Ensign Energy Services Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2024

There are 8 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Amazigh Energy Services Second Quarter 2024 Results Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for a question. I would now like to turn the conference over to Nicole Romano, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Jenny. Good morning, and welcome to Ensign Energy Services' 2nd quarter conference call and web cast. On our call today, Bob Geddes, President and COO and Mike Gray, Chief Financial Officer, will review Ensign's 2nd quarter 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.

Speaker 1

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 defensive lawsuits, the ability of oil and gas companies to pay accounts receivable balances or other unforeseen conditions, which could impact the demand for the services supplied by the company. Additionally, our discussion today may refer to non GAAP financial measures such as adjusted EBITDA. Please see our Q2 earnings release and SEDAR Plus 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.

Speaker 2

Thanks, Nicole. Good morning, everyone. I'll provide some introductory commentary. The Q2 was one of the strongest quarters in Ensign's history, buoyed by strong and increasing demand for our Canadian rigs, especially our high spec singles, doubles and triples, which provided a 15% increase year over year for the quarter. We also saw a year over year increase in our highly active international business unit where we operate in 6 different countries and where we saw marginal year over year increases in activity.

Speaker 2

In contrast, our U. S. Business unit is seeing reduced activity across the board as M and A activity sorts itself out through the rest of 2024. With steady margins and solid activity levels generally around the globe, we have been able to address another $80,000,000 of debt reduction in the quarter and stay on the path to reduce $600,000,000 of debt over the next 3 years with a solid cash flow stream into a building book and increasing margin construct. I'll pass it over to Mike to expand on that.

Speaker 3

Thanks, Bob. Customer consolidation in the U. S. Has impacted Ensign's operating and financial results over the short term. However, despite the short term headwind, the outlook for oilfield services is constructive and the operating environment for the oil and natural gas industry continues to support relatively steady demand for services.

Speaker 3

Overall, operating days declined in the Q2 of 2024 due to a 32% decrease in the United States to 2,912 operating days. Partially offsetting this decrease, Canadian operations recorded 2,451 operating days, an increase of 15% and international operations recorded 12.55 days, a 1% increase compared to the Q2 of 2023. For the 1st 6 months ended June 30, 2024, overall operating days declined with the United States recording a 32% decrease, offsetting by a 5% increase in Canada and a 9% increase in international when compared to the same period in 2023. The company generated revenue of $391,800,000 in the Q2 of 2024, a 9% decrease compared to revenue of $432,800,000 generated in the Q2 of

Speaker 2

the prior year. For the

Speaker 3

1st 6 months ended June 30, 2024, the company generated revenue of $823,100,000 a 10% decrease compared to revenue of 916,800,000 dollars generated in the same period of 2023. Adjusted EBITDA for the Q2 of 2024 was $100,200,000 14% lower than adjusted EBITDA of $116,600,000 in the Q2 of 2023. Adjusted EBITDA for the 6 months ended June 30, 2024 totaled 217,700,000 dollars 11% lower than adjusted EBITDA of $243,900,000 generated in the same period in 2023. The decrease in 2024 is due to year over year declines in drilling activity. Depreciation expense for the 1st 6 months 24 was $170,800,000 an increase of 12% compared to $152,700,000 in the 1st 6 months of 2023.

Speaker 3

General and administrative expenses in the Q2 of 2024 was $15,500,000 up from $14,600,000 in the Q2 of 2023. G and A expenses increased primarily as a result of the annual wage increases. Interest expense decreased by 19% to $25,500,000 from $31,600,000 The decrease is a result of lower debt levels and reduced effective interest rates. During the Q2 of 2024, dollars 78,900,000 of debt was repaid and a total of $90,300,000 was repaid for the first half of twenty twenty four. From January 1, 2023 to June 30, 2024, a total of $307,900,000 of debt has been repaid, leaving $292,100,000 of the 600,000,000 debt reduction target expected to be achieved by the end of 2025.

Speaker 3

Net purchase of the property and equipment for the Q2 of 2024 totaled $40,300,000 consisting of $2,400,000 in upgrade capital, dollars 46,100,000 in maintenance capital, offset by disposition proceeds of $8,100,000 Gross capital expenditures for 2024 are targeted to be approximately $147,000,000 dollars primarily related to maintenance expenditures and selective growth projects. On that note, I'll turn the call back to Bob. Thanks, Mike.

Speaker 2

So let's start with Canada operational update. First off, we're seeing a nice macro construct building in our Canadian business unit. The combination of expanded pipeline capacity both for oil and natural gas, the tightening differential and with the low Canadian dollar, the net effect that more drilling will occur in the Western Canadian Centimeters Basin moving forward. It's safe to say that the demand for our high spec singles and high spec triples is at the highest it has been in quite some time, at least a decade. This has also helped to drive the high spec double market to enjoy utilization of 60%.

Speaker 2

60% is a typical threshold where contractors are able to raise pricing and have it stick. Almost a third of Ensign's Canadian fleet is high spec doubles, so we have lots of product to feed into this construct. Our fleet of high spec singles and high spec triples are essentially booked well into 20 25 and we have some discussions going on with operators to mobilize some underutilized and fungible assets out of the U. S. Where the operator will cover the full ride and any costs required to get on to their first location.

Speaker 2

We are currently already back to the same peak level we saw last winter, which rarely occurs in the Canadian market so soon after breakup. We expect to also add a few more rigs between now year end. As mentioned, we have almost 90% of the current active fleet contracted until the end of Q1 2025. And in most cases, we have ratcheting rate increases compounding as we move through the fall season and into the winter drilling season. Our well servicing business in Canada has a strong schedule ahead for its rigs in the heavy oil area and in the back half of the year is expected to pick up as we capture more of the OWA work.

Speaker 2

Our rental fleet of tubulars, tanks and other high margin ancillary equipment continues to grow as more and more specialty equipment is called for, usually high torque tubulars to attach to our high spec ADR drill rigs. With accelerated wear an issue on tubulars as a result of a high penetration rates, it is becoming the norm for tubulars to be charged separate from the rig rate. Moving on to our international business unit, lots of exciting news in this area. We have a fleet of 30 plus drill rigs that operate in 6 different countries around the globe. In the Middle East, we have 100 percent of our high spec ADR fleet actively working on long term contracts.

Speaker 2

And with half of them on performance based contracts, we're able to get paid for the performance our high performance drilling team provides when coupled with our Edge Autopilot drill rig control systems. In Argentina, we're running at 100 percent utilization with both our 2,000 horsepower high spec ADRs operating under long term contracts. We have one of our drill rigs working in Venezuela with another ready to start up in the next month. There are obviously some daily developments in Venezuela, which are captivating the world, but so far we have seen no impact on the operation in the field. Australia is staying steady with little change.

Speaker 2

Moving to the United States, we have a fleet of 77 high spec ADRs in U. S. Stretching from the California market up into the Rockies and with the main focus on the Permian. We operate roughly 37 rigs today and expect a little change through the rest of 2024. The challenge in the U.

Speaker 2

S. Is that in addition to the depressed natural gas prices, we saw $500,000,000,000 of M and A activity in the last 18 months occur, which has manifested itself into less work in the short term. The natural gas story may take a bit longer to correct itself. The good news is that we have mainly been an oil focused driller in the U. S.

Speaker 2

Market. Coming back to the effects of M and A, until the combined entities get through a budget cycle and start addressing decline rates, we don't expect solid improvements in the U. S. Market until early to mid-twenty 25. Our U.

Speaker 2

S. Business unit continues to expand its PBI contract base and now has over half the fleet on a PBI contract that builds off our Performance Driller team coupled with our Edge Autopilot Driller Control Technology. Not only do we get a rate for Edge Autopilot technology, we capture the upside value generated to the operator through performance metrics. Our well site I'm sorry, our well service business unit, which is focused primarily on the Rockies and California well servicing market continues to enjoy high utilization in the upper 80s. Our directional drilling business, which is essentially a mud motor rental business, continues to provide some of the best motors of high quality rebuilds in the Rockies.

Speaker 2

Moving on to our Edge Autopilot drilling rig control systems, we continue to deploy Edge Autopilot, which employs algorithms and AI on new rigs and continue to expand the Edge Autopilot platform on each of the rigs that already have our Edge Autopilot drilling rig control technology. This part of our business continues to grow at a rapid pace year over year. It delivers results with reduced well times and increased P rates with reduced well tortuosity. With that, I'll move to questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Your first question is from Aaron Mateo from TD Cowen. Please ask your question.

Speaker 4

Hey, morning. Thanks for taking my questions. Bob, the debt repayment commitments don't leave a ton of wiggle room for growth capital. I think you've spent maybe $4,000,000 today.

Speaker 5

In your view,

Speaker 4

are you having to turn down organic capital opportunities with bid returns that your customers are asking for? Or do you think you're generally keeping pace with what your customers need?

Speaker 2

Yes. No, for sure, we're keeping pace. And then in conversations, we have the because we are drilling wells faster, the operator is willing to help invest in any upgrades in that growth CapEx side. So the market continues to absorb that conversation well.

Speaker 4

Okay. Sort of switching gears here, we've seen H and P do a big international deal and sort of indicate they may move rigs to international markets. I guess, what's your appetite to engage in that given that you already have such a big international presence?

Speaker 2

Yes. Yes. Well, as you know, we started that movement 20 years ago with the OD and E acquisition and have expanded that running 30 plus rigs. It is and we operate in 6 different countries outside of North America. It is a challenging business for sure.

Speaker 2

International comes with its own investing challenges. I would say that we've been feeding rigs out of North America. For instance, our Argentinian rigs are rigs that we bought through Rowan acquisition that were upgraded by the client and shipped to Argentina. So we've been quietly doing this for some time. We shipped 10 ADR, smaller ADRs out of Canada when the coal seam gas fell apart and we shipped them to Australia.

Speaker 2

So it's I'm glad to see another contractor understand that you need to get outside of North America. H and P is a strong well run company, so I'm sure they'll do well.

Speaker 4

And again, I guess maybe the better question to ask is like what sort of a checklist that you'd have to go to wish list you'd have to go through to maybe move a rig in your fleet to an international market? And then where do

Speaker 2

you think would represent the best opportunities for the fleet? Well, that's a good question because it's a dynamic process. We look at Australia as being a pretty static business with small and steady growth as they develop natural gas into their utility grid. The Middle East is steady. Bahrain, we have 2 rigs.

Speaker 2

Those are well contracted, same with Kuwait, Oman. We've got 3 ADRs there. 1 is coming down here for a short period of time. We already have another operator saying they'd like to pick it up plus add a few more to it. So I'm not worried about when you perform, you always find work.

Speaker 2

So those rigs are continuing to work. But we're not interested in going into new countries. We are always interested in expanding our footprint in the countries we're in. That makes more sense for us.

Speaker 4

Okay. Thanks. I'll turn it back.

Speaker 2

Thanks, Aaron.

Operator

Okay. Your next question is from Makar Sajan Raj from ACV Capital Markets. Please ask your question.

Speaker 5

Thank you for taking my question. Bob, so you mentioned that you have 37 rigs running in the U. S. Right now. How does that number compare to the average in Q2?

Speaker 2

You mean in historical Q2s, is that what your question is, Ricard?

Speaker 5

Yes, that's correct. Like this Q2, twenty twenty four, what was the average number of rigs running?

Speaker 2

In all of the U. S, is that what you mean?

Speaker 4

Yes, we're

Speaker 2

hanging on to about 7% market share. We're down year over year for the quarter by about, oh gosh, 10 rigs year over year for the quarter in the U. S.

Speaker 5

Okay. Now your revenues quarter over quarter in the U. S. Were flat at around $208,000,000 Your rig count was down. So what's the gap?

Speaker 5

Is it all well service? Hours were up 35%. Did that kind of help the quarter over quarter revenue comparison? Or there was something else as well or rates the rate scope went up? Or what was the cause of flat revenues?

Speaker 3

We saw the increase in well servicing. Then we also this is the increase as Bob was talking about drill pipe being outside the contract now. So some ancillary add ons and then well servicing would be the largest contributors to that gap.

Speaker 5

And is that sustainable into the subsequent quarters as well in Q3 and Q4? Outside of contract day rates that you're seeing revenue pickup as well as well servicing hours in Q3?

Speaker 2

For sure. The things like the drill pipe, for example, La Car have manifested itself from the accelerated penetration rates and the use of flocked water versus oil based mud systems and a lot of these cases, it tears drill pipe apart pretty quickly. We used to get 6 to 7 years out of drill pipe. We get maybe 2 to 3 years max out of drill pipe in some case less than that. And every contractor is feeling that same push.

Speaker 2

Everyone's drill pipe costs are up about 3 times what they were 5 years ago. And that's why the move to put it outside the contract to get a rate for it. In some cases, we have the operator provide the pipe and we just manage it for them. And then we've got the other end of the extreme. We'll give them a rate as high as $8,000 a day for managing the pipe, handling the destruction and the replacement of the pipe through the process.

Speaker 2

So it's somewhere in between, but it will continue to be a charge as we continue to have these high penetration rates in these 4 mile, 3 and 4 mile laterals, not going away.

Speaker 5

That makes sense. And then could you talk about asset sales? So Mike, there was a $40,000,000 real estate portfolio that you were interested in selling. We saw $8,000,000 of asset sales in Q2, dollars 3,000,000 in Q1. What should we be expecting for the second half?

Speaker 3

We're working through it. We have 2 properties up in Niskiyou that are actually marketed right now and we're working through a process in the U. S. So I would expect movement of that in Q4, not the whole balance, but a portion of the balance I believe will be closing in Q4.

Speaker 5

Okay. That makes sense. And then the $147,000,000 CapEx number that remains unchanged. Do you see anything in the horizon that could move it up or down?

Speaker 3

I think there is I mean with the U. S. Muted activity that will probably put I think a cap on some of the CapEx that was required for the U. S. But also I mean there's some international opportunities here and there.

Speaker 3

So for most part that should be fairly steady. If anything, if it does increase, it's usually tied to an EBITDA event, so net positive to the balance sheet and the income statement. So once again, if it's a positive impact, then we'll definitely look at stuff, but it should be really steady around there.

Speaker 2

Yes, we won't invest in any CapEx. It doesn't pay for itself in less than a 1 year period. Right. That's good. Yes.

Speaker 5

And then just one

Speaker 2

Well, it seems like it's bottomed. It depends on the area and the type of rig. But I would say that it feels like it's hit bottom. We've been catching the falling knife in the last quarter as the markets haven't moved. The Permian is still running 304, but it's not going up, but it isn't going down.

Speaker 2

So as operators merge together, of course, the first thing they do is they remove a few rigs, get to the end of the year, put together a new pro form a budget on the consolidated business and then walk into 2025. So we kind of expected all the 7 activity would provide that result. So it's not a surprise, but I would say rates have stabilized at the bottom end. And with drill pipe outside now and part of the total gross rig rate, we're still in the low 30s on a gross basis.

Speaker 5

Okay. And on these M and As like we've seen a number of these big mega mergers. Now where do you stand with respect to your exposure to the acquirers versus the target company?

Speaker 2

Well, we're on the right side of that equation on probably 80% of our portfolio, which is a nice place to be. The other nice place to be is to have industry reports showing Ensign as the highest penetration rate driller of the top 6 in the U. S. So the we're in conversations with companies that are the acquirer, where the acquiree, we did a lot of work for and they're going, hey, we want to hang on to those rigs.

Speaker 5

That's great. Well, thank you very much. Thanks for the answers.

Speaker 2

Thanks, Robert.

Operator

Thank you. Your next question is from Steve McKay from RBC Capital Markets. Please ask the question.

Speaker 6

Thanks. And just a question about your debt repayment target, maintain the $600,000,000 to $20.25 And of course, you always note that industry conditions could move that up or down. But based on prevailing industry conditions we see now with rig counts where they are, if that stays flat from here, do you see any risk to that $600,000,000 debt repayment target?

Speaker 3

No, when we look at the interest savings year over year, that's starting to decrease quite a bit. I mean, it was down almost 20% year over year. So you have some buffer being built in on the P and L from interest savings. If activity remains sort of steady as it is, your CapEx is going to remain kind of in that 150 range. So consensus for 2024 is 450 is 25, I mean, who knows where that's going to be plus or minus, but when you look at that with $150,000,000 in CapEx, dollars 90,000,000 or less in interest expense, there's about $210,000,000 of free cash flow to go towards repayments.

Speaker 3

And then we do have some non operational stuff like asset sales and some working capital movements to kind of aid in that. So yes, when we look at it, I mean, if everything kind of remains steady, we foresee this being quite easily to be achievable.

Speaker 6

Yes, okay. Sounds good. And just a question on your, you mentioned the free cash flow number. There's also some mandatory debt repayments and liquidity reductions forthcoming.

Speaker 1

At the end of the

Speaker 6

year and into Q1 next year, if the street consensus is right, what kind of breathing room do you foresee having in terms of liquidity?

Speaker 3

We never get into specifics. I mean, we'll have ample liquidity that continues around the business as we've had in the past.

Speaker 6

Fair enough. And just one more question on your maintenance CapEx per rig in the U. S. What approximately is that

Speaker 2

running these days? Good question. We like to think of the operating rig on an annual basis requiring about 1 to 1.25 depending on the type of rig it is.

Speaker 6

Got it. Is that Canadian or U. S?

Speaker 2

That'd be U. S. For U. S. And CAD for Canadian, yes.

Speaker 6

Got it. Okay. Thanks very much. That's it for me.

Speaker 2

Thank you.

Operator

Your next question is from Joseph Schechter from Schechter Energy. Please ask your question.

Speaker 7

Good morning, Bob, Mike and Nicole. Challenging day to have your conference call given what's going on in the market. I wanted to ask a macro question. November 5 is a big day in the States and energy industry could have 180 difference in terms of go forward strategy based on what happens that day that night. Are you getting any commentary from companies saying that we'll keep what's going on into Q4, but Q1 is up in the air depending upon the results of November 5?

Speaker 2

That's a good question, Joseph. I think that what we're seeing is the macro fundamentals of demand play out. Not to get into too much of the pulpits, but we saw one of the contestants suggest that they've changed their platform on fracking and they're okay with fracking now. So we're not getting any feedback from our operators. A lot of them are saying we're certainly not going to accelerate drilling in the Q4.

Speaker 2

And I think that's driven more so not by the election, but by, I guess, the staying with their plan to deliver shareholder return, not to accelerate CapEx and just staying disciplined. So I don't think the election has much impact is what we're seeing.

Speaker 7

Thanks for that. That's it for me.

Operator

Thank you. There are no further questions at this time. Please proceed.

Speaker 2

All right. Thank you, operator. Closing statements. Looking forward, it's an exciting time for Ensign with robust Canadian and international market fundamentals and improving long term outlook in all of our U. S.

Speaker 2

Markets and excellent visibility for sustained free cash flow with growing margins to continue executing on our debt reduction plan. With the application of Edge Autopilot combined with an expanding performance based contract base backed up with our superior performance drilling teams in the field, Ensign is delivering value to operators, which supports rate increases moving forward. Again, the focus continues to be accelerating debt reduction into a steadily improving construct for the drilling and well servicing businesses globally. Like to thank our professional crews and our employees along with our customers for helping Ensign achieve the performance and industry leading milestones that we that industry does recognize us for. I look forward to our next call in 3 months' time.

Speaker 2

Stay safe. Thank you.

Operator

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.

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Key Takeaways

  • Strong Q2 Performance: Q2 was one of Ensign’s best quarters, with Canadian operating days up 15% year-over-year and international activity inching higher, offsetting a 32% drop in U.S. days amid M&A headwinds.
  • Revenue and EBITDA Declines: Q2 revenue fell 9% to $391.8 million and adjusted EBITDA dropped 14% to $100.2 million, primarily due to reduced U.S. drilling activity.
  • Debt Reduction on Track: The company repaid $78.9 million of debt in Q2 (bringing total repayments since Jan 2023 to $307.9 million) and remains on pace to cut $600 million by end-2025, aided by 19% lower interest expense.
  • Robust Canadian Outlook: Demand for high-spec singles, doubles and triples is at decade highs, with nearly 90% of rigs contracted through Q1 2025 and ratcheting rate increases secured.
  • International & Tech-Driven Growth: International rigs operate at near-100% utilization on long-term ADR contracts, while U.S. performance-based agreements and Edge Autopilot deployment drive efficiency gains.
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Earnings Conference Call
Ensign Energy Services Q2 2024
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