Ensign Energy Services Reports 2008 First Quarter Results2008-05-05
CALGARY, May 5 /CNW/ -
Overview
Ensign Energy Services Inc. (the "Company") recorded net income of
$81.8 million ($0.53 per common share) for the three months ended March 31,
2008 compared with net income of $102.3 million ($0.67 per common share) for
the three months ended March 31, 2007, a decline of 20 percent. EBITDA (as
defined below), was $171.1 million ($1.12 per common share) in the first
quarter of 2008 compared with $185.4 million ($1.22 per common share) in the
first quarter of 2007, a decline of eight percent.
The Company's financial results for the first quarter of 2008, although
down from the corresponding period of 2007 due to reduced levels of oilfield
services activity in Canada, have been impacted positively by the global
growth initiatives executed by the Company in 2007. The first quarter of 2008
is the first quarter to fully reflect contributions from the 13
fit-for-purpose Automated Drill Rigs ("ADRs") that were constructed and added
to the United States drilling rig fleet throughout 2007. The international
oilfield services segment also delivered improved financial results in the
first quarter of 2008, owing in part to the transfer of two ADRs from Canada
to Australia, and the construction of three drilling rigs for the Middle East
and Africa, all of which occurred in the latter half of 2007. Although the
Company's Canadian oilfield services division experienced operating activity
levels below that of the first quarter of last year, the financial results
achieved by this division in the first three months of 2008 were higher than
initially anticipated, and partially reflect the Company's efforts to maintain
a flexible cost structure that can adapt to fluctuating activity levels.
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FINANCIAL AND OPERATING HIGHLIGHTS
($ thousands, except per share data and operating information)
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Three months ended March 31
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2008 2007 % change
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Revenue 472,184 509,485 (7)
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EBITDA(1) 171,055 185,419 (8)
EBITDA per share(1)
Basic $ 1.12 $ 1.22 (8)
Diluted $ 1.11 $ 1.19 (7)
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Adjusted net income(2) 92,661 106,060 (13)
Adjusted net income per share(2)
Basic $ 0.61 $ 0.70 (13)
Diluted $ 0.60 $ 0.68 (12)
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Net income 81,796 102,321 (20)
Net income per share
Basic $ 0.53 $ 0.67 (21)
Diluted $ 0.53 $ 0.66 (20)
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Funds from operations(3) 124,241 117,607 6
Funds from operations per share(3)
Basic $ 0.81 $ 0.77 5
Diluted $ 0.80 $ 0.76 5
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Weighted average shares
- basic (000s) 153,054 152,357 -
Weighted average shares
- diluted (000s) 154,357 155,553 (1)
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Drilling
Number of marketed rigs
Canada
Conventional 157 163 (4)
Oil sands coring/coal bed methane 31 31 -
United States 76 66 15
International(4) 48 47 2
Operating days
Canada 8,532 9,175 (7)
United States 4,917 4,479 10
International 2,367 2,361 -
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Well Servicing
Number of marketed rigs/units
Canada 118 114 4
United States 14 11 27
Operating hours
Canada 44,971 59,231 (24)
United States 8,802 5,963 48
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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 plan. 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
Three months
ended March 31
-----------------------
($ thousands) 2008 2007 Change % change
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Revenue
Canada 260,450 312,614 (52,164) (17)
United States 139,315 136,747 2,568 2
International 72,419 60,124 12,295 20
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472,184 509,485 (37,301) (7)
Oilfield services expense 287,464 309,824 (22,360) (7)
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184,720 199,661 (14,941) (7)
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Gross margin 39.1% 39.2%
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Revenue reported by the Company's Canadian oilfield service division
declined 17 percent in the first quarter of 2008 compared with the first
quarter of 2007. Canadian drilling operating days and well servicing hours
declined 7 percent and 24 percent, respectively, for the three months ended
March 31, 2008 compared with the three months ended March 31, 2007. Although
operating activity levels recorded by the Canadian oilfield services segment
in the first three months of 2008 exceeded earlier expectations, demand for
oilfield services continued to reflect a level of uncertainty in the Canadian
market as operators weighed the impact of a strong Canadian dollar and the
sustainability of strengthening commodity prices on their project economics.
The fundamentals of the Canadian oilfield services market may have seen a
slight improvement late in the first quarter of 2008 with an improvement in
the price of natural gas; however, the majority of winter drilling programs
were bid and contracted near the end of 2007 when operators approve their
capital budgets for the upcoming year. The Canadian market at that point
continued to be characterized by an oversupply of equipment, a weakening
United States dollar, and concerns over natural gas inventory levels heading
into the winter heating season and the resultant impact on natural gas prices.
All of these issues contributed to the pricing pressure experienced by the
Company in contracting work for the first quarter of 2008.
In light of market conditions in Canada, the Company completed several
reorganizations in the first quarter of 2008 to further streamline its
operations. Effective January 1, 2008, the Company consolidated its Ensign
Drilling and Tri-City Drilling operating divisions into a newly formed Ensign
Canadian Drilling division. The Company further consolidated its
transportation assets into a newly formed Artisan Trucking division. The
Company believes these consolidations will provide further operational
efficiencies and customer focus throughout the remainder of 2008. In addition,
in order to maintain its drilling rig fleet in the most cost-effective manner,
the Company removed three drilling rigs from its Canadian marketed fleet of
equipment in the first quarter of 2008. The Company will retain the
serviceable components from these drilling rigs to support the remainder of
its drilling rig fleet.
The Company embarked on a significant expansion of its United States
equipment fleet in 2007, and the first quarter of 2008 is the first period to
fully reflect the contributions from this additional equipment. The expansion
added 13 ADRs and three well servicing rigs to the Rocky Mountain region of
the United States, which contributed to a 12 percent increase in drilling
operating activity and a 48 percent increase in well servicing hours in the
first quarter of 2008 compared with the first quarter of 2007. The Company
enjoys the competitive advantage of having an established operational base in
the United States, complete with training programs and facilities, and was
able to quickly and efficiently integrate this new equipment into its existing
operations. The Company's California operations delivered stable results on a
period-over-period basis as operations in that region continue to be supported
by strong market prices for crude oil. The growth and positive financial
results achieved by the Company's United States oilfield services segment are
somewhat muted by the foreign exchange rates in effect in the first quarter of
2008 compared with the first quarter of 2007. The average United States dollar
exchange rate at which the results are translated to Canadian dollars declined
14 percent in the first quarter of 2008 compared with the first quarter of
2007.
The Company's international operations are also reaping the rewards of
actions taken in 2007 to bolster the international drilling rig fleet in
fulfillment of crude oil driven demand. Revenue for the international oilfield
services segment totaled $72.4 million for the first quarter of 2008, an
increase of 20 percent over the first quarter of 2007. The financial results
for the first quarter of 2008 reflect contributions from two ADRs relocated
from Canada to Australia in the latter half of 2007, one drilling rig deployed
to the Middle East in the fourth quarter of 2007, as well as the completion of
two drilling rig construction projects in the Middle East and Africa in the
first quarter of 2008. Future growth for this important segment includes the
construction of six ADRs for the Middle East and Africa markets, the
operations of which are expected to commence in early 2009.
Gross margin for the three months ended March 31, 2008 was 39.1 percent
compared with 39.2 percent for the three months ended March 31, 2007. The
maintenance of strong operating margins on a period-over-period basis is the
result of improved margins in the United States and international oilfield
services divisions, offset by margin compression in the Canadian oilfield
services segment, which faced highly competitive conditions in the first
quarter of 2008. While Canada remains a core market for the Company, its
global diversification strategy, upon which it has been leveraging its
existing United States and international operational bases over the past
several years, has served to mitigate the general market weakness experienced
in Canada in the first quarter of 2008. The Company also implemented several
cost control and restructuring initiatives that are ensuring the Canadian
equipment fleet continues to generate strong returns, despite the pressures
facing its operations.
Depreciation
Three months
ended March 31
-----------------------
($ thousands) 2008 2007 Change % change
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Depreciation 28,253 23,307 4,946 21
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Depreciation expense totaled $28.3 million for the three months ended
March 31, 2008 compared with $23.3 million for the three months ended
March 31, 2007. Although consolidated operating activity levels in the first
quarter of 2008 declined slightly compared with the same period of 2007,
depreciation expense has increased due to the introduction of higher valued
equipment to the drilling rig fleet, primarily in the United States.
General and Administrative Expense
Three months
ended March 31
-----------------------
($ thousands) 2008 2007 Change % change
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General and administrative 13,665 14,242 (577) (4)
% of revenue 2.9% 2.8%
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General and administrative expense totaled $13.7 million for the
three months ended March 31, 2008, a decrease of four percent from general and
administrative expense of $14.2 million for the three months ended March 31,
2007. As a percentage of revenue, general and administrative expense was
2.9 percent in the first quarter of 2008 and is comparable to 2.8 percent
recorded in the first quarter of 2007.
Stock-Based Compensation Expense
Three months
ended March 31
-----------------------
($ thousands) 2008 2007 Change % change
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Stock-based compensation 16,716 5,752 10,964 191
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Stock-based compensation expense arises from the intrinsic value
accounting of the Company's stock option plan, whereby the liability
associated with stock-based compensation is adjusted on a quarterly basis for
the effect of granting and vesting of stock options, and changes in the
underlying price of the Company's common shares. For the three months ended
March 31, 2008, stock-based compensation expense is comprised of additional
granting and vesting of stock options of $1.0 million (net of forfeitures) and
the impact of an increase in the Company's share price of $15.7 million. The
closing price of the Company's common shares was $20.01 at March 31, 2008
compared with $15.25 at December 31, 2007.
Interest Expense
Three months
ended March 31
-----------------------
($ thousands) 2008 2007 Change % change
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Interest 1,937 943 994 105
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Interest expense is incurred on the Company's operating lines of credit.
The increase in interest expense on a period-over-period basis is due to the
increase in the average balance outstanding of the Company's operating lines
of credit. The average balance outstanding for the first quarter of 2008 was
$121.8 million compared with $89.6 million for the first quarter of 2007.
Income Taxes
Three months
ended March 31
-----------------------
($ thousands) 2008 2007 Change % change
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Current income tax 43,346 56,759 (13,413) (24)
Future income tax (993) (3,663) 2,670 (73)
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42,353 53,096 (10,743) (20)
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Effective income
tax rate (%) 34.1% 34.2%
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The effective income tax rate for the three months ended March 31, 2008
was 34.1 percent compared with 34.2 percent for the three months ended
March 31, 2007. The future income tax recovery in both the first quarter of
2008 and 2007 is primarily due to partnership timing differences. Taxable
income generated by Canadian partnerships was a significant component of the
future income tax liability as at December 31, 2007 and 2006. These future
income tax liabilities decline as taxable income generated by Canadian
partnerships declines, resulting in a recovery in future income tax.
Financial Position
The following chart outlines significant changes in the consolidated
balance sheet from December 31, 2007 to March 31, 2008:
($ thousands) Change Explanation
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Cash and cash equivalents 11,920 See consolidated statement of
cash flows.
Accounts receivable 80,211 Increase due to an increase in
operating activity levels in Canada
in the first quarter of 2008
compared with the fourth quarter
of 2007.
Inventory and other (38,226) Decrease due to the reclassification
of drill pipe inventory to property
and equipment as a result of a
change in the estimated useful life.
Property and equipment 81,503 Increase due to ongoing capital
expenditures and the
reclassification of drill pipe
inventory, offset by depreciation
and changes in foreign exchange
rates in the period.
Accounts payable 1,378 Increase due to an increase in
and accrued liabilities operating activity levels in Canada,
offset by a decrease in net capital
expenditure activity levels during
the first quarter of 2008 compared
with the fourth quarter of 2007.
Operating lines of credit 7,676 Increase due to the use of operating
lines of credit to finance ongoing
capital expenditures.
Stock-based compensation 15,003 Increase due to share price
increases and additional vesting of
stock options, net of stock option
exercises and forfeitures.
Income taxes payable 5,477 Increase due to the current income
tax provision for the period, net
of tax instalments.
Dividends payable 5 Increase due to a slight increase in
the number of outstanding common
shares in the first quarter of 2008
compared with the fourth quarter of
2007.
Future income taxes 1,507 Increase due to the effect of
foreign exchange movements on
foreign-denominated opening
balances, net of the current period
future income tax recovery.
Shareholders' equity 104,362 Increase due to the aggregate impact
of net income for the period,
increase in common shares due to
exercises of employee stock options,
impact of foreign exchange rate
fluctuations on net assets of
foreign self-sustaining
subsidiaries, net of dividends
declared in the period.
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Working Capital and Funds from Operations
Three months
ended March 31
-----------------------
($ thousands, except
per share data) 2008 2007 Change % change
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Funds from operations 124,241 117,607 6,634 6
Funds from operations
per share $0.81 $0.77 $0.04 5
Working capital(1) 89,516 60,272 29,244 49
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(1) Comparative figure as of December 31, 2007.
Funds from operations for the three months ended March 31, 2008 increased
six percent compared with the three months ended March 31, 2007. Although net
income has declined in the first quarter of 2008 compared with the first
quarter of 2007, funds from operations have increased on a period-over-period
basis, primarily due to the timing of cash flows associated with the Company's
stock-based compensation plan.
At March 31, 2008, the Company's working capital totaled $89.5 million
compared with working capital of $60.3 million at December 31, 2007, an
increase of $29.2 million. The increase is primarily attributable to increased
operating activity levels, and an associated increase in accounts receivable,
in the Company's Canadian oilfield services division in the first quarter of
2008 compared to activity levels near the end of the fourth quarter of 2007.
Operating activity levels in Canada typically peak in the first quarter of
2008 when winter conditions support heightened drilling activities. Offsetting
the increase in accounts receivable, working capital was impacted by the
reclassification of drill pipe inventory to property and equipment as a result
of a change in estimate of the useful lives of these assets. As of March 31,
2008, the Company continues to operate with sufficient liquidity to meet its
obligations as they come due.
Investing Activities
Three months
ended March 31
-----------------------
($ thousands) 2008 2007 Change % change
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Net purchase of
property and equipment (33,544) (93,608) 60,064 (64)
Net change in
non-cash working capital (3,249) (4,262) 1,013 (24)
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Cash used in
investing activities (36,793) (97,870) 61,077 (62)
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Net investing activities for the three months ended March 31, 2008
totalled $36.8 million compared with $97.9 million for the three months ended
March 31, 2007. Capital expenditures in the first quarter of 2008 relate to
ongoing drilling rig upgrade initiatives, as well as finalization of the 2007
international build programs, including the deployment of one drilling rig to
the Middle East and one drilling rig to north Africa in the first three months
of 2008. The Company also completed the construction of two well servicing
rigs for the Canadian market in the first quarter of 2008.
As at March 31, 2008, the Company was in the early stages of constructing
six drilling rigs destined for the international market. Capital expenditures
for the remainder of 2008 will reflect this construction activity.
Financing Activities
Three months
ended March 31
-----------------------
($ thousands) 2008 2007 Change % change
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Net increase in operating
lines of credit 7,676 39,244 (31,568) (80)
Issue of capital stock 300 826 (526) (64)
Dividends (12,628) (12,188) (440) 4
Net change in
non-cash working capital 5 33 (28) (85)
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Cash (used in) provided
by financing activities (4,647) 27,915 (32,562) (117)
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The Company increased the utilized balance of its operating lines of
credit by $7.7 million during the first quarter of 2008. The funds provided by
this increase were used primarily to finance the Company's international
capital expenditure programs.
Other financing activities during the first quarter of 2008 include the
receipt of $0.3 million on the exercise of employee stock options and the
declaration of dividends in the amount of $12.6 million. The increase in
dividends on a quarter-over-quarter basis is due to an increase in the
Company's quarterly dividend rate from $0.08 per common share in the first
quarter of 2007 to $0.0825 per common share in the first quarter of 2008. 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.
Outlook
The first quarter activity levels in Canada, while down from activity
levels of a year ago, exceeded the Company's original expectations.
Strengthening natural gas commodity prices, combined with record levels of
crude oil prices, resulted in improved demand for oilfield services in the
first quarter. First quarter activity levels would have been slightly higher
were it not for a shortage of skilled labor within the industry. While an
oversupply of equipment still exists, and it remains to be seen whether the
province of Alberta's latest tinkering with the royalty regime will improve
the economics for exploration and production companies, there is growing
optimism around a recovery in the Canadian oilfield services industry.
However, we are not yet out of the woods. The Company still expects
utilization and operating margins to be in line with seasonal and forecasted
lows through the second and third quarters of 2008, as demand for oilfield
services lags the recent improvement in natural gas commodity prices. The
Company is positioning itself for improved levels of demand and operating
conditions for the 2008/09 winter drilling season in Canada.
The first quarter activity levels in the Company's United States segment
met expectations. The addition of the 13 newly constructed ADRs had a positive
impact on both utilization and operating margins. Activity levels are expected
to continue to improve through the remainder of the year. Additionally, the
Company will continue to cultivate and develop expansion opportunities to
increase its size in this core market, a market Ensign has been in since 1994.
The three newly constructed drilling rigs in the Company's international
segment started to contribute in the first quarter of 2008, slightly behind
schedule due to construction and commissioning delays. These new rigs and
contracts on existing rigs should enable the international division to show
year over year growth in utilization and operating margins through the
remainder of the year. Construction activities have commenced on six new ADRs
for the international market. These new builds are destined for Africa and the
Middle East and will not begin to meaningfully contribute to the Company's
financial results until the beginning of the 2009 fiscal year.
While the recovery in the Canadian oilfield services industry may have
started with improved prices for natural gas, the Company believes that
activity levels and financial contributions from its Canadian operations will
be restrained through the remainder of the year. The continued weakness in
Canada will be partially offset by strong contributions from the Company's
expanded United States operations and improved contributions from the
Company's international operations. The advantages of Ensign's established
global strategy will continue to benefit Ensign shareholders.
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 first quarter
results at 2:00 p.m. MT (4:00 p.m. ET) on Monday, May 5, 2008. The conference
call number is 1-800-732-9307. A taped recording will be available until
May 12, 2008 by dialing 1-877-289-8525 and entering reservation number
21271299 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
As at March 31, 2008 and December 31, 2007
(Unaudited, in thousands of dollars)
March 31 December 31
2008 2007
---- ----
Assets
Current assets
Cash and cash equivalents $ 13,860 $ 1,940
Accounts receivable 381,932 301,721
Inventory and other 51,526 89,752
Future income taxes 6,586 2,367
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453,904 395,780
Property and equipment 1,472,283 1,390,780
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$ 1,926,187 $ 1,786,560
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---------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 178,973 $ 177,595
Operating lines of credit 125,645 117,969
Current portion of stock-based compensation 22,400 8,056
Income taxes payable 24,742 19,265
Dividends payable 12,628 12,623
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364,388 335,508
Stock-based compensation 5,382 4,723
Future income taxes 207,849 202,123
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577,619 542,354
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Shareholders' Equity
Capital stock (note 4) 168,081 167,599
Accumulated other comprehensive income (62,876) (97,588)
Retained earnings 1,243,363 1,174,195
---------------------------
1,348,568 1,244,206
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$ 1,926,187 $ 1,786,560
---------------------------
---------------------------
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For the three months ended March 31, 2008 and 2007
(Unaudited, in thousands of dollars, except per share data)
2008 2007
---- ----
Revenue
Oilfield services $ 472,184 $ 509,485
Expenses
Oilfield services 287,464 309,824
Depreciation 28,253 23,307
General and administrative 13,665 14,242
Stock-based compensation 16,716 5,752
Interest 1,937 943
---------------------------
348,035 354,068
---------------------------
Income before income taxes 124,149 155,417
---------------------------
Income taxes
Current 43,346 56,759
Future (993) (3,663)
---------------------------
42,353 53,096
---------------------------
Net income for the period 81,796 102,321
Retained earnings - beginning of period 1,174,195 973,644
Dividends (note 4) (12,628) (12,188)
---------------------------
Retained earnings - end of period $ 1,243,363 $ 1,063,777
---------------------------
---------------------------
Net income per share (note 4)
Basic $ 0.53 $ 0.67
Diluted $ 0.53 $ 0.66
---------------------------
---------------------------
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2008 and 2007
(Unaudited, in thousands of dollars)
2008 2007
---- ----
Cash provided by (used in)
Operating Activities
Net income for the period $ 81,796 $ 102,321
Items not affecting cash:
Depreciation 28,253 23,307
Stock-based compensation, net of cash paid 15,185 (4,358)
Future income taxes (993) (3,663)
---------------------------
Cash provided by operating activities before
the change in non-cash working capital 124,241 117,607
Net change in non-cash working capital
(note 6) (70,881) (47,717)
---------------------------
53,360 69,890
---------------------------
Investing Activities
Net purchase of property and equipment (33,544) (93,608)
Net change in non-cash working capital
(note 6) (3,249) (4,262)
---------------------------
(36,793) (97,870)
---------------------------
Financing Activities
Net increase in operating lines of credit 7,676 39,244
Issue of capital stock 300 826
Dividends (note 4) (12,628) (12,188)
Net change in non-cash working capital
(note 6) 5 33
---------------------------
(4,647) 27,915
---------------------------
Increase (decrease) in cash and
cash equivalents during the period 11,920 (65)
Cash and cash equivalents - beginning of
period 1,940 14,570
---------------------------
Cash and cash equivalents - end of period $ 13,860 $ 14,505
---------------------------
---------------------------
Supplemental information
Interest paid $ 1,983 $ 961
Income taxes paid $ 37,869 $ 57,668
---------------------------
---------------------------
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31, 2008 and 2007
(Unaudited, in thousands of dollars)
2008 2007
---- ----
Net income for the period $ 81,796 $ 102,321
Other comprehensive income
Foreign currency translation adjustment 34,712 (989)
---------------------------
Comprehensive income for the period $ 116,508 $ 101,332
---------------------------
---------------------------
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME
For the three months ended March 31, 2008 and 2007
(Unaudited, in thousands of dollars)
2008 2007
---- ----
Accumulated other comprehensive income
- beginning of period $ (97,588) $ (20,163)
Foreign currency translation adjustment 34,712 (989)
---------------------------
Accumulated other comprehensive income
- end of period $ (62,876) $ (21,152)
---------------------------
---------------------------
See accompanying notes to the consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2008 and 2007
(Unaudited, in thousands of dollars, except share and per share data)
The interim consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles
("Canadian GAAP"), and include the accounts of Ensign Energy Services
Inc. and its subsidiaries and partnerships (the "Company"), substantially
all of which are wholly-owned. The interim consolidated financial
statements have been prepared following the same accounting policies and
methods of computation as the consolidated financial statements for the
year ended December 31, 2007, except as noted below. The disclosures
provided below are incremental to those included with the annual
consolidated financial statements. These interim consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto in the Company's annual report for the
year ended December 31, 2007.
1. Adoption of new accounting standards
Capital disclosures
Effective January 1, 2008, the Company adopted the Canadian Institute
of Chartered Accountants ("CICA") Handbook Section 1535 "Capital
Disclosures". The new section requires an entity to disclose
information about its capital and how it is managed. The Company's
capital management strategy is outlined in note 7.
Financial instruments
Effective January 1, 2008, the Company adopted CICA Handbook Section
3862 "Financial Instruments - Disclosures" and Section 3863
"Financial Instruments - Presentation", which replace Section 3861
"Financial Instruments - Disclosure and Presentation". The new
sections revise and enhance financial instruments disclosure
requirements and place increased emphasis on disclosures about the
nature and extent of risks arising from financial instruments and how
the Company manages those risks.
The Company has designated its financial instruments as follows:
- Cash and cash equivalents are classified as "held for trading" and
any period change in fair value is recorded through net income;
- Accounts receivable are classified as "loans and receivables".
After their initial fair value measurement, they are measured at
amortized cost using the effective interest rate method. For the
Company, the measured amount generally corresponds to historical
cost; and
- Accounts payable and accrued liabilities, operating lines of
credit, and dividends payable are classified as "other financial
liabilities". After their initial fair value measurement, they are
measured at amortized cost using the effective interest rate
method. For the Company, the measured amount generally corresponds
to historical cost.
Inventories
Effective January 1, 2008, the Company adopted CICA Handbook Section
3031 "Inventories", which requires inventory to be valued on a
'first-in, first out' or weighted average basis. The new standard
also requires fixed and variable production overheads that are
incurred in converting materials into finished goods to be allocated
to the cost of inventory on a systematic basis. The adoption of this
standard did not have a material impact on the Company's consolidated
financial statements.
Recent accounting pronouncements
In January 2006, the CICA Accounting Standards Board ("AcSB") adopted
a strategic plan for the direction of accounting standards in Canada.
As part of that plan, the AcSB confirmed in February 2008 that
International Financial Reporting Standards ("IFRS") will replace
Canadian GAAP in 2011 for profit-oriented Canadian publicly
accountable enterprises. As the Company will be required to report
its results in accordance with IFRS starting in 2011, the Company is
assessing the potential impacts of this changeover and developing its
plan accordingly.
2. Change in accounting estimates
Effective January 1, 2008 the Company revised the estimated useful
life of drill pipe to 1,500 operating days, to be depreciated on a
unit-of-production basis with a 20% residual value. The change in
estimated useful life reflects the Company's recent experience with
respect to the period over which future benefits are derived from
drill pipe and the impact improved technologies have had on extending
the useful lives of these assets. As a result of this change in
accounting estimate, drill pipe of $39,000 previously classified as
inventory and other on the consolidated balance sheet has been
reclassified to property and equipment on the basis that its
estimated useful life of 1,500 operating days extends beyond the
current period.
Effective January 1, 2008 the Company revised the estimated useful
life of oil sands coring rigs from 3,650 operating days to 1,000
operating days. The oil sands coring rigs will continue to be
depreciated on a unit-of-production basis with a 20% residual value.
Further, the Company revised the estimated useful life of coiled
tubing units from 24,000 operating hours to five years, to be
depreciated on a straight-line basis.
These changes in accounting estimates have been applied on a
prospective basis and did not have a significant effect on
consolidated net income for the three months ended March 31, 2008. It
is impracticable to estimate the effect of these changes in
accounting estimates on future periods as such an estimate would
depend on a forecast of future operating activity levels.
3. Seasonality of operations
The Company's Canadian oilfield services operations are seasonal in
nature and are impacted by weather conditions that may hinder the
Company's ability to access locations or move heavy equipment. The
lowest activity levels are experienced during the second quarter of
the year when road weight restrictions are in place and access to
wellsites in Canada is reduced.
4. Capital Stock
Authorized
Unlimited common shares
Unlimited preferred shares, issuable in series
Outstanding
Number of
Common Shares Amount
---------------------------------------------------------------------
Balance at January 1, 2008 153,041,378 $ 167,599
Issued under employee stock option plan 26,000 482
----------------------------
Balance at March 31, 2008 153,067,378 $ 168,081
---------------------------------------------------------------------
Options
A summary of the status of the Company's stock option plan as of
March 31, 2008, and the changes during the three-month period then
ended, is presented below:
Weighted
Average
Number of Exercise
Options Price
---------------------------------------------------------------------
Outstanding at January 1, 2008 9,655,450 $ 16.55
Granted 55,000 13.79
Exercised for shares (26,000) (11.54)
Exercised for cash (260,350) (10.78)
Forfeited (49,900) (16.74)
---------------------------------------------------------------------
Outstanding at March 31, 2008 9,374,200 $ 16.70
---------------------------------------------------------------------
Exercisable at March 31, 2008 3,426,100 $ 13.15
---------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------------------------
Average Weighted Weighted
Options Vesting Average Options Average
Exercise Outstand- Remaining Exercise Exercis- Exercise
Price ing (in years) Price able Price
---------------------------------------------------------------------
$8.75 to $11.05 2,598,100 0.49 $ 10.42 1,917,100 $ 10.40
$13.50 to $18.85 2,119,100 1.40 14.04 1,024,700 13.66
$19.88 to $23.33 4,657,000 2.47 21.42 484,300 22.93
----------------------------------------------------
9,374,200 1.68 $ 16.70 3,426,100 $ 13.15
---------------------------------------------------------------------
Common share dividends
During the three months ended March 31, 2008, the Company declared
dividends of $12,628 (2007 - $12,188), being $0.0825 per common share
(2007 - $0.08 per common share).
Net income per share
Net income per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the
period. Diluted net income per share is calculated using the treasury
stock method, which assumes that all outstanding stock options are
exercised, if dilutive, and the assumed proceeds are used to purchase
the Company's common shares at the average market price during the
period.
The weighted average number of common shares outstanding for the
three months ended March 31, 2008 and 2007 are as follows:
2008 2007
---------------------------
Weighted average number of common shares
outstanding - basic 153,054,171 152,356,587
Weighted average number of common shares
outstanding - diluted 154,357,359 155,552,697
---------------------------
Stock options of 4,890,500 (2007 - 2,449,000) were excluded from the
calculation of diluted weighted average number of common shares
outstanding, as the options' exercise price was greater than the
average market price of the common shares for the period.
5. Segmented information
The Company operates in three geographic areas within one industry
segment. Oilfield services are provided in Canada, the United States
and internationally. The amounts related to each geographic area are
as follows:
Three months ended March 31, 2008
---------------------------------------------------------------------
United Inter-
Canada States national Total
---------------------------------------------------------------------
Revenue $260,450 $139,315 $72,419 $472,184
Property and
equipment, net $799,093 $357,441 $315,749 $1,472,283
Capital
expenditures,
net $11,715 $10,528 $11,300 $33,543
Depreciation $14,974 $6,656 $6,623 $28,253
---------------------------------------------------------------------
Three months ended March 31, 2007
---------------------------------------------------------------------
United Inter-
Canada States national Total
---------------------------------------------------------------------
Revenue $312,614 $136,747 $60,124 $509,485
Property and
equipment, net $804,795 $291,522 $268,224 $1,364,541
Capital
expenditures,
net $40,360 $40,669 $12,579 $93,608
Depreciation $13,346 $4,639 $5,322 $23,307
---------------------------------------------------------------------
6. Supplemental disclosure of cash flow information
The net change in non-cash working capital for the three months ended
March 31, 2008 and 2007 is determined as follows:
2008 2007
------------ -----------
Net change in non-cash working capital
Accounts receivable $ (80,211) $ (38,340)
Inventory and other (774) (2,074)
Accounts payable and accrued liabilities 1,378 (10,656)
Income taxes payable 5,477 (909)
Dividends payable 5 33
------------ -----------
$ (74,125) $ (51,946)
------------ -----------
Relating to
Operating activities $ (70,881) $ (47,717)
Investing activities (3,249) (4,262)
Financing activities 5 33
------------ -----------
$ (74,125) $ (51,946)
------------ -----------
------------ -----------
7. Capital management strategy
The Company's objectives when managing capital are to exercise
financial discipline, and to deliver positive returns and stable
dividend streams to its shareholders. The Company's capital
management strategy remained unchanged during the three months ended
March 31, 2008; however, the Company continues to be cognizant of the
challenges associated with operating in a cyclical, commodity-based
industry and may make future adjustments to its capital management
strategy in light of changing economic conditions.
The Company considers its capital structure to include shareholders'
equity and operating lines of credit. In order to maintain or adjust
its capital structure, the Company may from time to time adjust its
capital spending or dividend policy to manage the level of its
short-term borrowings, or may revise the terms of its operating lines
of credit to support future growth initiatives. As at March 31, 2008,
operating lines of credit totaled $125,645 and shareholders' equity
totaled $1,348,568.
The Company and several of its subsidiaries are subject to externally
imposed capital requirements associated with their operating lines of
credit, including financial covenants that incorporate shareholders'
equity and level of indebtedness. As at March 31, 2008, the Company
is in good standing with respect to these requirements.
8. Financial Instruments
Fair value
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities, operating lines of credit
and dividends payable approximate fair value due to the short-term
nature of these instruments.
Credit risk
Credit risk is the risk of financial loss to the Company if a
customer or counterparty to a financial instrument fails to meet its
contractual obligations. Credit risk arises principally from the
Company's accounts receivable balances owing from customers operating
primarily in the oil and natural gas industry in Canada, the United
States and internationally. The carrying amount of accounts
receivable represents the maximum credit exposure as at March 31,
2008.
The Company assesses the credit worthiness of its customers on an
ongoing basis and considers the credit risk on these amounts normal
for the industry. The Company establishes credit limits for each
customer based on external credit reports, internal analysis and
historical experience with the customer. Credit limits are approved
by senior management and are reviewed on a regular basis or when
changing economic circumstances dictate. The Company also monitors
the amount and age of accounts receivable balances on an ongoing
basis. At March 31, 2008 the Company's allowance for doubtful
accounts was $328, a decrease of $85 from the balance as at
December 31, 2007.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meets
its financial obligations as they are due. The Company manages
liquidity by forecasting cash flows on an annual basis and secures
sufficient credit facilities to meet financing requirements that
exceed anticipated internally generated funds. As at March 31, 2008,
the remaining contractual maturities of accounts payable and accrued
liabilities, operating lines of credit and dividends payable are less
than one year.
Market risk
Market risk is the risk that changes in market prices, such as
foreign exchange rates and interest rates, will affect the Company's
net income or the value of the financial statements.
Interest rate risk
------------------
The Company is exposed to interest rate risk with respect to its
operating lines of credit that bear interest at floating market
rates. For the three months ended March 31, 2008, if interest rates
applicable to the operating lines of credit had been 1% higher or
lower, with all other variables held constant, net income would have
been $803 higher or lower.
Foreign currency exchange rate risk
-----------------------------------
The Company operates internationally and is exposed to foreign
exchange risk arising from various currency exposures, primarily with
respect to the United States dollar and the Australian dollar. The
principal foreign exchange risk relates to the conversion of the
Company's self-sustaining subsidiaries from their functional
currencies to Canadian dollars. At March 31, 2008, had the Canadian
dollar weakened or strengthened by 1% against the United States
dollar, with all other variables held constant, the Company's other
comprehensive income would have been approximately $4,800 higher or
lower. At March 31, 2008, had the Canadian dollar weakened or
strengthened by 1% against the Australian dollar, with all other
variables held constant, the Company's other comprehensive income
would have been approximately $2,000 higher or lower.
%SEDAR: 00001999E
For further information: Glenn Dagenais, Executive Vice President Finance and Chief Financial Officer, (403) 262-1361 |