Ensign Energy Services Reports 2008 Earnings2009-03-16
CALGARY, March 16 /CNW/ -
Overview
Ensign Energy Services Inc. (the "Company") reports net income of $260.0
million ($1.70 per common share) for the year ended December 31, 2008, an
increase of $10.2 million or four percent over net income of $249.8 million
($1.64 per common share) recorded in the year ended December 31, 2007. Funds
from operations increased 37 percent to $406.8 million ($2.66 per common
share) in 2008 compared with $296.0 million ($1.94 per common share) recorded
in 2007, a result second only to that achieved in the Company's record year of
2006.
Net income of $73.8 million ($0.48 per common share) for the fourth
quarter of 2008 increased by two percent over net income of $72.6 million
($0.48 per common share) recorded in the fourth quarter of 2007. Net income
for the fourth quarter of 2008 was affected by several one-time items. In
light of weakening market conditions, the Company performed an assessment of
its equipment fleet and recorded additional depreciation of $11.3 million in
the fourth quarter of 2008. Further, net income for the fourth quarter of 2008
was favorably impacted by additional income tax deductions available to its
United States subsidiaries. Additional domestic production deductions claimed
for the years 2005 through 2008 have been reflected as a reduction in income
tax expense in the fourth quarter of 2008. Funds from operations, a measure of
cash flow generated by operating activities before such one-time items,
totaled $109.6 million ($0.72 per common share) for the fourth quarter of
2008, an increase of 28 percent over the corresponding period of 2007.
The Company delivered strong financial results in 2008 amidst a wavering
Canadian market, and later in the year, a global economic crisis that is
unprecedented in the Company's 21-year history. As these economic events
unfolded across the globe, the Company continued to focus on items within its
control, namely its proven business model - financial discipline, diverse
operations, measured growth and commitment to safety - and delivered a solid
return on average shareholders equity of 18.6 percent in 2008. While this
represents a decline from previous years, it demonstrates the Company's
ability to generate positive returns throughout the business cycle.
The Company's total assets surpassed $2 billion in 2008, totaling
$2,228.8 million as at December 31, 2008, an increase of 25 percent over the
balance as at December 31, 2007. The Company expanded its asset base in
strategic markets in 2008, including the acquisition of 12 specialty drilling
rigs in Canada and the construction of two drilling rigs for the Middle East
and Africa markets. The Company also commenced a significant new-build program
in the second quarter of 2008 that added one Automated Drill Rig ("ADR(TM)")
and one well servicing rig to the United States market in the fourth quarter
of 2008, and will add an additional five ADRs to the United States market, six
ADRs to its international markets and six well servicing rigs to its North
American equipment fleet in 2009.
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FINANCIAL AND OPERATING HIGHLIGHTS
($ thousands, except per share data and operating information)
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Three months ended Year ended
December 31 December 31
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% %
2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Revenue 460,435 388,261 19 1,705,579 1,577,601 8
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EBITDA(1) 113,347 108,554 4 497,122 468,178 6
EBITDA per
share(1)
Basic $ 0.74 $ 0.71 4 $ 3.25 $ 3.07 6
Diluted $ 0.74 $ 0.70 6 $ 3.22 $ 3.03 6
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Adjusted net
income(2) 67,805 62,739 8 260,731 244,966 6
Adjusted net
income per
share(2)
Basic $ 0.44 $ 0.41 7 $ 1.70 $ 1.61 6
Diluted $ 0.44 $ 0.41 7 $ 1.69 $ 1.59 6
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Net income 73,830 72,561 2 259,959 249,765 4
Net income
per share
Basic $ 0.48 $ 0.48 - $ 1.70 $ 1.64 4
Diluted $ 0.48 $ 0.47 2 $ 1.68 $ 1.62 4
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Funds from
operations(3) 109,558 85,305 28 406,775 296,048 37
Funds from
operations
per share(3)
Basic $ 0.72 $ 0.56 29 $ 2.66 $ 1.94 37
Diluted $ 0.71 $ 0.55 29 $ 2.63 $ 1.92 37
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Weighted average
shares -
basic (000s) 153,129 152,703 - 153,095 152,517 -
Weighted average
shares -
diluted (000s) 153,552 154,018 - 154,408 154,306 -
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Drilling
Number of
marketed rigs
Canada
Conventional 163 160 2 163 160 2
Oil sands
coring/
coal-bed
methane 28 31 (10) 28 31 (10)
United States 75 76 (1) 75 76 (1)
International(4) 42 49 (14) 42 49 (14)
Operating days
Canada 6,072 5,938 2 25,581 24,046 6
United States 4,670 4,839 (3) 19,986 19,110 5
International 2,497 2,362 6 9,918 9,291 7
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Well Servicing
Number of
marketed
rigs/units
Canada 108 116 (7) 108 116 (7)
United States 17 14 21 17 14 21
Operating hours
Canada 31,138 38,414 (19) 142,494 168,313 (15)
United States 9,333 7,073 32 37,245 26,494 41
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(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
plans, 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
Three months ended Year ended
December 31 December 31
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% %
($ thousands) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Revenue
Canada 180,201 184,344 (2) 742,968 777,228 (4)
United States 181,704 138,333 31 635,465 555,072 14
International 98,530 65,584 50 327,146 245,301 33
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460,435 388,261 19 1,705,579 1,577,601 8
Oilfield services
expense 324,472 263,183 23 1,145,884 1,054,334 9
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135,963 125,078 9 559,695 523,267 7
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Gross margin 29.5% 32.2% 32.8% 33.2%
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Revenue recorded in the fourth quarter of 2008 totaled $460.4 million, an
increase of 19 percent over the fourth quarter of 2007. Revenue recorded in
the year ended December 31, 2008 totaled $1,705.6 million, an increase of
eight percent over the prior year and nearing the record year of 2006 in which
revenue totaled $1,807.2 million. The revenue growth achieved in 2008 over
2007 is owing to capital expansion initiatives completed by the Company in
recent years as it increased its ADR(TM) fleet in the United States and
bolstered its international operations through several drilling rig
construction and relocation projects.
Despite the market turbulence experienced in Canada in 2008, and the
deterioration of the wider global economy in the fourth quarter of 2008, the
Company achieved operating margins of 32.8 percent in 2008 (2007 - 33.2
percent). The significant inflationary pressures driving input costs in recent
years began to ease somewhat in 2008; although, the attraction and retention
of skilled labour remained a challenge for most of the Company's operating
divisions in 2008 due to a competitive labour market. In order to protect
operating margins during periods of volatile demand, the Company aims to
maintain a highly variable cost structure that allows it to react quickly to
changes in market conditions. In 2008, in addition to maintaining several cost
control initiatives implemented in 2007 when weakness in the Canadian market
was prevalent, Ensign implemented several Company-wide cost control
initiatives including an increased focus on supply chain management,
operational consolidations, and a rationalization of the drilling rig fleet
that resulted in retiring equipment that is no longer cost-effective to
operate in the current environment.
As a percentage of revenue, gross margin for the fourth quarter of 2008
fell to 29.5 percent from 32.2 percent for the fourth quarter of 2007. The
decline in gross margin on a quarter-over-quarter basis is a reflection of the
global economic and financial crisis which took hold during the fourth quarter
of 2008 and negatively impacted demand for the Company's services. The Company
faced highly competitive conditions in the fourth quarter of 2008 which added
to the pricing pressure that lingered throughout most of 2008, particularly in
the Canadian market.
Canadian Oilfield Services
--------------------------
Three months ended Year ended
December 31 December 31
----------------------------------------------------------
% %
2008 2007 change 2008 2007 change
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Conventional
drilling rigs
Opening balance 169 162 160 164
Addition - 1 12 3
Transfer - - - (2)
Decommission/
Disposal (6) (3) (9) (5)
----------------------------------------------------------
Ending balance 163 160 2 163 160 2
Oil sands
coring/coal
bed methane rigs
Opening balance 28 31 31 22
Addition - - - 9
Decommission/
Disposal - - (3) -
----------------------------------------------------------
Ending balance 28 31 (10) 28 31 (10)
Drilling
operating days 6,072 5,938 2 25,581 24,046 6
Drilling rig
utilization % 33.8 33.8 - 36.5 34.2 7
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Well servicing
rigs/units
Opening balance 118 115 116 114
Addition - 1 2 3
Transfer - - - (1)
Decommission/
Disposal (1) - (10) -
----------------------------------------------------------
Ending balance 108 116 (7) 108 116 (7)
Well servicing
operating
hours 31,138 38,414 (19) 142,494 168,313 (15)
Well servicing
utilization % 31.3 36.2 (14) 33.7 40.4 (17)
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A multitude of challenging, external market forces weighed on the
Company's Canadian oilfield services division in 2008, with volatile swings in
demand playing out as the year progressed. Initial expectations of financial
and operational performance for the division were reduced heading into the
2007/08 winter drilling season. The first quarter, typically the most active
in Canada due to winter weather conditions that facilitate drilling in
northern regions, was expected to be negatively impacted by lingering concerns
over natural gas commodity prices and expected changes to the royalty regime
in the Province of Alberta. The Canadian industry continued to face an
oversupply of oilfield services equipment, an issue that arose out of the
significant industry-wide capital expansion that followed the robust oilfield
service activity levels of 2006. Although these issues did result in lower
equipment utilization levels and financial contributions from the Canadian
oilfield services division in the first quarter of 2008 compared with the
first quarter of 2007, results exceeded initial expectations as demand for
oilfield services began to recover with improved natural gas commodity prices.
As the division progressed through the second and third quarters of 2008,
the fundamentals of the Canadian market began to improve. Drilling operating
days recorded by the division in the second quarter surpassed the comparable
period of the prior year by seven percent and peaked in the third quarter when
drilling operating days increased 32 percent over the third quarter of 2007.
The Company's operational reach across the Western Canada Sedimentary Basis
("WCSB") was a key contributor to improved operating activity levels in these
quarters. The Company responded quickly to its customers' changing focus as
many of them shifted capital expenditures away from the Province of Alberta to
Saskatchewan and British Columbia and directed more capital towards crude oil
projects and shale gas plays. The Company leveraged its established
operational base in Saskatchewan to capture the increase in crude oil-driven
exploration and development activity in that province. Similarly, the Company
experienced steady demand for its services in northeast British Columbia,
where activity levels in shale gas resource plays, such as the Montney and
Horn River basins, are not as susceptible to short-term fluctuations in
natural gas prices given the longer life spans of these reservoirs compared
with conventional plays. The Company also expanded its equipment fleet during
this period, acquiring 12 specialty drilling rigs that have the ability to
drill conventional wells and perform oils sands coring.
Activity levels in the fourth quarter of 2008 began strong but were
negatively impacted as the quarter progressed as the Company's customers
reacted to the series of unprecedented events that shocked the global economy.
As credit markets tightened, global recessionary conditions worsened and
commodity prices declined sharply, the Company's customers began to cut back
their drilling programs and equipment utilization levels declined accordingly.
These events only further increased the highly competitive conditions of the
Canadian marketplace, and as a result, the oilfield services industry
experienced additional pricing pressure.
In response to the changing conditions of the Canadian market, the
Company took several steps to streamline its operations in 2008. The Company
consolidated management of some drilling operations and consolidated its
transportation assets to improve customer focus amidst a highly competitive
marketplace and realize cost savings for the Company. In addition, and in
order to maintain its drilling rig fleet in the most cost-effective manner,
the Company removed 12 drilling and coring rigs and eight coiled tubing units
from its Canadian marketed fleet of equipment in 2008. The Company will retain
the serviceable components from these drilling rigs to support the remainder
of its drilling rig fleet.
United States Oilfield Services
-------------------------------
Three months ended Year ended
December 31 December 31
----------------------------------------------------------
% %
2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Conventional
drilling rigs
Opening balance 75 74 76 64
Addition 1 2 1 13
Decommission/
Disposal (1) - (2) (1)
----------------------------------------------------------
Ending balance 75 76 (1) 75 76 (1)
Drilling
operating days 4,670 4,839 (3) 19,986 19,110 5
Drilling rig
utilization % 67.7 70.1 (3) 72.3 74.1 (2)
----------------------------------------------------------
Well servicing
rigs/units
Opening balance 16 12 14 11
Addition 1 2 3 2
Transfer - - - 1
----------------------------------------------------------
Ending balance 17 14 21 17 14 21
Well servicing
operating
hours 9,333 7,073 32 37,245 26,494 41
Well servicing
utilization % 59.7 59.1 1 66.7 61.3 9
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The Company's United States oilfield services division recorded revenue
of $635.5 million in the year ended December 31, 2008, a 14 percent increase
over 2007. Drilling operating days totaled 19,986, a five percent increase
over the prior year. These results represent the highest level of revenue and
operating activity levels achieved by this division since the Company entered
the United States market in 1994, and highlights the importance of the
Company's initiatives to lessen its exposure to the cyclicality of any one
particular geographical market segment. While revenues declined year-over-year
in Canada, the United States market has grown and provided a measure of
stability to the Company's earnings. This growth is largely attributable to
the ADR(TM) expansion program that added 13 ADRs to the United States market
under long-term contracts throughout 2007, largely focused on resource
development plays. This further enabled the Company to participate in historic
levels of oilfield service activity in 2008 in the United States, a market
that saw its active drilling rig count peak at a 22-year high in the third
quarter. Similarly, the United States well servicing division performed well
and benefited from the addition of three well servicing rigs in 2008,
increasing operating hours by 41 percent over the prior year.
In previous years, short-term concerns over natural gas commodity prices
did not materially impact demand for United States drilling services as
exploration and production companies in that region tended to take a longer
term view and focused on developing long-life resource plays. However, in the
fourth quarter of 2008, the Company began to note a decline in demand as its
customers reacted to lower expectations for natural gas and crude oil prices,
reduced levels of cash flows and limited access to credit. For the first time
in 2008, the Company's United States oilfield services division experienced a
decline in quarterly equipment utilization levels compared with the prior
year, realizing 67.7 percent utilization in the fourth quarter of 2008
compared with 70.1 percent utilization in the fourth quarter of 2007. That
said, a high proportion of the new equipment introduced into the Company's
Rocky Mountain and California core markets in recent years is secured by
long-term contracts, partially shielding the Company from the impact of an
overall decline in exploration and development activities in these areas. All
six of the new ADRs being constructed for the United States market, one of
which was commissioned in the fourth quarter of 2008, are secured by long-term
contracts, which will provide increased stability to the financial
contributions generated by the United States oilfield services division in
2009. Financial contributions generated by the United States oilfield services
division in the fourth quarter of 2008, as presented in Canadian dollars,
benefited from the strengthening of the United States dollar relative to the
Canadian dollar during this period. The United States/Canadian dollar exchange
rate closed 2008 at 1.2180, compared with 0.9913 at December 31, 2007.
In 2008, the Company expanded its service offering in the United States
to include directional drilling services, which complement the Company's
ADR(TM) technology and provide seamless service and cost savings to its
customers. This new business line contributed to the record revenue levels
achieved by the United States division in 2008 as a greater proportion of
wells are now being drilled on a directional basis, particularly in the
resource plays of the Rocky Mountain region where the Company remained the
most active driller in 2008.
The Company will continue to expand its fleet of ADRs based in the United
States. Albeit reduced from original plans, the Company is constructing six
additional ADRs for this market. The first of these was deployed in the fourth
quarter of 2008. The addition of this equipment under long-term contracts will
provide further stability to the Company's operations and financial results
during volatile market conditions and will offset the decommissioning of two
conventional drilling rigs in 2008. The United States division will also add
two well servicing rigs in the first quarter of 2009.
International Oilfield Services
-------------------------------
Three months ended Year ended
December 31 December 31
----------------------------------------------------------
% %
2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Conventional
drilling/
workover rigs
Opening balance 44 49 49 47
Addition - - - 2
Decommission/
Disposal (2) - (7) -
----------------------------------------------------------
Ending balance 42 49 (14) 42 49 (14)
Drilling
operating days 2,497 2,362 6 9,918 9,291 7
Drilling rig
utilization % 64.6 52.4 23 59.9 52.6 14
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Demand for oilfield services in the international arena is more heavily
influenced by crude oil prices compared with the predominantly natural gas
focus of North America. Despite the dramatic decline in commodity prices in
the fourth quarter of 2008, average crude oil prices increased significantly
in 2008 compared with 2007 and supported high exploration and development
activity levels in the international market for most of the year. West Texas
Intermediate ("WTI") crude oil averaged US$99.65 per barrel in 2008, an
increase of 38 percent over an average price of US$72.31 per barrel during
2007. Owing to this crude oil driven demand, the Company recorded 9,918
drilling operating days in its international division in 2008, an increase of
627 days or seven percent over 2007.
The Company's international oilfield services division delivered
meaningful quarter-over-quarter revenue growth in the fourth quarter of 2008.
Revenue totaled $98.5 million, a 50 percent increase over 2007. The largest
revenue growth was achieved by the Company's operations in Australia, Oman and
Libya, owing to the additional equipment deployed to or constructed for these
markets late in 2007 and early 2008. The Company's Latin American operations
also delivered significant revenue growth in the fourth quarter of 2008
compared with the fourth quarter of 2007.
A reality of operating in the international oilfield services market is
that relocating equipment is often a long, complex and costly process. The
Company has established field offices around the globe to partially mitigate
this challenge and to facilitate the relocation of equipment to areas of
higher demand. During the fourth quarter of 2007 and the first quarter of
2008, the Company undertook several relocation projects, including the
transfer of two ADRs from Canada to Australia and the deployment of one
drilling rig to the Middle East. The international oilfield services division
also constructed two drilling rigs, deploying one to the Middle East and one
to Africa in the first quarter of 2008. The rewards of these projects were
realized throughout the remainder of 2008 as the relocated equipment delivered
positive financial results and contributed to the 33 percent revenue growth
achieved by the international division in 2008 compared with 2007. Partially
offsetting improved financial contributions from this relocated equipment, two
drilling rigs previously operating in Asia completed their contracts in 2008
and are being bid for future contracts. The drilling rig deployed to the
Middle East in the fourth quarter of 2007 completed its contract in the fourth
quarter of 2008 and is being marketed to other jurisdictions.
The international division closed 2008 with a total of 42 marketed
drilling and work-over rigs. During the year, the Company removed a total of
seven drilling rigs from its international equipment fleet. The
decommissioning of rigs on a periodic basis ensures the Company can maintain
its equipment in the most cost-effective manner. In most cases, the
serviceable components from the decommissioned equipment have been redeployed
to other rigs. The international fleet will be expanded in 2009 by six
state-of-the art ADRs. Six new ADRs were under construction or being
transported as of December 31, 2008. Five of these new ADRs will be deployed
to Oman and the remaining ADR(TM) to Gabon in the first half of 2009.
Depreciation
Three months ended Year ended
December 31 December 31
----------------------------------------------------------
% %
($ thousands) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Depreciation 36,104 27,698 30 125,809 92,636 36
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Depreciation expense totaled $36.1 million for fourth quarter of 2008
compared with $27.7 million for the fourth quarter of 2007. Depreciation
expense for the year ended December 31, 2008 increased 36 percent to $125.8
million compared with $92.6 million in the prior year. The increase is due to
the introduction of higher valued equipment to the drilling rig fleet, revised
accounting estimates, as well as the recording of additional depreciation in
2008.
Additional depreciation of $6.8 million was recognized on coiled tubing
units following a review of the carrying value of this equipment performed in
the fourth quarter of 2008. With respect to two decommissioned drilling rigs
in Indonesia, the Company recorded additional depreciation of $4.5 million in
light of current market conditions and the estimated cost involved to
reactivate or relocate this equipment.
Several changes in accounting estimates in 2008 impact the comparability
of depreciation on a year-over-year basis. Effective January 1, 2008, the
Company reduced the estimated useful life of oil sands coring rigs and coiled
tubing units, thereby accelerating the depreciation of this equipment. In
addition, effective July 1, 2008, the Company began applying a depreciation
charge for drilling and well servicing rigs that have not operated within the
last 12 months based on the revised estimated useful life of such equipment.
General and Administrative Expense
Three months ended Year ended
December 31 December 31
----------------------------------------------------------
% %
($ thousands) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
General and
administrative 22,616 16,524 37 62,573 55,089 14
% of revenue 4.9% 4.3% 3.7% 3.5%
-------------------------------------------------------------------------
For the three months ended December 31, 2008, general and administrative
expense totaled $22.6 million (4.9 percent of revenue) compared with $16.5
million (4.3 percent of revenue) for the three months ended December 31, 2007.
General and administrative expense totaled $62.6 million for the year ended
December 31, 2008, an increase of 14 percent over the prior year. As a
percentage of revenue, general and administrative expense was 3.7 percent in
2008 and 3.5 percent in 2007. The increase in general and administrative
expense in 2008 compared with 2007 was incurred primarily in support of the
Company's growth initiatives in the United States and international divisions.
Stock-Based Compensation Expense
Three months ended Year ended
December 31 December 31
----------------------------------------------------------
% %
($ thousands) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Stock-based
compensation (9,269) (15,111) (39) 1,188 (7,383) (116)
-------------------------------------------------------------------------
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.
Stock-based compensation was a recovery of $9.3 million in the fourth
quarter of 2008 compared with a recovery of $15.1 million recorded in the
fourth quarter of 2007. These recoveries result from a decline in the price of
the Company's common shares over these periods, net of the impact of
additional granting and vesting of stock options. For the year ended December
31, 2008, stock-based compensation was an expense of $1.2 million, compared
with a recovery of $7.4 million for the year ended December 31, 2007. The
closing price of the Company's common shares was $13.22 at December 31, 2008,
compared with $15.25 at December 31, 2007 and $18.39 at December 31, 2006.
Although the closing price of the Company's common shares had declined at
December 31, 2008 compared with December 31, 2007, an expense was incurred in
the year ended December 31, 2008 due to stock option exercises that occurred
at higher prices throughout the year. In 2008, the price of the Company's
common shares reached a high of $24.85.
Interest Expense
Three months ended Year ended
December 31 December 31
----------------------------------------------------------
% %
($ thousands) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Interest 1,604 1,154 39 7,006 5,249 33
-------------------------------------------------------------------------
Interest expense is incurred on the utilized balance of the Company's
operating lines of credit and the promissory note payable. The variance in
interest expense on a period-over-period basis is due to an increase in the
average balance outstanding on the Company's operating lines of credit and the
issuance of a $20.0 million promissory note payable in the third quarter of
2008, offset by declining interest rates in 2008. Interest is incurred on the
Company's global revolving credit facility at prime interest rates or bankers'
acceptance rates/LIBOR plus 0.75 percent and at prime interest rates or
bankers' acceptance rates/LIBOR plus 0.85 percent on the Canadian facility.
The promissory note payable bears interest at five percent per annum.
Income Taxes
Three months ended Year ended
December 31 December 31
----------------------------------------------------------
% %
($ thousands) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Current
income tax 2,002 12,070 (83) 74,887 142,846 (48)
Future
income tax 9,076 10,182 (11) 28,273 (14,935) (289)
----------------------------------------------------------
11,078 22,252 (50) 103,160 127,911 (19)
----------------------------------------------------------
Effective income
tax rate (%) 13.0% 23.5% 28.4% 33.9%
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The effective income tax rate for the fourth quarter of 2008 was 13.0
percent compared with 23.5 percent in the fourth quarter of 2007. The
effective income tax rate was 28.4 percent for year ended December 31, 2008
compared with 33.9 percent for the year ended December 31, 2007. The decline
in effective income tax rate in 2008 compared with 2007 is largely due to
additional deductions available to the Company's United States subsidiaries,
namely a domestic production deduction available to companies engaged in
qualified activities. Additional guidance issued by the tax authorities in
2008 confirmed that the drilling of crude oil and natural gas wells performed
by the Company was a qualified activity and that the Company was therefore
entitled to an additional income tax deduction. This deduction was claimed for
the year ended December 31, 2008. As well, income tax returns for the years
2005 through 2007 were amended and refiled in order to claim the deduction for
those periods. The benefit of these deductions has been reflected as a
reduction in current income tax expense in the year ended December 31, 2008.
The decrease in the Company's effective income tax rate on a
period-over-period basis is also due to ongoing income tax rate reductions in
Canada. Income tax rate reductions previously announced by the federal
government will phase in income tax rate reductions each year until 2012 at
which point the federal corporate income tax rate in Canada will reduce to 15
percent from its current level of 19.5 percent.
Current income tax expense for the year ended December 31, 2007 included
$3.8 million related to Omani tax assessments. The Company's Oman operating
entity had been appealing income tax assessments received for the 1994, 1995
and 1996 financial years on the basis that they were without merit under Omani
law. The Company's appeal was dismissed during the year ended December 31,
2007. Excluding the impact of the Omani tax assessments, the effective income
tax rate would have been 32.9 percent for the year ended December 31, 2007.
Financial Position
The following chart outlines significant changes in the consolidated
balance sheets from December 31, 2007 to December 31, 2008:
($ thousands) Change Explanation
-------------------------------------------------------------------------
Cash and cash 93,965 See consolidated statements of cash flows.
equivalents
Accounts 58,765 Increase due to an increase in revenue
receivable generated by the United States and
international oilfield services divisions
in the fourth quarter of 2008 compared with
the fourth quarter of 2007.
Inventory and (28,928) Decrease due to the reclassification of
other drill pipe inventory to property and
equipment as a result of a revision in the
estimated useful life effective January 1,
2008.
Property and 319,801 Increase due to the acquisition of 12
equipment specialty drilling rigs in the second
quarter of 2008, the new-build construction
program, ongoing capital expenditures, the
reclassification of drill pipe inventory
and changes in foreign exchange rates,
offset by depreciation in the year.
Accounts payable 58,489 Increase due to new-build construction
and accrued activities.
liabilities
Operating lines 51,474 Increase in support of drilling and well
of credit servicing rig construction activities.
Promissory note 20,000 Increase due to the issuance of a
payable promissory note payable in conjunction with
the acquisition of 12 specialty drilling
rigs during the third quarter of 2008.
Stock-based (8,138) Decrease due to a decline in the price of
compensation the Company's common shares and the
exercise of employee stock options in the
year.
Income taxes (30,115) Decrease due to income tax installments
payable made during the year, net of the current
income tax provision for the year.
Dividends payable 393 Increase due to a three-percent increase
in the dividend rate in the fourth quarter
of 2008 and a slight increase in the number
of outstanding common shares compared with
the fourth quarter of 2007.
Future income 44,555 Increase due to the current year future
taxes income tax provision and changes in foreign
exchange rates in the year.
Shareholders' 306,945 Increase due to the aggregate impact of net
equity income for the year, increase in capital
stock due to exercises of employee stock
options, impact of foreign exchange rate
fluctuations on the net assets of foreign
self-sustaining subsidiaries, less
dividends declared in the year.
-------------------------------------------------------------------------
Funds from Operations and Working Capital
Three months ended Year ended
December 31 December 31
----------------------------------------------------------
% %
($ thousands) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Funds from
operations 109,558 85,305 28 406,775 296,048 37
Funds from
operations per
share $0.72 $0.56 29 $2.66 $1.94 37
Working
capital 107,024 60,272 78 107,024 60,272 78
-------------------------------------------------------------------------
Funds from operations totaled $109.6 million ($0.72 per common share) in
the fourth quarter of 2008 compared with funds from operations of $85.3
million ($0.56 per common share) recorded in the fourth quarter of 2007, an
increase of 28 percent. During the year ended December 31, 2008, the Company
generated funds from operations of $406.8 million ($2.66 per common share), an
increase of 37 percent over the prior year. The increase is attributable to
improved levels of cash flows generated by the Company's United States and
international oilfield services divisions in 2008 compared with 2007. The
significant factors that may impact the Company's ability to generate funds
from operations in future periods are outlined in the "Risks and
Uncertainties" section below.
Despite the market challenges experienced in 2008, the Company exited the
year with a strong balance sheet with working capital of $107.0 million and
minimal long-term debt. Cash and cash equivalents totaled $95.9 million as at
December 31, 2008, an increase of $94.0 million from the cash and cash
equivalents balance as at December 31, 2007. The Company's strong cash
position and existing credit facilities are expected to adequately support its
future operations and capital expansion initiatives. Existing credit
facilities provide for total borrowings of $250 million, of which $64.3
million was available as at December 31, 2008.
The Company's solid balance sheet and significant cash build up during
2008 are the result of actions taken to ensure that sufficient liquidity is
maintained during these periods of extreme market turbulence:
- In the third quarter of 2008, the Company prudently reviewed and
amended its new-build program, scaling back its new-build
construction plans from 27 drilling rigs and nine well servicing rigs
to 12 drilling rigs and seven well servicing rigs. This initiative
alone will conserve approximately $200 million of cash otherwise
allocated to such construction projects.
- The Company enforces its highly variable cost structure. As
utilization levels decline, seasonal personnel, comprised largely of
field employees, are released.
- During the second quarter of 2008, the Company proactively
restructured its operating credit facilities to better support its
global operations and international growth initiatives. This action
enabled the Company to leverage its overall global borrowing capacity
to lock in financing at favorable rates. The new operating credit
facilities also provide the Company with greater flexibility in
managing its financing needs across geographic segments.
- The Company implemented a hiring freeze in August 2008 and a salary
freeze for administrative staff took effect January 2009.
- In December 2008, the Company further tightened its control over
expenditures, reducing field spending authorization limits. In
February 2009, an additional review of open AFEs (authority for
expenditures) was performed, suspending several routine projects
pending further analysis and approval.
- Throughout 2008, the Company reviewed the performance of its drilling
rig fleet around the world. Those drilling rigs needing significant
maintenance or refurbishment to continue operating in a safe and
efficient manner were removed from the marketed rig fleet. A total of
20 drilling and coring rigs and eight coiled tubing units were
decommissioned in 2008. The Company will capture future cost savings
as it retained serviceable components from the decommissioned rigs to
support future operations.
- The Company progressed with the implementation of a comprehensive
asset management system. The new system will provide greater inventory
control and provide more robust control over purchasing and
procurement activities. As well, the system will provide reduced
repair and maintenance costs through improved management of preventive
maintenance systems.
- The Company also focused on its supply chain management initiative in
2008 to leverage its purchasing power and realize cost savings on its
global purchasing.
The Company's balance sheet remained strong throughout 2008 and its
practice of fiscal restraint and responsibility only added to this strength.
The actions noted above will help to ensure the Company remains strong
throughout any prolonged downturn in the economic cycle and position it to
take advantage of growth opportunities that may arise.
Investing Activities
Three months ended Year ended
December 31 December 31
----------------------------------------------------------
% %
($ thousands) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Net purchase of
property and
equipment (87,651) (48,017) 83 (274,323) (271,984) 1
Net change in
non-cash working
capital (8,304) (39,950) (79) 35,285 (54,168) (165)
---------------------------------------------------------
Cash used in
investing
activities (95,955) (87,967) 9 (239,038) (326,152) (27)
-------------------------------------------------------------------------
During the fourth quarter of 2008, net purchases of property and
equipment totaled $87.6 million, an increase of 83 percent over $48.0 million
in the fourth quarter of 2007. During the year ended December 31, 2008, net
purchases of property and equipment totaled $274.3 million, which is
comparable to $272.0 million in 2007. Additional details regarding the
new-build program are provided in the "New Builds" section below.
In addition to ongoing equipment upgrade initiatives and the 2008
new-build program, other major capital additions during 2008 included:
- The acquisition of 12 specialty drilling rigs and related equipment
in Canada in the third quarter of 2008.
- Completion of two drilling rig construction projects for the Middle
East and Africa in the first quarter of 2008.
- Construction of two well servicing rigs in Canada in the first quarter
of 2008.
- Construction of three well servicing rigs in the United States, one
in each of the second, third and fourth quarters of 2008.
Financing Activities
Three months ended Year ended
December 31 December 31
----------------------------------------------------------
% %
($ thousands) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Net increase in
operating lines
of credit 54,629 5,605 875 51,474 47,980 7
Issue of capital
stock 115 3,199 (96) 1,014 (5,141) (80)
Dividends (13,016) (12,623) 3 (50,905) (49,214) 3
Net change in
non-cash working
capital 383 421 (9) 393 468 (16)
---------------------------------------------------------
Cash provided by
financing
activities 42,111 (3,398) (1,339) 1,976 4,375 55
-------------------------------------------------------------------------
During the year ended December 31, 2008, the Company restructured its
operating credit facilities to better support its global operations and
international growth initiatives. Effective June 26, 2008, the Company's
available operating lines of credit consist of a $200-million global revolving
credit facility (the "Global Facility") and a $50-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 $50 million or the equivalent United States dollars. The
utilized balance of the operating lines of credit increased during the year
and three-month period ended December 31, 2008 to finance the Company's
new-build program.
In the fourth quarter of 2008, the Company increased its quarterly
dividend rate to $0.085 per common share, a three percent increase over the
dividend of $0.0825 per common share declared for the fourth quarter of 2007.
During the year ended December 31, 2008, the Company declared dividends of
$0.3325 per common share, an increase of three percent over dividends of
$0.3225 per common share declared in 2007. All dividends paid by the Company
subsequent to January 1, 2006 qualify as an eligible dividend, as defined by
subsection 89(1) of the Canadian Income Tax Act. Other financing activities
during the year ended December 31, 2008 include the receipt of $1.0 million on
the exercise of employee stock options.
During the third quarter of 2008, the Company issued a promissory note
payable in the amount of $20.0 million in connection with the purchase of
specialty drilling rigs and related equipment from Terracore Specialty
Drilling Ltd. The promissory note is unsecured, bears interest at five percent
per annum (payable quarterly) and is payable in full on July 16, 2011.
New Builds
As previously disclosed, the Company is expanding its global fleet of
state-of-the-art ADR(TM) drilling rigs. As of March 16, 2009, three ADRs have
been delivered and nine remain under construction pursuant to the Company's
world-wide rig construction program, which consists of 12 ADRs and seven well
servicing rigs, a decline of 15 drilling rigs and two well servicing rigs from
initial plans.
Following the unprecedented events impacting the global economy in the
latter half of 2008 and the sharp decline in crude oil and natural gas prices,
the Company prudently reviewed and amended its drilling rig construction
program, suspending 17 drilling and well servicing rig construction projects.
The reduction in the Company's capital expansion plans is one of several
actions taken to maintain a strong balance sheet during volatile market
conditions and further bolster the Company's liquidity. The reduction in the
new-build program alone will conserve approximately $200 million of cash.
All remaining drilling rig construction projects are supported by term
contracts and are proceeding as planned. Of the 12 ADRs included in the latest
construction program, two are ADR(TM)-250 models, two are ADR(TM)-300 models,
four are ADR(TM)-350 models, and four are ADR(TM)-500 models. Upon completion
of this new-build program, the Company will have a total of 60 ADRs in its
fleet. The well servicing rig new-build program consists of four well
servicing rigs for the Canadian market and three well servicing rigs for the
United States market. The Company has no plans to build additional rigs upon
completion of the current new-build program.
The new-build delivery schedule, by geographic area, is as follows:
Actual Forecast
---------------------------------------------------
Q4 2008 Q1 2009 Q2 2009 Q3 2009 Total
-------------------------------------------------------------------------
ADRs
United States 1 1 1 3 6
International - 2 4 - 6
---------------------------------------------------
Total 1 3 5 3 12
-------------------------------------------------------------------------
Well Servicing Rigs
Canada - 1 2 1 4
United States 1 2 - - 3
---------------------------------------------------
Total 1 3 2 1 7
-------------------------------------------------------------------------
Outlook
It is still unclear precisely how bad the economic downturn will become
and how long it will persist. What is clear is that the recent sharp decline
in commodity prices, both for crude oil and natural gas, combined with the
tightening of credit availability, indicates that our customers will not have
the same level of cash flows directed to oilfield services expenditures as we
have seen in the past, at least for the short term. However, out of crisis
comes opportunity. With a strong balance sheet, the Company is well positioned
to navigate through the current market turmoil and take advantage of the
opportunities that will present themselves in the inevitable recovery. We are
well positioned to act on any opportunistic growth opportunities that meet our
strict criteria.
Up until December 2008, we were expecting a reasonably strong 2008/09
winter drilling season in Canada, at least better than the utilization that we
experienced in the winter of 2007/08. However, as 2008 came to a close, the
impact and extent of the deteriorating market conditions in Canada made it
clear that activity levels this winter would be worse than last winter. The
Canadian oilfield services sector as a whole continues to have an oversupply
of equipment. Reduced levels of demand for oilfield services due to
unfavourable oil and natural gas commodity prices and reduced levels of
financing available to the exploration and production companies has resulted
in poor year-over-year utilization levels and reduced margins for our
services. The outlook after the winter drilling season is worse. Our customers
are not committing to oilfield services expenditures as they have reduced
expenditure levels to strengthen their balance sheets and wait until commodity
prices improve the economics of their projects. Although there may be some
resource plays that somewhat buck the trend, generally speaking we expect
activity levels and margins in the second and third quarters of 2009 to be
down significantly compared with 2008. As is our practice, we will price to
maintain our market share.
The outlook for our United States operations is not much better as our
customers react to lower crude oil and natural gas commodity prices. We have
already seen activity levels fall meaningfully in our key markets of
California and the Rocky Mountain region. As with Canada, we do not expect any
significant recovery until commodity prices recover along with supply and
demand fundamentals for crude oil and natural gas. That said, we have 34
drilling rigs committed under term contracts in key resource plays in the
United States. Additionally, we have six more drilling rigs under construction
for delivery under long-term contracts throughout 2009. At this time, we
expect these contracts to continue and provide a modicum of protection from
the deteriorating conditions in the industry. We will need to see a recovery
in natural gas fundamentals before the North American situation improves.
The long term nature of contracts and operations in the international
market tends to make this segment of our business less volatile relative to
our North American operations. However, the international division is not
immune from the impact of falling oil and natural gas commodity prices or
deteriorating global economic conditions. We have recently noticed delays in
awarding new work that has been bid, as well as delays in requesting bids for
new projects. Further, national oil companies struggle with balancing their
internal cash needs to sustain their operations with the demands for cash from
their government owners to sustain social programs in their home countries.
Counteracting these negative factors will be the contributions from six new
technically-advanced drilling rigs we are building for the international
market. All of these new ADRs will be operational by the middle of 2009 and
will provide a meaningful addition to the contributions from our growing
international division.
While the current outlook for 2009 is filled with concern and pessimism,
we think there may be some interesting growth opportunities available to the
Company. Additionally, we will continue to expand the technical capabilities
of our drilling fleet through our new-build program. Our ADR(TM) drilling
technology will continue to broaden its reach around the world as we roll out
12 new ADRs in the United States, the Middle East and Africa. Once these are
fully deployed, we will have 60 ADRs in our global fleet, operating in Canada,
the United States, Australia, Oman and Gabon.
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
results at 2:00 p.m. MDT (4:00 p.m. EDT) on Monday, March 16, 2009. The
conference call number is 1-800-733-7560. A taped recording will be available
until March 23, 2009 by dialing 1-877-289-8525 and entering reservation number
21299214 followed by the number sign. 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
(Unaudited, in thousands of dollars)
December 31 December 31
2008 2007
------------ ------------
Assets
Current assets
Cash and cash equivalents $ 95,905 $ 1,940
Accounts receivable 360,486 301,721
Inventory and other 60,824 89,752
Future income taxes 1,040 2,367
-------------------------
518,255 395,780
Property and equipment 1,710,581 1,390,780
-------------------------
$ 2,228,836 $ 1,786,560
-------------------------
-------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 236,084 $ 177,595
Operating lines of credit 169,443 117,969
Current portion of stock-based compensation 3,538 8,056
Income taxes payable (10,850) 19,265
Dividends payable 13,016 12,623
-------------------------
411,231 335,508
Promissory note payable 20,000 -
Stock-based compensation 1,103 4,723
Future income taxes 245,351 202,123
-------------------------
677,685 542,354
-------------------------
Shareholders' Equity
Capital stock 169,485 167,599
Accumulated other comprehensive loss (1,583) (97,588)
Retained earnings 1,383,249 1,174,195
-------------------------
1,551,151 1,244,206
-------------------------
$ 2,228,836 $ 1,786,560
-------------------------
-------------------------
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited, in thousands of dollars, except per share data)
Three months ended Year ended
December 31 December 31
2008 2007 2008 2007
---- ---- ---- ----
Revenue
Oilfield services $ 460,435 $ 388,261 $ 1,705,579 $ 1,577,601
Expenses
Oilfield services 324,472 263,183 1,145,884 1,054,334
Depreciation 36,104 27,698 125,809 92,636
General and
administrative 22,616 16,524 62,573 55,089
Stock-based compensation (9,269) (15,111) 1,188 (7,383)
Interest
Promissory note 461 - 461 -
Other 1,143 1,154 6,545 5,249
---------------------------------------------------
375,527 293,448 1,342,460 1,199,925
---------------------------------------------------
Income before
income taxes 84,908 94,813 363,119 377,676
Income taxes
Current 2,002 12,070 74,887 142,846
Future 9,076 10,182 28,273 (14,935)
---------------------------------------------------
11,078 22,252 103,160 127,911
---------------------------------------------------
Net income 73,830 72,561 259,959 249,765
Retained earnings -
beginning of period 1,322,435 1,114,257 1,174,195 973,644
Dividends (13,016) (12,623) (50,905) (49,214)
---------------------------------------------------
Retained earnings -
end of period $ 1,383,249 $ 1,174,195 $ 1,383,249 $ 1,174,195
---------------------------------------------------
---------------------------------------------------
Net income per share
Basic $0.48 $0.48 $1.70 $1.64
Diluted $0.48 $0.47 $1.68 $1.62
---------------------------------------------------
---------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands of dollars)
Three months ended Year ended
December 31 December 31
2008 2007 2008 2007
---- ---- ---- ----
Cash provided
by (used in)
Operating activities
Net income for
the period $ 73,830 $ 72,561 $ 259,959 $ 249,765
Items not
affecting cash:
Depreciation 36,104 27,698 125,809 92,636
Stock-based
compensation, net
of cash paid (9,452) (25,136) (7,266) (31,418)
Future income taxes 9,076 10,182 28,273 (14,935)
---------------------------------------------------
Cash provided by
operating activities
before the change in
non-cash working
capital 109,558 85,305 406,775 296,048
Net change in non-cash
working capital 15,506 (7,301) (75,748) 13,099
---------------------------------------------------
125,064 78,004 331,027 309,147
---------------------------------------------------
Investing activities
Net purchase of property
and equipment (87,651) (48,017) (274,323) (271,984)
Net change in non-cash
working capital (8,304) (39,950) 35,285 (54,168)
---------------------------------------------------
(95,955) (87,967) (239,038) (326,152)
---------------------------------------------------
Financing activities
Net increase in
operating lines of
credit 54,629 5,605 51,474 47,980
Issue of capital stock 115 3,199 1,014 5,141
Dividends (13,016) (12,623) (50,905) (49,214)
Net change in non-cash
working capital 383 421 393 468
---------------------------------------------------
42,111 (3,398) 1,976 4,375
---------------------------------------------------
Increase (decrease) in
cash and cash
equivalents during
the period 71,220 (13,361) 93,965 (12,630)
Cash and cash
equivalents - beginning
of period 24,685 15,301 1,940 14,570
---------------------------------------------------
Cash and cash
equivalents - end of
period $ 95,905 $ 1,940 $ 95,905 $ 1,940
---------------------------------------------------
---------------------------------------------------
Supplemental information
Interest paid $ 1,879 $ 1,871 $ 7,464 $ 5,683
Income taxes paid $ 11,975 $ 29,296 $ 105,002 $ 170,364
---------------------------------------------------
---------------------------------------------------
%SEDAR: 00001999E
For further information: Glenn Dagenais, Executive Vice President Finance and Chief Financial Officer, (403) 262-1361 |