Ensign Energy Services Inc. (ESI) Earnings Call Transcript & Summary

Good afternoon. My name is Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ensign Energy Services 2020 Annual General Meeting of Shareholders Conference Call and Webcast. [Operator Instructions] Mr. Edwards, you may begin your conference.

Thank you very much, and good afternoon, ladies and gentlemen. As Chairman of Ensign Energy Services Inc., we welcome you to our Annual Meeting of Shareholders. Obviously, this annual meeting is certainly different for us at Ensign and for all of you. Each year, we look forward to our annual meeting to see many of our shareholders in person, especially our employees who enjoy the opportunity to say hello to the Board of Directors. We appreciate that many of our shareholders attend our annual meeting each year and hope they will be able -- they'll be listening into today and look forward to seeing them next year at our -- hopefully in person annual meeting 1 year from today. At Ensign, we've always been proud of our ability to adapt and be nimble in the face of changing circumstances. In fact, we have been known to call ourselves opportunistic. So today, it's another opportunity for Ensign to be nimble and adapt to the world as we see it before us. And as such, I welcome you to this nearly virtual annual general meeting of our shareholders for 2002 (sic) [ 2020 ]. A very small handful of personnel are attending in person at Ensign's head office in Calgary, appropriately physically distant, ensuring that everything goes smoothly in the background. So we thank them for their attendance in-person. But first item of business is the meeting coming to order. In the Calgary office, I mentioned earlier, we have Bob Geddes, President of Ensign; Mike Gray, Chief Financial Officer of Ensign; Suzanne Davies, VP Legal and Corporate Secretary at Ensign; and Nicole Romanow, Investor Relations for Ensign. Mr. Davies -- Ms. Davies will act as secretary of the meeting. Also, all current members of the Board are in attendance on this afternoon's conference call. [ Lisa Bala ] and [ Farro Lacombe ] of Computershare Trust Company will act as scrutineers of the meeting, and they are also in attendance on the conference call. For today's meeting, we have a brief meeting, which will include setting the number in election of directors, appointment of auditors and an advisory vote on executive compensation. At the conclusion of the formal meeting, we will make some brief remarks, introduce our directors and then Bob Geddes will make a short presentation regarding Ensign. The presentation, in terms of actual slides, will be a webcast, which will be accessible through our website, which you can tie-in to hear the oral presentation by Bob related to the slides. A short question-and-answer session will then follow, which registered shareholders will be provided an opportunity to ask questions. The conference call will -- conference call moderator will ask each of you to confirm that you're a registered shareholder and then place you in the queue for any questions that arise. With that, I will continue with the formal part of the meeting. We can confirm that we have received an affidavit from Computershare Trust Company, confirming the mailing of the notice of the annual meeting, information circular and the instrument of proxy to shareholders. This affidavit, together with copies of the documents mailed to shareholders, will be kept by the Corporate Secretary with the minutes of this meeting. In terms of quorum, underneath the bylaws of the corporation, business may be transacted at the meeting if 2 persons are person -- are present holding or represented by proxy not less than 25% of the total issued and outstanding shares entitled to vote at the meeting. The scrutineer's report shows that there are 3 shareholders holding or represented by proxy 107,258,000 shares or approximately 66.76% of the shares which are entitled to be voted present at this meeting. Accordingly, there is quorum of shareholders present. A copy of the final scrutineer's report will be kept by the Corporate Secretary, again, with the minutes of the meeting. As such, this meeting is regularly called and properly constituted for the transaction of business. In terms of resolutions today, all resolutions presented are ordinary resolutions which require approval by a simple majority of the votes cast at the meeting. As we described in our notice of meeting and information circular, this meeting format we have today does not permit shareholder to vote through conference call or a webcast. Prior to the meeting though, the management and corporation received proxies from the holders of approximately 65.76% of our eligible votes attached to the outstanding voting shares of the corporation. As a result, even if all registered shareholders present in person or meeting will engage the management to consider all such matters to be approved as set forth in the information circular. As such, unless a registered shareholder or proxy holder demand otherwise, the votes will be by show of hands by those present or represented by proxy. With the exception of the resolution with respect to the election of directors and the advisory resolution regarding exec compensation, which we conducted by a ballot. Where we are conducting the vote by a ballot because I'm not present to meet in person, I will be asking Ms. Davies, Ensign's Corporate Secretary, to verbally provide a report by the show of their -- show of hands in the room. In addition, for the efficiency of the meeting, certain directors who are shareholders of Ensign have been asked to move or second the motions being prepared. In terms of formal business of the meeting, the first item of the business is the presentation of the financial statements of the corporation for the fiscal year ended December 31, 2019, and the audit report thereon. A copy of the year-end financials has been mailed to each registered shareholder who's requested one by mail. These documents are also available on our website and on SEDAR. The next formal item of business is setting the number of directors to be elected. Do I have a motion in that regard?

Mr. Chairman, I move that the number of directors to be elected to be set at 9 directors.

Thank you, Cary. Do I have a second in that regard?

Yes. This is Gail Surkan, and I'll second the motion.

Thank you, Gail. The motion has been moved and seconded. All those in favor signify raising of their right hand, which includes those names present in person or a proxy holder. So Ms. Davies? [Voting]

Mr. Chairman, I confirm that all shareholders present have voted in favor.

Any oppose it? [Voting]

I confirm that no shareholder present is opposed.

I therefore declare the motion setting the number of directors is carried. The next formal item of business is the election of directors. For over a decade, the Board of Directors of Ensign has had a majority voting policy for the election of directors. Where the election of director nominees by shareholder is -- in an uncontested election shall be by a majority of vote. Details regarding this policy can be found on Page 18 of the information circular of the corporation dated March 20, 2020. I will now entertain a motion for the director -- for the directors of the corporation.

Mr. Chairman, I nominate the following individuals as directors of the corporation to hold office until the next annual election of directors or until their successors are elected or appointed, subject to the provisions of the Business Corporation Act and the bylaws of the corporation. The nominees are N. Murray Edwards, Robert H. Geddes, Gary W. Casswell, James B. Howe, Len O. Kangas, Cary A. Moomjian, Jr., John G. Schroeder, Gail D. Surkan and Barth E. Whitham.

Thank you, Cary.

Mr. Chairman, I'll second that.

[indiscernible] Thank you, Gail. Each registered shareholder or proxy present in person at the meeting is provided with ballot marked election of directors as they entered the meeting. Ms. Davies, please confirm that all ballots have been collected and returned to scrutineers.

I confirm that all ballots have been collected and provided to the scrutineers.

Thank you, Suzanne. The scrutineers are currently tabulating the actual results of the ballot on the election of directors, and the final results can be obtained from the Corporate Secretary shortly after the meeting. And will be disclosed in respect -- in a report we'll file with the Securities Commission on SEDAR shortly after the meeting. However, I can confirm based on the proxies received, we expect the total votes in favor of the election of each director to be in excess of -- by at least 85%. As such, those duly nominated as -- those nominated are duly elected as directors of the corporation to hold office until the next annual election of directors or until their successors are elected or appointed, subject to provisions of the Business Corporations Act of Alberta and the bylaws of the corporation. I can also confirm that based on results, no nominated director will have more than 6 of the votes withheld from [indiscernible] his or her election of directors. And just in that regard, in person or -- at this point, I always take an opportunity to introduce all of our directors. I will make just a couple of quick comments, though. We are very fortunate with the Board we have -- we have directors that are very thorough. They are very diligent and detailed in reviewing any material. And as we move through this COVID pandemic, the Board has been having information sessions every 2 weeks with management, in which they look for updates outside of normal -- the normal Board cycle, and not formal Board meetings but information sessions, which they're kept informed of the challenges and opportunities before us. We have 3 of our directors, Gary Casswell, Cary Moomjian and Barth Whitham, who are based in the United States of America. And given that now approximately 60% of our revenue is from the United States, having that U.S. perspective, the U.S. base has been very helpful in terms of Board decision-making. The other independent directors, Len Kangas and Jim Howe, John Schroeder and Gail Surkan are Canadian-based and bring a different skill set. Both John and Jim Howe are chartered accountants by training, and have a good stance on the financial reporting and statements, whereas Len Kangas is formerly a -- is an active manager in the drilling business and understands the business. And Gail is quite involved in public service and governance issues and bringing that perspective to the Board. So as a shareholder, I can tell you that our directors are very thorough and diligent. They ask very penetrating and forceful questions at every meeting. And they do keep management on our toes. And I'd like to thank them on behalf of both management and shareholders for their service. The next item of business -- formal item of business is the appointment of auditors. Do I have a motion in that regard?

This is John Schroder. I move that the firm of PricewaterhouseCoopers LLP chartered accountants be appointed auditors of the corporation until the next annual meeting or until their successors are appointed and that the Board of Directors be and are hereby authorized to fix the remuneration of the said auditors.

Thank you, John. Is there a second there?

Yes. This is Jim Howe. I second the motion.

Thank you, Jim. It's been moved and seconded, the appointment of the auditors. Do we have all in favor, signified by raising their right hand? Ms. Davies, please? [Voting]

I confirm that all shareholders present have voted in favor.

Is there any opposed, Suzanne? [Voting]

No shareholder present has opposed.

Thank you, Suzanne. I now declare the motion is carried. The final item of -- the formal business of the meeting is the advisory nonbinding shareholder vote on the corporation proposed to executive compensation. Do I have a motion in that regard?

Yes. This is Jim Howe. I move on an advisory and nonbinding basis that the shareholders of Ensign accept the approach to executive compensation disclosed in Ensign's information circular dated March 20, 2020.

Thank you, Jim. Do I have a second in that regard?

Yes. This is Gail Surkan, and I'll second the motion.

Thank you, Gail. Each registered shareholder or proxy present in person at the meeting was provided with a ballot marked advisory vote on executive compensation as they entered the meeting. Ms. Davies, can you confirm that all ballots have been collected and returned by the scrutineers?

Yes. All ballots have been collected and provided to the scrutineers.

Thank you. Based on the proxies received, there will be a majority of votes cast in favor of the advisory nonbinding vote on executive compensation. Accordingly, the resolution is passed. I now request the motion that the formal part of the meeting be terminated. Do I have a motion in that regard?

John Schroeder here. I so move.

Thank you, John. All in favor, please signify by raising their right hand. Suzanne? [Voting]

I confirm that all shareholders present has voted in favor.

Thank you. Any opposed? [Voting]

No shareholder present has opposed.

Thank you, Suzanne. Carried. With that, the formal part of this meeting is now terminated. So I just -- I would like to thank everybody who did take the time to attend in person or by way of the conference call. Clearly, these are unprecedented times. Clearly, the industry is under a lot of challenges right now between the fall in the price of oil, which was due to overproduction at the OPEC level and -- which was compounded by the COVID virus. Comparably, the level of activity by our customers is down dramatically. And Ensign is trying to be, as we said earlier, opportunistic and proactive in trying to reduce our cost base and manage the operations as effectively as we can in these challenging times. Where we end up, I think, is going to be an interesting journey over the next 6 or 12 months. There -- clearly, there's going to be challenges in terms of financial performance for this entire sector. And whether it relates to either liquidity, levels of debt or other things, I can assure you that the Board and management will be as diligent as possible in working through these challenges and hope that we can come out across the other side of the river unscathed. But I do not want to underestimate the challenges before this industry, although I think there are some positives we're seeing obviously, for example, the natural gas side. So with that, I'm now going to turn this over to Bob Geddes. Bob will have a slide presentation outside the formal part of the meeting. If you want to see those slides, you can go to our website, ensignenergy.com, and you can see the presentation, both the slides and the text online. Correct, Suzanne? The slides...

Yes. The audio will be available online.

You can see both the audio and the slides online. We can [indiscernible] it's just the audio, but not the slide. So with that, I would like to thank everybody and turn it over to Bob for his slide presentation. Bob?

Thanks, Murray. Just give it a moment for everyone to get onto another website there. Okay. All right. Differentiating through performance innovation, Ensign 2020. Next slide is your Board of Directors. Forward-looking statements. This presentation contains forward-looking statements based on current expectations that involve a number of business risks and uncertainties. I urge you to read the details of the slide displayed and march on. I'll move to the next slide, a year in review. 2019 seems so long ago now, but it does talk to how Ensign has bench strength and strong processes in place to get through these difficult times. Strong operational performance. An expanded geographic footprint in Bahrain and Kuwait. Ensign, in fact, operates somewhere above 11 different business units in 5 different countries. $50 million of realized synergies and cost savings and economies of scale, a lot through the Trinidad Drilling acquisition. Our total recordable injury rate, which is a reflection of our safety record, is at historic lows. 50% increase in our EDGE technology platform systems deployed across our fleet around the world. And we deployed our first Hybrid Rig with natural gas and battery technology operations, resulting in 50% less emission and 20% reduction in fuel costs. Obviously, COVID-19 is all part of an enhanced safe workplace. On top of working on the rigs, we also have COVID-19. And in every jurisdiction we operate, we have been deemed an essential service. So we have been keeping our global operations moving ahead. Happy to report we have had very few, if any, incidents affecting us at the operational level. It's not lost on anyone on the call. All the other impacts of COVID-19, I assure you that the company, those that are in the field and in the office, have put appropriate policies and procedures in place to protect everyone. This is obviously, as the Chairman pointed out, very tough, but we believe to be a temporary event. So demand losses have been significant. We saw an April supply surge, which affected and could have happened at the worst time, but we understands the impact of oil pricing. Rig counts have been significantly impacted. And again, while the current oil market outlook remains unprecedented, we remain deeply focused on the health and safety, our balance sheet liquidity and be prepared to when the market rebounds. Keep in mind, those companies came together through the acquisition of 63 different companies 26 years ago. Long-term view. Although the timing of the oil market recovery remains uncertain, the oil price environment will gradually stabilize and improve. The chart on the left shows the delta between production and consumption. Everyone has their forecast on when this strike is over. And when it does flip over, we'll be there with rigs and it will come with some pricing attached to it. To the right of that, you see the current production profiles on Permian, how the decline rates in the Permian and other places around the world continues to accelerate through this process, albeit with curtailment in different areas around the world. Decline rates may be buffered to some extent, but this gives you some example of what we believe the profile would be looking like and how we'll get through this. Ensign is built for cycles. 75% of our costs are fuel-related costs, 25% fixed. We have flexibility on capital expenditures with cold stacked rigs they are like miniature plants. About $40 million of the $50 million so far that are projected in 2020. About $10 million -- $8 million to $10 million a quarter moving forward on maintenance Capex. I'll point out that $10 million of the $50 million was a target for the growth capital occurring in Q1 tied to new long-term contracts, 2 to 3-year contracts. High-quality, long-life assets. We have an average age of the fleet of about 9 years. We have treated 70 rigs. Again, on average, about 9 years old. A full cycle life of 25 years. So we've got a long fleet. More stable international segment. We bring in about 20% of our EBITDA and 24% of our revenue from international segments. That helps de-risk geopolitical tension in different areas around the world. And as I mentioned at the outset here, we have a low fixed cost, high variable cost business model. We've always had a disciplined capital deployment. We've maintained a strong balance sheet, flexible capital structure with senior notes maturing not until 2024. Our nearest maturity in our bank facility is 18 months with a strong positive bank relationship. We exited Q1 with liquidity of almost $190 million and room in all our bank covenants. Continued debt reduction is the priority. And the capital program, as I mentioned on the prior slide, $50 million is forecasted for 2020, but the takeaway here is $40 million maintenance CapEx moving forward to [ keep and create ] revenue. We are prioritizing high capital efficiency, organic growth initiatives, albeit they're nominal at this point in time. And most importantly, we've returned almost $1 billion to shareholders over the last 25 years. So our rig fleet, as I mentioned, it's 11 countries, we have over 3,000 people deployed in the field, most of those -- about 400 people in the office. $3.6 billion of assets, 273 drilling rigs, 99 well service rigs. Most of our revenue comes from the U.S., 64%, about 18% Canada, 18% international. We have a high-quality asset fleet. Over 80% are high-spec, super-spec rigs. Our ADRs, the U.S. has got the largest component of them, china is second, following that on international with about 18%. Contracted revenue. Over 50% of our active contracted fleet is under long-term contracts, a long-term contract being defined as contract at 6 months or greater term. You can see on the right, the graph there that shows remaining contract tenure. We've got -- as I mentioned, majority are in the 6 to 1 year -- or 6 months to 1 year, but we do have contracts, mostly in the Middle East, that play out in 3 to 5 years from now. We're well positioned in all the U.S. basins, the Rockies area, the California area, and the Texas, Haynesville, Eagle Ford area. We're seeing different things happening in different areas. Obviously, it's not lost during the call. The Permian is now below 200 rig count. It was up towards the 600 at some point in time. It's only about 373 rigs working in all of the U.S. today. So it's seriously hampered. We've increased our market share around 2018, obviously, with the Trinidad transaction, which basically tripled our market share in the Permian. And today, you can see the market share is in the Rockies. We have about 14% of market share. In California, we're the single largest provider of services in California and in the Permian, we have about 9% market share. And in the Haynesville, about 4%. Most of our rigs in the U.S. are the 1,500 high-spec type rig with a [ starter ] in 2,000 horsepower and some 1,000 horsepower or less. Most of those focused over at the Rockies, California region. In Canada, we run a fleet of about 100 rigs. The fleet in Canada is a little more diverse in the sense that you've got the Duvernay, Montney plays demanding 1,500 horsepower type class rigs. We have a 2,000 horsepower rig up in areas like the Horn River, the gas plays. And the 1,000 horsepower or less talks to the high-spec double fleet, which typically focuses around the Cardium and a little bit into the Montney area, which is obviously very, very depressed at this point in time. But we have about 25% of the market share in Canada, on a fleet capacity. As I mentioned earlier, we have a strong international exposure, which helps de-risk geopolitical events. They're high-spec assets that are generally on longer-term contracts. If you look to the Middle East, our Kuwait rigs, so they're on 5-year contracts. They're 3,400 horsepower rigs, arguably a couple of the largest rigs in the world. The Bahrain 2,000 horsepower rigs are just starting 3-year contracts. Oman currently have 2 rigs running. And Kurdistan, we have 1 rig lagged. In Australia, most of our business is obviously gas-related. Most of the gas that we're drilling is for internal purposes and some of it is exported. It's quite a stable business. The oil rigs in Australia, we have 3 of them running. We have obviously come down, but we still have 8 of the 11 that were active, still running on [ closing ] gas plays. So we expect them to stay busy. And in Mexico, the 4 rigs there that -- 2 of them are 3,600 horsepower rigs, the joint venture with Halliburton, and a couple of smaller doubles. In Argentina, we have 1 rig active right now in the Neuquén, a second rig potentially. In Venezuela, we have 0 rigs running obviously currently. On the technology front, most of the 1,500 horsepower AC rigs have what's called an Ensign EDGE. It's organically constructed technology platform that we built from the ground up starting about 6 years ago. It's turned out to be a great strategic position to operate the rigs. We purposely decided the EDGE platform to be able to operate anyone's rig. We successfully transitioned that over to the Trinidad fleet for about $25,000 an application. We can put our EDGE platform onto the Trinidad fleet, as I mentioned, and it's through what we call our EDGE Gateway. We've got -- the next slide kind of gives you a pictogram of how the information flows around the rig. And what you're seeing today is basically continuing improvement of artificial intelligence. We have the EDGE on 50 systems, on our 50 rigs, we have the EDGE system installed. We've drilled 100 million feet to date. Our AutoDriller -- or AutoPilot, I'm sorry, our EDGE AutoPilot is being currently beta-tested on a well in the Permian. And the first well, we cut a day out of a 5-day, 2-mile horizontal section. So for instance, quite amazing results right off the bat. Again, it's still in the beta test platform. In a few months, we should be rolling that out to the existing fleet. And it plays out for about $2,500 a day, the EDGE AutoPilot. The best way I describe it is a lot of the applications of the EDGE system are like the orchestra. And the AutoPilot is basically the maestro and the symphony that brings it all together and starts to pull in artificial intelligence and basically enhances the driller's capability right at the rig site. We also have some performance-based contracts. And we're in the process of expanding that when all hell broke loose in the market. Notwithstanding that, we're taking the opportunity to enhance our EBITDA per dig by taking on a little more controlled risk by application of the EDGE products, and using our EDGE Analytics through our operations center down in Houston. In addition, we've got incremental revenue streams, 99 service rigs. What happened in Canada happens in the U.S. Service rigs aren't sexy, but they always make an EBITDA and keep things moving along. Our managed pressure drilling unit, we've got a couple of these working up in Canada. We have -- a rental is basically -- so any piece of equipment that isn't being utilized out in the field kind of gets [indiscernible] put in the oilfield rentals and used for that purpose. Directional drilling, we around 15 kits -- 50 drills -- 15 kits capable. We ran about 5 to 10 up here in Canada. Here, we're arguably the third largest directional drilling group in Canada. In the U.S., the competition is a little more critical and we're running about 5 kits in the U.S. currently. So our responsibility is people, environment and governance. That is unwavering and we continue to push through that. And the proposition is creating upside for the customers and our investors through advanced quality fleet. Our team of professional crews, not only out in the field, but in the office. And making sure that we're positioned in the right markets at the right time. All of our rigs are mobile. They can be picked up and moved to -- around the world. As I mentioned, we've got a great foundation in 11 different markets. So we've got great capabilities to de-risk any particular area. Any questions? Okay. Thank you very much, everyone, for chiming in through these difficult times. And hopefully, next year, we are talking to you face-to-face.

Thank you very much. You can close the conference.

Thank you for joining us. This concludes today's conference. You may now disconnect.