Ensign Energy Services Inc. Reports 2014 Third Quarter Results

2014-11-10
5:00am

CALGARY, Nov. 10, 2014 /CNW/ -

Overview

Revenue for the third quarter of 2014 for Ensign Energy Services Inc. ("Ensign" or the "Company") was $583.3 million, seven percent higher than revenue of $543.0 million recorded in the third quarter of 2013.  Revenue for the nine months ended September 30, 2014 was $1,719.1 million, 10 percent higher than revenue of $1,562.0 million for the nine months ended September 30, 2013.  Adjusted EBITDA, defined as "income before interest, income taxes, depreciation, share-based compensation expense (recovery) and foreign exchange and other", totaled $137.3 million ($0.90 per common share) in the third quarter of 2014, 12 percent higher than adjusted EBITDA of $123.1 million ($0.81 per common share) in the third quarter of 2013.  For the first nine months of 2014, adjusted EBITDA was $394.5 million ($2.58 per common share), six percent higher than adjusted EBITDA of $373.3 million ($2.45 per common share) for the first nine months of 2013.  Net income for the third quarter of 2014 decreased 21 percent to $26.5 million ($0.17 per common share) compared to net income of $33.7 million ($0.22 per common share) for the third quarter of 2013.  Net income for the nine months ended September 30, 2014 was consistent at $102.2 million ($0.67 per common share) compared to net income of $102.0 million ($0.67 per common share) for the first nine months of 2013.  Included in the current quarter earnings was the negative impact of a $22.1 million foreign exchange and other loss, primarily due to the effect of a weakening Australian dollar on United States dollar debt in the Company's Australian operations.  The foreign exchange and other loss for the nine months ended September 30, 2014 was $11.1 million.  Excluding the tax-effected impact of share-based compensation expense (recovery) and foreign exchange and other, adjusted net income for the third quarter of 2014 totaled $36.1 million ($0.24 per common share), three percent higher than adjusted net income of $34.9 million ($0.23 per common share) in the third quarter of 2013.  For the nine months ended September 30, 2014 adjusted net income was $104.4 million ($0.68 per common share), 10 percent lower than adjusted net income of $116.0 million ($0.76 per common share) for the nine months ended September 30, 2013.  Funds from operations increased 25 percent to $132.2 million ($0.87 per common share) in the third quarter of 2014 from $105.9 million ($0.69 per common share) in the third quarter of the prior year.  For the nine months ended September 30, 2014, funds from operations increased by eight percent to $359.6 million ($2.35 per common share) compared to $334.4 million ($2.19 per common share) for the nine months ended September 30, 2013.

Gross margin increased to $162.7 million (27.9 percent of revenue) for the third quarter of 2014 compared with gross margin of $144.4 million (26.6 percent of revenue) for the third quarter of 2013.  For the nine months ended September 30, 2014 gross margin increased to $465.8 million (27.1 percent of revenue) compared to $437.7 million (28.0 percent of revenue) for the nine months ended September 30, 2013.  Third quarter margins improved as the level of required maintenance and start-up expenditures associated with additional equipment preparing for work later in 2014 reduced compared to the level of expenditures in the first half of 2014.

Working capital at September 30, 2014 was $202.2 million, compared to a deficit of $71.1 million at December 31, 2013.  During the second quarter of 2014 the Company increased the amount available on its existing global revolving credit facility (the "Global Facility") from $400.0 million to $600.0 million.  The expanded Global Facility has a three year term and will support the Company's recently expanded new build and major retrofit program.  Available borrowings at September 30, 2014 were $173.6 million compared to $70.7 million at December 31, 2013.  Working capital resources were mainly utilized in the first nine months of 2014 to support the ongoing new build and major retrofit program that delivered three new ADR® drilling rigs and completed four major retrofits to existing drilling rigs during the first nine months of 2014.

FINANCIAL AND OPERATING HIGHLIGHTS
($ thousands, except per share data and operating information)

    Three months ended September 30    Nine months ended September 30
    2014   2013   % Change   2014   2013   % Change
Revenue    583,299   542,951   7   1,719,074   1,561,967   10
                         
Adjusted EBITDA 1   137,295   123,123   12   394,501   373,251   6
Adjusted EBITDA per share 1                        
  Basic    $0.90   $0.81   11   $2.58   $2.45   5
  Diluted    $0.89   $0.80   11   $2.57   $2.43   6
                         
Adjusted net income 2   36,076   34,861   3   104,386   115,961   (10)
Adjusted net income per share 2                        
  Basic    $0.24   $0.23   4   $0.68   $0.76     (11)
  Diluted    $0.24   $0.23   4   $0.68   $0.76   (11)
                         
Net income    26,505   33,699   (21)   102,158   101,970   -
Net income per share                         
  Basic    $0.17   $0.22   (23)   $0.67   $0.67   -
  Diluted    $0.17   $0.22   (23)   $0.67   $0.66   2
                         
Funds from operations 3   132,187   105,923   25   359,629   334,402   8
Funds from operations per share 3                        
  Basic    $0.87   $0.69     26   $2.35   $2.19   7
  Diluted    $0.86   $0.69   25   $2.34   $2.18   7
                         
Weighted average shares - basic (000s)   152,680   152,605     -   152,741   152,654   -
Weighted average shares - diluted (000s)   153,433   153,641   -   153,533   153,468   -
                         
Drilling                        
  Number of marketed rigs                        
    Canada 4   103   121   (15)   103   121   (15)
    United States    110   117   (6)   110   117   (6)
    International 5   59   54   9     59   54   9
  Operating days                         
    Canada 4   3,780   3,799   (1)   10,807   10,726   1
    United States    6,054   5,961     2   17,717   17,177   3
    International 5   2,710   2,979   (9)   8,690   8,496   2
                         
Well Servicing                        
  Number of marketed rigs                        
    Canada    92   94   (2)   92   94   (2)
    United States    44   45   (2)   44   45   (2)
  Operating hours                        
    Canada    30,353   30,355     -   93,736   90,835   3
    United States    32,033   27,529   16   91,493   75,203   22
1 Adjusted EBITDA is defined as "income before interest expense, income taxes, depreciation, share-based compensation expense (recovery) and foreign exchange and other".  Management believes that in addition to net income, Adjusted EBITDA and Adjusted EBITDA per share are useful supplemental measures as they provide an indication of the results generated by the Company's principal business activities prior to consideration of how these activities are financed, how the results are taxed in various jurisdictions, how the results are impacted by foreign exchange or how the results are impacted by the accounting standards associated with the Company's share-based compensation plans.  Adjusted EBITDA and Adjusted EBITDA per share as defined above are not recognized measures under International Financial Reporting Standards and accordingly, may not be comparable to measures used by other companies.
2 Adjusted net income is defined as "net income before share-based compensation expense (recovery) and foreign exchange and other, tax-effected using an income tax rate of 35 percent".  Adjusted net income and Adjusted net income per share are useful supplemental measures as they provide an indication of the results generated by the Company's principal business activities prior to consideration of how the results are impacted by foreign exchange and how the results are impacted by the accounting standards associated with the Company's share-based compensation plans, net of income taxes.  Adjusted net income and Adjusted net income per share as defined above are not recognized measures under International Financial Reporting Standards and accordingly, may not be comparable to measures used by other companies.
3 Funds from operations is defined as "cash provided by operating activities before the change in non-cash working capital".  Funds from operations and Funds from operations per share are measures that provide additional information regarding the Company's liquidity and its ability to generate funds to finance its operations.  Management utilizes these measures to assess the Company's ability to finance operating activities and capital expenditures.  Funds from operations and Funds from operations per share are not measures that have any standardized meaning prescribed by International Financial Reporting Standards and accordingly, may not be comparable to similar measures used by other companies.
4 Excludes coring rigs.
5 Includes workover rigs.

Third Quarter Highlights

  • Revenue for the three months ended September 30, 2014 was $583.3 million, up seven percent from revenue for the three months ended September 30, 2013.  The increase in revenue was mainly due to equipment fleet upgrades and stronger demand in the United States and international operations.
  • Third quarter revenue by segment:
    • Canada - 28 percent;
    • United States - 45 percent; and
    • International - 27 percent.
  • Canadian drilling recorded 3,780 operating days in the third quarter of 2014, a one percent decrease from 3,799 operating days in the third quarter of 2013.  Canadian well servicing hours were consistent in the third quarter of 2014 compared to the third quarter of 2013.
  • United States drilling recorded 6,054 operating days in the third quarter of 2014, a two percent increase from 5,961 operating days in the third quarter of 2013.  United States well servicing hours increased by 16 percent in the third quarter of 2014 compared to the third quarter of 2013.
  • International drilling recorded 2,710 operating days in the third quarter of 2014, a nine percent decrease from 2,979 operating days recorded in the third quarter of 2013.
  • Adjusted EBITDA for the third quarter of 2014 was $137.3 million, a 12 percent increase from adjusted EBITDA of $123.1 million for the third quarter of 2013.  Funds from operations for the third quarter of 2014 increased 25 percent to $132.2 million from $105.9 million in the third quarter of the prior year.
  • Two new well servicing rigs were added to the Company's equipment fleet; one in Canada and one in the United States during the third quarter of 2014.  The new build and major retrofit program completed one major retrofit of a drilling rig transferred from Canada to Australia.

Revenue and Oilfield Services Expense

    Three months ended September 30   Nine months ended September 30
($ thousands)   2014   2013   % Change   2014   2013   % Change
                         
Revenue                        
  Canada    161,730   161,079   -   498,885   502,520   (1)
  United States    260,072   234,625   11     754,620   654,938   15
  International    161,497   147,247   10     465,569   404,509   15
                         
    583,299   542,951   7   1,719,074   1,561,967     10
Oilfield services expense    420,553   398,546   6   1,253,315   1,124,317   11
                         
Gross margin    162,746   144,405   13     465,759   437,650     6
Gross margin percentage (%)   27.9   26.6       27.1   28.0

Revenue for the three months ended September 30, 2014 increased seven percent to $583.3 million compared to $543.0 million for the comparable period in 2013.  Revenue for the nine months ended September 30, 2014 increased 10 percent to $1,719.1 million from revenue of $1,562.0 million recorded for the nine months ended September 30, 2013.  As a percentage of revenue, gross margin for the third quarter of 2014 increased to 27.9 percent (2013 - 26.6 percent) and decreased to 27.1 percent for the nine months ended September 30, 2014 (2013 - 28.0 percent).  The gross margin percentage increase in the third quarter of the current year resulted from reduced repairs and maintenance expenditures as much of these expenditures were front-end loaded in the current year.

For the three months ended September 30, 2014 revenue strengthened for the United States and international operations compared to the three months ended September 30, 2013 and Canada held consistent.  Similarly for the nine months ended September 30, 2014, when compared to the same period in the prior year, revenue generated in Canada was down only slightly, and United States and international revenue improved.  Equipment fleet upgrades and stronger demand led to the increased revenue.  Further, United States and international financial results were improved on translation to Canadian dollars by a seven percent increase in the average United States exchange rate against the Canadian dollar for the nine months ended September 30, 2014 compared to the same period of the prior year. 

Canadian Oilfield Services

Revenue was consistent at $161.7 million for the three months ended September 30, 2014, compared with $161.1 million for the three months ended September 30, 2013. For the nine months ended September 30, 2014, revenue decreased one percent to $498.9 million compared to $502.5 million for the same period in 2013. Canadian revenues accounted for 28 percent of the Company's total revenue in the third quarter of 2014, compared with 30 percent in the third quarter of 2013, and during the nine months ended September 30, 2014, Canadian revenues were 29 percent of total revenue (2013 - 32 percent).

The Company's Canadian operations recorded 3,780 drilling days in the third quarter of 2014, compared to 3,799 drilling days for the third quarter of 2013, a decrease of one percent.  For the nine months ended September 30, 2014, the Company recorded 10,807 drilling days compared to 10,726 drilling days for the nine months ended September 30, 2013, an increase of one percent.  Canadian well servicing hours remained consistent at 30,353 operating hours in the third quarter of 2014 compared with 30,355 operating hours in the corresponding period of 2013.  For the nine months ended September 30, 2014, well servicing hours increased by three percent to 93,736 operating hours compared with 90,835 operating hours for the nine months ended September 30, 2013.

Revenue and operating days were mainly consistent in Canada in the current year third quarter compared to the prior year period.  The 2013 second quarter acquisitions of assets from EGOC Enviro Group of Companies Ltd. ("EGOC") and Departure Energy Services Inc. ("Departure") helped to improve year-to-date financial results for the nine months ended September 30, 2014 compared to the same period of the prior year, however, reduced demand at the start of the current year, particularly for the oil sands coring division, offset this increase.

During the nine months ended September 30, 2014, the Company's Canadian operations added one retrofitted drilling rig transferred from the United States fleet to the Canadian fleet; added one new well servicing rig; decommissioned 14 inactive drilling rigs and four inactive well servicing rigs; and transferred two drilling rigs to the oil sands coring fleet and three retrofitted drilling rigs to Australia.

United States Oilfield Services

The Company's United States operations recorded revenue of $260.1 million in the third quarter of 2014, an 11 percent increase from the $234.6 million recorded in the corresponding period of the prior year. During the nine months ended September 30, 2014, revenue of $754.6 million was recorded, an increase of 15 percent from the $654.9 million recorded for the nine months ended September 30, 2013. The Company's United States operations accounted for 45 percent of the Company's revenue in the third quarter of 2014 (2013 - 43 percent) and 44 percent of total revenue in the nine months ended September 30, 2014 (2013 - 42 percent).  Drilling rig operating days increased by two percent to 6,054 drilling days in the third quarter of 2014 from 5,961 drilling days in the third quarter of 2013.  For the nine months ended September 30, 2014, drilling days increased by three percent to 17,717 drilling days from 17,177 drilling days in the nine months ended September 30, 2013.  Well servicing activity increased by 16 percent in the third quarter of 2014 to 32,033 operating hours from 27,529 operating hours in the third quarter of 2013.  For the nine months ended September 30, 2014 well servicing activity increased 22 percent to 91,493 operating hours from 75,203 operating hours in the first nine months of 2013.

Growth in demand for oilfield services resulted in stronger operating and financial results in the United States operations for the three and nine months ended September 30, 2014 compared to the same periods of the prior year.  As a result of new equipment added to the Company's United States fleet throughout 2013 and into 2014, revenue rates also improved in both the three and nine months ended September 30 of the current year compared to the same periods of the prior year.  Financial results from the United States were positively impacted on translation to Canadian dollars by the strengthening of the United States dollar against the Canadian dollar in the first nine months of 2014 compared to the first nine months of 2013.  For the nine months ended September 30, 2014 the average United States dollar exchange rate increased by approximately seven percent to 1.09 when compared to the same period of the prior year.

An additional ADR® was added to the United States fleet in the first quarter of 2014 and one new well servicing rig was added in the third quarter of 2014.  The Company's United States operations also decommissioned or disposed of seven inactive drilling rigs and two well servicing rigs and transferred one drilling rig to Canada in the first nine months of 2014.

International Oilfield Services

The Company's international operations recorded revenue of $161.5 million in the third quarter of 2014, a 10 percent increase over the $147.2 million recorded in the corresponding period of the prior year. Similarly, international revenues for the nine months ended September 30, 2014, increased by 15 percent to $465.6 million from $404.5 million recorded for the nine months ended September 30, 2013. International operations contributed 27 percent of the Company's revenue in the third quarter of 2014 (2013 - 27 percent) and 27 percent of the Company's revenue in the first nine months of 2014 (2013 - 26 percent). International operating days for the three months ended September 30, 2014 totaled 2,710 drilling days compared with 2,979 drilling days in 2013, a decrease of nine percent.  For the nine months ended September 30, 2014, international operating days totaled 8,690 drilling days compared with 8,496 drilling days for the nine months ended September 30, 2013, an increase of two percent.

Increased revenue from the Company's international operations was mainly a result of contributions from new build and retrofitted drilling rigs added to the international drilling rig fleet over the past nine months.  In the first nine months of 2014, three retrofitted drilling rigs were transferred from the Canadian fleet to Australia and two new build ADRs were added in Australia.  Challenges in the Middle East and North Africa experienced during the current year third quarter offset much of the increases from the drilling rigs recently added to the international fleet.  Operations in Libya were suspended in the third quarter of 2014 due to an escalation of civil unrest within the country.  The Company currently expects operations in Libya to resume in the near future.

Similar to the Company's United States operations, the translation of the financial results for the international operations were positively impacted by the strengthening of the United States dollar versus the Canadian dollar on translation into Canadian dollars for reporting purposes in the first nine months of 2014 compared to the first nine months of the prior year.

Depreciation

    Three months ended September 30   Nine months ended September 30
($ thousands)   2014   2013   % Change   2014   2013   % Change
                         
Depreciation    77,069   66,264   16     219,597   178,873     23

Depreciation expense totaled $77.1 million for the third quarter of 2014 compared with $66.3 million for the third quarter of 2013, an increase of 16 percent.  Depreciation expense for the first nine months of 2014 was $219.6 million, an increase of 23 percent over the $178.9 million recorded for the first nine months of 2013.  Increased depreciation reflects a mix of higher-valued equipment being utilized in the first nine months of 2014, new and retrofitted equipment being added to the Company's global fleet throughout the latter half of 2013 and into 2014 and the impact of the 2013 second quarter acquisitions of assets from EGOC and Departure.  In addition, a seven percent increase in the average United States dollar exchange rate against the Canadian dollar increased United States and international depreciation in the three and nine months ended September 30, 2014 compared to the same periods of the prior year.

General and Administrative Expense

    Three months ended September 30   Nine months ended September 30
($ thousands)   2014   2013   % Change   2014   2013   % Change
                         
General and administrative    25,451   21,282   20   71,258   64,399   11
                     
% of revenue   4.4   3.9       4.1   4.1 

General and administrative expense increased 20 percent to $25.5 million (4.4 percent of revenue) for the third quarter of 2014 compared with $21.3 million (3.9 percent of revenue) for the third quarter of 2013. For the nine months ended September 30, 2014, general and administrative expense totaled $71.3 million (4.1 percent of revenue) compared with $64.4 million (4.1 percent of revenue) recorded for the nine months ended September 30, 2013, an increase of 11 percent. The overall increase in general and administrative expense in the current periods reflects the negative translational impact of a stronger United States dollar on United States and international administrative expenses and increased costs to support growing international operations.

Share-Based Compensation (Recovery) Expense

    Three months ended September 30   Nine months ended September 30
($ thousands)   2014   2013   % Change   2014   2013   % Change
                         
Share-based compensation    (7,362)   4,268     (272)   (7,660)   6,094   (226)

Share-based compensation (recovery) 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 price of the Company's common shares.

For the three months ended September 30, 2014, share-based compensation (recovery) expense was a recovery of $7.4 million compared with an expense of $4.3 million recorded in the third quarter of 2013. For the nine months ended September 30, 2014, share-based compensation was a recovery of $7.7 million compared with an expense of $6.1 million for the nine months ended September 30, 2013.   The change in share-based compensation expense in the three and nine months ended September 30, 2014, compared to the same periods of 2013 was a result of the change in the fair value of the share-based compensation liability primarily resulting from movements in the price of the Company's common shares.  The closing price of the Company's common shares was $14.71 at September 30, 2014 ($17.64 at September 30, 2013), compared with $16.57 at June 30, 2014 ($16.28 at June 30, 2013), $16.34 at March 31, 2014 ($17.32 at March 31, 2013) and $16.73 at December 31, 2013 ($15.37 at December 31, 2012).

Interest Expense

    Three months ended September 30   Nine months ended September 30
($ thousands)   2014   2013   % Change   2014   2013   % Change
                         
Interest expense     5,327   4,741   12     16,215   13,400     21
Interest income    (315)     (302)   4     (774)     (1,013)   (24)
                         
    5,012   4,439   13   15,441   12,387     25

Interest is incurred on the Company's $10.0 million Canadian-based revolving credit facility (the "Canadian Facility"), the expanded $600.0 million Global Facility and the United States dollar $300.0 million senior unsecured notes (the "Notes") issued in February 2012.  The amortization of deferred financing costs associated with the issuance of the Notes was included in interest expense in both quarters.

Interest expense in the three and nine months ended September 30, 2014 increased over interest expense in the comparable periods of 2013 due to increased draws on the expanded Global Facility and the negative translational impact of a stronger United States dollar on United States and international interest expense in the current year.  During the second quarter of 2014, the Company amended its existing Global Facility, increasing the amount available to $600.0 million from $400.0 million.  The amended Global Facility has a term of three years.

Foreign Exchange and Other (Loss/(Gain))

    Three months ended September 30   Nine months ended September 30
($ thousands)   2014   2013   % Change   2014   2013   % Change
                         
Foreign exchange and other    22,087   (2,481)   (990)   11,088   15,431     (28)

Included in this amount are foreign currency movements, mainly in the Company's subsidiaries that have functional currencies other than Canadian dollars.  During the three months ended September 30, 2014, the Australian dollar weakened by approximately seven percent against the United States dollar causing a foreign currency loss on translation of the Company's United States dollar denominated debt into Australian dollars.  During the nine months ended September 30, 2014, the Australian dollar weakened by approximately two percent against the United States dollar.

Income Taxes

    Three months ended September 30   Nine months ended September 30
($ thousands)   2014   2013   % Change   2014   2013   % Change
                         
Current income tax    308   13,044   (98)   21,997   36,570   (40)
Deferred income tax    13,676   3,890   252   31,880   21,926     45
                         
    13,984   16,934     (17)   53,877   58,496     (8)
                     
Effective income tax rate (%)   34.5   33.4       34.5   36.5 

The effective income tax rate for the three months ended September 30, 2014 was 34.5 percent compared with 33.4 percent for the three months ended September 30, 2013. The effective income tax rate for the nine months ended September 30, 2014 was 34.5 percent compared with 36.5 percent for the nine months ended September 30, 2013.  The increase in the effective income tax rate in the current quarter when compared with the corresponding quarter in 2013 was due to the impact of foreign exchange translation losses for which the effective tax rate varies from statutory rates, offset by a higher proportion of taxable income earned in Canada.

Financial Position

The following chart outlines significant changes in the consolidated statement of financial position from December 31, 2013 to September 30, 2014:

($ thousands)      Change    Explanation 
Cash and cash equivalents      (56,128)   See consolidated statements of cash flows. 
Accounts receivable      28,674   Increase was due to increased demand and revenue rates in certain regions in the third quarter of 2014 when compared to the fourth quarter of 2013 and an increase in the quarter-end foreign exchange rate on the consolidation of the Company's foreign subsidiaries.
Inventories and other      (12,377)   Decrease was due to normal course use of consumables and amortization of prepaid expenses, offset by additional inventory.
Property and equipment      297,245   Increase was due to additions from the current new build and major retrofit construction program and the impact of an increase in the quarter-end foreign exchange rate on the consolidation of the Company's foreign subsidiaries, offset by depreciation.
Accounts payable and accruals     26,262   Increase was due to increased operating activity in the third quarter of 2014 compared to the fourth quarter of 2013, the expansion of the Company's new build program in the current year and an increase in the quarter-end foreign exchange rate on the consolidation of the Company's foreign subsidiaries.
Operating lines of credit      (326,525)   Decrease was due to the renewal of the Company's Global Facility which now has a three year term.
Share-based compensation       (8,642)   Decrease was due to the decrease in the price of the Company's common shares as at September 30, 2014 compared with December 31, 2013.
Long-term debt     430,265   Increase was due to the renewal of the Company's expanded Global Facility which matures in 2017 and foreign exchange fluctuations on the United States dollar denominated long-term debt, offset by repayments during the period.
Deferred income taxes      33,285   Increase was primarily due to accelerated tax depreciation of assets added during the current year.
Shareholders' equity      108,907   Increase was due to net income for the current year and the impact of foreign exchange rate fluctuations on net assets of foreign subsidiaries, offset by the amount of dividends declared in the first three quarters of 2014.

Funds from Operations and Working Capital

    Three months ended September 30    Nine months ended September 30
($ thousands)     2014    2013    % Change    2014    2013     % Change
                         
Funds from operations     132,187   105,923    25    359,629    334,402    8
Funds from operations per share    $0.87    $0.69    26   $2.35    $2.19     7
Working capital (deficit) 1     202,248   (71,146)    n/m    202,248    (71,146)    n/m

1 Comparative figure as of December 31, 2013.
n/m - Calculation not meaningful.

During the three months ended September 30, 2014, the Company generated funds from operations of $132.2 million ($0.87 per common share) compared with funds from operations of $105.9 million ($0.69 per common share) for the three months ended September 30, 2013, an increase of 25 percent. For the nine months ended September 30, 2014, the Company generated funds from operations of $359.6 million ($2.35 per common share), an eight percent increase over funds from operations of $334.4 million ($2.19 per common share) generated in the first nine months of 2013. This increase in the three and nine months ended September 30, 2014 compared to the same periods of the prior year was a result of increased demand in the United States, contributions from the upgrades to the Company's global equipment fleet over the past few quarters through the new build and major retrofit program and a strengthening in the United States dollar against the Canadian dollar, positively impacting United States and international operating results on translation to Canadian dollars.

At September 30, 2014, the Company had working capital of $202.2 million, compared to a deficit of $71.1 million at December 31, 2013.  The Company's working capital resources were used in the current quarter to fund the ongoing new build and major retrofits construction program that as at September 30, 2014 is anticipated to deliver an additional 34 new build ADR® drilling rigs and seven major retrofits to existing drilling rigs.  The Company expects funds generated by operations, combined with current and future credit facilities, to fully support current operating and capital requirements.  The newly expanded revolving credit facilities provide for total borrowing of $610.0 million, of which $173.6 million was available at September 30, 2014.

Investing Activities

    Three months ended September 30   Nine months ended September 30
($ thousands)   2014   2013   % Change   2014   2013   % Change
                         
Acquisitions    -   -   -   -   (76,408)   (100)
Purchase of property and equipment    (167,996)   (88,951)   89     (425,665)   (235,313)   81
Net change in non-cash working capital    4,956   1,647   201     2,822   (2,842)   (199)
                         
Cash used in investing activities    (163,040)   (87,304)   87   (422,843)   (314,563)   34

Purchases of property and equipment during the third quarter of 2014 totaled $168.0 million (2013 - $89.0 million).  Purchases of property and equipment during the first nine months of 2014 totaled $425.7 million (2013 - $235.3 million).  The purchase of property and equipment relates predominantly to expenditures made pursuant to the Company's ongoing new build and major retrofit program.

During the second quarter of 2013 the Company acquired the rental assets of EGOC and the directional drilling assets of Departure.

Financing Activities

    Three months ended September 30   Nine months ended September 30
($ thousands)   2014   2013   % Change   2014   2013   % Change
                         
Net increase (decrease) in debt facilities    6,590   (142)   (4,741)   67,397   78,057   (14)
Issue of capital stock     -   508     (100)   -   2,002     (100)
Purchase of shares held in trust    (534)   (559)   (4)   (5,282)   (5,917)   (11)
Dividends    (18,019)   (16,868)   7     (54,056)   (50,595)   7
Net change in non-cash working capital    3,201   2,995   7   3,066   2,876   7
                         
Cash (used in) provided by financing activities   (8,762)   (14,066)   (38)     11,125   26,423     (58)

The Company's available debt facilities consist of an expanded $600.0 million Global Facility and a $10.0 million Canadian 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 $600.0 million Canadian dollars.  The amount available under the Canadian Facility is $10.0 million or the equivalent in United States dollars.

During the second quarter of 2014, the Company amended its existing Global Facility, increasing the amount available from $400.0 million to $600.0 million and extending the term for three years.  Net draws of the Global Facility for the three and nine months ended September 30, 2014 were mainly used to fund the ongoing new build and major retrofit program that added three new ADR® drilling rigs to the Company's global fleet in the first nine months of 2014, one in the United States and two in Australia; as well as completed four major retrofits to existing drilling rigs, one in Canada and three in Australia.  As of September 30, 2014, the Global Facility is primarily being used to fund the Company's current new build and major retrofit program and to support international operations.

On September 25, 2014 the Company received approval from the Toronto Stock Exchange to acquire for cancellation up to three percent of the Company's issued and outstanding common shares under a Normal Course Issuer Bid (the "Bid").  The Company may purchase up to 4,600,477 common shares for cancellation.  The Bid commenced on September 29, 2014 and will terminate on September 28, 2015 or such earlier time as the Bid is completed or terminated at the option of the Company.  As at September 30, 2014, no common shares have been purchased and cancelled pursuant to the Bid.  Subsequent to September 30, 2014, to date 119,700 common shares were purchased at an average price of $13.19 and cancelled pursuant to the Bid.

The Company previously had a Bid that commenced on June 25, 2013 and terminated on June 24, 2014, under which no common shares were purchased and cancelled.

During the first quarter of 2014, the Company secured a $20.0 million uncommitted facility, solely for issuing letters of credit, primarily used for bidding on contracts in the normal course of business.  As at September 30, 2014 no amounts were drawn on the facility.

New Builds and Major Retrofits

During the nine months ended September 30, 2014, the Company commissioned one new ADR® drilling rig in the United States; retrofitted one drilling rig transferred from the United States to Canada; commissioned two new ADR® drilling rigs in Australia; and retrofitted three drilling rigs transferred from Canada to Australia.

In response to contracts and advanced bid activity for Ensign's higher technology drilling rigs, the Company currently plans to construct 34 new build ADRs that will be delivered into its fleet through to the middle of 2016.  Concurrent with the delivery of 10 of these new builds, designated as ADR®-850 ultra-deep tele-double drilling rigs, 10 existing Canadian drilling rigs will be decommissioned.

In Canada, the Company is continuing to transition from shallow drilling to deeper drilling, building new ADRs and upgrading existing drilling rigs for deeper resource plays in the Western Canada Sedimentary Basin.  In the United States, the Company builds new ADRs for specific resource plays and has been upgrading existing drilling rigs for pad drilling operations.  Internationally, the Company has been increasing its capabilities, through a combination of new ADRs and major retrofits of existing drilling rigs, to meet the requirements of specific markets.  In addition, the Company is in discussions with numerous customers for the possible supply of a number of additional new drilling rigs that may be constructed and delivered into operations, beyond these 34 new ADR® drilling rigs currently set for delivery.

The estimated delivery schedule for new ADRs and major retrofits of existing drilling rigs currently under construction at September 30, 2014, and as approved by the Company's Board of Directors, is as follows:

    Estimated Delivery Date
                                 
    Q4   Q1   Q2   Q3   Q4   Q1   Q2    
    2014   2015   2015   2015   2015   2016   2016   Total
                                 
New Build ADRs    4   6   6   7   5   3     34
Major Retrofits    5   -   2   -   -   -   -   7
                                 
    9   6   8   7   5   3   3   41

The delivery schedule is monitored continuously and the Company may modify its plans based on the changing demands of its customers.  The Company is currently reviewing its new build program in the wake of recent reductions in the price for crude oil and the impact this may have on the demand for new oilfield service equipment in certain markets.

Outlook

The spot prices for crude oil and natural gas have deteriorated substantially since the start of the third quarter of 2014.  Data sourced from the United States Energy Information Administration ("EIA") indicates that the spot price for crude oil decreased approximately 26 percent from a WTI spot price of USD$106.07 per barrel on June 30, 2014 to USD$78.77 per barrel on November 3, 2014.  The EIA data also shows that the spot price for natural gas decreased approximately 13 percent from a Henry Hub natural gas spot price of USD$4.39 per million Btu on June 30, 2014 to USD$3.82 per million Btu on November 3, 2014.  There are many geo-political factors that might contribute to possible energy supply disruptions in the near future, but these global issues appear to be trumped by supply and demand fundamentals.  The market currently perceives that the growth in crude oil and natural gas supply is exceeding the growth in global demand for energy in the face of tepid economic performance in many parts of the world.

Reduced crude oil and natural gas commodity prices have a direct negative effect on cash flows and project economics for oil and natural gas exploration and production companies and ultimately affect the demand for oilfield services.  While continued relative weakness in North American natural gas prices is not a good thing for the industry, it is not totally unexpected given the apparent abundance of supply from the many resource plays and the difficulty exporting the product out of North America.  However, the recent reduction in crude oil prices is of particular concern as the majority of the oilfield services activity in recent years continues to be directed at crude oil and liquids-rich projects, particularly in North America.  The Company has not yet experienced any reduction in demand for oilfield services due to the recent reduction in commodity prices, but it is prudent to stay vigilant and prepare for reduced activity levels should commodity prices deteriorate further.

Against an increasingly uncertain background, utilization in the Company's Canadian operations has been improving over the past several quarters as the focus continues on the reconfiguration of the Canadian fleet for deeper, long-reach oil and liquids-rich resource play development. Subject to the aforementioned potential negative effects from a lower commodity price environment, the Company currently anticipates continued improvement in operating and financial performance from the Canadian operations as up to 18 new build drilling rigs and two major retrofits to existing drilling rigs are scheduled to be added over the next two years.  Further, the Company is encouraged by recent announcements with respect to the future of proposed LNG export facilities on the west coast of Canada.  The Company expects to benefit from the increased demand for oilfield services that will be required for the efficient development of western Canadian resource plays associated with such future LNG projects.

The operating and financial results from the Company's United States operations have continued to improve; however, the current uncertainty in commodity prices will likely result in a renewed focus on costs and specific project economics by the exploration and production companies served by the Company.  The Company's fleet of technologically advanced equipment should provide the efficiencies needed to ensure a high level of utilization going forward, at least through the next several quarters.  The majority of the Company's current ADR® 1500S new build program continues to be aimed at resource plays in the United States and 16 new build drilling rigs and three major retrofits to existing drilling rigs are expected to be delivered over the next two years.

An advantage of established geographic diversification is that the Company is not fully dependent on the North American market and its attendant regional issues.  The international market generally takes a longer term approach to resource development and the demand for oilfield services does not react as quickly to changes in commodity prices, positive or negative.  Accordingly, the Company expects that its international operations will continue with its upward trend in operating and financial results in a steady and measured manner.  Currently, two major retrofits to existing drillings rigs are expected to be delivered over the next three months.  There will continue to be challenges unique to particular regions, but the Company's operating experience makes it well equipped to manage through such challenges.

Recent Developments

The Company is pleased to announce the appointment of Mr. Cary A. Moomjian Jr. to its Board of Directors, effective November 5, 2014.  Mr. Moomjian has over 35 years of experience as a senior legal and commercial advisor in the contract drilling industry.  His industry career, which includes service as a Senior Vice President - Contracts Administration & Business Development for Santa Fe Drilling Co. and Vice President and General Counsel for Santa Fe International Corporation, culminated as Vice President, General Counsel and Corporate Secretary for Ensco plc., a London, England-based global offshore drilling contractor listed on the New York Stock Exchange. Since 2012 he has had a consulting and legal practice in the Dallas, Texas area. He obtained a law degree from Duke University School of Law in 1972.

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 and economic conditions, crude oil and natural gas prices, foreign currency fluctuations, weather conditions, the Company's defense of lawsuits and the ability of oil and natural 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 third quarter 2014 results at 2:00 p.m. MST (4:00 p.m. EST) on Monday, November 10, 2014.  The conference call number is (647) 427-7450 (in Toronto) or 1-888-231-8191 (outside Toronto).  A taped recording will be available until November 17, 2014 by dialing 1-416-849-0833 (in Toronto) or 1-855-859-2056 (outside Toronto) and entering the reservation number 36091828.  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  
As at    September 30     December 31
    2014     2013
   
(Unaudited, in thousands of Canadian dollars)  
   
Assets  
Current Assets  
  Cash and cash equivalents    $ 22,730   $ 78,858
  Accounts receivable        469,464     440,790
  Inventories and other      54,470     66,847
  Income taxes receivable    14,515     8,572
           
      561,179     595,067
           
Property and equipment       3,085,576     2,788,331
Note receivable       4,475     4,280
           
    $ 3,651,230   $ 3,387,678
     
Liabilities    
Current Liabilities     
  Accounts payable and accruals    $ 333,409   $ 307,147
  Operating lines of credit      -     326,525
  Dividends payable   18,019     18,019
  Share-based compensation    7,503     14,522
           
    358,931     666,213
           
Long-term debt   747,672     317,407
Share-based compensation   1,370     2,993
Deferred income taxes   471,781     438,496
           
    1,579,754     1,425,109
Shareholders' Equity    
             
  Share capital    170,148     168,155
  Contributed surplus    816     4,614
  Foreign currency translation reserve    87,675     25,065
  Retained earnings    1,812,837     1,764,735
           
    2,071,476     1,962,569
     
  $ 3,651,230   $ 3,387,678
              

 

Ensign Energy Services Inc.  
Consolidated Statements of Income  
For the three and nine months ended September 30                      
   
(Unaudited, in thousands of Canadian dollars, except per share data)  
  Three months ended    Nine months ended
  September 30   September 30   September 30   September 30
    2014   2013   2014   2013
   
Revenue $ 583,299   $ 542,951   $ 1,719,074   $   1,561,967
   
Expenses  
  Oilfield services    420,553     398,546     1,253,315     1,124,317
  Depreciation    77,069     66,264     219,597     178,873
  General and administrative    25,451     21,282     71,258     64,399
  Share-based compensation    (7,362)     4,268       (7,660)     6,094
  Foreign exchange and other    22,087     (2,481)     11,088     15,431
                       
      537,798     487,879     1,547,598     1,389,114
                       
Income before interest and income taxes   45,501     55,072     171,476       172,853
                       
Interest income    315     302     774     1,013
Interest expense    (5,327)     (4,741)     (16,215)     (13,400)
                       
Income before income taxes   40,489     50,633       156,035       160,466
   
Income taxes  
  Current tax    308     13,044     21,997     36,570
  Deferred tax    13,676     3,890     31,880     21,926
                       
    13,984     16,934     53,877     58,496
                       
Net income $ 26,505   $ 33,699     $ 102,158   $ 101,970
                         
   
Net income per share  
  Basic  $ 0.17   $     0.22     $ 0.67   $   0.67
  Diluted  $   0.17   $ 0.22     $ 0.67   $   0.66
                         

 

Ensign Energy Services Inc.  
Consolidated Statements of Cash Flows  
For the three and nine months ended September 30                      
   
(Unaudited, in thousands of Canadian dollars)  
  Three months ended     Nine months ended
  September 30     September 30     September 30   September 30
    2014     2013   2014       2013
Cash provided by (used in)  
   
Operating activities  
Net income  $   26,505   $ 33,699   $ 102,158   $ 101,970
Items not affecting cash  
  Depreciation    77,069     66,264       219,597     178,873
  Share-based compensation, net of cash paid    (6,047)     6,020     (5,440)     10,080
  Unrealized foreign exchange and other    20,898     (4,032)     11,173     21,309
  Accretion on long-term debt    86     82     261     244
  Deferred income tax    13,676     3,890     31,880     21,926
Net change in non-cash working capital    (35,106)     (40,485)     4,998     3,808
                       
    97,081     65,438     364,627     338,210
   
Investing activities  
Purchase of property and equipment    (167,996)     (88,951)       (425,665)     (235,313)
Acquisitions   -     -     -     (76,408)
Net change in non-cash working capital    4,956     1,647     2,822     (2,842)
                       
    (163,040)     (87,304)     (422,843)     (314,563)
   
Financing activities  
Net increase (decrease) in debt facilities    6,590     (142)     67,397     78,057
Issue of capital stock    -     508     -     2,002
Purchase of shares held in trust      (534)     (559)     (5,282)     (5,917)
Dividends    (18,019)     (16,868)     (54,056)       (50,595)
Net change in non-cash working capital    3,201     2,995     3,066     2,876
                       
    (8,762)     (14,066)     11,125     26,423
                       
Net (decrease) increase in cash and cash equivalents   (74,721)     (35,932)     (47,091)     50,070
                         
  Effects of foreign exchange on cash and cash equivalents   (1,259)     4,119     (9,037)     (2,352)
   
Cash and cash equivalents  
                         
  Beginning of period   98,710     112,739     78,858     33,208
                         
  End of period $ 22,730   $ 80,926     $ 22,730   $ 80,926
                         
   
Supplemental information  
  Interest paid $ 3,026   $ 1,669   $ 12,641     $ 9,088
  Income taxes paid $ 11,073   $ 18,599   $ 27,940   $ 53,322
                         

SOURCE Ensign Energy Services Inc.

For further information:

Glenn Dagenais, Executive Vice President Finance and Chief Financial Officer, (403) 262-1361.