Ensign Energy Services Inc. - 2007 Third Quarter Earnings2007-11-05
CALGARY, Nov. 5 /CNW/ -
Overview
Ensign Energy Services Inc. (the "Company") reports net income of
$49.7 million ($0.33 per common share) for the third quarter of 2007, a
decrease of $53.1 million or 52 percent from net income of $102.9 million
($0.68 per common share) recorded in the third quarter of 2006. EBITDA (as
defined below) for the three months ended September 30, 2007 totaled
$103.5 million ($0.68 per common share) compared with EBITDA of $159.5 million
($1.05 per common share) in the three months ended September 30, 2006, a
decline of 35 percent.
Net income of $177.2 million ($1.16 per common share) for the nine months
ended September 30, 2007 compares with net income of $277.3 million ($1.83 per
common share) recorded in the nine months ended September 30, 2006, a decrease
of 36 percent. EBITDA for the nine months ended September 30, 2007 totaled
$359.6 million ($2.36 per common share), a decrease of 24 percent from EBITDA
of $471.1 million ($3.11 per common share) in the first three quarters of
2006.
The decline in financial results in the third quarter of 2007 and the
nine months ended September 30, 2007 is primarily the result of declining
contributions from the Company's Canadian oilfield services division. Weaker
demand for oilfield services throughout the Western Canada Sedimentary Basin
("WCSB"), combined with an over-supply of equipment, negatively impacted
equipment utilization and operating margins in 2007 compared to the record
levels of 2006. The Company's expansion of its United States operations and
the stable returns generated by its international oilfield services division
partially mitigated the challenging operating environment experienced in
Canada in the first nine months of 2007.
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FINANCIAL AND OPERATING HIGHLIGHTS
($ thousands, except per share data and operating information)
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Three months ended Nine months ended
September 30 September 30
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2007 2006 % change 2007 2006 % change
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Revenue 383,316 459,778 (17) 1,189,340 1,385,322 (14)
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EBITDA(1) 103,519 159,464 (35) 359,624 471,140 (24)
EBITDA per
share(1)
Basic $0.68 $1.05 (35) $2.36 $3.11 (24)
Diluted $0.67 $1.02 (34) $2.31 $3.00 (23)
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Adjusted net
income(2) 50,157 88,279 (43) 182,227 271,197 (33)
Adjusted net
income per
share(2)
Basic $0.33 $0.58 (43) $1.20 $1.79 (33)
Diluted $0.32 $0.56 (43) $1.17 $1.73 (32)
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Net income 49,748 102,850 (52) 177,204 277,346 (36)
Net income
per share
Basic $0.33 $0.68 (51) $1.16 $1.83 (37)
Diluted $0.32 $0.66 (52) $1.14 $1.77 (36)
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Funds from
operations(3) 53,257 99,653 (47) 210,743 310,594 (32)
Funds from
operations
per share(3)
Basic $0.35 $0.66 (47) $1.38 $2.05 (33)
Diluted $0.34 $0.64 (47) $1.35 $1.98 (32)
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Weighted
average
shares -
basic (000s) 152,516 151,786 - 152,456 151,708 -
Weighted
average
shares -
diluted
(000s) 155,513 156,800 (1) 155,534 156,913 (1)
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Drilling
Number of
marketed
rigs
Canada
Conven-
tional 162 162 - 162 162 -
Oil sands
coring/
coal-bed
methane 31 21 48 31 21 48
United States 74 65 14 74 65 14
Interna-
tional(4) 49 47 4 49 47 4
Operating days
Canada 5,760 8,861 (35) 18,108 25,896 (30)
United
States 5,118 4,735 8 14,271 13,714 4
Interna-
tional 2,274 2,138 6 6,929 6,698 3
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Well Servicing
Number of
marketed
rigs/units
Canada 115 116 (1) 115 116 (1)
United
States 12 8 50 12 8 50
Operating
hours
Canada 39,674 49,378 (20) 129,899 158,942 (18)
United
States 7,035 5,505 28 19,421 16,214 20
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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 Nine months ended
September 30 September 30
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($ thousands) 2007 2006 % change 2007 2006 % change
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Revenue
Canada 169,726 271,124 (37) 592,884 843,061 (30)
United
States 149,108 132,988 12 416,739 377,563 10
Interna-
tional 64,482 55,666 16 179,717 164,698 9
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383,316 459,778 (17) 1,189,340 1,385,322 (14)
Oilfield
services
expense 268,270 288,678 (7) 791,151 877,231 (10)
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115,046 171,100 (33) 398,189 508,091 (22)
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Gross margin 30.0% 37.2% 33.5% 36.7%
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The Company's Canadian oilfield services division faced an increasingly
competitive market in the first nine months of 2007. Although the Company
maintains a strong presence in key crude oil regions of the WCSB and offers a
diverse range of services, the majority of exploration and development
activity in western Canada remains focused on natural gas. Lower natural gas
commodity prices persisted throughout the first three quarters of 2007,
resulting in a decrease in drilling and well servicing demand. The reduction
in the number of natural gas wells being drilled in Western Canada comes at a
time of a significant increase in industry-wide capacity, compounding the
impact to utilization and pricing. These factors contributed to the decline in
revenue generated by the Company's Canadian oilfield services division, which
decreased 37 percent and 30 percent in the third quarter of 2007 and nine-
month period ended September 30, 2007, respectively, compared with the
corresponding periods of 2006.
The Company's gradual expansion of its United States operations has
successfully diversified its operations geographically, providing growth in
revenue and operating activity levels during periods of declining demand in
Canada. On a year-to-date basis, revenue generated by the Company's United
States oilfield services division now accounts for 35 percent of consolidated
revenue compared with 27 percent one year ago. Revenue generated by the United
States oilfield services division in the third quarter of 2007 totaled
$149.1 million compared with $133.0 million in the third quarter of 2006, an
increase of 12 percent. For the nine months ended September 30, 2007, revenue
of $416.7 million compares with revenue of $377.6 million for the nine months
ended September 30, 2006, an increase of 10 percent. The improved financial
contributions are largely the result of the successful deployment of the
Company's proprietary Automated Drill Rig ("ADR(TM)") technology to that
market. During the first three quarters of 2007, a total of 11 ADRs were added
to the equipment fleet in the United States, with an additional two ADRs
scheduled to commence operations in the fourth quarter of 2007.
Revenue generated by the Company's international oilfield services
division totaled $64.5 million for the three months ended September 30, 2007
compared with $55.7 million for the three months ended September 30, 2006, an
increase of 16 percent. For the nine months ended September 30, 2007, revenue
increased nine percent to $179.7 million compared with revenue of $164.7
million recorded in the nine months ended September 30, 2006. The Company
continuously assesses growth opportunities around the globe and relocates
equipment accordingly. During 2007, the Company relocated two drilling rigs
from Canada to Australia where they will operate under long-term contracts.
During the third quarter of 2007, one of these drilling rigs commenced
operations while the second will be introduced into service in the fourth
quarter of 2007. The Company is nearing completion of the construction of two
drilling rigs for operations in the Middle East, with delivery anticipated in
the fourth quarter of 2007. The upgrade and reactivation of one drilling rig
in Africa is in progress and is expected to be complete in the first quarter
of 2008.
Oilfield services expense totaled $268.3 million in the three months
ended September 30, 2007, a decline of seven percent compared with the third
quarter of 2006. For the nine months ended September 30, 2007, oilfield
services expense declined 10 percent to $791.2 million compared with the nine
months ended September 30, 2006. The decline in oilfield services expense is
due to a decline in consolidated operating activity levels on a period-over-
period basis, partially offset by an increase in labour and material costs.
Gross margin was 30.0 percent for third quarter of 2007 compared with
37.2 percent for the third quarter of 2006. On a year-to-date basis, gross
margin was 33.5 percent in 2007 compared with 36.7 percent in 2006. The
weakening Canadian market and the resultant lower pricing is the largest
factor contributing to the decline in gross margin on a period-over-period
basis.
Depreciation
Three months ended Nine months ended
September 30 September 30
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($ thousands) 2007 2006 % change 2007 2006 % change
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Depreciation 22,028 22,309 (1) 64,938 62,317 4
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Depreciation expense totaled $22.0 million for the third quarter of 2007
compared with $22.3 million for the third quarter of 2006. For the nine months
ended September 30, 2007, depreciation expense totaled $64.9 million compared
with $62.3 million for the nine months ended September 30, 2006. Depreciation
expense is calculated on a unit-of-production basis for rigs and related
equipment. Throughout the first nine months of 2007, a higher cost base of
equipment in operation offset the impact of lower equipment utilization rates
on depreciation expense. Depreciation expense per operating day increased in
2007 as the Company introduced newly constructed and higher valued assets to
its equipment fleet.
General and Administrative Expense
Three months ended Nine months ended
September 30 September 30
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($ thousands) 2007 2006 % change 2007 2006 % change
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General and
administrative 11,527 11,636 (1) 38,565 36,951 4
% of revenue 3.0% 2.5% 3.2% 2.7%
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As a percentage of revenue, general and administrative expense for the
third quarter of 2007 was 3.0 percent compared with 2.5 percent for the third
quarter of 2006. On a year-to-date basis, general and administrative expense
as a percentage of revenue is 3.2 percent in 2007 compared with 2.7 percent in
2006. Costs contributing to general and administrative expense are relatively
fixed and, as a result, general and administrative expense as a percentage of
revenue will increase during periods of declining revenue levels. On a gross
dollar basis, general and administrative expense for both the quarter and nine
months ended September 30, 2007 is comparable to the prior periods.
Stock-Based Compensation Expense
Three months ended Nine months ended
September 30 September 30
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($ thousands) 2007 2006 % change 2007 2006 % change
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Stock-based
compensation 630 (22,417) (103) 7,728 (9,460) (182)
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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 vesting of stock options and changes in the underlying price of
the Company's common shares. Stock-based compensation expense for the third
quarter of 2007 is comprised of $1.7 million for additional vesting of stock
options (net of forfeitures), net of a $1.1 million decrease associated with a
decline in the price of the Company's common shares. For the nine-month period
ended September 30, 2007, stock-based compensation expense is comprised of
$5.3 million for additional granting and vesting of stock options, $4.3
million related to the increase in the price of the Company's common shares,
and a recovery of $1.9 million due to forfeitures during the period. The price
of the Company's common shares was $18.78 at September 30, 2007 compared with
$19.00 at June 30, 2007 and $18.39 at December 31, 2006.
The significant recovery of stock-based compensation expense in the three
months and nine months ended September 30, 2006 is primarily the result of
decreases in the price of the Company's common shares during these periods.
Share price declines of $4.39 and $4.91 were experienced in the third quarter
of 2006 and in the nine months ended September 30, 2006, respectively.
Interest Expense
Three months ended Nine months ended
September 30 September 30
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($ thousands) 2007 2006 % change 2007 2006 % change
-------------------------------------------------------------------------
Interest 1,190 1,213 (2) 4,095 3,950 4
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Interest expense is incurred on the Company's operating lines of credit.
Interest expense totaled $1.2 million for the third quarter of 2007 and $4.1
million for the nine months ended September 30, 2007, both of which are
comparable to the corresponding periods of 2006.
Income Taxes
Three months ended Nine months ended
September 30 September 30
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($ thousands) 2007 2006 % change 2007 2006 % change
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Current income
tax 48,944 53,635 (9) 130,776 125,200 4
Future income
tax (19,021) 1,874 (1,115) (25,117) 11,787 (313)
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29,923 55,509 (46) 105,659 136,987 (23)
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Effective income
tax rate (%) 37.6% 35.1% 37.4% 33.1%
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The effective income tax rate for the third quarter of 2007 was
37.6 percent compared with 35.1 percent in the third quarter of 2006. For the
nine months ended September 30, 2007, the effective income tax rate was
37.4 percent compared with 33.1 percent in the nine months ended September 30,
2006. The increase in the Company's effective income tax rate on a year-over-
year basis is partially due to the recognition of substantively enacted income
tax rate reductions in Canada in the second quarter of 2006. During the second
quarter of 2006, a one-time reduction in the Company's opening future income
tax liability of $11.5 million was recognized.
Current income tax expense for the nine months ended September 30, 2007
includes $4.0 million related to Omani tax assessments. As previously
disclosed, the Company's Oman operating entity was appealing income tax
assessments received for the 1994, 1995 and 1996 financial years. The Company
was appealing these assessments; however, the Company's appeal was dismissed
during the second quarter of 2007. Excluding the impact of the Omani tax
assessments, the effective income tax rate would have been 35.9 percent for
the nine months ended September 30, 2007.
The future income tax recovery in 2007 is due to partnership timing
differences and an income tax rate reduction in Canada. Taxable income
generated by Canadian partnerships was a significant component of the future
income tax liability as at December 31, 2006. This balance declined as of
September 30, 2007 due to the decline in income generated by Canadian
partnerships. Also, a further income tax rate reduction in Canada of
0.5 percent was enacted in the second quarter of 2007. The application of this
rate reduction on opening future income tax balances resulted in a one-time
reduction in the Company's opening future income tax liability of
$2.2 million.
Financial Position
The following chart outlines significant changes in the consolidated
balance sheets from December 31, 2006 to September 30, 2007:
($ thousands) Change Explanation
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Cash and cash 731 See consolidated statement of cash flows.
equivalents
Accounts receivable (82,681) Decrease due to the reduction in
operating activity within the Canadian
oilfield services division.
Inventory and other 7,726 Increase due to additions to drill
pipe inventory.
Property and 87,379 Increase due to ongoing capital
equipment expenditures and equipment under
construction, offset by depreciation
for the period.
Accounts payable (58,481) Decrease due to the reduction in operating
and accrued activity within the Canadian oilfield
liabilities services division.
Operating lines 42,375 Increase in utilization of the available
of credit United States and Australian-based
operating lines of credit, net of
repayments in Canada during the period
Stock-based (9,412) Decrease due to stock option exercises,
compensation net of the increase associated with
additional vesting and share price
increases.
Income taxes (10,292) Decrease due to income tax payments, net
payable of the current income tax provision
for the period.
Dividends payable 47 Increase due to a slight increase in the
number of outstanding common shares
compared with the fourth quarter of 2006.
Future income (27,773) Decrease due to the future income tax
taxes recovery in the period and an income
tax rate reduction in Canada.
Shareholders' 76,691 Increase due to the aggregate impact of
equity net income for the period, increase in
capital stock 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 Nine months ended
September 30 September 30
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($ thousands) 2007 2006 % change 2007 2006 % change
-------------------------------------------------------------------------
Funds from
operations 53,257 99,653 (47) 210,743 310,594 (32)
Funds from
operations per
share $0.35 $0.66 (47) $1.38 $2.05 (33)
Working
capital(1) 16,558 63,162 (74) 16,558 63,162 (74)
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(1) Comparative figures as of December 31, 2006.
During the three months ended September 30, 2007, the Company generated
funds from operations of $53.3 million ($0.35 per common share) compared with
funds from operations of $99.7 million ($0.66 per common share) for the three
months ended September 30, 2006, a decline of 47 percent. Funds from
operations totaled $210.7 million ($1.38 per common share) in the first nine
months of 2007, a decline of 32 percent from funds from operations of $310.6
million ($2.05 per common share) generated in the nine months ended September
30, 2006. The decline from the record levels of funds from operations
generated in 2006 is predominantly due to a reduction in operating activity
and compressed margins in the Company's Canadian oilfield services division on
a period-over-period basis. Compared to the corresponding periods of 2006,
reduced oilfield services activity in Canada in both the third quarter of 2007
and the nine months ended September 30, 2007 was partially offset by increased
contributions from the Company's United States oilfield services division.
The Company had a positive working capital position of $16.6 million at
September 30, 2007 compared with working capital of $63.2 million at December
31, 2006. The decline in working capital is largely due to an increase in the
utilized balance of the Company's United States and international operating
lines of credit, which are supporting capital expenditure initiatives in those
segments.
As of September 30, 2007, the Company continues to operate with no long-
term debt. The Company's strong balance sheet positions the Company to weather
the downturn in the Canadian market, as well as provides the financial
strength to pursue potential growth opportunities as they may arise.
Investing Activities
Three months ended Nine months ended
September 30 September 30
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($ thousands) 2007 2006 % change 2007 2006 % change
-------------------------------------------------------------------------
Net purchase of
property and
equipment (62,850) (74,716) (16) (223,967) (239,821) (7)
Net change in
non-cash
working
capital 12,183 (13,296) (192) (14,218) (14,342) (1)
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Cash used in
investing
activities (50,667) (88,012) (42) (238,185) (254,163) (6)
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A substantial portion of the Company's 2007 capital expenditure program
was directed toward expansion of its equipment fleet in the United States.
During the nine months ended September 30, 2007, construction of 11 ADRs was
completed within the United States, including three within the third quarter
of 2007. An additional two ADRs were completed subsequent to September 30,
2007, with one being introduced into service in October 2007 and the second in
early November 2007. The delivery of these additional ADRs in the fourth
quarter of 2007 completes the Company's 2007 13-ADR(TM)-build program.
Capital expenditure activity within Canada in the third quarter of 2007
included the addition of two newly constructed slant well servicing rigs.
Other capital expenditures completed by the Company in the first nine months
of 2007 include the addition of one triple drilling rig to its fleet of
equipment in southeastern Saskatchewan in the second quarter of 2007, a double
drilling rig slated for operations in northeastern British Columbia and nine
oilsands coring rigs in the first quarter of 2007. The Canadian oilfield
services division also recently completed the construction of a new ADR(TM),
which will commence operations in the fourth quarter of 2007 under a long-term
contract in northern Alberta. Within the international arena, the Company is
currently refurbishing two drilling rigs for operations in the Middle East and
reactivating one previously idle drilling rig for operations in Libya.
Other equipment movements during 2007 include the transfer of two
drilling rigs from the Canadian fleet of equipment to Australia, where they
will both operate under long-term contracts. One well servicing rig was also
transferred from Canada to the Rocky Mountain region of the United States.
These movements demonstrate the Company's ability to leverage its established
operational bases around the globe and to relocate idle equipment to areas of
higher demand.
Financing Activities
Three months ended Nine months ended
September 30 September 30
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($ thousands) 2007 2006 % change 2007 2006 % change
-------------------------------------------------------------------------
Net increase
(decrease) in
operating
lines of
credit 48,243 10,826 346 42,375 (71,120) (160)
Issue of
capital stock 276 422 (35) 1,942 2,933 (34)
Dividends (12,202) (11,386) 7 (36,591) (30,350) 21
Net change in
non-cash
working capital 1 5 (80) 47 3,820 (99)
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Cash provided
by (used in)
financing
activities 36,318 (133) (27,407) 7,773 (94,717) (108)
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The Company increased the utilized balance of its operating lines of
credit during both the three months and nine months ended September 30, 2007.
Net repayments made by the Company's Canadian oilfield services division were
offset by increases in the United States and Australian-based operating lines
of credit. During the first quarter of 2007, the Company amended the terms of
its United States-based operating line of credit and increased the amount
available to US$50.0 million. The increased credit facility is being used to
finance the Company's new build projects and support its expanded operations
in the United States. The Company also temporarily increased its available
Australia-based facility by AUD$22.2 million in the third quarter of 2007 to
finance the three additional drilling rigs being prepared for long-term
contracts in the international market.
Other financing activities during the third quarter of 2007 include the
receipt of $0.3 million on the exercise of employee stock options and the
payment of dividends in the amount of $12.2 million. Dividends were declared
at a quarterly dividend rate of $0.08 per common share for the three months
ended September 30, 2007, an increase of seven percent over the third quarter
of 2006. For the nine months ended September 30, 2007, cash received on
employee stock option exercises totaled $1.9 million and dividends totaled
$36.6 million. During the first nine months of 2007, the Company declared
year- to-date dividends totaling $0.24 per common share compared with $0.20
during the first nine months of 2006. 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 ("ITA").
The Company also announces an increase of three percent in its regular
quarterly dividend to $0.0825 per common share. The Company has increased the
cumulative amount of dividends declared in each fiscal year since the Company
began paying a dividend in September 1995. The Board of Directors of the
Company has declared the dividend of $0.0825 to be payable on January 2, 2008
to all Common Shareholders of record as of December 20, 2007. The dividend
payment is pursuant to the quarterly dividend policy adopted by the Company.
Pursuant to subsection 89(14) of the ITA, the dividend being paid is being
designated as an eligible dividend, as defined in subsection 89(1) of the ITA.
Outlook
The third quarter financial results reflect the deteriorating market
conditions in Canada, the growing positive impact of the Company's United
States operations and continued steady improvement of the Company's
international operations.
The fundamentals around natural gas remain weak as North American storage
levels are at peak levels heading into the winter heating season. The Canadian
market has been especially hard hit as operators have experienced reduced
economic returns due to relatively low commodity price levels for natural gas
and a stronger Canadian dollar. Such reduced economics have resulted in
reduced levels of demand for oilfield services at a time when the oilfield
services industry's fleet of equipment has reached record levels. There is
currently too much equipment chasing a reduced number of jobs. Accordingly,
the deterioration of day rates experienced in the latter part of the third
quarter has continued into the fourth quarter. As if basic supply and demand
fundamentals were not enough, the government of the Province of Alberta chose
to conduct a royalty review thereby adding another layer of uncertainty onto
an already uncertain market. The government of Alberta announced proposed
changes to the royalty rate structure on October 25, 2007. These proposed
changes have been deemed by some to be a reasonable compromise between the
status quo and the proposals of a royalty review panel commissioned by the
government of Alberta. Only time will tell the ultimate impact of the royalty
changes on each sub-sector of the oil and natural gas industry within Alberta.
Unfortunately for the Company, the damage in the near-term has been done as
many customers have reduced planned expenditures in Alberta for the upcoming
winter drilling season due to reduced economics and uncertainty around the
impact of the new royalty regime. Accordingly, utilization and margins will be
negatively impacted until such time as natural gas commodity prices improve to
a level that is attractive for more investment by the Company's customers in
western Canada, particularly those affected by Alberta's new royalty
environment. The challenges facing the Company and the Canadian industry are
summarized in the Canadian Association of Oilwell Drilling Contractors
forecast for 13,735 wells to be drilled in western Canada in 2008, for an
average drilling rig utilization of 35 percent for the year, numbers not seen
since 2002 when the drilling rig fleet was substantially smaller.
Partially offsetting the expected weakness in the Canadian market is the
Company's growing presence in the United States and international markets. The
United States operations are subject to similar natural gas fundamentals that
are challenging the Canadian market, but to this point operators appear to be
committed to continuing with the unconventional plays that underscore the
increased level of activity in the Rocky Mountain region. However, another
mild winter and high season-ending natural gas storage levels could result in
reduced levels of demand in the United States in the second half of 2008 if
operators choose to adjust their programs following the winter season. The
California market, which is largely crude oil based, is expected to continue
at a steady level of activity. The international market segment is also
primarily driven by crude oil pricing levels, which are currently at
historical highs. Further, the international market is experiencing increased
demand for oilfield services in support of increased development of the liquid
natural gas (LNG) sector. Accordingly, the Company continues to experience
continued improvements in its international operations.
The Company continues to face many challenges in its operations, mainly
within Canada at this time. The Company has the people, the experience, the
quality equipment fleet (including the advanced technology of our growing
ADR(TM) drilling fleet), the geographic diversification and the financial
strength and discipline that give it an advantage over many of its
competitors. The next year will be full of challenges and opportunities, which
the Company is well positioned to meet head on.
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 third quarter
results at 2:00 p.m. MST (4:00 p.m. EST) on Monday, November 5, 2007. The
conference call number is 1-800-733-7571. A taped recording will be available
until November 12, 2007 by dialing 1-877-289-8525 and entering reservation
number 21252523 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 September 30, 2007 and December 31, 2006
(Unaudited, in thousands of dollars)
September 30 December 31
2007 2006
---- ----
Assets
Current assets
Cash and cash equivalents 15,301 14,570
Accounts receivable 282,394 365,075
Inventory and other 84,954 77,228
Future income taxes 10,418 11,010
------------------------------
393,067 467,883
Property and equipment 1,381,645 1,294,266
------------------------------
1,774,712 1,762,149
------------------------------
------------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 183,495 241,976
Operating lines of credit 112,364 69,989
Current portion of stock-based
compensation 31,957 33,818
Income taxes payable 36,491 46,783
Dividends payable 12,202 12,155
------------------------------
376,509 404,721
Stock-based compensation 10,448 17,999
Future income taxes 203,459 231,824
------------------------------
590,416 654,544
------------------------------
Shareholders' Equity
Capital stock (note 2) 159,910 154,838
Accumulated other comprehensive income
(note 1) (89,871) (20,163)
Retained earnings 1,114,257 972,930
------------------------------
Contingencies and commitments (note 5) 1,184,296 1,107,605
------------------------------
1,774,712 1,762,149
------------------------------
------------------------------
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited - in thousands of dollars, except per share data)
Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
---- ---- ---- ----
Revenue
Oilfield services 383,316 459,778 1,189,340 1,385,322
Expenses
Oilfield services 268,270 288,678 791,151 877,231
Depreciation 22,028 22,309 64,938 62,317
General and
administrative 11,527 11,636 38,565 36,951
Stock-based
compensation 630 (22,417) 7,728 (9,460)
Interest 1,190 1,213 4,095 3,950
-------------------------------------------------
303,645 301,419 906,477 970,989
-------------------------------------------------
Income before income
taxes 79,671 158,359 282,863 414,333
Income taxes
Current (note 5) 48,944 53,635 130,776 125,200
Future (19,021) 1,874 (25,117) 11,787
-------------------------------------------------
29,923 55,509 105,659 136,987
-------------------------------------------------
Net income for the
period 49,748 102,850 177,204 277,346
Retained earnings -
beginning of period,
as originally
reported 1,076,711 829,683 972,930 674,151
Transition adjustment
on adoption of
financial instruments
standard (note 1) - - 714 -
-------------------------------------------------
Retained earnings -
beginning of period,
as restated 1,076,711 829,683 973,644 674,151
Dividends (note 2) (12,202) (11,386) (36,591) (30,350)
-------------------------------------------------
Retained earnings -
end of period 1,114,257 921,147 1,114,257 921,147
-------------------------------------------------
-------------------------------------------------
Net income per share
(note 2)
Basic $ 0.33 $ 0.68 $ 1.16 $1.83
Diluted $ 0.32 $ 0.66 $ 1.14 $1.77
-------------------------------------------------
-------------------------------------------------
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands of dollars)
Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
---- ---- ---- ----
Cash provided by
(used in)
Operating activities
Net income for the
period 49,748 102,850 177,204 277,346
Items not affecting
cash:
Depreciation 22,028 22,309 64,938 62,317
Stock-based
compensation, net
of cash paid 502 (27,380) (6,282) (40,856)
Future income taxes (19,021) 1,874 (25,117) 11,787
-------------------------------------------------
Cash provided by
operating activities
before the change in
non-cash working
capital 53,257 99,653 210,743 310,594
Net change in non-cash
working capital
(note 4) (33,538) (13,593) 20,400 27,233
-------------------------------------------------
19,719 86,060 231,143 337,827
-------------------------------------------------
Investing activities
Net purchase of
property and equipment (62,850) (74,716) (223,967) (239,821)
Net change in non-cash
working capital
(note 4) 12,183 (13,296) (14,218) (14,342)
-------------------------------------------------
(50,667) (88,012) (238,185) (254,163)
-------------------------------------------------
Financing activities
Net increase
(decrease) in
operating lines of
credit 48,243 10,826 42,375 (71,120)
Issue of capital
stock 276 422 1,942 2,933
Dividends (note 2) (12,202) (11,386) (36,591) (30,350)
Net change in non-cash
working capital
(note 4) 1 5 47 3,820
-------------------------------------------------
36,318 (133) 7,773 (94,717)
-------------------------------------------------
Increase (decrease)
in cash and cash
equivalents during
the period 5,370 (2,085) 731 (11,053)
Cash and cash
equivalents -
beginning of period 9,931 23,025 14,570 31,993
-------------------------------------------------
Cash and cash
equivalents - end of
period 15,301 20,940 15,301 20,940
-------------------------------------------------
-------------------------------------------------
Supplemental information
Interest paid 1,485 1,191 3,812 4,289
Income taxes paid 37,145 26,595 141,068 86,880
-------------------------------------------------
-------------------------------------------------
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited - in thousands of dollars)
Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
---- ---- ---- ----
Net income for the
period 49,748 102,850 177,204 277,346
Other comprehensive
income
Foreign currency
translation
adjustment (31,357) 1,816 (69,708) (16,749)
-------------------------------------------------
Comprehensive income 18,391 104,666 107,496 260,597
-------------------------------------------------
-------------------------------------------------
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME
(Unaudited - in thousands of dollars)
Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
---- ---- ---- ----
Accumulated other
comprehensive
income - beginning
of period (58,514) (57,786) (20,163) (39,221)
Foreign currency
translation
adjustment (31,357) 1,816 (69,708) (16,749)
-------------------------------------------------
Accumulated other
comprehensive
income - end of
period (89,871) (55,970) (89,871) (55,970)
-------------------------------------------------
-------------------------------------------------
See accompanying notes to the consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2007 and 2006
(Unaudited - in thousands of dollars, except per share data)
The interim consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles,
and include the accounts of Ensign Energy Services Inc. and all of
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, 2006, 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, 2006.
1. Change in accounting policies
Effective January 1, 2007, the Company adopted the Canadian Institute
of Chartered Accountants Handbook Section 1530 "Comprehensive
Income", Section 3251 "Equity" and Section 3855 "Financial
Instruments - Recognition and Measurement". As required by the new
standards, prior periods have not been restated except to reclassify
the cumulative translation adjustment balance.
Comprehensive income
The new standards introduce comprehensive income, which consists of
net income and other comprehensive income ("OCI"). For the Company,
OCI is comprised entirely of the movement in the cumulative
translation adjustment balance. The Company's consolidated financial
statements now include Consolidated Statements of Comprehensive
Income, which outline the components of comprehensive income.
The cumulative changes in OCI are included in accumulated other
comprehensive income ("AOCI"), which is presented as a new category
within shareholders' equity in the Consolidated Balance Sheets. The
cumulative translation adjustment, formerly presented as a separate
category within shareholders' equity, is now included in AOCI. The
Company's consolidated financial statements now include Consolidated
Statements of Accumulated Other Comprehensive Income, which provide
the continuity of the AOCI balance.
Financial instruments
The financial instruments standard establishes the recognition and
measurement criteria for financial assets and financial liabilities.
All financial instruments are required to be measured at fair value
on initial recognition of the instrument. Measurement in subsequent
periods depends on how the financial instruments have been classified
in accordance with the standard. The adjustment to recognize
financial instruments at fair value on the balance sheet was recorded
as an adjustment to the opening balance of retained earnings.
2. Capital stock
Authorized
Unlimited common shares
Unlimited preferred shares, issuable in series
Outstanding
Number of
Common Shares Amount
---------------------------------------------------------------------
Balance at January 1, 2007 152,267,928 $ 154,838
Issued under employee stock option
plan 262,550 5,072
------------------------------
Balance at September 30, 2007 152,530,478 $ 159,910
---------------------------------------------------------------------
Options
A summary of the status of the Company's stock option plan as of
September 30, 2007, and the changes during the nine-month period then
ended, is presented below:
Weighted
Average
Number of Exercise
Options Price
---------------------------------------------------------------------
Outstanding at January 1, 2007 11,112,100 $ 13.16
Granted 2,515,000 19.83
Exercised for common shares (262,550) (7.40)
Exercised for cash (1,271,000) (7.97)
Forfeited (642,800) (16.44)
---------------------------------------------------------------------
Outstanding at September 30, 2007 11,450,750 $ 15.08
---------------------------------------------------------------------
Exercisable at September 30, 2007 4,260,450 $ 10.86
---------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------------------------
Average Weighted Weighted
Options Vesting Average Options Average
Exercise Outstan- Remaining Exercise Exercis- Exercise
Price ding (in years) Price able Price
---------------------------------------------------------------------
$6.25 to $8.75 1,893,750 0.11 $ 6.74 1,687,750 $ 6.49
$9.45 to $13.50 4,608,500 1.51 11.77 2,062,900 11.48
$16.55 to $23.33 4,948,500 3.37 21.36 509,800 22.83
-----------------------------------------------------
11,450,750 2.08 $ 15.08 4,260,450 $ 10.86
---------------------------------------------------------------------
Common share dividends
During the nine months ended September 30, 2007, the Company declared
dividends of $36,591 (2006 - $30,350), being $0.24 per common share
(2006 - $0.20 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
nine months ended September 30, 2007 and 2006 are as follows:
2007 2006
------------------------------
Weighted average number of common
shares outstanding - basic 152,455,715 151,707,915
Weighted average number of common
shares outstanding - diluted 155,533,693 156,913,449
------------------------------
Stock options of 4,806,000 (2006 - 2,769,500) 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.
3. 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:
Nine months ended September 30, 2007
---------------------------------------------------------------------
United Inter-
Canada States national Total
---------------------------------------------------------------------
Revenue $592,884 $416,739 $179,717 $1,189,340
Property and equipment,
net $815,320 $289,265 $277,060 $1,381,645
Capital expenditures,
net $71,794 $105,685 $46,488 $223,967
Depreciation $34,255 $15,201 $15,482 $64,938
---------------------------------------------------------------------
Nine months ended September 30, 2006
---------------------------------------------------------------------
United Inter-
Canada States national Total
---------------------------------------------------------------------
Revenue $843,061 $377,563 $164,698 $1,385,322
Property and equipment,
net $730,529 $220,797 $239,252 $1,190,578
Capital expenditures,
net $131,096 $95,924 $12,801 $239,821
Depreciation $37,536 $10,572 $14,209 $62,317
---------------------------------------------------------------------
4. Supplemental disclosure of cash flow information
Three months Six months
September 30 September 30
2007 2006 2007 2006
----------------------------------------------
Net change in non-cash
working capital
Accounts receivable $(39,649) $(46,767) $82,681 $18,543
Inventory and other (1,026) (4,939) (7,726) (9,263)
Accounts payable and
accrued liabilities 7,521 (2,223) (58,481) (34,709)
Income taxes payable 11,799 27,040 (10,292) 38,320
Dividends payable 1 5 47 3,820
----------------------------------------------
$(21,354) $(26,884) $6,229 $16,711
----------------------------------------------
----------------------------------------------
Relating to
Operating activities $(33,538) $(13,593) $20,400 $27,233
Investing activities 12,183 (13,296) (14,218) (14,342)
Financing activities 1 5 47 3,820
----------------------------------------------
$(21,354) $(26,884) $6,229 $16,711
----------------------------------------------
----------------------------------------------
5. Contingencies and commitments
The Company's Oman operating entity had previously received income
tax assessments for the 1994, 1995 and 1996 financial years. The
Company was appealing these assessments on the basis that they were
without merit under Omani law; however, the Company's appeal was
dismissed during the nine-month period ended September 30, 2007.
Current income tax expense for the nine months ended September 30,
2007 includes $4,000 (2006: $nil) related to this matter.
6. Prior period amounts
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
For further information: Glenn Dagenais, Executive Vice President Finance and Chief Financial Officer, (403) 262-1361 |