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

Good afternoon. Welcome to the Ensign Energy Services Annual Meeting. Thank you very much for joining us in this virtual meeting format. My name is Suzanne Davies. I'm the VP Legal and Corporate Secretary for Ensign, and I'm speaking to you from our head office here in Calgary. Also present in this virtual format are Bob Geddes, our President and Chief Operating Officer; Mike Gray, our Chief Financial Officer; and Nicole Romanow, our Director of Investor Relations. Our Chairman, Murray Edwards, is unable to attend today's meeting. And as a result, Bob Geddes will chair the formal portion of the meeting in his place. Except for Mr. Edwards, all other current members of our Board of Directors are in -- also in attendance at this virtual meeting. This is Ensign's first fully virtual annual meeting. And as with any new technology, unexpected glitches or delays may occur. Please be patient if that happens so that our service providers can address any technological issues. I'm told that if we experience any issues, the background music will start up again, and that means we've encountered an issue, so please wait and sing along while the problem is solved. Also, please note that the Lumi platform we are using for this virtual meeting works best with the latest versions of the Chrome, Safari, Edge or Firefox browsers. So if you're experiencing any issues, it might be that you're using Internet Explorer or an old browser format. The agenda for this meeting is brief as usual and includes the following items: first, to set the number and election of directors; second, to appoint the auditors of the corporation for the year; third, to approve the issuance of common shares as may be required to be issued to Murray Edwards upon the conversion of all or some of the convertible debenture outstanding, where such conversion would result in the creation of Murray Edwards as a new control person; and fourth, an advisory vote on executive compensation. Instructions on how to ask questions and the voting procedure will be visible on your screens once the meeting formally begins. For those shareholders who have already voted by depositing proxies in advance of the meeting, you do not need to vote during this meeting unless you'd like to change your vote. Registered shareholders who have not submitted a proxy and wish to vote their shares or who wish to change their vote may do so by following the instructions on your screen. Duly appointed and registered proxy holders may also vote, and again, please follow the instructions on your screen. Note that there is a small delay between the act of voting and the receipt by the system of those votes. As a result of this delay, we will open the voting on all agenda matters momentarily once the formal meeting starts and keep these open until the termination of the meeting. Votes can be cast at any time prior to the termination of the meeting. If anyone has questions relating to the matters coming before this meeting, registered shareholders and duly appointed proxy holders can type questions in the message section once it opens during the discussion period. We will do our best to address relevant and appropriate questions during the meeting. If we are unable to answer all questions during the meeting, Nicole Romanow, our Investor Relations manager, will be in touch with you following the meeting to address your question using the e-mail address you provided when you logged in. With that, we will commence the formal business of the meeting. Voting will now open on all matters before the meeting. I welcome Mr. Geddes now to call the meeting to order.

Thank you, Suzanne. The meeting will now come to order. Ms. Davies will act as Secretary for the meeting and Kyle Gould and Farah Lecomte of Computershare Trust Company of Canada will act as scrutineers. They are in attendance at this virtual meeting. Affidavit of mailing. I confirm that we have received an affidavit from Computershare Trust Company of Canada confirming the mailing of the notice of the annual and special meeting, information circular and instrument of proxy to registered shareholders as of the record date. This affidavit, together with copies of the documents mailed to the shareholders, will be kept by the secretary with the minutes of this meeting. A quorum of scrutineers' report meeting regularly constituted. Ensign's amended and restated Bylaws allows business to be transacted at this meeting. If 2 persons are present, holding or representing by proxy, not less than 25% of the total number of issued shares of the corporation entitled to vote at the meeting. The Scrutineers' report has now been received, and it shows that there is a quorum of shareholders present at the meeting. A copy of the Scrutineers' report will be kept by the secretary with the minutes of this meeting. The meeting is, therefore, regularly called and properly constituted for the transaction of business. Voting on ordinary resolutions. Before we consider the business of the meeting, I would like to reiterate the voting procedures to be used in today's meeting. We will conduct each vote by way of vote cast through the Lumi platform and those submitted by proxy. As a reminder, if you have voted your shares by proxy prior to the start of the meeting, your vote has been received by the scrutineers and there is no need to vote those shares during the meeting unless you wish to revoke or change your vote. All of the resolutions presented today are ordinary resolutions, which require approval by a majority of the votes cast at the meeting. Prior to this meeting, management of the corporation received proxies from the holders of 49.61% of the eligible [ votes ] attached to the outstanding voting shares of the corporation. For meeting efficiencies, certain members of management of Ensign who are shareholders of Ensign, have been asked to move or second the motions being presented. Annual report, financial statements and auditors report. The first item of business is the presentation of the financial statements of the corporation for the fiscal year ended December 31, 2020, and the auditor's report. A copy of the year-end financial statements has been mailed to each registered shareholder who has requested one by mail. These documents are also available on our website and on SEDAR. Matters to be voted on. Number of directors. The next item of business is setting the number of directors to be elected at 9 directors, and I ask the designated movers and secondaries to move and then second this motion.

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

I second the motion.

The motion has been moved and seconded. All shareholders who intend to vote at this meeting, please go ahead and do so now. We will address the results of the vote towards the end of the meeting. Election of directors. The next 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. Details regarding this policy can be found on Page 18 of the information circular dated March 19, 2021. I will now entertain nominations for directors of the corporation. Again, if the designated movers and seconders could please move and second this motion.

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 Corporations Act and the law -- bylaws of the corporation: N. Murray Edwards, Robert H. Geddes, Gary W. Casswell, James B. Howe, Len O. Kangas, Cary A. Moomjian, John G. Schroeder, Gail D. Surkan, Barth E. Whitham.

I second the nominations.

Thank you. The motion has been moved and seconded. Okay. All shareholders who intend to vote through the virtual platform of this meeting, please go ahead and do so now. We will address the results of the vote towards the end of the meeting. The final results will also be disclosed in a report to be filed with the securities regulators on SEDAR shortly after the meeting. Based on the proxies received, we expect the total votes in favor of the election of each director to be in excess of 90%. As such, those nominated are duly elected 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 Corporations Act and the bylaws of the corporation. Based on these results, I also confirm that no nominee director will have more than 50% of the votes withheld from voting or his or her election as director. Auditors. The next item of business is the appointment of auditors. Again, if the designated movers and seconders could please move and second this motion.

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.

I second the motion.

Thanks, Ms. Romanow. The motion has been moved and seconded. All shareholders who intend to vote at this meeting, please go ahead and do so now. We will address the results of the vote towards the end of the meeting. Next, we have the MAC Resolution. Ms. Davies, could you please speak to this side of the business?

Thank you, Bob. Beginning on Page 24 of our information circular is detail with respect to a resolution proposed to authorize and approve the issuance of common shares that may be required to be issued to Mr. Edwards upon conversion of all or some of the corporation's unsecured convertible debenture, maturing May 1, 2023, that may be held by Mr. Edwards at the time of such conversion and where such conversion would materially affect control, as that term is defined in the TSX company manual. So materially affects control of the corporation through the creation of a new control person. To be effective, this resolution must be approved by a simple majority of the disinterested shareholders of the corporation. That means that the votes to be excluded for this approval are those held by Mr. Edwards. The full text of the resolution is set out on Page 27 of the information circular. With the consent of the meeting, I will dispense with the reading of the full text of the resolution. Can we please now hear from the designated movers and seconders?

I move that the MAC resolution as set out on Page 27 of the information circular, be approved and adopted.

I second the motion.

Thanks. The motion has been moved and seconded. There is no discussion in the message box. All shareholders who intend to vote at this meeting, please go ahead and do so now. Based on the proxies received, there will be a majority of votes cast in favor of this resolution. Accordingly, the resolution has been passed. Back to you now, Bob.

Thanks, Suzanne. Next, we have executive compensation. The next item of business is the advisory nonbinding shareholder vote on the corporation's approach to executive compensation. Can we please hear from the designated movers and seconders?

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 19, 2021.

I second the motion.

Thank you. The motion has been moved and seconded. All shareholders who intend to vote at this meeting, please go ahead and do so now. Based on the proxies received, there will be a majority of votes cast in favor of this advisory nonbinding vote on executive compensation. Accordingly, the resolution has been passed. Next, we have other business. As that concludes the formal business for this annual meeting, voting will be closed on the virtual meeting platform in about 10 seconds. [Voting]

Voting is now closed. I have been advised by the scrutineer that all resolutions have been approved by more than the requisite majority and that those nominated have been duly elected as the directors of the corporation. Accordingly, I declare the motions carried and the nominees for the Board of Directors elected. I direct that the scrutineers' report on ballot to be annexed to the minutes of the meeting. After the meeting, we will post the final voting results on SEDAR. I now request the motion of the formal portion of the meeting be terminated.

So moved.

Thank you, Mike. With that, the formal portion of this meeting is now terminated. Based on the preliminary results of the voting, I confirm that all ordinary resolutions have passed with the required number of votes. The final results will be posted on SEDAR today or on Monday. So let me introduce the directors. Murray Edwards, Robert Geddes, Gary Casswell, James Howe, Len Kangas, Cary Moomjian, John Schroeder, Gail Surkan and Barth Whitham. So we'll go into our presentation here. This is the -- at your leisure of course, please familiarize yourself with the premise under which the following slides and comments are presented. The Disclaimer & Advisory. Next slide, please. 2020 certainly tested us in more ways than we thought possible. Despite significant macroeconomic headwinds, Ensign generated $240 million of EBITDA, and more importantly, reduced debt by $200 million in 2020. We maintained market share across our global operations amidst a highly competitive market. We acquired the remaining 40% interest in the TDI joint venture, enhancing earnings potential in Bahrain and Kuwait with rigs on long-term contracts. We continue to drive systems cost efficiency to establish structural and sustained cost savings and [ never let a ] crisis go to waste, is what we say. Successful field testing of the EDGE AutoPilot rig controls automation suite happened in later 2020. We achieved a total recordable injury rate of 0.72, a new company record in the face of one of the most challenging movements of personnel around the world that we've seen. Effective COVID-19 emergency response initiatives resulted in 0 field or business interruptions related to COVID-19. Next slide, please. Ensign is built on a very strong foundation of highly technical rigs and highly trained crews, leading rig controls automation, a strong international presence, low fixed cost, high variable costs, that business model provides positive cash flow even in the toughest of markets. Next slide, please. ESG is our social license to operate in today's world. We work hard to provide a unit of energy to the world as efficient as we can and as safely as we can. Next slide, please. As economies around the world ramp up, the reality is that they need energy and most importantly, the world needs cost-effective and readily available energy. What's really important to understand is that decline rates in North America continue to accelerate. That's the reality. We'll be drilling energy for some time well into the future. As you can see in these charts on the bottom left, the forecast with COVID stretching into 2021 has probably been delayed. But in any case, the world's demand seems to be pointing back to where it was before at 100 million barrels of oil and gas a day. Again, as economies ramp up, they will be looking for cost-effective and readily available energy. Crude oil, in the right-hand column, you see a strengthening, continually above 60 as it appears, and natural gas staying strong. It looks like the market is moving our way but with some tension. Next slide, please. Ensign is structurally built to weather storms and ready to embrace market [ objects. ] Ensign's fleet of high-spec rigs is relatively young at an average age of 10 years, which leaves a full 15 years of life cycle left on the current fleet. Ensign has one of the most contract stable fleets with a low beta being that we work in 8 different countries, Canada, U.S., Argentina, Venezuela, Middle East and Australia, over 40% of our revenue comes from outside the U.S. We have a low fixed cost, high variable cost business structure, as I mentioned before, this always allows positive free cash flow. Our G&A expense on a [ property ] day basis continues to move down as well, so we become more efficient. The flexibility in the capital expenditures, because of our young fleet, we can maintain the fleet safely at current activity levels with predictable CapEx levels into the future of about $50 million annually. Next slide, please. In one of the worst years ever, Ensign managed to reduce total debt by $200 million. That talks to the ability to generate free cash flow, one thing this business does well even in tight markets. The reducing interest expense on the bottom left there shows reduced interest expense of about 23% year-over-year or about $35 million annually. On the right side, you see the bottom right-hand chart, we're one of the few [ Hubco ] drilling companies with positive retained earnings on the balance sheet. Next slide, please. To recap where we operate around the world, we operate 8 different countries. We employ about 3,000 people, $3 billion of assets, 227 rigs in our active fleet. And we actually have 100 service rigs. We added 1 here a few months back in the U.S. You see the revenue distribution. 57% is in the U.S., 24% international, 19% Canada. So a very diverse global platform. Next slide, please. Ensign's diverse fleet is dispersed in several of the prominent oil and gas -- in all of the prominent oil and gas bases around the world. Having a diverse fleet allows Ensign the ability to service markets all over the world effectively and efficiently. You'll see on the right-hand column there the distribution, 41% of our fleet in Canada, 41% in the U.S., 18% International. Next slide, please. Ensign is one of the few growing companies that has a strong presence from coast-to-coast in the U.S. 10% of our Ensign rigs are on performance-based contracts. Our Edge Autopilot platform is now being rolled out to all of our AC rigs worldwide over the next few years, starting with our U.S. fleet. Over 75% of our Permian fleet are high spec rigs. And performance-based contracts drive a 25% to 30% margin upside. As I mentioned, our growing Edge AutoPilot revenue streams continues to expand in the U.S. Next slide, please. With 92 grill rigs in Canada, Ensign has one of the largest fleets. Canada, like most of our areas of operations, has several high-spec rig sizes to satisfy that market. Canada remains one of our most challenged areas still geopolitically. And because of its continuing COVID issues, it's -- continues to be a challenge. Also, we have the challenge of attracting crews while the government pays workers to stay at home. It's ironic, but the challenge, getting people -- younger people to come back to work is a prominent issue and a continuing focus for the industry. If we move to the next slide. Our international business unit segment has the longest contract runway ahead of it and the lowest beta, which generates a steady cash flow stream year in and year out. If we go to Australia for the moment, we're the largest drilling contractor there with leading market share in 3 distinct regions dominated by LNG and utility projects, and we have the newest fleet in the country. In the Middle East, we have the most technically advanced drilling rigs in the area. We recently acquired full ownership, as I mentioned before, of the TDI joint venture operating in Kuwait and Bahrain with long-term high margin contracts. 50% of our active rigs are running the Edge Automation platform. In Latin America, the shale exploration on Neuquén keeps us busy. We're just in the middle of renewing 1 of our rigs in Argentina with our major -- our 1 year to 2-year contract. Venezuela is obviously still shut down to OFAC restrictions and 100% or the 1 rig in Argentina is running our Edge Automation platform. Next slide, please. As mentioned earlier, in 2020, Ensign successfully beta tested our rig controls foundation platform, which we're calling the AutoPilot. You can think of AutoPilot as a conductor of the rig controls orchestra. We have several levels of AutoPilot that clients can choose to engage or not engage starting at 230 -- $240 a day, I'm sorry, going all the way up to $2,100 a day. Also, with the Ensign drilling solution platform comes our Advanced Performance Management team which is the area where our APM engineers work closer with the operations group on PBC contracts and deploy the technology where we feel it is appropriately deployed and get paid for it with upticks in performance metrics. Next slide, please. With a tight competitive market, premier drillers like Ensign have moved to realize value in the record wells. We continue to drill with the application of performance based contracts, not risk-based contracts, performance-based contracts where we derisk the performance by applying the technology that we've developed in-house, along with our advanced performance engineers who manage the project closely under the operations' purview. Next slide, please. The continued performance process is not new. What is new is tying it to an automated rig controls process like our Edge controls platform. This increases repeatability, reduces downtime and increases profitability for both our clients and Ensign. Next slide, please. We also have complementary business lines that always contribute free cash flow on our high-margin [ port ] businesses and up cycles. Our service rigs, both in Canada and the U.S., our MPD units in Canada and the U.S. Our oilfield rentals business, particularly focused in Canada, and directional drilling, which is on both sides of the border of Canada and the U.S. All positive free cash flow generators. Next slide, please. Of course, powering our rigs. We've been using alternative fuels to power rigs natural gas for 25 to 30 years. It's something new to Ensign. Highline power is something we've been also using more and more regularly and trying to [ rigs ] and even mini grids as we roll out conversation and solutions to our clients on how to reduce emissions and stay on the ESG platform with a strong focus. Natural gas, as I mentioned, a lot of areas, we're even running produced gas from the area to run the rig, which is very emission friendly, about half the emissions per barrel of oil produced on the drilling side and even as recent as 3 to 5 years ago. Next slide, please. Coming all back to ESG, everything we do is with the highest regard for the environment, the safety of our people and the governance. Next slide, please. Thank you for listening to us today and thank you for joining the AGM and the continued support as a shareholder through these very challenging times. Stay safe and stay healthy. Thank you.