Ensign Energy Services Inc. Reports 2014 Second Quarter Results2014-08-11 CALGARY, Aug. 11, 2014 /CNW/ - Overview Revenue for the second quarter of 2014 for Ensign Energy Services Inc. ("Ensign" or the "Company") was $511.6 million, 17 percent higher than revenue of $437.9 million recorded in the second quarter of 2013. Revenue for the six months ended June 30, 2014 was $1,135.8 million, 11 percent higher than revenue of $1,019.0 million for the six months ended June 30, 2013. Net income for the second quarter of 2014 increased 364 percent to $15.2 million ($0.10 per common share) compared to net income of $3.3 million ($0.02 per common share) for the second quarter of 2013. Net income for the six months ended June 30, 2014 increased 11 percent to $75.7 million ($0.50 per common share) compared to net income of $68.3 million ($0.45 per common share) for the first six months of 2013. Included in the prior year comparative earnings for the second quarter was the negative impact of a $21.8 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. Excluding the tax-effected impact of share based compensation expense (recovery) and foreign exchange and other, adjusted net income for the second quarter of 2014 totaled $14.4 million ($0.09 per common share), one percent lower than adjusted net income of $14.5 million ($0.09 per common share) in the second quarter of 2013. For the six months ended June 30, 2014 adjusted net income was $68.3 million ($0.45 per common share), 16 percent lower than adjusted net income of $81.1 million ($0.53 per common share) for the six months ended June 30, 2013. Adjusted EBITDA, defined as "income before interest, income taxes, depreciation, share-based compensation expense (recovery) and foreign exchange and other", totaled $97.1 million ($0.64 per common share) in the second quarter of 2014, 13 percent higher than adjusted EBITDA of $85.7 million ($0.56 per common share) in the second quarter of 2013. For the first six months of 2014 adjusted EBITDA was $257.2 million ($1.68 per common share), three percent higher than adjusted EBITDA of $250.1 million ($1.64 per common share) for the first six months of 2013. Funds from operations increased two percent to $90.4 million ($0.59 per common share) in the second quarter of 2014 from $88.7 million ($0.58 per common share) in the second quarter of the prior year. For the six months ended June 30, 2014, funds from operations was consistent with the prior year comparable period at $227.4 million ($1.49 per common share) compared to $228.5 million ($1.50 per common share) for the six months ended June 30, 2013. Canadian operating and financial results were improved in the current quarter compared to the prior year as Canadian operations experienced less of a reduction in the current year second quarter due to a shorter spring break-up period as a result of slightly longer winter weather conditions in Canada and a beneficial shift in the mix of drilling rigs working as the industry moves towards deeper drilling projects. Demand for United States and international oilfield services also increased to help improve results for both the three and six months ended June 30, 2014 when compared to the same periods of the prior year. An eight percent increase in the average United States exchange rate against the Canadian dollar for the six months ended June 30, 2014 compared to the same period of the prior year helped to further increase United States and international financial results on translation to Canadian dollars. Gross margin increased to $120.8 million (23.6 percent of revenue) for the second quarter of 2014 compared with gross margin of $109.3 million (25.0 percent of revenue) for the second quarter of 2013. For the six months ended June 30, 2014 gross margin increased to $303.0 million (26.7 percent of revenue) compared to $293.2 million (28.8 percent of revenue) for the six months ended June 30, 2013. Margins were negatively impacted in the first half of 2014 by higher costs related to ongoing maintenance and start-up costs of additional equipment preparing for work later in 2014. Working capital at June 30, 2014 was a deficit of $145.3 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 June 30, 2014 were $207.1 million compared to $70.7 million at December 31, 2013. Working capital resources were mainly utilized in the first half of 2014 to support dividend payments and the ongoing new build and major retrofit program that delivered three new ADR® drilling rigs and completed three major retrofits to existing drilling rigs during the first six months of 2014.
FINANCIAL AND OPERATING HIGHLIGHTS
Second Quarter Highlights
Revenue and Oilfield Services Expense
Revenue for the three months ended June 30, 2014 increased 17 percent to $511.6 million compared to $437.9 million for the comparable period in 2013. Revenue for the six months ended June 30, 2014 increased 11 percent to $1,135.8 million from revenue of $1,019.0 million recorded for the six months ended June 30, 2013. As a percentage of revenue, gross margin for the second quarter of 2014 decreased to 23.6 percent (2013 - 25.0 percent) and decreased to 26.7 percent for the six months ended June 30, 2014 (2013 - 28.8 percent). The gross margin decrease was attributable to increased repairs and maintenance costs incurred during the current year second quarter and start-up costs of additional equipment preparing for work later in 2014. Revenue strengthened across all operating divisions for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. For the six months ended June 30, 2014 only Canadian revenue was down slightly with United States and international revenue increasing over the comparable period of the prior year. Increased demand and upgrades to the Company's consolidated equipment fleet over the last few quarters helped to drive the increase in revenue in the current quarter compared to the prior year. In addition, demand for Canadian oilfield services improved in the current quarter compared to the prior year second quarter as a result of the Company continuing to transition the fleet to deeper capacity drilling rigs to capitalize on increased levels of demand. Year-to-date Canadian operating and financial results reflect the lower demand levels experienced by the Company in the first quarter of 2014 compared to the prior year. Canadian Oilfield Services Revenue increased 30 percent to $110.7 million for the three months ended June 30, 2014, from $85.5 million for the three months ended June 30, 2013. For the six months ended June 30, 2014, revenue decreased one percent to $337.2 million compared to $341.4 million for the same period in 2013. Canadian revenues accounted for 22 percent of the Company's total revenue in the second quarter of 2014, compared with 20 percent in the second quarter of 2013, and during the six months ended June 30, 2014, Canadian revenues were 30 percent of total revenue (2013 - 34 percent). The Company's Canadian operations recorded 2,235 drilling days in the second quarter of 2014, compared to 1,598 drilling days for the second quarter of 2013, an increase of 40 percent. For the six months ended June 30, 2014, the Company recorded 7,027 drilling days compared to 6,927 drilling days for the six months ended June 30, 2013, an increase of one percent. Canadian well servicing hours increased by 13 percent to 28,703 operating hours in the second quarter of 2014 compared with 25,343 operating hours in the corresponding period of 2013. For the six months ended June 30, 2014, well servicing hours increased by five percent to 63,383 operating hours compared with 60,480 operating hours for the six months ended June 30, 2013. Improved demand for Canadian oilfield services in the second quarter of 2014 compared to the second quarter of 2013 helped to drive up second quarter revenue for this segment. The industry has shifted towards deeper, longer reach drilling and the Company continues to transition its Canadian drilling fleet to deeper drilling rigs through the current new build and major retrofit program. Demand levels were lower for the first three months of 2014 compared to the comparable prior year period, particularly for the oil sands coring division, bringing down year-to-date Canadian operating and financial results. Consistent with prior years, Canadian operations were also negatively impacted in the second quarter of 2014 by the seasonal operating environment where spring break-up weather conditions hindered the mobility of the Company's equipment. During the six months ended June 30, 2014, the Company added one retrofitted drilling rig transferred from the United States fleet to the Canadian fleet; decommissioned 14 inactive drilling rigs and four inactive well servicing rigs; and transferred two drilling rigs to the oil sands coring fleet and two retrofitted drilling rigs to Australia. In addition one drilling rig has been removed from the Canadian fleet and is undergoing major retrofit for the Australian market. United States Oilfield Services The Company's United States operations recorded revenue of $246.2 million in the second quarter of 2014, a 12 percent increase from the $219.9 million recorded in the corresponding period of the prior year. During the six months ended June 30, 2014, revenue of $494.5 million was recorded, an increase of 18 percent from the $420.3 million recorded for the six months ended June 30, 2013. The Company's United States operations accounted for 48 percent of the Company's revenue in the second quarter of 2014 (2013 - 50 percent) and 43 percent of total revenue in the six months ended June 30, 2014 (2013 - 41 percent). Drilling rig operating days increased by five percent to 5,990 drilling days in the second quarter of 2014 from 5,712 drilling days in the second quarter of 2013. For the six months ended June 30, 2014, drilling days increased by four percent to 11,663 drilling days from 11,216 drilling days in the six months ended June 30, 2013. Well servicing activity increased by 23 percent in the second quarter of 2014 to 30,599 operating hours from 24,897 operating hours in the second quarter of 2013. For the six months ended June 30, 2014 well servicing activity increased 25 percent to 59,460 operating hours from 47,674 operating hours in the first six months of 2013. Upgrades to the Company's United States equipment fleet throughout 2013 and the first three months of 2014 helped to strengthen revenue rates and this combined with an increase in demand levels helped to improve revenue in the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013. In addition, the United States dollar strengthened against the Canadian dollar in the first six months of 2014 compared to the first six months of 2013, having a positive impact on the translation of United States financial results to Canadian dollars. In the first six months of 2014, the average United States dollar exchange rate increased by approximately eight percent to 1.10 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. The Company also decommissioned six inactive drilling rigs and transferred one retrofitted drilling rig to Canada in the first half of 2014. In 2013, the Company added three new build ADRs and one new well servicing rig to the United States fleet. International Oilfield Services The Company's international operations recorded revenue of $154.7 million in the second quarter of 2014, a 17 percent increase over the $132.6 million recorded in the corresponding period of the prior year. Similarly, international revenues for the six months ended June 30, 2014, increased by 18 percent to $304.1 million from $257.3 million recorded for the six months ended June 30, 2013. International operations contributed 30 percent of the Company's revenue in the second quarter of 2014 (2013 - 30 percent) and 27 percent of the Company's revenue in the first half of 2014 (2013 - 25 percent). International operating days for the three months ended June 30, 2014 totaled 2,828 drilling days compared with 2,805 drilling days in 2013, an increase of one percent. For the six months ended June 30, 2014, international operating days totaled 5,980 drilling days compared with 5,517 drilling days for the six months ended June 30, 2013, an increase of eight percent. Additions and upgrades to the Company's international drilling rig fleet over the past 12 months helped to grow revenue for the three and six months ended June 30, 2014 when compared to the three and six months ended June 30, 2013. In the first six months of 2014, two retrofitted drilling rigs were transferred from the Canadian fleet to Australia and two new build ADRs were added in Australia. Currently one retrofitted drilling rig is in transit from Canada to Australia and is expected to begin work in the third quarter of 2014. In the latter half of 2013, the Company added one drilling rig into Kurdistan, a region new to Ensign's operations, resumed operations with an additional drilling rig in Libya and added one retrofitted drilling rig to Australia from the United States fleet. 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 six months of 2014 compared to the first six months of the prior year. Subsequent to the second quarter of 2014, the Company suspended operations in Libya due to an escalation of civil unrest within the country and there is uncertainty as to when operations may resume. The carrying value of assets located in Libya is approximately $41.4 million and at this time the Company does not believe that any impairment has occurred. Depreciation
Depreciation expense totaled $69.2 million for the second quarter of 2014 compared with $55.4 million for the second quarter of 2013, an increase of 25 percent. Depreciation expense for the first six months of 2014 was $142.5 million, an increase of 27 percent over the $112.6 million recorded for the first six months of 2013. Increased depreciation reflects higher-valued equipment being utilized in the first half 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 Enviro Group of Companies Ltd. ("EGOC") and Departure Energy Services Inc. ("Departure"). In addition, an eight percent increase in the average United States dollar exchange rate against the Canadian dollar increased United States and international depreciation in the three and six months ended June 30, 2014 compared to the same periods of the prior year. General and Administrative Expense
General and administrative expense increased one percent to $23.7 million (4.6 percent of revenue) for the second quarter of 2014 compared with $23.6 million (5.4 percent of revenue) for the second quarter of 2013. For the six months ended June 30, 2014, general and administrative expense totaled $45.8 million (4.0 percent of revenue) compared with $43.1 million (4.2 percent of revenue) recorded for the six months ended June 30, 2013, an increase of six 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 Expense (Recovery)
Share-based compensation expense (recovery) 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, 2014, share-based compensation expense (recovery) was an expense of $0.6 million compared with a recovery of $4.6 million recorded in the second quarter of 2013. For the six months ended June 30, 2014, share-based compensation was a recovery of $0.3 million compared with an expense of $1.8 million for the six months ended June 30, 2013. The change in share-based compensation expense in the three and six months ended June 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 $16.57 at June 30, 2014 ($16.28 at June 30, 2013), compared with $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
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 six months ended June 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 quarter. During the current year second quarter, 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 ((Gain)/Loss)
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 June 30, 2014, the Australian dollar strengthened by approximately two percent against the United States dollar causing a foreign currency gain on translation of the Company's United States dollar denominated debt into Australian dollars. During the six months ended June 30, 2014, the Australian dollar strengthened by approximately five percent. In general the United States dollar was stronger when compared to other world currencies in the first half of 2014 compared to the first half of 2013, but weakened slightly during the three months ended June 30, 2014. Income Taxes
The effective income tax rate for the three months ended June 30, 2014 was 36.4 percent compared with 63.9 percent for the three months ended June 30, 2013. The effective income tax rate for the six months ended June 30, 2014 was 34.5 percent compared with 37.8 percent for the six months ended June 30, 2013. The decrease in the effective income tax rate in the current quarter and first half of 2014 was due to a higher proportion of taxable income earned in lower tax rate jurisdictions, including Canada. The prior year tax rates had also been increased by the impact of foreign exchange translation losses for which the effective tax rate varies from statutory rates, however this was not a factor in the first half of 2014. Financial Position The following chart outlines significant changes in the consolidated statement of financial position from December 31, 2013 to June 30, 2014:
Funds from Operations and Working Capital
During the three months ended June 30, 2014, the Company generated funds from operations of $90.4 million ($0.59 per common share) compared with funds from operations of $88.7 million ($0.58 per common share) for the three months ended June 30, 2013, an increase of two percent. For the six months ended June 30, 2014, the Company generated funds from operations of $227.4 million ($1.49 per common share), which was consistent with funds from operations of $228.5 million ($1.50 per common share) generated in the first half of 2013. This increase in the current quarter compared to the prior year second quarter reflects improvements in demand throughout the Company's global operations whereas the decrease year-to-date was mainly a result of Canadian operations having lower activity in the first quarter of 2014 when compared to the prior year. In addition, higher spending on continuing equipment maintenance that the Company generally expenses as incurred reduced both the three and six month funds from operations when compared to the same periods of the prior year. At June 30, 2014, the Company had a working capital deficit of $145.3 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 June 30, 2014 is anticipated to deliver an additional 34 new build ADR® drilling rigs and nine 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. In addition, the Company may look to long-term financing to improve the current working capital position and expects future contributions from additions from the current new build and major retrofit program to help reduce the working capital deficit once the equipment starts working. The newly expanded revolving credit facilities provide for total borrowing of $610.0 million, of which $207.1 million was available at June 30, 2014. Investing Activities
Purchases of property and equipment during the second quarter of 2014 totaled $136.9 million (2013 - $83.6 million). Purchases of property and equipment during the first half of 2014 totaled $257.7 million (2013 - $146.4 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
The Company's available operating lines of credit 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 the Company amended its existing Global Facility, increasing the amount available from $400.0 million to $600.0 million. Net draws of the operating lines of credit for the three and six months ended June 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 six months of 2014, one in the United States and two in Australia; as well as completed three major retrofits to existing drilling rigs, one in Canada and two in Australia. As of June 30, 2014, the operating lines of credit are primarily being used to fund the completion of the most recent new build and major retrofit program and to support international operations. 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 June 30, 2014, $19.0 million was drawn on the facility. The Board of Directors of the Company has declared a third quarter dividend of $0.1175 per common share to be payable October 3, 2014 to all Common Shareholders of record as of September 19, 2014. 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 and Major Retrofits During the six months ended June 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 two drilling rigs transferred from Canada to Australia. In response to contracts and advanced bid activity for Ensign's higher technology drilling rigs, the Company has added an additional 10 new build 4000m deep tele-doubles to its existing 24 new build ADRs. The addition of these 10 new builds, specifically targeted for the Canadian fleet, will bring the total to 34 new build ADRs that Ensign will deliver into its fleet through to the end of 2015. Concurrent with the delivery of these 10 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 between now and December 31, 2015, 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 June 30, 2014, and as approved by the Company's Board of Directors, is as follows:
Outlook Oil and natural gas producers benefited from favorable oil and natural gas prices throughout much of the first half of 2014. North American natural gas prices retreated in the second quarter from peak pricing levels in the first quarter that primarily resulted from a cold winter in many natural gas consuming regions of North America. Crude oil prices were pushed to nine month highs in the second quarter due to geopolitical turmoil and tensions in Europe and the Middle East. While crude oil prices have recently subsided slightly, the Company expects relatively steady prices to support continuing demand growth for energy services, particularly in North America. Operating days and revenues recorded by our Canadian operations in the second quarter were up strongly when compared with the second quarter of 2013. Equipment had been repositioned and reconfigured to take advantage of increased levels of demand that occurred during this year's spring break-up quarter in Canada. The Company expects the overall trend to higher utilization in our Canadian operations to continue through the second half of 2014, as the equipment fleet continues to transition to deeper capacity. While Ensign is slightly more optimistic than in the past, sustained improvements in the demand for oilfield services in Canada will ultimately depend on positive developments with respect to improving crude oil and natural gas transportation infrastructure. Second quarter operating days in the Company's United States operations were up slightly over the immediately preceding quarter, as land-based drilling activity continues to expand in certain of the large resource plays. The United States drilling industry continues to shift further into multiple well, pad drilling projects in such resource plays, where the Company's deeper, longer reach, self-moving high-tech ADR® drilling rigs meet stringent customer demands for horizontal and lateral drilling. Consequently, the majority of our new ADRs being constructed over the next several years will likely end up in our United States fleet to service the demand of our growing customer base. The second quarter results for Ensign's international operations were essentially flat on a year-over-year basis. Challenges persist in some of the Company's international markets, such as in parts of Africa and the Middle East; however start-ups of recent new drilling rig deployments and repositioning transfers will contribute to improved operating and financial results in future quarters. The Company expanded its credit arrangements in support of the current capital program during the second quarter. The amended Global Facility will ensure that the Company has the funds it needs to complete the current new build and major retrofit program and finance future expanded operations. 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 second quarter 2014 results at 2:00 p.m. MST (4:00 p.m. EST) on Monday, August 11, 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 August 18, 2014 by dialing 1-416-849-0833 (in Toronto) or 1-855-859-2056 (outside Toronto) and entering the reservation number 36067977. 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.
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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