Ensign Energy Services Inc. - Strong Fourth Quarter Earnings Drive 2010 Financial Results2011-03-14 CALGARY, March 14 /CNW/ - Overview The fourth quarter financial results for Ensign Energy Services Inc. ("Ensign" or the "Company") improved significantly from the fourth quarter of 2009. Net income increased 83 percent to $41.3 million ($0.27 per common share) for the fourth quarter of 2010 from net income of $22.6 million ($0.15 per common share) recorded in the fourth quarter of 2009. Operating earnings, expressed as EBITDA (defined as earnings before interest, taxes, depreciation, amortization, and stock-based compensation), of $103.3 million ($0.67 per common share) for the fourth quarter of 2010 increased 54 percent over EBITDA of $67.2 million ($0.44 per common share) recorded in the fourth quarter of 2009. Funds from operations were $88.7 million ($0.58 per common share) for the fourth quarter of 2010, a 53 percent increase from $57.8 million ($0.38 per common share) recorded in the fourth quarter of 2009. Financial results in the fourth quarter of 2010 reflect a strong recovery in the demand for oilfield services which resulted in higher activity levels across all geographic segments compared with 2009. The Company recorded net income of $121.4 million ($0.79 per common share) in the year ended December 31, 2010, a three percent decrease from $125.4 million ($0.82 per common share) recorded in 2009. Operating earnings for 2010 were $326.5 million, a six percent increase from EBITDA of $309.0 million for the year ended December 31, 2009. Funds from operations increased 15 percent to $297.0 million ($1.94 per common share) in 2010 from $257.4 million ($1.68 per common share) in the prior year. Overall activity levels in 2010 increased over 2009 as demand for oilfield services began to show signs of recovery from the global economic crisis that reduced demand for much of 2009. However, pricing pressures continued throughout most of 2010, reducing revenue rates across all geographic segments. This, combined with the translational impact of a weakening United States dollar on United States and international consolidated financial results, and higher depreciation as high-valued equipment was added to the fleet through the Company's new build program, led to slightly lower overall financial results when compared to 2009. While the global economic recovery proceeded at a slower pace than had earlier been projected, the Company's strong cash position and geographic diversification allowed it to take advantage of new growth opportunities that arose in the year. In 2010, the Company expanded its new build program to capitalize on customer needs for new oilfield service equipment as a result of the increasing technical demands of resource plays. Two Automated Drill Rigs (ADRTM) and seven well servicing rigs were added to the Company's fleet in 2010; and 19 ADR's and 12 additional well servicing rigs are forecast to be completed throughout 2011 and early 2012. The Company also expanded its Canadian directional drilling services in 2010 through the acquisition of 14 directional drilling packages late in the year. The 2010 fourth quarter dividend rate increased 8.6 percent to $0.0950 per common share from $0.0875 per common share declared in the fourth quarter of 2009. The Company's 2010 annual dividend rate was $0.3575 per common share, an increase of four percent over the annual dividend rate of $0.3425 per common share declared in 2009. The Company has increased its dividend every year since it first started to pay a dividend in 1995. Working capital at December 31, 2010 was $95.9 million compared to $107.9 million at December 31, 2009. The Company's expansion of its new build program to take advantage of market growth opportunities in 2010 led to a decrease in the consolidated working capital at December 31, 2010. The Company is cautiously optimistic about future market developments in 2011, and accordingly will preserve its operational and balance sheet strength to support future strategic growth opportunities for the Company.
1 EBITDA is defined as "income before interest expense, income taxes, depreciation and stock-based compensation expense". Management believes that in addition to net income, EBITDA and 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 or how the results are impacted by the accounting standards associated with the Company's stock-based compensation plans. EBITDA and EBITDA per share as defined above are not recognized measures under Canadian generally accepted accounting principles and accordingly may not be comparable to measures used by other companies. 2 Adjusted net income is defined as "net income before stock-based compensation expense, tax-effected using an income tax rate of 35%". 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 the accounting standards associated with the Company's stock-based compensation plan, net of income taxes. Adjusted net income and adjusted net income per share as defined above are not recognized measures under Canadian generally accepted accounting principles 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 shareholders and potential investors with 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 Canadian generally accepted accounting principles and accordingly may not be comparable to similar measures used by other companies. 4 Includes workover rigs.
Revenue and Oilfield Services Expense
Revenue recorded in the fourth quarter of 2010 totaled $404.0 million, a 45 percent increase from $278.7 million recorded in the fourth quarter of 2009. Revenue recorded in the year ended December 31, 2010 totaled $1,355.7 million, an increase of 19 percent over the prior year. The increase in revenue across all segments was a reflection of a recovery in demand for oilfield services equipment as evidenced by an increase in operating days for 2010. As a percentage of revenue, gross margin for the fourth quarter of 2010 fell slightly to 27.5 percent from 28.8 percent for the fourth quarter of 2009. In general, despite higher activity levels, margins have yet to recover from earlier pricing pressures. Furthermore, in 2010 slightly higher operating and maintenance costs were incurred as the Company prepared additional equipment to return to work in response to growing levels of customer demand for oilfield services. The Company's gross margin decreased in 2010 to 26.8 percent compared with 31.3 percent for the year ended December 31, 2009. Gross margin deterioration was attributable to lower revenue rates that started in early 2009 and did not start to recover until recently. The Company also incurred higher maintenance costs in 2010 associated with rigs returning to work that were idle during periods of 2009 and early 2010. The Company continues to maintain its variable cost structure and is putting increased attention and focus on cost control initiatives. Canadian Oilfield Services
The Company recorded revenue of $173.8 million in Canada in the fourth quarter of 2010, a 55 percent increase from $112.4 million recorded in the fourth quarter of 2009. Canadian revenue was $546.3 million in Canada for the year ended December 31, 2010; a 28 percent increase from $425.9 million recorded in the year ended December 31, 2009. Canada accounted for 43 percent of the Company's revenue in the fourth quarter of 2010 (2009 - 40 percent); and for 40 percent of the Company's revenue in the year ended December 31, 2010 (2009 - 37 percent). Drilling days recorded by the Canadian segment in the fourth quarter of 2010 increased by 36 percent from the comparable period of the prior year. For the year ended December 31, 2010, Canadian drilling operating days totaled 19,413, a 42 percent increase from the previous year. Canadian well servicing hours increased by 37 percent in the fourth quarter of 2010 and by 27 percent in the year ended December 31, 2010 from the respective corresponding prior periods. The demand for Canadian oilfield services began to show signs of recovery in 2010, primarily as a result of crude oil prices stabilizing at levels attracting additional investment from exploration and production companies. Crude oil prices continued to steadily improve during 2010 into the US$75 to $80 range. Despite increased operating activity and utilization in Canada in 2010, margins remain somewhat constrained at lower levels due to the oversupply of oilfield service equipment in the Western Canada Sedimentary Basin. Higher operating and maintenance costs further decreased margins in 2010 as the Company prepared additional equipment to return to work in response to the growing levels of customer demand. Although general industry activity levels had been lower during 2009, there were several pockets of the Canadian market where the need for oilfield service equipment remained active. In particular, the Montney and Horn River shale gas plays in northeast British Columbia, the Bakken play in southeast Saskatchewan, and the Cardium play and heavy oil areas in Alberta, have remained relatively active as the Company's customers carried on with their longer-term development plans. Activity levels in these resource plays have continued into 2010. United States Oilfield Services
The Company's United States operations recorded revenue of $142.5 million in the fourth quarter of 2010, a 56 percent increase from the $91.1 million recorded in the corresponding period of the prior year. United States revenue of $493.0 million for the year ended December 31, 2010 was up 21 percent from revenue of $407.4 million for the year ended December 31, 2009. The United States segment accounted for 35 percent of the Company's revenue in the fourth quarter of 2010 (2009 - 33 percent); and 37 percent of the Company's revenue in the current year (2009 - 36 percent). The number of drilling days recorded by the Company's United States segment in the fourth quarter of 2010 increased by 66 percent from the same period of the prior year; drilling days for 2010 increased by 56 percent from the prior year. Well servicing activity expressed in operating hours increased by 52 percent in the fourth quarter of 2010 and 52 percent for the year when compared to the corresponding periods in 2009. On an industry basis, the United States active drilling rig count averaged 1,546 during 2010, up 42 percent from 1,086 in 2009. The United States active drilling rig count has increased steadily in 2010 after declines occurred throughout 2008 and 2009. The Company's drilling rig activity increase year-over-year was similar to the average activity increase experienced by the United States industry as a whole. Consistent with the Company's other geographic segments, the Company's United States results were negatively impacted by lower revenue rates. The translational impact of a weakening United States dollar relative to the Canadian dollar further decreased financial contributions in 2010. The average Canadian/United States dollar exchange rate at which the Company's United States results were translated to Canadian dollars for presentation purposes was 1.03 for 2010 compared to 1.14 for 2009, a 10 percent decline. International Oilfield Services
The international segment recorded revenue of $87.7 million in the fourth quarter of 2010, a 17 percent increase from $75.2 million recorded in the fourth quarter of 2009. International revenue totaled $316.4 million for the year ended December 31, 2010, a four percent increase from $304.4 million in 2009. The international segment contributed 22 percent of the Company's revenue in the three months ended December 31, 2010 (2009 - 27 percent); and 23 percent of the Company's revenue in the year ended December 31, 2010 (2009 - 27 percent). The recovery in activity in Venezuela in 2010 was partially offset by challenges in other regions of Latin America. The Company continues to focus on these regional challenges in executing its geographic diversification strategy. Consistent with the Company's United States segment, the financial results from the Company's international segment were negatively impacted by the weakening of the United States dollar relative to the Canadian dollar in the 2010 fiscal year, as the Company's international segment uses the United States dollar as its functional currency. Drilling days recorded by the Company's international operations during the fourth quarter of 2010 increased 49 percent from the fourth quarter of 2009, while drilling days recorded in the year ended December 31, 2010 increased 39 percent from the same period in 2009. Higher operating days were a result of increased utilization in the Company's existing operations, the full year impact of new rigs deployed into the international market during 2009, the resumption of activity in Venezuela, and the addition of the Company's operations in Mexico through the acquisition of FE Services Holdings, Inc. ("Foxxe Energy") effective December 31, 2009. Following a dramatic decline in commodity prices in the fourth quarter of 2008, crude oil prices began to recover in 2009 and price increases continued throughout 2010, reaching a level in the US $80 to 85 range by the fourth quarter of 2010. In addition, worldwide average rig count, excluding Canada and the United States, increased nearly ten percent from 2009 to 2010, essentially reversing the year-over-year decrease of the previous year. Depreciation
Depreciation expense totaled $36.2 million for the fourth quarter of 2010 compared with $34.9 million for the fourth quarter of 2009. Annual depreciation expense increased to $135.8 million for 2010 compared with $111.0 million for the prior year. The increase in depreciation expense is consistent with the increase in operating activity in 2010 compared with 2009. Furthermore, depreciation increased due to the utilization of higher-valued equipment added to the Company's fleet over the course of 2009 and 2010. Depreciation charges for 2010 also include additional amounts of $12.1 million (2009 - $7.5 million) in respect of equipment that has been inactive for a period of 12 consecutive months or more with a limited near term outlook for work. General and Administrative Expense
General and administrative expense increased 47 percent to $16.3 million (4.0 percent of revenue) for the fourth quarter of 2010 compared with $11.1 million (4.0 percent of revenue) for the fourth quarter of 2009. General and administrative expense increased four percent to $52.8 million (3.9 percent of revenue) for the year ended December 31, 2010 compared with $50.9 million (4.5 percent of revenue) for the year ended December 31, 2009. The increase in general and administrative expenses in the fourth quarter is consistent with higher activity levels in 2010 compared to 2009 and includes year-end adjustments arising from variable compensation programs. As a percent of revenue, general and administrative expense has remained consistent with the prior year comparative period. Stock-Based Compensation Expense
Stock-based compensation expense arises from the intrinsic value accounting associated with the Company's stock option plan, whereby the liability associated with stock-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 quarter ended December 31, 2010, stock-based compensation expense was $3.1 million compared with a recovery of $1.8 million recorded in the fourth quarter of 2009. The majority of the fourth quarter expense relates to the exercise for cash of the options that were due to expire on December 31, 2010. For 2010, stock-based compensation was an expense of $1.4 million compared with an expense of $8.8 million for the year ended December 31, 2009. The closing price of the Company's common shares was $15.03 at December 31, 2010, compared with $15.00 at December 31, 2009 and $13.22 at December 31, 2008. In 2009, increased volatility in the Company's share price led to a higher expense for the year. Interest Expense (Income)
Interest is incurred on the Company's $200 million global revolving credit facility at prime interest rates or bankers' acceptance rates/LIBOR plus 0.75 percent and is shown net of interest income earned on the Company's cash balances. Interest expense was consistent in 2010 with the prior year. Foreign Exchange and Other
This amount consists primarily of exchange gains on the conversion of the Australian operations from Australian dollars to United States dollars. The Australian dollar continued to strengthen against the United States dollar in 2010, consistent with the prior year. Income Taxes
For the three months ended December 31, 2010, the effective income tax rate was 35.4 percent compared with 32.8 percent for the same period in 2009. For the year ended December 31, 2010, the effective income tax rate was 35.4 percent compared with 33.2 percent for the year ended December 31, 2009. The increase in the Company's effective income tax rate over the comparable prior periods is due to a greater proportion of taxable income being generated in the United States and in certain international jurisdictions with higher income tax rates, including jurisdictions where income taxes are based on "deemed profits" or withholding taxes on gross revenue. The lower proportion of current income tax in the current year, as compared to 2009, arises from an extension of the bonus depreciation regime in the United States which results in accelerated tax expenses in relation to new qualified capital assets placed into service during the current year. Financial Position The following chart outlines significant changes in the consolidated balance sheet from December 31, 2009 to December 31, 2010:
Funds from Operations and Working Capital
During the three months ended December 31, 2010, the Company generated funds from operations of $88.7 million ($0.58 per common share) compared with funds from operations of $57.8 million ($0.38 per common share) for the three months ended December 31, 2009, an increase of 53 percent. Funds from operations totaled $297.0 million ($1.94 per common share) for 2010, an increase of 15 percent compared to $257.4 million ($1.68 per common share) generated in 2009. The increase in funds from operations in both the three months and the year ended December 31, 2010 compared to the corresponding periods of 2009 is consistent with the increased activity levels in 2010 as the demand for oilfield services began to show signs of recovery from the deterioration of market conditions in 2009. At December 31, 2010, the Company's working capital totaled $95.9 million compared to $107.9 million at December 31, 2009. Cash and cash equivalents totaled $89.5 million as at December 31, 2010, a decrease of $45.6 million from the balance at year-end 2009. The Company expanded its new build program to take advantage of market growth opportunities in 2010 which led to a decrease in the consolidated cash balance at December 31, 2010. The Company's cash position and existing credit facilities are expected to be sufficient in supporting future operations and capital expenditures. Existing credit facilities provide for total borrowings of $210 million, of which $39 million was available as at December 31, 2010. Investing Activities
Net purchases of property and equipment during the fourth quarter of 2010 totaled $105.5 million (2009 - $14.9 million). Net purchases of property and equipment for the year ended December 31, 2010 totaled $256.3 million compared with $132.6 million for the year ended December 31, 2009. The net purchase of property and equipment for both the three and twelve months ended December 31, 2010 relates predominantly to expenditures incurred with respect to the Company's new build program, as well as expanding the Company's service offerings with the purchase of 14 directional drilling packages in Canada shortly before year end. The Company did not complete any significant acquisitions in 2010 compared with one acquisition in 2009. Effective December 31, 2009, the Company completed a corporate acquisition by acquiring all of the issued and outstanding shares of Foxxe Energy, which owns and operates six drilling rigs in Mexico. The purchase of Foxxe Energy was funded with existing cash balances and credit facilities. Significant additions to the Company's oilfield services equipment fleet in 2010 included:
Financing Activities
The increase in the operating lines of credit in the three months ended December 31, 2010, is primarily due to the capital expenditures made pursuant to the Company's new build program in the fourth quarter. Net repayments of the operating lines of credit in the year ended December 31, 2010 were the result of operating cash flows generated by the Company in excess of capital expenditure requirements. As of December 31, 2010, the operating lines of credit were primarily being used to fund the completion of the most recent new build program and to support international operations. The Company's available operating lines of credit consist of a $200-million global revolving credit facility (the "Global Facility") and a $10-million Canadian based revolving credit facility (the "Canadian Facility"). The Global Facility is available to the Company and any of its wholly-owned subsidiaries, and may be drawn in Canadian, United States or Australian dollars, up to the equivalent value of $200 million Canadian dollars. The amount available under the Canadian Facility is $10 million or the equivalent United States dollars. On May 10, 2010, the Company announced its intent to file with the Toronto Stock Exchange a Normal Course Issuer Bid (the "Bid") to acquire for cancellation up to five percent of the Company's issued and outstanding common shares. On May 28, 2010, the Company received approval from the Toronto Stock Exchange to purchase up to 7,661,411 common shares for cancellation. The Bid commenced on June 1, 2010 and will terminate on May 31, 2011 or such earlier time as the Bid is completed or terminated at the option of the Company. As at March 14, 2011, 200,000 common shares have been purchased and cancelled pursuant to the Bid. Other financing activities during the three months and year ended December 31, 2010 include the receipt of $2.5 million, compared with the receipt of $0.7 million for the fourth quarter of 2009 and $1 million for the year ended December 31, 2009, on the exercise of employee stock options for common shares in the Company. In the fourth quarter of 2010, the Company increased its quarterly dividend rate to $0.0950 per common share, an 8.6 percent increase over the dividend of $0.0875 per common share declared for the fourth quarter of 2009. During the year ended December 31, 2010, the Company declared dividends of $0.3575 per common share, an increase of four percent over dividends of $0.3425 per common share declared in 2009. Subsequent to December 31, 2010, the Company declared a dividend for the first quarter of 2011. A quarterly dividend of $0.0950 per common share is payable April 5, 2011 to all Common Shareholders of record as of March 25, 2011. 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 In response to continued customer demand for new oilfield services equipment to meet the growing technical demands of resource plays, the Company's current new build program will result in 19 new ADRTM style drilling rigs and 12 new well servicing rigs being constructed for delivery throughout 2011 and early 2012. One drilling rig has been allocated to the international segment; 11 drilling rigs and eight well servicing rigs have been allocated to the United States; and the remaining seven drilling rigs and four well servicing rigs will be operated in Canada. The Company plans to fund the construction program using internally generated cash flows and available operating lines of credit. The new build delivery schedule, by geographic area, is as follows:
Outlook The year 2010 turned out to be another year of interesting challenges and unforeseen events. The Company's year began with a crew constrained resurgence in Canadian winter oilfield services activity, continued with global economic recovery concerns arising from the credit crises in the Eurozone, as well as a general increase in oilfield services industry scrutiny arising from the Deepwater Horizon blowout and pipeline mishaps in North America, and ended with events of public protest in parts of Africa and the Middle East. In particular, four drilling rigs in Libya have had their operations temporarily suspended. Through all these challenges, improved crude oil prices remained a positive driver for the industry, as general economic prospects showed small improvements. Unfortunately, the weakening trends with respect to natural gas supply and demand fundamentals have continued as expected. The cyclical recovery in Canada's energy sector benefitted the Company's Canadian operations in terms of a 42 percent increase in drilling days in the 2010 fiscal year compared to the prior year. The Company's Canadian operations contributed a higher proportion of revenue year-over-year in 2010, due to higher activity levels and the negative impact of a weaker United States dollar on the contributions of the Company's United States and international operations. Canadian revenue rates began to increase slightly in the fourth quarter, signaling increased demand for oilfield services, particularly as the number of crews available to the industry became a constraint during the year. The Company anticipates further margin improvements in 2011 as major maintenance expenditures made during 2010 to put portions of the fleet back to work in Canada have been completed. Company rig fleet utilization is expected to be similar in the coming year versus 2010, as promising crude oil and liquids-rich natural gas resource plays continue to be offset by uncertain or bearish prospects for natural gas related oilfield service demand due to declining pipeline exports to an over-supplied United States market. The Company's United States operations continued an upward trend in drilling days, and revenue rates also increased slightly towards the end of the year from rates experienced in earlier quarters. The approximate doubling of crude oil and liquids-rich natural gas drilling for the industry during 2010 offset decreases in drilling for conventional natural gas. The Company is optimistic that its performance will continue to improve as newly constructed equipment is deployed in 2011. The overall optimism with respect to the United States is tempered by the lingering concern regarding the possibility of decreases in natural gas drilling levels, as exploration and production companies adjust to less than robust natural gas supply and demand fundamentals in the near term. Diversification of the Company's international operations outside of North America proved effective as a risk mitigation strategy for maintaining profitability, despite local challenges in some of the countries in which the Company operates. Revenue rates were essentially maintained from earlier quarters, and both drilling days and utilization were higher. Latin America remains a challenge as the Company's operations in Argentina and Mexico are negatively impacted by local market conditions; however, the resumption of activity in Venezuela has partially offset some of this weakness. Wet weather conditions hampered Australian operations for a relatively brief period in the third quarter of 2010 and again more significantly in early 2011; resumption of these operations is currently in progress. Additionally, the operations in Libya are effectively suspended and steps have been taken to secure the Company's assets, comprised of four drilling rigs and related equipment. Given the aggregate outlook for the Company's international operations, this division should experience continued slow but steady growth in its overall operations as 2011 progresses. Consistent with the ongoing strategy to pursue opportunistic growth, the Company continues to evaluate many expansion opportunities which expand the service offerings to the Company's customers, or which may strengthen the company's overall market presence. The fleet modernization and new build programs continue, along with a prudent approach to managing the balance sheet. At present, the Company expects 2011 to be slightly better than 2010 given some cautious optimism about future market developments. In this continuing uncertain environment, the Company will preserve its operational and balance sheet strength in order to support selective growth opportunities such as the new build program during the year. 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 year-end 2010 results at 2:00 p.m. MDT (4:00 p.m. EDT) on Monday, March 14, 2011. The conference call number is (647) 427-7450 (in Toronto) or 1-888-231-8191 (outside Toronto). A taped recording will be available until March 21, 2011 by dialing 1-416-849-0833 (in Toronto) or 1-800-642-1687 (outside Toronto) and entering the reservation number 44045151. 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.
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
CONSOLIDATED STATEMENTS OF CASH FLOWS
For further information: Glenn Dagenais, Executive Vice President Finance and Chief Financial Officer, (403) 262-1361. |
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