Ensign Energy Services Reports Second Quarter Earnings2007-08-07 CALGARY, Aug. 7 /CNW/ - Overview Ensign Energy Services Inc. (the "Company") reports net income of $25.1 million ($0.16 per common share) for the second quarter of 2007 compared with $46.6 million ($0.31 per common share) for the second quarter of 2006, a decrease of 46 percent. For the six months ended June 30, 2007, net income totaled $127.5 million ($0.84 per common share), a decrease of 27 percent from net income of $174.5 million ($1.15 per common share) recorded in the first six months of 2006. A large portion of the year-over-year decrease in net income is due to one-time income tax adjustments, including an $11.5 million reduction in future income taxes in the second quarter of 2006 associated with income tax rate reductions in Canada, a charge of $4.0 million in the second quarter of 2007 related to Omani tax assessments, net of the impact of further rate reductions in Canada of $2.2 million recorded in the second quarter of 2007. Operating earnings (expressed as EBITDA as defined below) for the second quarter of 2007 totaled $70.7 million ($0.46 per common share) compared with $81.8 million ($0.54 per common share) recorded in the second quarter of 2006, a decline of 14 percent. EBITDA for the six months ended June 30, 2007 was $256.1 million, a decrease of 18 percent from EBITDA of $311.7 million for the first six months of the prior year. The financial results for the second quarter of 2007 reflect weaker quarter-over-quarter results from the Company's Canadian oilfield services division, partially offset by growth in the United States operations and steady results from the international segment. Although impacted by seasonal spring break-up conditions in Canada and wet weather in certain operating areas, weak demand for natural gas related oilfield services was the predominant factor negatively impacting utilization and pricing in Canada in the second quarter of 2007. Partially offsetting weakness in the Canadian market, the United States oilfield services division reported growth in both revenue and operating margins in the second quarter of 2007 compared with the second quarter of 2006, reflecting positive contributions from an expanded drilling rig fleet. ------------------------------------------------------------------------- FINANCIAL AND OPERATING HIGHLIGHTS ($ thousands, except per share data and operating information) ------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 ------------------------------------------------------------------------- % % 2007 2006 change 2007 2006 change ------------------------------------------------------------------------- Revenue 296,539 357,545 (17) 806,024 925,544 (13) ------------------------------------------------------------------------- EBITDA(1) 70,686 81,757 (14) 256,105 311,676 (18) EBITDA per share(1) Basic $0.46 $0.54 (15) $1.68 $2.05 (18) Diluted $0.45 $0.52 (13) $1.65 $1.98 (17) ------------------------------------------------------------------------- Adjusted net income(2) 26,010 53,470 (51) 132,070 182,918 (28) Adjusted net income per share(2) Basic $0.17 $0.35 (51) $0.87 $1.21 (28) Diluted $0.17 $0.34 (50) $0.85 $1.16 (27) ------------------------------------------------------------------------- Net income 25,135 46,646 (46) 127,456 174,496 (27) Net income per share Basic $0.16 $0.31 (48) $0.84 $1.15 (27) Diluted $0.16 $0.30 (47) $0.82 $1.11 (26) ------------------------------------------------------------------------- Funds from operations(3) 39,879 55,836 (29) 157,486 210,941 (25) Funds from operations per share(3) Basic $0.26 $0.37 (30) $1.03 $1.39 (26) Diluted $0.26 $0.35 (26) $1.01 $1.34 (25) ------------------------------------------------------------------------- Weighted average shares - basic (000s) 152,494 151,721 1 152,425 151,669 - Weighted average shares - diluted (000s) 155,796 157,593 (1) 155,557 157,258 (1) ------------------------------------------------------------------------- Drilling Number of marketed rigs Canada Conventional 162 161 1 162 161 1 Oil sands coring/ coal-bed methane 31 21 48 31 21 48 United States 71 64 11 71 64 11 International(4) 49 47 4 49 47 4 Operating days Canada 3,173 5,150 (38) 12,348 17,035 (28) United States 4,674 4,559 3 9,153 8,979 2 International 2,294 2,193 5 4,655 4,560 2 ------------------------------------------------------------------------- Well Servicing Number of marketed rigs/units Canada 113 116 (3) 113 116 (3) United States 12 8 50 12 8 50 Operating hours Canada 30,994 41,218 (25) 90,225 109,564 (18) United States 6,423 5,274 22 12,386 10,709 16 ------------------------------------------------------------------------- (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 Six months ended June 30 June 30 --------------------------------------------------- % % ($ thousands) 2007 2006 change 2007 2006 change ------------------------------------------------------------------------- Revenue Canada 110,544 179,381 (38) 423,158 571,937 (26) United States 130,884 122,058 7 267,631 244,575 9 International 55,111 56,106 (2) 115,235 109,032 6 --------------------------------------------------- 296,539 357,545 (17) 806,024 925,544 (13) Oilfield services expense 213,057 263,550 (19) 522,881 588,553 (11) --------------------------------------------------- 83,482 93,995 (11) 283,143 336,991 (16) --------------------------------------------------- Gross margin 28.2% 26.3% 35.1% 36.4% ------------------------------------------------------------------------- Revenue generated by the Canadian oilfield services division declined 38 percent in the second quarter of 2007 and 26 percent in the six months ended June 30, 2007 compared with the corresponding periods of 2006. In addition to seasonal fluctuations caused by spring break-up, the Company's Canadian oilfield services division experienced declines in equipment utilization levels in the second quarter of 2007 stemming from soft demand and significant uncertainty surrounding natural gas commodity prices. Concerns over natural gas commodity prices have prevailed throughout the first six months of 2007 and have negatively impacted capital spending by the Company's customers, particularly in the shallow natural gas and coal bed methane markets. The Company's diverse product offerings and strong presence in key oil regions in Western Canada have somewhat mitigated the declining demand for natural gas drilling services. However, equipment utilization levels in Canada will continue to be impacted in the near future as the industry as a whole grapples with an over-supply of equipment that has resulted from significant additions of equipment to this market in recent years. The ongoing expansion of the Company's United States drilling rig fleet had a positive impact on the Company's year-to-date financial results in 2007. Revenue generated by the United States oilfield services divisions in the second quarter of 2007 and in the six months ended June 30, 2007 increased seven percent and nine percent, respectively, over the corresponding periods of 2006. In addition to the three new Automated Drill Rigs ("ADRs") that commenced operations in the first quarter of 2007, a further five ADRs were completed and placed into service under term contracts in the second quarter of 2007. The Company's proprietary ADR technology has been well-received by customers in the Rocky Mountain and California regions, and the delivery of five additional ADRs throughout the remainder of 2007 will further bolster the Company's United States drilling rig fleet and diversify its service offerings to customers in that market. The Company's strategic focus on the United States oilfield services market has successfully diversified the Company's operations in North America and has served to reduce its exposure to the seasonal operating environment in Canada. For the first time in the Company's history, quarterly revenues generated by the United States oilfield services division have exceeded those generated in Canada. The Company's international oilfield services division continues to deliver stable financial results. During the three months ended June 30, 2007, revenue for the international oilfield services division totaled $55.1 million compared with $56.1 million for the three months ended June 30, 2006, a decline of two percent. For the six months ended June 30, 2007, the international oilfield services division recorded a six percent growth in revenue compared with the six months ended June 30, 2006. The Company continues to experience demand for additional equipment in several international markets and is expanding its drilling rig fleet in several key oil markets. As a result, the Company was in the process of relocating two drilling rigs from Canada to Australia during the second quarter of 2007, and is also modernizing its equipment fleet based in the Middle East and Africa with the refurbishment of two drilling rigs and the upgrade and reactivation of one previously idle drilling rig. For the three months ended June 30, 2007, oilfield services expense declined 19 percent compared with the three months ended June 30, 2006. The decline in oilfield services expense on a quarter-over-quarter basis is the result of declining operating activity levels in Canada but is also a reflection of cost control measures implemented by the Company well in advance of the market downturn in Canada. Gross margin as a percentage of revenue was 28.2 percent for the second quarter of 2007 compared with 26.3 percent for the second quarter of 2006. The improvement in gross margin is partially the result of careful management of discretionary spending by the Company during a period of declining demand. Gross margin in the second quarter of any given fiscal year will lag that recorded on a year-to-date basis as it is during this period that the majority of the annual scheduled maintenance activities are completed by the Canadian oilfield services division. Depreciation Three months ended Six months ended June 30 June 30 --------------------------------------------------- % % ($ thousands) 2007 2006 change 2007 2006 change ------------------------------------------------------------------------- Depreciation 19,603 16,918 16 42,910 40,008 7 ------------------------------------------------------------------------- Depreciation expense totaled $19.6 million for the second quarter of 2007 compared with $16.9 million for the second quarter of 2006. Although operating activity levels in the three months ended June 30, 2007 declined compared with the same period of 2006, depreciation expense increased due to a higher capital asset base associated with the Company's rig building program. Similarly, depreciation expense increased to $42.9 million for the six months ended June 30, 2007 compared with $40.0 million for the six-month period ended June 30, 2006, despite a decline in operating activity over this same period. Depreciation expense on a per day basis has increased as the Company has introduced newly constructed and higher valued assets to its equipment fleet. General and Administrative Expense Three months ended Six months ended June 30 June 30 --------------------------------------------------- % % ($ thousands) 2007 2006 change 2007 2006 change ------------------------------------------------------------------------- General and administrative 12,796 12,238 5 27,038 25,315 7 % of revenue 4.3% 3.4% 3.4% 2.7% ------------------------------------------------------------------------- As a percentage of revenue, general and administrative expense for the second quarter of 2007 was 4.3 percent compared with 3.4 percent for the second quarter of 2006. On a year-to-date basis, general and administrative expense expressed as a percentage of revenue was 3.4 percent in 2007 compared with 2.7 percent in 2006. As a percentage of revenue, general and administrative expense is typically higher during the second quarter compared with other periods of the year, as revenue levels decline during this period as a result of spring break-up conditions in Canada. On a gross dollar basis, general and administrative expense has increased due to the Company's expanded operations in the United States. Stock-Based Compensation Expense Three months ended Six months ended June 30 June 30 --------------------------------------------------- % % ($ thousands) 2007 2006 change 2007 2006 change ------------------------------------------------------------------------- Stock-based compensation 1,346 10,498 (87) 7,098 12,957 (45) ------------------------------------------------------------------------- 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 second quarter of 2007 is comprised of $1.7 million for additional vesting of stock options (net of forfeitures), net of a $0.4 million decrease associated with a decline in the price of the Company's common shares. For the six-month period ended June 30, 2007, stock-based compensation expense is comprised of $3.6 million for additional granting and vesting of stock options, $5.4 million related to the increase in the price of the Company's common shares, net of a recovery of $1.9 million due to forfeitures during the period. The price of the Company's common shares was $19.00 at June 30, 2007 compared with $19.35 at March 31, 2007 and $18.39 at December 31, 2006. Interest Expense Three months ended Six months ended June 30 June 30 --------------------------------------------------- % % ($ thousands) 2007 2006 change 2007 2006 change ------------------------------------------------------------------------- Interest 1,962 1,010 94 2,905 2,737 6 ------------------------------------------------------------------------- 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 an increase in the average balance outstanding of the Company's operating lines of credit based in the United States and Australia, which are being used to finance capital expenditure activities and expanded operations. These increases were partially offset by a decline in the utilized balance on the Canadian-based credit facility. Income Taxes Three months ended Six months ended June 30 June 30 --------------------------------------------------- % % ($ thousands) 2007 2006 change 2007 2006 change ------------------------------------------------------------------------- Current income tax 25,073 13,729 83 81,832 71,565 14 Future income tax (2,433) (7,044) (65) (6,096) 9,913 (161) --------------------------------------------------- 22,640 6,685 239 75,736 81,478 (7) --------------------------------------------------- Effective income tax rate (%) 47.4% 12.5% 37.3% 31.8% ------------------------------------------------------------------------- The effective income tax rate for the second quarter of 2007 was 47.4 percent compared with 12.5 percent in the second quarter of 2006. For the six months ended June 30, 2007, the effective income tax rate was 37.3 percent compared with 31.8 percent for the six months ended June 30, 2006. The significant reduction in the Company's effective income tax rate in the three months and six months ended June 30, 2006 is 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 three and six months ended June 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 on the basis that they were without merit under Omani law; however, the Company's appeal was dismissed by the Omani courts during the three months ended June 30, 2007. Excluding the impact of the Omani tax assessments, the effective income tax rate would have been 39.0 percent for the second quarter of 2007 and 35.3 percent for the six months ended June 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 in Canadian partnerships was a significant component of the future income tax liability as at December 31, 2006. This balance has declined as of June 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 net future income tax liability of $2.2 million. Financial Position The following chart outlines significant changes in the consolidated balance sheets from December 31, 2006 to June 30, 2007: ($ thousands) Change Explanation ------------------------------------------------------------------------- Cash and (4,639) See consolidated statement of cash cash equivalents flows. Accounts receivable (122,330) Decrease due to the reduction in operating activity in the second quarter of 2007 as a result of spring break-up and reduced demand in Canada. Inventory and other 6,700 Increase due to additions to drill pipe inventory. Property and equipment 79,147 Increase due to ongoing capital expenditures and equipment under construction, offset by depreciation for the period. Accounts payable and (66,002) Decrease due to the reduction in accrued liabilities operating activity in the second quarter of 2007 as a result of spring break-up and reduced demand in Canada. Operating lines of credit (5,868) Decrease due to net repayments in Canada during the period, net of increases in the United States and Australian-based operating lines of credit. Stock-based compensation (9,697) Decrease due to stock option exercises and forfeitures, net of the increase associated with additional vesting and share price increases. Income taxes payable (22,091) Decrease due to income tax instalments, net of the current income tax provision for the period. Dividends payable 46 Increase due to a slight increase in the number of outstanding common shares compared with the fourth quarter of 2006. Future income taxes (7,518) Decrease due to the future income tax recovery in the period as well as an income tax rate reduction in Canada. Shareholders' equity 70,008 Increase due to the aggregate impact of 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, less dividends declared in the period. ------------------------------------------------------------------------- Working Capital and Funds from Operations Three months ended Six months ended June 30 June 30 --------------------------------------------------- % % ($ thousands) 2007 2006 change 2007 2006 change ------------------------------------------------------------------------- Funds from operations 39,879 55,836 (29) 157,486 210,941 (25) Funds from operations per share $0.26 $0.37 (30) $1.03 $1.39 (26) Working capital(1) 37,829 63,162 (40) 37,829 63,162 (40) ------------------------------------------------------------------------- (1) Comparative figures as of December 31, 2006. During the three months ended June 20, 2007, the Company generated funds from operations of $39.9 million ($0.26 per common share) compared with funds from operations of $55.8 million ($0.37 per common share) for the three months ended June 30, 2006, a decline of 29 percent. Funds from operations totaled $157.5 million ($1.03 per common share) in the first six months of 2007, a decline of 25 percent from funds from operations of $210.9 million ($1.39 per common share) generated in the six months ended June 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 three months and six months ended June 30, 2007 was partially offset by steady activity levels generated by the Company's United States oilfield services division. At June 30, 2007, the Company had a positive working capital position of $37.8 million compared with positive working capital of $63.2 million at December 31, 2006. As of June 30, 2007, the Company continues to operate with no long-term debt. The Company's strong balance sheet enables the Company to face the challenges associated with operating in a cyclical industry and to pursue potential growth opportunities as they may arise. Investing Activities Three months ended Six months ended June 30 June 30 ----------------------------------------------------- % % ($ thousands) 2007 2006 change 2007 2006 change ------------------------------------------------------------------------- Net purchase of property and equipment (67,509) (74,535) (9) (161,117) (165,105) (2) Net change in non-cash working capital (22,138) 6,491 (441) (26,401) (1,046) 2,424 ----------------------------------------------------- Cash used in investing activities (89,647) (68,044) 32 (187,518) (166,151) 13 ------------------------------------------------------------------------- Construction activity was ongoing during the first half of 2007, particularly within the Company's United States oilfield services division. During the second quarter of 2007, the construction of five new ADRs was completed. A total of eight new ADRs were placed into service in the United States in the first six months of 2007. The five remaining ADRs from the Company's previously announced 13 ADR(TM) rig-building program are under construction and will be completed and placed into service at a rate of approximately one per month from August to December 2007. Capital expenditure activity in Canada in the second quarter of 2007 included the addition of a newly constructed triple drilling rig to its fleet of equipment based in southeastern Saskatchewan. Two slant well servicing rigs are under construction for delivery in August 2007. Other major expenditures in Canada in 2007 include the addition of nine oil sands coring rigs in the first quarter of 2007. 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 north Africa. One of the three drilling rigs being refurbished for international operations is expected to be operational in the third quarter of 2007, with the remaining two drilling rigs expected to be complete by the end of the fourth quarter of 2007. Other equipment movements during the second quarter of 2007 include the transfer of two drilling rigs from the Canadian fleet of equipment to Australia. One well servicing rig was also transferred from Canada to the Rocky Mountain region of the United States during the second quarter of 2007. These movements demonstrate the Company's ability to leverage its established operational bases around the globe and to relocate under utilized equipment to areas of higher demand. Financing Activities Three months ended Six months ended June 30 June 30 --------------------------------------------------- % % ($ thousands) 2007 2006 change 2007 2006 change ------------------------------------------------------------------------- Net decrease in operating lines of credit (45,112) (80,226) (44) (5,868) (81,946) (93) Issue of capital stock 840 711 18 1,666 2,511 (34) Dividends (12,201) (11,381) 7 (24,389) (18,964) 29 Net change in non-cash working capital 13 3,798 (100) 46 3,815 (99) --------------------------------------------------- Cash (used in) provided by financing activities (56,460) (87,098) (35) (28,545) (94,584) (70) ------------------------------------------------------------------------- The Company decreased the utilized balance of its operating lines of credit during both the three months and six months ended June 30, 2007. Net repayments made by the Company's Canadian oilfield services divisions 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. Other financing activities during the second quarter of 2007 include the receipt of $0.8 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 June 30, 2007, an increase of seven percent over the second quarter of 2006. For the six months ended June 30, 2007, cash received on employee stock option exercises totaled $1.7 million and dividends totaled $24.4 million. During the first six months of 2007, the Company declared year-to-date dividends totaling $0.16 per common share compared with $0.125 during the first six 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. Outlook To keep things in perspective, it should be noted that Ensign's financial results for the three months and six months ended June 30, 2007 were the second best ever recorded by the Company for such fiscal periods. While the results were down significantly from the record financial results of one year ago, they do reflect the strength of its operations and employees and the continued growth of the Company and, in particular, show the importance of the geographic diversification that has been quietly occurring over the past several years. Ensign's growth in the United States market has been very timely and the investments in the international market will prove themselves out over time as exploration and production companies further expand their search for supplies of crude oil and natural gas. The Company is currently operating about 50 percent of its Canadian drilling rig fleet as demand for oilfield services has improved following the spring "break up" quarter in Canada. Unfortunately, pricing has reduced significantly due to the over-supply of equipment in the Canadian market. Consequently, Ensign's Canadian margins have eroded as the Company endeavors to maintain its market share in a difficult environment. This weakness is expected to continue in the Canadian market given the current sentiment associated with the exploration and development of natural gas as reflected in current prices for the commodity. Ensign's United States operations continue to grow led by the newest generation of the ADR(TM) drilling rigs being constructed and delivered pursuant to term contracts during the 2007 fiscal year. As expected, the Company's operations in the Rocky Mountain region have started to show some signs of weakness as a result of the weakening fundamentals for natural gas in North America. However, the impact is far less than that experienced in Canada, owing to the more favorable economics associated with the non-conventional natural gas development plays that appear to be driving the demand for oilfield services in the Rocky Mountain region of the United States. The California operation is primarily oil focused and, as such, is experiencing stable levels of demand along with isolated opportunities for growth, supported by the current market price for crude oil. The international operations continue to show modest levels of improvement. The Company is currently refurbishing two deep capacity drilling rigs for the Middle East market, another deep capacity drilling rig for north Africa and is in the process of redeploying two ADR(TM) drilling rigs from Canada to Australia under term contracts. These new projects will not likely have a meaningful impact on Ensign's international operations until the 2008 fiscal year due to the timing of the required drilling rig construction and mobilization to their new locations. Additionally, the Company continues to look for ways to improve the financial contributions from existing operations. Ensign has geographically diversified its operations over the years; however, Canada remains an important market segment for the Company. While crude oil related activity has remained relatively strong owing to the current level of crude oil commodity prices, the overall level of oilfield activity in Canada is very dependent on the demand for oilfield services associated with the exploration and production of natural gas. Current natural gas supply and demand fundamentals are not very compelling as inventory storage levels in North America are likely to reach record storage levels before the upcoming heating season. This "excess" inventory is reflected in the current prices for natural gas, making natural gas exploration and development less economic for the Company's customers. The Company does not expect a recovery in Canada until there is an improvement in natural gas supply and demand fundamentals. In time the market will correct this supply imbalance. In the interim, Ensign is financially strong and is not only prepared to weather the storm, but is well situated to take advantage of opportunities that inevitably occur during such parts of the commodity cycle. 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 have an impact on the demand for services supplied by the Company. (*) (*) (*) A conference call will be held to discuss the Company's first quarter results at 2:00 p.m. MDT (4:00 p.m. EDT) on Tuesday, August 7, 2007. The conference call number is 1-800-588-4942. A taped recording will be available until August 14, 2007 by dialing 1-877-289-8525 and entering reservation number 21242934 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 June 30, 2007 and December 31, 2006 (in thousands of dollars) June 30 December 31 2007 2006 ---- ---- (Unaudited) Assets Current assets Cash and cash equivalents $ 9,931 $ 14,570 Accounts receivable 242,745 365,075 Inventory and other 83,928 77,228 Future income taxes 10,537 11,010 ------------------------------ 347,141 467,883 Property and equipment 1,373,413 1,294,266 ------------------------------ $ 1,720,554 $ 1,762,149 ------------------------------ ------------------------------ Liabilities Current liabilities Accounts payable and accrued liabilities $ 175,974 $ 241,976 Operating lines of credit 64,121 69,989 Current portion of stock-based compensation 32,324 33,818 Income taxes payable 24,692 46,783 Dividends payable 12,201 12,155 ------------------------------ 309,312 404,721 Stock-based compensation 9,796 17,999 Future income taxes 223,833 231,824 ------------------------------ 542,941 654,544 ------------------------------ Shareholders' Equity Capital stock (note 2) 159,416 154,838 Accumulated other comprehensive income (note 1) (58,514) (20,163) Retained earnings 1,076,711 972,930 ------------------------------ Contingencies and commitments (note 5) 1,177,613 1,107,605 ------------------------------ $ 1,720,554 $ 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 Six months ended June 30 June 30 2007 2006 2007 2006 ---- ---- ---- ---- Revenue Oilfield services $ 296,539 $ 357,545 $ 806,024 $ 925,544 Expenses Oilfield services 213,057 263,550 522,881 588,553 Depreciation 19,603 16,918 42,910 40,008 General and administrative 12,796 12,238 27,038 25,315 Stock-based compensation 1,346 10,498 7,098 12,957 Interest 1,962 1,010 2,905 2,737 ------------------------------------------------- 248,764 304,214 602,832 669,570 ------------------------------------------------- Income before income taxes 47,775 53,331 203,192 255,974 Income taxes Current 25,073 13,729 81,832 71,565 Future (2,433) (7,044) (6,096) 9,913 --------------------------------------------------- 22,640 6,685 75,736 81,478 --------------------------------------------------- Net income for the period 25,135 46,646 127,456 174,496 Retained earnings - beginning of period, as originally reported 1,063,777 794,418 972,930 674,151 Transition adjustment on adoption of financial instruments standard (note 1) - - 714 - ------------------------------------------------- Retained earnings - beginning of period, as restated 1,063,777 794,418 973,644 674,151 Dividends (note 2) (12,201) (11,381) (24,389) (18,964) ------------------------------------------------- Retained earnings - end of period $1,076,711 $ 829,683 $1,076,711 $ 829,683 ------------------------------------------------- ------------------------------------------------- Net income per share (note 2) Basic $0.16 $0.31 $0.84 $1.15 Diluted $0.16 $0.30 $0.82 $1.11 ------------------------------------------------- ------------------------------------------------- See accompanying notes to the consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited - in thousands of dollars) Three months ended Six months ended June 30 June 30 2007 2006 2007 2006 ---- ---- ---- ---- Cash provided by (used in) Operating activities Net income for the period $ 25,135 $ 46,646 $ 127,456 $ 174,496 Items not affecting cash: Depreciation 19,603 16,918 42,910 40,008 Stock-based compensation, net of cash paid (2,426) (684) (6,784) (13,476) Future income taxes (2,433) (7,044) (6,096) 9,913 ------------------------------------------------- Cash provided by operating activities before the change in non-cash working capital 39,879 55,836 157,486 210,941 Net change in non-cash working capital (note 4) 101,654 81,562 53,938 40,826 ------------------------------------------------- 141,533 137,398 211,424 251,767 ------------------------------------------------- Investing activities Net purchase of property and equipment (67,509) (74,535) (161,117) (165,105) Net change in non-cash working capital (note 4) (22,138) 6,491 (26,401) (1,046) ------------------------------------------------- (89,647) (68,044) (187,518) (166,151) ------------------------------------------------- Financing activities Net decrease in operating lines of credit (45,112) (80,226) (5,868) (81,946) Issue of capital stock 840 711 1,666 2,511 Dividends (note 2) (12,201) (11,381) (24,389) (18,964) Net change in non-cash working capital (note 4) 13 3,798 46 3,815 ------------------------------------------------- (56,460) (87,098) (28,545) (94,584) ------------------------------------------------- Decrease in cash and cash equivalents during the period (4,574) (17,744) (4,639) (8,968) Cash and cash equivalents - beginning of period 14,505 40,769 14,570 31,993 ------------------------------------------------- Cash and cash equivalents - end of period $ 9,931 $ 23,025 $ 9,931 $ 23,025 ------------------------------------------------- ------------------------------------------------- Supplemental information Interest paid $ 1,366 $ 1,736 $ 2,327 $ 3,098 Income taxes paid $ 46,255 $ 28,715 $ 103,923 $ 60,285 ------------------------------------------------- ------------------------------------------------- See accompanying notes to the consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited - in thousands of dollars) Three months ended Six months ended June 30 June 30 2007 2006 2007 2006 ---- ---- ---- ---- Net income for the period $ 25,135 $ 46,646 $ 127,456 $ 174,496 Other comprehensive income Foreign currency translation adjustment (37,362) (15,714) (38,351) (18,565) ------------------------------------------------- Comprehensive (loss) income $ (12,227) $ 30,932 $ 89,105 $ 155,931 ------------------------------------------------- ------------------------------------------------- See accompanying notes to the consolidated financial statements. CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (Unaudited - in thousands of dollars) Three months ended Six months ended June 30 June 30 2007 2006 2007 2006 ---- ---- ---- ---- Accumulated other comprehensive income - beginning of period $ (21,152) $ (42,072) $ (20,163) $ (39,221) Foreign currency translation adjustment (37,362) (15,714) (38,351) (18,565) ------------------------------------------------- Accumulated other comprehensive income - end of period $ (58,514) $ (57,786) $ (58,514) $ (57,786) ------------------------------------------------- ------------------------------------------------- See accompanying notes to the consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the six months ended June 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 on initial recognition 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 237,550 4,578 ------------------------------ Balance at June 30, 2007 152,505,478 $ 159,416 --------------------------------------------------------------------- Options A summary of the status of the Company's stock option plan as of June 30, 2007, and the changes during the six-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 (237,550) (7.01) Exercised for cash (1,240,100) (7.96) Forfeited (615,300) (17.18) --------------------------------------------------------------------- Outstanding at June 30, 2007 11,534,150 $ 15.06 --------------------------------------------------------------------- Exercisable at June 30, 2007 3,754,550 $ 9.28 --------------------------------------------------------------------- Options Outstanding Options Exercisable ------------------------------------------------------------------------- Average Weighted Weighted Vesting Average Options Average Options Remaining Exercise Exercis- Exercise Exercise Price Outstanding (in years) Price able Price ------------------------------------------------------------------------- $6.25 to $8.75 1,915,650 0.11 $ 6.74 1,709,650 $ 6.50 $9.45 to $13.50 4,642,500 1.52 11.76 2,026,500 11.52 $16.55 to $23.33 4,976,000 3.47 21.35 18,400 21.23 -------------------------------------------------------- 11,534,150 2.13 $ 15.06 3,754,550 $ 9.28 ------------------------------------------------------------------------- Common share dividends During the six months ended June 30, 2007, the Company declared dividends of $24,389 (2006 - $18,964), being $0.16 per common share (2006 - $0.125 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 June 30, 2007 and 2006 are as follows: 2007 2006 -------------- ------------- Weighted average number of common shares outstanding - basic 152,425,337 151,668,921 Weighted average number of common shares outstanding - diluted 155,557,069 157,258,430 -------------- ------------- Stock options of 4,833,500 (2006 - 1,791,000) 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. 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: Six months ended June 30, 2007 --------------------------------------------------------------------- United Inter- Canada States national Total --------------------------------------------------------------------- Revenue $423,158 $267,631 $115,235 $806,024 Property and equipment, net $813,140 $289,570 $270,703 $1,373,413 Capital expenditures, net $58,214 $76,842 $26,061 $161,117 Depreciation $22,855 $9,692 $10,363 $42,910 --------------------------------------------------------------------- Six months ended June 30, 2006 --------------------------------------------------------------------- United Inter- Canada States national Total --------------------------------------------------------------------- Revenue $571,937 $244,575 $109,032 $925,544 Property and equipment, net $702,503 $196,484 $237,267 $1,136,254 Capital expenditures, net $89,574 $68,180 $7,351 $165,105 Depreciation $24,041 $6,934 $9,033 $40,008 --------------------------------------------------------------------- 4. Supplemental disclosure of cash flow information Three months Six months ended June 30 ended June 30 2007 2006 2007 2006 --------------------------------------------- Net change in non-cash working capital Accounts receivable $160,670 $133,721 $122,330 $65,310 Inventory and other (4,626) 1,121 (6,700) (4,324) Accounts payable and accrued liabilities (55,346) (31,803) (66,002) (32,486) Income taxes payable (21,182) (14,986) (22,091) 11,280 Dividends payable 13 3,798 46 3,815 --------------------------------------------- $ 79,529 $ 91,851 $ 27,583 $ 43,595 --------------------------------------------- --------------------------------------------- Relating to Operating activities $101,654 $ 81,562 $ 53,938 $ 40,826 Investing activities (22,138) 6,491 (26,401) (1,046) Financing activities 13 3,798 46 3,815 --------------------------------------------- $ 79,529 $ 91,851 $ 27,583 $ 43,595 --------------------------------------------- --------------------------------------------- 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 by the Omani courts during the three-month period ended June 30, 2007. Current income tax expense for the three and six months ended June 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 |