Ensign Energy Services Inc. Reports 2017 First Quarter Results

CALGARY, May 8, 2017 /CNW/ -

OVERVIEW

Revenue for the three months ended March 31, 2017 was $251.3 million, a decrease of three percent from revenue for the three months ended March 31, 2016 of $258.5 million. Revenue, net of third party, for the three months ended March 31, 2017 was $208.9 million, a decrease of eight percent from Revenue, net of third party, for the three months ended March 31, 2016 of $226.9 million. Adjusted EBITDA totaled $50.1 million ($0.32 per common share) in the first quarter of 2017, 17 percent lower than Adjusted EBITDA of $60.5 million ($0.40 per common share) in the first quarter of 2016.  Net loss for the three months ended March 31, 2017 was $13.8 million ($0.09 per common share), compared to net loss of $14.9 million ($0.10 per common share) for the three months ended March 31, 2016, Adjusted net loss was $24.6 million ($0.16 per common share), compared to Adjusted net loss of $24.4 million ($0.16 per common share) for the three months ended March 31, 2016. Funds flow from operations decreased 19 percent to $44.8 million ($0.29 per common share) in the first quarter of 2017 compared to $55.2 million ($0.36 per common share) in the first quarter of the prior year.

Operating days across the Company's fleet were higher in Canada and the United States in the first quarter of 2017 when compared to the first quarter of 2016 due to increased demand in oilfield services caused by a modest price recovery of crude oil and natural gas commodity prices. A year-over-year weakening of the United States dollar against the Canadian dollar negatively impacted United States and international financial results on translation to Canadian dollars. The average United States dollar exchange rate was 1.32 for the first three months of 2017 (first three months of 2016 - 1.37) versus the Canadian dollar, a decrease of four percent, compared to the first three months of 2016.

Gross margin decreased to $60.6 million (29.0 percent of Revenue, net of third party) for the first quarter of 2017 compared to gross margin of $76.2 million (33.6 percent of Revenue, net of third party) for the first quarter of 2016. The decrease in gross margin in the first quarter of 2017 compared to the first quarter of 2016 was primarily attributed to lower revenue rates across the oilfield service equipment fleet and nominal shortfall revenue earned.

Working capital at March 31, 2017 was a surplus of $147.9 million, compared to a deficit of $11.2 million at December 31, 2016, largely due to the repayment of a portion of long-term debt (USD $100.0 million of senior unsecured notes bearing interest at 3.43 percent, paid February 22, 2017). The Company's bank credit facilities provide unused and available borrowings of $22.0 million as at March 31, 2017, down by $162.4 million, compared to $184.4 million at December 31, 2016, due to the senior unsecured notes repayment in February 2017.

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 2017 was $251.3 million, a three percent decrease from the first quarter of 2016 revenue of $258.5 million.
• Revenue by geographic area:
• Canada - $84.3 million, 34 percent;
• United States - $98.0 million, 39 percent; and
• International - $69.0 million, 27 percent.
• Canadian drilling recorded 2,325 operating days in the first quarter of 2017, a 48 percent increase from 1,569 operating days in the first quarter of 2016. Canadian well servicing recorded 20,783 operating hours in the first quarter of 2017, a 52 percent increase from 13,675 operating hours in the first quarter of 2016.
• United States drilling recorded 2,253 operating days in the first quarter of 2017, a 19 percent increase from 1,890 operating days in the first quarter of 2016. United States well servicing recorded 20,081 operating hours in the first quarter of 2017, a 40 percent increase from 14,355 operating hours in the first quarter of 2016.
• International drilling recorded 1,578 operating days in the first quarter of 2017, a 12 percent decrease from 1,790 operating days recorded in first quarter of 2016.
• Adjusted EBITDA for the first quarter of 2017 was $50.1 million, a 17 percent decrease from Adjusted EBITDA of $60.5 million for the first quarter of 2016. Funds from operations for the first quarter of 2017 decreased 19 percent to $44.8 million from $55.2 million in first quarter of the prior year.
• Net capital expenditures for the calendar year 2017 remains targeted at $61 million.
• The Company declared a second quarter cash dividend on common shares of $0.12 per common share, payable July 7, 2017.

REVENUE AND OILFIELD SERVICES EXPENSE

 

Revenue for the three months ended March 31, 2017 totaled $251.3 million, a decrease of 3 percent from the first quarter of 2016 of $258.5 million. As a percentage of Revenue, net of third party, gross margin for the first quarter of 2017 increased to 29.0 percent (2016 - 33.6 percent).

The moderate price increases in oil and natural gas commodity prices have increased demand for oilfield services, which resulted in higher equipment utilization rates; however revenue rates declined throughout the prior years and have yet to increase with demand. The financial results from the Company's United States and international operations were negatively impacted on translation, as the United States dollar weakened relative to the Canadian dollar in the first three months of 2017 as opposed to a strengthening in the first quarter of 2016. This served to increase the impact of some of the revenue rate declines experienced during the past several months.

CANADIAN OILFIELD SERVICES

The Company recorded revenue of $84.3 million in Canada for the three months ended March 31, 2017, an increase of 11 percent from $75.6 million recorded for the three months ended March 31, 2016. Canadian revenues accounted for 34 percent of the Company's total revenue in the first quarter of 2017, compared to 29 percent in the first quarter of 2016.

Demand for the Company's Canadian oilfield services was higher compared to the prior quarters due to the modest increase in oil and natural gas commodity prices. The increase in demand was offset by lower revenue rates and nominal short fall revenue earned, compared to the first quarter of 2016. 

For the three months ended March 31, 2017, the Company recorded 2,325 drilling days compared to 1,569 drilling days for the three months ended March 31, 2016, an increase of 48 percent. Canadian well servicing hours increased by 52 percent to 20,783 operating hours in the first quarter of 2017 compared to 13,675 operating hours in the corresponding period of 2016.

During the three months ended March 31, 2017, the Company added one new build ADR^® drilling rig to the Canadian fleet. 

UNITED STATES OILFIELD SERVICES

During the three months ended March 31, 2017, revenue of $98.0 million was recorded by the Company's United States operations, a decrease of 2 percent from the $100.1 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 2017 (2016 - 39 percent).

Drilling rig operating days increased by 19 percent to 2,253 drilling days in the first quarter of 2017 from 1,890 drilling days in the first quarter of 2016. Well servicing activity expressed in operating hours increased by 40 percent in the first quarter of 2017 to 20,081 operating hours from 14,355 operating hours in the first quarter of 2016.

Overall operating results for the Company's United States operations were positively impacted by a modest increase in demand for oilfield services due to renewed optimism regarding oil and natural gas commodity prices. Revenue rates in the United States have not yet rebounded with the operating activity, maintaining declines experienced throughout 2016. The increased activity was partially offset by a weakening United States dollar, which decreased four percent versus the Canadian dollar when compared to the three months ending March 31, 2016.

INTERNATIONAL OILFIELD SERVICES

The Company's international operations recorded revenue of $69.0 million in the first quarter of 2017, a 17 percent decrease from the $82.8 million recorded in the corresponding period of the prior year. The Company's international operations contributed 27 percent of the total revenue in the first quarter of 2017 (2016 - 32 percent).

For the three months ended March 31, 2017, international operating days totaled 1,578 operating days compared to 1,790 drilling days for the three months ended March 31, 2016, a decrease of 12 percent.

The international operations saw a decrease in activity as certain rigs on long-term contracts rolled off and were not renewed. Similar to the Company's United States operations, international operations were negatively impacted by the weakening United States dollar year-over-year in the first three months of 2017, versus the Canadian dollar, on translation into Canadian dollars for reporting purposes compared to the same period of 2016.

DEPRECIATION

 

Depreciation expense totaled $79.4 million for the first quarter of 2017 compared with $94.5 million for the first quarter of 2016, a decrease of 16 percent. Depreciation expense was lower in the three months ended March 31, 2017 compared to the three months ended March 31, 2016, despite higher operating activity. The lower depreciation expense was due to certain operating assets now being fully depreciated and thus no further depreciation expense is required on such assets, depreciation on certain idle equipment in the prior year, and the positive translational impact of a weaker United States dollar compared to the Canadian dollar on non-Canadian domiciled fixed assets.

GENERAL AND ADMINISTRATIVE EXPENSE

 

General and administrative expense decreased 33 percent to $10.6 million (4.2 percent of revenue) for the first quarter of 2017 compared to $15.7 million (6.1 percent of revenue) for the first quarter of 2016. The decrease in general and administrative expense resulted from the Company's continued initiatives to reduce costs.  The decrease was accentuated by the positive translational impact on non-Canadian operations of the weakening United States dollar versus the Canadian dollar for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. We expect normalized general and administrative expenses to run in a $9.5 to $10.5 million range per quarter on a go-forward basis, excluding share-based compensation and subject to variability due to foreign exchange rates.

SHARE-BASED COMPENSATION

 

Share-based compensation 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, 2017 share-based compensation was a recovery of $1.0 million compared with an expense of $0.5 million for the three months ended March 31, 2016. The share-based compensation recovery for the first quarter of 2017 was a result of changes in the fair value of the share-based compensation liability which impacted the amortization of share 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 $7.97 at March 31, 2017 ($5.98 at March 30, 2016), compared with $9.38 at December 31, 2016 ($7.38 at December 31, 2015).

INTEREST EXPENSE

 

Interest is incurred on the Company's $500.0 million global revolving credit facility (the "Global Facility") and the United States dollar $200.0 million ($300.0 million at December 31, 2016) 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 47 percent for the first quarter of 2017 compared to the same period in 2016 as a result of borrowings of an additional $23.5 million on the Company's bank credit facilities and an increase to the overall interest rate. The increased interest expense was partially offset by the positive translational impact on United States dollar-denominated debt of a weakening United States dollar versus the Canadian dollar on a year-over-year basis.

FOREIGN EXCHANGE GAIN 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, 2017, the Australian dollar strengthened by approximately six 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 strengthening by approximately five percent against the United States dollar in the first quarter of 2016.

INCOME TAXES

 

The effective income tax rate for the three months ended March 31, 2017 was 37.3 percent compared with 41.0 percent for the three months ended March 31, 2016. The effective tax rate in the first quarter of the current year was lower than the effective tax rate in the first quarter of 2016 due to increased tax rates having been recognized in 2016 first quarter results, further decreased 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, 2016 to March 31, 2017 are outlined below:

 

FUNDS FLOW FROM OPERATIONS AND WORKING CAPITAL

 

For the three months ended March 31, 2017, the Company generated Funds flow from operations of $44.8 million ($0.29 per common share) a decrease of 19 percent from $55.2 million ($0.36 per common share) for the three months ended March 31, 2016. The decrease in Funds flow from operations in 2017 compared to 2016 is due to the decline in revenue rates, nominal short fall revenue earned compared to the prior period, and the weakening United States dollar.

At March 31, 2017 the Company's working capital was a surplus of $147.9 million, compared to a working capital deficit of $11.2 million at December 31, 2016. The increase in working capital in the first three months of 2017, was mainly related to the repayment a USD $100.0 million of senior unsecured notes. 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 $500.0 million, of which $22.0 million was undrawn and available at March 31, 2017. The Company is finalizing a $50.0 million accordion to be included in the existing revolving credit facilities. 

INVESTING ACTIVITIES

 

Net purchases of property and equipment for the first quarter of 2017 totaled $29.5 million (2016 - $14.7 million). The purchase of property and equipment relates predominantly to the construction of two new ADR^® drilling rigs and upgrades to certain drilling rigs to a higher specification, as well as for maintenance capital costs incurred in the current quarter.

FINANCING ACTIVITIES

 

The Company's available bank credit facilities consist of a $500.0 million Global 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 $500.0 million Canadian dollars. The Global Facility matures in early October 2018. The Company is finalizing a $50.0 million accordion that will be included in the existing revolving credit facilities.

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 Company received net debt proceeds of $23.5 million during the three months ended March 31, 2017, increasing the outstanding long-term debt balance.

In the settlement of the first quarter dividend, subsequent to March 31, 2017, 41 percent of shareholders elected to reinvest their dividends in common shares of the Company.  

NEW BUILDS AND MAJOR RETROFITS

During the three months ended March 31, 2017, the Company added one new build ADR^® drilling rig to its expansive tier one-fleet worldwide, which has been contracted on a long-term contract. The Company continues to selectively add new ADR^® drilling rigs to meet the increasing technical demands of its customers. The Company is currently in the process of completing one new ADR^® 1500s for the United States and one new ADR^® 1000 for Canada. These rigs are expected to be finished in the second half of 2017 and were part of the canceled rig build program that the company halted in 2014 to preserve the balance sheet in a declining market. 

OUTLOOK

Despite a meaningful improvement in crude oil pricing in the first quarter of 2017 with WTI averaging USD $52 per barrel compared to USD $33 per barrel in the comparable period of 2016, the abundance of idle oilfield equipment has resulted in continued pricing pressure.  However, with WTI oil prices appearing to settle in the high USD $40's to low USD $50's, we believe some stability is emerging and is resulting in our customers' increasing activity levels year-over-year.

Year-to-date, activity levels were significantly higher in North America than the previous year but still are below historical averages. The Company continues to focus on positioning itself with key customers and expanding the services that it offers at the well-site including drilling, directional drilling, rental equipment and well servicing. The combining of services has allowed the Company to reduce drilling time and increase efficiencies for the benefit of our customers according them improved economics during this period of low commodity prices.

Throughout the downturn Management's focus has been on reducing costs, controlling capital expenditures and creating efficiencies with new systems and processes. Management will continue to implement a cost structure that remains variable through these volatile times. This is expected to enable future revenue day rate increases to improve returns and increase margins.

Canada

Currently, the Montney and Duvernay are the Company's most active operating areas in Canada. Utilization for our high-spec triple drilling rigs was higher than the industry average for that type of rig for the first quarter of 2017 and we continue to see higher demand for this type of rig. We are expecting spring breakup activity to be stronger than the prior year with a total of 10 rigs running as at May 5, 2017. Of our Canadian rigs, 34 drilling and coring rigs are currently under contract with 27 under contract longer than six months or 47 percent of the marketed fleet. Gross margins currently in Canada will likely lag 2016 gross margins due to the short fall revenues that were received during 2016. This will be offset by any pricing increases that are realized.

United States

The Company's three main operating areas in the United States, being the Rockies, California and the Permian Basin, have seen an increase in activity from the second half of 2016.  As at May 5, 2017, seven rigs are currently running in the Rockies, five in California and 18 in the Permian Basin with one rig running in the North East. Of our United States rigs, 25 drilling rigs are currently under contract with 10 under contract longer than six months or 37 percent of the marketed fleet. We are still experiencing pricing pressure in the West Coast and the Rockies region but are seeing some pricing increases in the Permian Basin for the high-spec walking drilling rigs. Although activity in the United States is expected to continue to increase throughout the remainder of the year, the extent of potential resulting increases in revenue day rates is still moderately unknown.  

International

Activity internationally is expected to remain relatively flat for the year when compared to the first quarter of 2017. There are a total of nine of our drilling rigs currently running in Latin America as at May 5, 2017 and that is expected to be maintained throughout the year, but could vary depending on the political situation in Venezuela which poses risks to the Company and others operating in this unstable environment. We have a total of four rigs running in the Middle East and six in Australia. The Middle East and Australia are expected to see slightly lower activity due to rigs that recently came off contract and are currently being marketed. In the international segment we have 17 drilling rigs under contract with 12, or 27 percent of the marketed fleet under contract longer than six 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, 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 2017 results at 2:00 p.m. MDT (4:00 p.m. EDT) on Monday, May 8, 2017. The conference call number is 1-647-427-7450 (in Toronto) or 1-888-231-8191 (outside Toronto). A taped recording will be available until May 15, 2017 by dialing 1-416-849-0833 (in Toronto) or 1-855-859-2056 (outside Toronto) and entering the reservation number 63492088. 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

 

Ensign Energy Services Inc.
Consolidated Statements of Cash Flows

 

SOURCE Ensign Energy Services Inc.

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