend being paid is designated as an eligible dividend, as defined in subsection 89(1) of the ITA.

NEW BUILDS AND MAJOR RETROFITS

During the three months ended March 31, 2016, the Company completed one new build drilling rig. The Company continues to selectively build new ADR^® drilling rigs and upgrade existing rigs to meet the increasing technical demands of its customers.  The decline in oil and natural gas commodity prices resulted in the Company proactively and aggressively reducing the rig build program during the year.

OUTLOOK

The oil and natural gas industry downturn, which appears to be mainly caused by excess supply, has begun to show some stabilization over the past month. Crude oil prices are still very volatile with West Texas Intermediate hitting lows of $26 in February and rising to $42 in April, representing a 62 percent change.

The global producers’ meeting in Doha on April 17 failed to create an agreement on OPEC production freezes, with most of the attention centered on Iran not being at the table. As expected by many analysts, this meeting did not create any meaningful impact. Even without an agreement in Doha, it appears that there are some indications that supply is starting to or soon will begin to decrease, causing the market to begin the much-needed rebalancing phase.

Demand for oil is still growing year-over-year and, according to the April OPEC Monthly Oil Market Report, oil demand is still expected to grow at 1.2 million barrels per day in 2016. Demand growth will aid in the rebalancing and should help create some stability in oil prices. Price stabilization is what our customers need to increase investment in drilling and other oilfield services.

As the market begins to rebalance, we see some issues arising from the commodity slump. One of them will be the access to capital required for our customers to increase drilling activity. Some E&P companies are seeing their credit lines reduced, and some of them have decided to issue equity in order to strengthen their balance sheets. We believe that this credit tightening will affect the recovery and that some energy companies are at risk of default as access to additional capital will be difficult and more expensive than in the past.

Oilfield services activity levels in Canada continue to be weak, as had widely been expected. The Company is starting to see mixed signals on producer expenditures with some choosing to increase spending from 2015 levels and some are decreasing it and focusing on field maintenance. The current price increase and talks of price stabilization may partially begin to restore customer confidence. Activity levels for the Company’s Canadian equipment fleet continue to be in line with the industry. Future expectations are for the Company to track with lower industry levels, and for the Company’s larger rigs to continue to perform relatively well in deeper plays under development with major operators in Canada.

The United States drilling rig count appears to have bottomed, with some weekly count increases and decreases. As of mid-April, active land-based rigs operating in the United Stateswere 440 rigs, down 514 rigs from around the same time in 2015. The Company’s United States equipment fleet continues to perform somewhat favorably when compared with the overall industry, but pressures on day rates and contract retention persist and are expected to continue until activity increases.

The mid-April rig count for international, according to the Baker Hughes March 2016 rig count, was down 266 rigs from the prior year to 985. The international drilling markets tend to be more diverse and generally have longer term contracts. Our international operations, which have diversified the Company, have aided in reducing the declines that have been seen in North America. For the remainder of 2016, the Company expects to operate internationally at similar utilization levels to those of the first quarter due to a relatively high proportion of long-term contracts and international oil companies capitalizing on the lower service sector costs. The Company’s international operations are exposed to geopolitical issues, civil unrest, economic constraints and other factors inherent in international activities.

The Company remains focused on: operational improvements, close attention to customer credit conditions, and safeguarding the balance sheet. The market may soon begin the rebalancing process, which could continue into late 2016 or early 2017. As we move forward, the Company will continue to look for ways to deal with the “new normal.”

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, economic and market conditions, crude oil and natural gas prices, foreign currency fluctuations, weather conditions, the Company’s defense of lawsuits and the ability of oil and gas companies to pay accounts receivable balances and raise capital or other unforeseen conditions which could impact on the use of the services supplied by the Company.

CONFERENCE CALL

A conference call will be held to discuss the Company’s first quarter 2016 results at 2:00 p.m. MDT (4:00 p.m. EDT) on Monday, May 9, 2016. 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 16, 2016 by dialing 1-416-849-0833 (in Toronto) or 1-855-859-2056 (outside Toronto) and entering the reservation number 50606297. 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.

Ensign Energy Services Inc.
Consolidated Statements of Financial Position

Ensign Energy Services Inc.
Consolidated Statements of (Loss) Income

 

Ensign Energy Services Inc.
Consolidated Statements of Cash Flows

 

SOURCE Ensign Energy Services Inc.

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