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

Good morning and afternoon, ladies and gentlemen. Welcome to the Ensign Energy Services Inc. Second Quarter 2021 Results Conference Call. [Operator Instructions] Also note, the call is being recorded on Friday, August 6, 2021. I now would like to turn the conference over to Nicole Romanow. Please go ahead.

Thank you, Sylvie. Good morning, and welcome to Ensign Energy Services Second Quarter 2021 Earnings Conference Call and Webcast. On our call today, Bob Geddes, President and COO; and Mike Gray, Chief Financial Officer, will review Ensign's second quarter 2021 highlights and financial results followed by our operational update and outlook. We'll then open the call for questions. Our discussion today may include forward-looking statements based upon current expectations that involve several 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, the ability of oil and gas companies to pay accounts receivable balances or other unforeseen conditions, which could impact the demand for our services supplied by the company. Additionally, our discussion today may refer to non-GAAP financial measures such as adjusted EBITDA. Please see our second quarter earnings release and SEDAR filings for more information on forward-looking statements and the company's use of non-GAAP financial measures. With that, I'll pass it on to Bob.

Thanks, Nicole, and good morning, everyone. Thanks for joining the call today. Once again, it's exciting to see the solid turn off the bottom for our industry as we help oil get back to business and for Ensign to play its part in delivering cost-effective and emissions-efficient energy. We had a great second quarter, which Mike Gray will expand on in a moment. We've got lots to talk about after that on what we've been doing or what we've been up to and where we think the market is going, and the low -- and to expand on Ensign's participation in that. We'll follow up with the Q&A at the end of that. With that, I'll turn it over to Mike Gray.

Thanks, Bob. So over the first half of 2021, we continue to see improvements in the industry conditions, supporting the recovery of the oilfield services and driving activity improvements year-over-year. Rising COVID-19 vaccination rates in several nations have aided the recovery of crude oil demand. This, in combination with economic commodity prices, has continued to drive the recovery of oil and natural gas industry from the significant and adverse impacts of the COVID-19 pandemic. Overall, operating days were higher in the second quarter of 2021. Canadian operations recorded 1,058 operating days in the second quarter, an increase of 681 operating days. The United States recorded 2,899 operating days in the second quarter of 2021, an increase of 31%. And international operations recorded 844 days, a 20% increase compared to the second quarter of 2020. For the 6 months of 2021, operating days were lower with the Canadian operations experiencing a 17% decrease, the United States operations a 25% decrease and international operations showing a 20% decrease compared to the first 6 months of 2020. The company generated revenue of $212.3 million in the second quarter of 2021, a 9% increase compared to revenue of $194.8 million generated in the second quarter of the prior year. For the first 6 months of 2021, the company generated revenue of $430.9 million, a 26% decrease compared to revenue of $578.6 million generated in the first 6 months of the prior year. Adjusted EBITDA for the second quarter of 2021 was $45.6 million, 21% lower than adjusted EBITDA of $58.1 million in the second quarter of 2020. Adjusted EBITDA for the first 6 months of 2021 totaled $95.5 million, 36% lower than adjusted EBITDA of $149.3 million generated in the first 6 months of 2020. The 3 and 6 months of 2021 decrease in adjusted EBITDA was predominantly due to lower early termination fees during the first half of 2021 when compared to the same period in 2020. Depreciation expense in the first 6 months of 2021 was $140.7 million, a decrease of 23% compared to $182 million for the first 6 months of 2020. G&A expense in the second quarter of 2021 was 17% lower than the second quarter of 2020. G&A expense decreased as a result of cost-saving initiatives implemented in March of 2020 and the wage subsidies received from the Government of Canada. The company continues to focus on and will continue to manage costs on a go-forward basis. Total debt for the second quarter of 2021 decreased by $30.3 million to $1.33 billion as of June 30, 2021, from $1.36 billion as of March 31, 2021. Net capital purchases for the second quarter of 2021 was $11.8 million, consisting of $9.5 million in maintenance capital, $4 million in upgrade capital, offset by proceeds of $1.8 million from disposals. Planned capital expenditures for the 2021 year remains at $50 million. On July 29, 2021, the company acquired Nabors' fleet of 35 land-based drilling rigs located in Canada as well as related equipment and certain real estate for $117.5 million. The company funded this purchase price with cash on hand and available credit facility. On that note, I'll turn the call back to Bob.

Thanks, Mike. Just to come back to some highlights on the second quarter and year-to-date. We -- amidst this COVID distraction, we had a safety performance -- record safety performance in the company. So hats off to the operations team. Just in the U.S., we saw U.S. drilling with demand muted still through the second quarter, but it seems just in the last few weeks, we've seen operators start to book rigs with more pace. Just in the last week, we've picked up 6 more contracts for stacked rigs to go to work. Our U.S. well servicing continues to deliver record performance with a record EBITDA for the second quarter and the first 6 months of any year in our U.S. well servicing history, and we're currently running about 75% capacity. Canada has exited breakup stronger than expected activity, both drilling on -- and, I'm sorry, well servicing, 2.5x year-over-year for the second quarter and delivered the strongest second quarter in the last 5 years. International has had a delayed resurgence of activity in Australia and Argentina due to COVID, while Middle East business units, Kuwait and Bahrain have been maintaining operations, but incremental quarantine costs have affected financial results year-to-date. Our EDGE rig controls now is on 57 rigs with the EDGE AutoPilot platform now rolled out on 19 rigs. Edge Apps generating incremental margin on average of about $700 a day on 33 rigs to date. Happy to report that we completed our first fully commercial 4-well pad with a major in the U.S. using our EDGE AutoPilot, and we shaved 20% off their well plan and $3 million off their AFE, and we're getting a full $2,600 a day for EDGE AutoPilot MAX on this contract. I'll expand a little bit more on our rollout plan with that. We also introduced a new product called the ELLS, the Enhanced Location Lighting System. It helps safety on location during dusk and evening, non-glare system, and we charge that out a la carte. We also, as Mike pointed out, were busy doing the Nabors Canada asset deal, which closed on July 29. Again, it added 35 rigs, 16 of them high spec, of which 14 are active today. It doubles our market share in the Montney, one of the busiest areas that consolidates the market, continues to drive cost synergies, which we'll enjoy. Third quarter '21, what to expect? Commodity prices are bouncing around $70 and $4 AECO. Improving operators cash flow will spill over to higher activity in second half '21 but with some hesitation to accelerating any '22 work into fourth quarter '21. The U.S. currently at 33 rigs, we'll add another 6 here in September. And we're starting to see signaling that fourth quarter '21 should get to plus or minus 50 rigs with rates starting to move up $2,000 to $3,000 a day. Canada also currently at 44 rigs active, looks to 50 rigs plus fourth quarter '21 and with a 10% quarter-over-quarter rate increase as contracts roll over into the fall. Australia forecasts a pickup in fourth quarter '21, supported by significant beta activity in the last few months. Oman, unlikely to receive any awards that will provide work in second half '21, and COVID will continue to hamper operations that affect costs worldwide. Because of the high migratory workforce in the Middle East, the restrictions are tightest in those areas. The tide is turning as operators queue for the best rigs as we enter fourth quarter '21 and '22. And as I mentioned, the EDGE AutoPilot installs, we're moving that up to a 2 to 3 installed per month on the backs of the success of our EDGE AutoPilot MAX on our first commercial application. We also were able to confirm that our EDGE Portal, which is part of the AutoPilot product, can be used to interface seamlessly with an operator's real-time operating center and downlink rotary steerable assemblies. This opens up a world of opportunity with operators to engage our EDGE AutoPilot MAX with our portal on either a day rate or a performance-based contract. On our long-term rig book, we have our international carrying the bulk of our long-term contract book moving forward. This is quite by design as we purposely do not want to tie in current low rates for any term in North America. As we raise rates quarter-over-quarter, we will continue to avoid any long-term contracts in order to maximize our pricing opportunities. One thing about the business -- the drilling business, in an up cycle, we have lots of torque. We've seen it before, and we generate lots of cash flow through these cycles. For example, if we were to raise rates and increase days by 10% across the board, we generate an additional $110 million of EBITDA. That's 10% on rates, 10% on days equals $110 million of EBITDA. What we're seeing for developing trends? Emission reduction solutions have moved from a notion to a reality. Most discussions with clients today involve how to move off diesel and on to at least a bi-fuel discussion with many operators looking for natural gas produced or compressed, and with a few looking at how to run Highline power to the pad site. Ensign has been a pioneer in the BESS, the battery energy storage system for over 8 years now. Ensign has partnered with Cat over the last 7 years and recently showcased an Ensign rig with a Cat BESS system in Houston. The event attracted strong interest from our client base, the notion of reducing diesel fuel costs and reducing emissions by 25% is attractive. Ensign has BESS system on rigs currently earning $2,600 a day. Developing trend -- I'm sorry, still back on the ESG front. We published our inaugural sustainability report this June. We continue to explore enhanced ESG metrics and disclosure to showcase our ESG performance over time. With the Nabors acquisition, we acquired an additional 17 emission-friendly rigs; 2 Highline, 15 bi-fuel. Including those rigs, approximately 1/3 of our marketed fleet is equipped with emission-reducing solutions with the majority of our fleet excellent candidates for upgrades. In the half of -- in the first half of 2021, approximately 20% of our active fleet operated with reduced emissions, resulting in approximately 23,000 tons of carbon oxide saved equating to removing 5,000 cars off the road. We continue to explore fuel and power alternatives with a focus on hybrid technology and our BESS system. Particularly in Canada and the U.S., we are seeing interest from our customers, and this is an area Ensign has quite a bit of experience and expertise to share. With our BESS system, as we pointed out, we not only achieved a reduction in emissions, but superior performance with enhanced power transition and reduced cost of fuel savings that now cover the cost of the BESS system. We've also discovered -- or discussed our AutoPilot in EDGE platforms. There are numerous benefits to this technology, including eliminating waste, optimizing resource use and drive the operational efficiencies that make our operation overall more sustainable and environmentally friendly. Another developing trend is labor. Labor rates are under pressure everywhere. As we come out of COVID cycle, labor has become used to the concept of a universal basic income of some sort. And with that, threshold to attract entry-level personnel has jumped up roughly 10% to 15%. All of our contracts are covered with escalation clauses. So these are pass-through events, but it does raise the cost of doing business on a net-net basis. So with that, I'll turn it back to the operator for Q&A.

[Operator Instructions] And your first question will be from Waqar Syed at ATB.

Bob, at the end of Q2, total liquidity stood at around $116-point-something million. While the Nabors deal is also worth about $117 million. So where does the liquidity stand today? And are there any negotiations going on to increase the revolver? Or how do you intend to manage the liquidity in Q3 and in the coming quarters?

Yes. Mike, do you want to handle that?

Sure. So definitely, the Nabors deal did reduce our liquidity. From our perspective, this is a high-variable, low-fixed cost business, of which we generate free cash flow quarter-over-quarter. So from our perspective, over the next 2 quarters and beyond, we'll continue to clip off our accounts receivables and working capital to add additional liquidity to our credit facility and to our balance sheet. From our perspective, we do have some real estate that is available for sale and some redundant assets that when they're monetized will add additional liquidity to the balance sheet. So from our perspective, we're not in any discussions to do anything other than to collect the accounts receivables and generate free cash flow.

So what do you expect in terms of cash inflow from working capital in Q3?

I don't have a specific number on that. We'll continue to harvest. A lot of it depends on collections and timing of outflows.

Fair enough. But could you give us kind of some bookends in terms of where it could be?

Currently, no.

Okay. Bob, in Australia, you mentioned that there could be activity increases. Could you maybe talk about the magnitude of increases in active rigs?

Yes. We're currently running 7 rigs. COVID has frustrated a lot of the start-up of some of those rigs. We've got visibility for another 2 getting us up to 9. And with the bid activity, we see strong opportunity maybe to go north of that. But certainly, we're going to -- we're starting to see it play up again.

So these 2 rigs, could they be reactivated by the end of this year or in Q3 or Q4?

Yes, yes. They'll be reactivated in Q3, end of Q3.

Okay. And the 6 -- recent contract for 6 rigs, could you mention when do you expect those rigs to be up and running?

They'll be up and running early September.

And are these with public E&Ps or private E&Ps?