Ensign Energy Services Inc. Reports 2013 Second Quarter Results2013-08-06 CALGARY, Aug. 6, 2013 /CNW/ - Overview Ensign Energy Services Inc. ("Ensign" or the "Company") recorded revenue of $437.9 million for the second quarter of 2013, six percent lower than revenue of $463.9 million recorded in the second quarter of 2012. Revenue for the six months ended June 30, 2013 was $1,019.0 million, 11 percent lower than revenue of $1,141.5 million for the six months ended June 30, 2012. Net income for the second quarter of 2013 decreased 82 percent to $3.3 million ($0.02 per common share) compared to net income of $18.7 million ($0.12 per common share) for the second quarter of 2012. Net income for the six months ended June 30, 2013 decreased 45 percent to $68.3 million ($0.45 per common share) compared to net income of $124.2 million ($0.81 per common share) for the first six months of 2012. Second quarter earnings were negatively impacted by $21.8 million of foreign exchange and other charges in the quarter primarily due to the effect of a weakening AUS dollar on US dollar debt in the Company's Australian operations. Excluding the impact of share-based compensation expense (recovery) and foreign exchange and other, adjusted net income for the second quarter of 2013 totaled $14.5 million ($0.09 per common share), 27 percent lower than adjusted net income of $19.8 million ($0.13 per common share) in the second quarter of 2012. For the six months ended June 30, 2013 adjusted net income was $81.1 million ($0.53 per common share), 36 percent lower than adjusted net income of $125.9 million ($0.82 per common share) for the six months ended June 30, 2012. Adjusted EBITDA, defined as "income before interest, income taxes, depreciation, share-based compensation expense (recovery) and foreign exchange and other", totaled $85.7 million ($0.56 per common share) in the second quarter of 2013, four percent lower than adjusted EBITDA of $89.6 million ($0.59 per common share) in the second quarter of 2012. For the first six months of 2013 adjusted EBITDA was $250.1 million ($1.64 per common share), 18 percent lower than adjusted EBITDA of $304.5 million ($1.99 per common share) for the first six months of 2012. Funds from operations increased two percent to $88.7 million ($0.58 per common share) in the second quarter of 2013 from $87.3 million ($0.57 per common share) in the second quarter of the prior year. For the six months ended June 30, 2013, funds from operations decreased 15 percent to $228.5 million ($1.50 per common share) compared to $268.6 million ($1.76 per common share) for the six months ended June 30, 2012. Reduced operating activity in North America weakened operating and financial results for the three and six months ended June 30, 2013. Consistent with prior years, the second quarter reflects the seasonal impact of spring break-up weather conditions which restricted activity levels for the Company's Canadian operations. Additionally, second quarter operating and financial results were hampered by weakened demand for oilfield services and slightly lower revenue rates in the United States. As previously mentioned, second quarter financial results include the negative impact from a strengthening United States dollar on USD denominated debt in the Company's Australian operations. Increased activity in Latin America and the eastern hemisphere helped to partially offset these reductions. A slight increase of approximately one percent in the average United States dollar foreign exchange rate against the Canadian dollar during the six months ended June 30, 2013 compared to the six months ended June 30, 2012, positively impacted United States and international financial results on translation to Canadian dollars. Gross margin decreased to $109.3 million (25.0 percent of revenue) for the second quarter of 2013 compared with gross margin of $110.2 million (23.8 percent of revenue) for the second quarter of 2012. For the six months ended June 30, 2013 gross margin decreased to $293.2 million (28.8 percent of revenue) compared to $344.6 million (30.2 percent of revenue) for the six months ended June 30, 2012. Margins were negatively impacted by reduced operating activity in North America for the three and six months ended June 30, 2013; however, positive operating and financial results from the Company's international operations partially offset weaker North American margins in the current quarter compared to the second quarter of the prior year. During the second quarter the Company expanded its existing oilfield rental business when it acquired rental equipment assets through the acquisition of substantially all of the assets of EGOC Enviro Group of Companies ("EGOC"). Additionally, the Company expanded its directional drilling business in Canada during the second quarter through the acquisition of substantially all of the assets of Departure Energy Services Inc. ("Departure"). Both of these acquisitions closed during the second quarter of 2013 and were completed utilizing the Company's existing cash balances. The use of funds for these acquisitions, combined with an active new build program that has delivered three new ADR® drilling rigs and three new well servicing rigs in the first six months of the year, resulted in a working capital deficit at June 30, 2013, of $38.4 million compared to positive working capital of $13.9 million at December 31, 2012. The Company's ongoing new build program is expected to deliver an additional six new ADR® drilling rigs and four new well servicing rigs throughout the remainder of 2013 and into 2014. In addition to the above new builds, the Company is refurbishing and upgrading three drilling rigs into ADR®-style drilling rigs. FINANCIAL AND OPERATING HIGHLIGHTS ($ thousands, except per share data and operating information)
Second Quarter Highlights
Revenue and Oilfield Services Expense
Revenue for the three months ended June 30, 2013 decreased six percent to $437.9 million compared to $463.9 million for the comparable period in 2012. Revenue for the six months ended June 30, 2013 decreased 11 percent to $1,019.0 million from revenue of $1,141.5 million recorded for the six months ended June 30, 2012. As a percentage of revenue, gross margin for the second quarter of 2013 increased to 25.0 percent (2012 - 23.8 percent) but decreased to 28.8 percent for the six months ended June 30, 2013 (2012 - 30.2 percent). Revenue for the three and six months ended June 30, 2013 decreased compared to the corresponding periods of the prior year due to reduced demand for North American oilfield services. Ongoing concerns regarding the economics of oil and natural gas projects within North America, along with continuing general uncertainty in global economic conditions, had caused many operators to delay or reduce their capital programs, reducing demand for oilfield services. The Company's established global diversification has helped to somewhat mitigate these negative impacts to financial results as the Company's international operations continue to grow and improve. Canadian Oilfield Services Revenue decreased 21 percent to $85.5 million for the three months ended June 30, 2013, from $108.8 million for the three months ended June 30, 2012. For the six months ended June 30, 2013, revenue decreased 21 percent to $341.4 million compared to $433.7 million for the same period in 2012. Canadian revenues accounted for 20 percent of the Company's total revenue in the second quarter of 2013, compared with 23 percent in the second quarter of 2012, and during the six months ended June 30, 2013, Canadian revenues were 34 percent of total revenue (2012 - 38 percent). The Company's Canadian operations recorded 1,598 drilling days in the second quarter of 2013, compared to 2,281 drilling days for the second quarter of 2012, a decrease of 30 percent. For the six months ended June 30, 2013, the Company recorded 6,927 drilling days compared to 9,712 drilling days for the six months ended June 30, 2012, a decrease of 29 percent. Canadian well servicing hours decreased by 17 percent to 25,343 operating hours in the second quarter of 2013 compared with 30,691 operating hours in the corresponding period of 2012. For the six months ended June 30, 2013, well servicing hours decreased by 15 percent to 60,480 operating hours compared with 70,826 operating hours for the six months ended June 30, 2012. Reduced revenue and operating activity in Canada in the three and six months ended June 30, 2013, compared to the prior year was primarily a result of a particularly wet spring break-up in 2013, restricting operating activity in Canada and overall reduced demand for Canadian oilfield services in 2013 compared to 2012. During the six months ended June 30, 2013, the Company added one newly constructed ADR® to its Canadian drilling rig fleet and three new well servicing rigs. Five inactive drilling rigs and 10 inactive well servicing rigs were decommissioned, all in the first quarter. The Company also disposed of its non-rig manufacturing facility located in Calgary, Alberta. United States Oilfield Services The Company's United States operations recorded revenue of $219.9 million in the second quarter of 2013, a 10 percent decrease from the $244.4 million recorded in the corresponding period of the prior year. During the six months ended June 30, 2013, revenue of $420.3 million was recorded, a decrease of 15 percent from the $493.8 million recorded for the six months ended June 30, 2012. The Company's United States operations accounted for 50 percent of the Company's revenue in the second quarter of 2013 (2012 - 53 percent) and 41 percent of total revenue in the six months ended June 30, 2013 (2012 - 43 percent). Drilling rig operating days decreased by eight percent to 5,712 drilling days in the second quarter of 2013 from 6,188 drilling days in the second quarter of 2012. For the six months ended June 30, 2013, drilling days decreased by 10 percent to 11,216 drilling days from 12,501 drilling days in the six months ended June 30, 2012. Well servicing activity decreased by 18 percent in the second quarter of 2013 to 24,897 operating hours from 30,491 operating hours in the second quarter of 2012. For the six months ended June 30, 2013 well servicing activity decreased 21 percent to 47,674 operating hours from 60,640 operating hours in the first six months of 2012. Similar to Canada, United States operating and financial results reflect reduced demand for United States oilfield services in the three and six months ended June 30, 2013, when compared to the same periods of 2012. In addition the decreased demand put downward pressure on revenue rates and margins in the current quarter compared to the second quarter of the prior year. During the six months ended June 30, 2013 the Company added two new ADR® drilling rigs to its United States fleet, decommissioned six inactive drilling rigs and disposed of two well servicing rigs. A strengthening United States dollar against the Canadian dollar in the first six months of 2013 had a positive impact on the translation of the Company's United States financial results to Canadian dollars. In the first six months of 2013 the average United States dollar exchange rate increased by approximately one percent to 1.02 when compared to the same period of the prior year. International Oilfield Services The Company's international operations recorded revenue of $132.6 million in the second quarter of 2013, a 20 percent increase over the $110.7 million recorded in the corresponding period of the prior year. Similarly, international revenues for the six months ended June 30, 2013, increased by 20 percent to $257.3 million from $214.1 million recorded for the six months ended June 30, 2012. International operations contributed 30 percent of the Company's revenue in the second quarter of 2013 (2012 - 24 percent) and 25 percent of the Company's revenue in the first half of 2013 (2012 - 19 percent). International operating days for the three months ended June 30, 2013 totaled 2,805 drilling days compared with 2,845 drilling days in 2012, a decrease of one percent. For the six months ended June 30, 2013, international operating days totaled 5,517 drilling days compared with 5,642 drilling days for the six months ended June 30, 2012, a decrease of two percent. Growth of the Company's international revenue in the first half of the year was the result of two new ADR's being added to the Company's international fleet and the relocation of an existing drilling rig from the United States to the international market late in 2012. These additions more than offset the expected reduction in 2013 drilling days due to the impact from the completion of the Company's drilling contracts in Mexico in 2012. Similar to the Company's United States operations, international operations benefited from the strengthening of the United States dollar relative to the Canadian dollar when translating financial results into Canadian dollars for reporting purposes in the first six months of 2013 compared to the first six months of the prior year. During the six months ended June 30, 2013 the Company decommissioned one inactive drilling rig from its international fleet. Depreciation
The Company uses the unit of production method of calculating depreciation for the majority of its property and equipment. Depreciation expense totalled $55.4 million for the second quarter of 2013 compared with $50.4 million for the second quarter of 2012, an increase of 10 percent. Depreciation expense for the first six months of 2013 was $112.6 million, an increase of four percent over the $108.6 million recorded for the first six months of 2012. Increased depreciation reflects higher-valued equipment being added to the Company's global fleet throughout the latter half of 2012 and into the first six months of 2013. General and Administrative Expense
General and administrative expense increased 14 percent to $23.6 million (5.4 percent of revenue) for the second quarter of 2013 compared with $20.7 million (4.5 percent of revenue) for the second quarter of 2012. For the six months ended June 30, 2013, general and administrative expense totaled $43.1 million (4.2 percent of revenue) compared with $40.1 million (3.5 percent of revenue) recorded for the six months ended June 30, 2012, an increase of eight 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
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 June 30, 2013, share-based compensation (recovery) expense was a recovery of $4.6 million compared with a recovery of $3.3 million recorded in the second quarter of 2012. For the six months ended June 30, 2013, share-based compensation was an expense of $1.8 million compared with a recovery of $6.2 million for the six months ended June 30, 2012. The change in share-based compensation expense in the three and six months ended June 30, 2013, compared to the same periods of 2012 was a result of the change in the fair value of 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 $16.28 at June 30, 2013 ($14.00 at June 30, 2012), compared with $17.32 at March 31, 2013 ($14.91 at March 31, 2012) and $15.37 at December 31, 2012 ($16.25 at December 31, 2011). Interest Expense
Interest is incurred on the Company's $10.0 million Canadian-based revolving credit facility, the $400.0 million global revolving credit facility and the USD $300.0 million senior unsecured notes issued in February 2012. The amortization of deferred financing costs associated with the issuance of the Company's long-term debt was included in interest expense in both quarters. The decrease in interest expense in the three and six months ended June 30, 2013, compared to the same periods of the prior year is due to interest incurred in the prior year on the USD $100.0 million remaining balance of the short-term acquisition loan which was repaid in full during the second quarter of 2012. Foreign Exchange and Other
Included in this amount is the impact of the conversion of the Australian operations from Australian dollars to United States dollars. The increase in foreign exchange loss in the three and six months ended June 30, 2013, compared to the same periods of 2012 is mainly due to the Australian currency weakening by approximately 12 percent against the United States dollar in the first six months of 2013 causing a foreign currency loss on translation of the Company's USD denominated debt into Australian dollars.
Income Taxes
The effective income tax rate for the three months ended June 30, 2013 was 63.9 percent compared with 41.4 percent for the three months ended June 30, 2012. The effective income tax rate for the six months ended June 30, 2013 was 37.8 percent compared with 32.4 percent for the six months ended June 30, 2012. The increase in the effective income tax rate in the current quarter and first half of 2013 is due to a higher proportion of taxable income earned in high tax rate jurisdictions outside of Canada, further increased by the impact of foreign exchange translation losses for which the effective tax rate varies from statutory rates.
Financial Position The following chart outlines significant changes in the consolidated statement of financial position from December 31, 2012 to June 30, 2013:
Funds from Operations and Working Capital
During the three months ended June 30, 2013, the Company generated funds from operations of $88.7 million ($0.58 per common share) compared with funds from operations of $87.3 million ($0.57 per common share) for the three months ended June 30, 2012, an increase of two percent. For the six months ended June 30, 2013, the Company generated funds from operations of $228.5 million ($1.50 per common share), a decrease of 15 percent from funds from operations of $268.6 million ($1.76 per common share) generated in the first half of 2012. This decrease reflects lower activity levels in the Company's North American operations in the current year versus the comparable period in 2012. At June 30, 2013, the Company had a working capital deficit of $38.4 million, compared to positive working capital of $13.9 million at December 31, 2012. The Company's working capital resources were used in the current quarter to fund the acquisitions of the assets of EGOC and Departure, as well as the ongoing new build program. The Company expects funds generated by operations, combined with current and future credit facilities, to fully support current operating and capital requirements. Existing revolving credit facilities provide for total borrowing of $410.0 million, of which $70.0 million was available at June 30, 2013. Investing Activities
Purchases of property and equipment during the second quarter of 2013 totaled $83.6 million (2012 - $76.1 million). Purchases of property and equipment during the first half of 2013 totaled $146.4 million (2012 - $156.6 million). The purchase of property and equipment for the three and six months ended June 30, 2013 relate predominantly to expenditures made pursuant to the Company's ongoing new build program. During the second quarter of 2013 the Company acquired the rental assets of EGOC and the directional drilling assets of Departure. These acquisitions increase the Company's presence in the rental and directional drilling markets in Western Canada. Financing Activities
The Company's available operating lines of credit consist of a $400.0 million global revolving credit facility (the "Global Facility") and a $10.0 million Canadian based revolving credit facility (the "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 $400.0 million Canadian dollars. The amount available under the Canadian Facility is $10.0 million or the equivalent United States dollars. Net draws of the operating lines of credit were mainly used to fund the ongoing new build program, which added three new ADR® drilling rigs to the Company's fleet in the first half of 2013; one in Canada and two in the United States as well as three new well servicing rigs, all in Canada. As of June 30, 2013, the operating lines of credit are primarily being used to fund the completion of the most recent new build program and to support international operations. In February 2012, the Company completed the private placement of USD $300.0 million of senior unsecured notes, with the proceeds from the issuance being used to repay a portion of the USD $400.0 million unsecured term loan with the remaining balance repaid in full in the second quarter of 2012. On June 21, 2013 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 4,599,367 common shares for cancellation. The Bid commenced on June 25, 2013, and will terminate on June 24, 2014, or such earlier time as the Bid is completed or terminated at the option of the Company. As at June 30, 2013, no common shares have been purchased and cancelled pursuant to the Bid. The Company previously had a Bid that commenced on June 18, 2012, and terminated on June 17, 2013, under which no common shares were purchased and cancelled. The Board of Directors of the Company has declared a third quarter dividend of $0.11 per common share to be payable October 4, 2013, to all Common Shareholders of record as of September 20, 2013. The dividend is pursuant to the quarterly dividend policy adopted by the Company. Pursuant to subsection 89(1) of the Canadian Income Tax Act ("ITA"), the dividend being paid is designated as an eligible dividend, as defined in subsection 89(1) of the ITA. New Builds During the six months ended June 30, 2013, the Company commissioned two new ADR® drilling rigs in the United States; and one new ADR® drilling rig and three new well servicing rigs in Canada. The remaining new build estimated delivery schedule, by geographic area, is as follows:
In addition to the above new builds, the Company is refurbishing and upgrading three drilling rigs into ADR®-style drilling rigs. One drilling rig is being refurbished for the Canadian market, with an estimated delivery date in the first quarter of 2014. The two remaining drilling rigs are being refurbished for the international market, one of the drilling rigs is scheduled for delivery in the third quarter of 2013 and the other drilling rig is scheduled for delivery in the fourth quarter of 2013. All of the major refurbishments are supported by long-term contracts. Outlook The North American economy continues to show signs of improvement which should improve the prospects for crude oil and natural gas, and lead to higher development activity levels in the coming years. While North American and international crude oil pricing differentials have recently narrowed, North America is still in need of additional transportation infrastructure to efficiently move crude oil and natural gas to established markets. Until North American infrastructure needs are effectively addressed and the global economy strengthens, commodity prices will remain volatile and result in uncertain levels of demand for oilfield services, particularly in Canada and the United States. Seasonal factors had an unusually negative impact on the Company's Canadian operations in the second quarter of 2013, representing the lowest activity level in several years. Consistent with the upward revision in the recent well forecast by the Canadian Association of Oilwell Drilling Contractors, prospects for increased activity in the Company's Canadian operations in the second half of 2013 are encouraging; activity levels are expected to rebound to levels similar with those experienced in the second half of 2012. Additionally, the rental equipment and directional drilling assets acquired during the second quarter will begin contributing in the second half of 2013. One new ADR® drilling rig and three new well servicing rigs were added during the first half of the year; and three additional ADR® drilling rigs and four well servicing rigs are currently being refurbished or under construction by the Company for the Canadian market. The Company's United States operations continued to be negatively impacted by industry adjustments to new resource plays and related technology, regional shifts between natural gas and crude oil drilling, and transportation constraints. Current expectations call for improved demand for oilfield services in the United States in the second half of 2013, a reversal from the year-over-year decrease in first half activity levels. Plans for new equipment in the Company's United States operations include two new ADR® drilling rigs under term contracts for delivery later this year. Two new ADR® drilling rigs were added during the first half of 2013. The Company's international operations experienced continued growth during the second quarter. Latin American operations continue to face the usual political and currency challenges; and eastern hemisphere operations continue to develop. Prospects remain positive for future growth in the Company's international operations, despite some regional uncertainties. The ongoing new build program includes four ADR® drilling rigs currently being refurbished or under construction for the international market. 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 and the ability of oil and natural gas companies to 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 second quarter 2013 results at 2:00 p.m. MST (4:00 p.m. EST) on Tuesday, August 6, 2013. The conference call number is (647) 427-7450 (in Toronto) or 1-888-231-8191 (outside Toronto). A taped recording will be available until August 13, 2013 by dialing 1-416-849-0833 (in Toronto) or 1-855-859-2056 (outside Toronto) and entering the reservation number 20553551. 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.
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SOURCE: Ensign Energy Services Inc.  For further information: Glenn Dagenais, Executive Vice President Finance and Chief Financial Officer, (403) 262-1361. |
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