Ensign Energy Services Inc. Reports 2011 Second Quarter Results2011-08-04 CALGARY, Aug. 4, 2011 /CNW/ - Overview Ensign Energy Services Inc. ("Ensign" or the "Company") recorded revenue of $334.4 million in the three months ended June 30, 2011, an increase of 30 percent from revenue of $257.6 million recorded in the second quarter of the prior year. The Company recorded revenue of $836.7 million for the six months ended June 30, 2011, a 37 percent increase from revenue of $610.4 million for the six months ended June 30, 2010. EBITDA (defined as earnings before interest, taxes, depreciation, amortization, and share-based compensation expense) totaled $65.1 million ($0.43 per common share) in the second quarter of 2011, 38 percent higher than EBITDA of $47.2 million ($0.31 per common share) in the second quarter of 2010. EBITDA for the six months ended June 30, 2011 totaled $235.4 million ($1.54 per common share), an increase of 67 percent from EBITDA of $140.9 million ($0.92 per common share) recorded in the first six months of 2010. Adjusted net income (defined as net income before share-based compensation expense tax-effected using an income tax rate of 35%) totaled $18.9 million ($0.12 per common share) in the second quarter of 2011, 89 percent higher than Adjusted net income of $10.0 million ($0.07 per common share) in the second quarter of 2010. Adjusted net income for the six months ended June 30, 2011 totaled $106.6 million ($0.70 per common share), an increase of 119 percent from Adjusted net income of $48.6 million ($0.32 per common share) recorded in the first six months of 2010. Net income for the second quarter of 2011 increased slightly over the comparable prior year period to $16.1 million ($0.11 per common share) compared to net income of $16.0 million ($0.10 per common share) for the second quarter of 2010. Net income for the six months ended June 30, 2011 totaled $95.8 million ($0.63 per common share), an increase of 75 percent from net income of $54.8 million ($0.36 per common share) recorded in the first six months of 2010. Funds from operations increased 44 percent to $66.4 million ($0.43 per common share) in the second quarter of 2011 from $46.0 million ($0.30 per common share) in the second quarter of the prior year. Funds from operations for the first six months of 2011 increased 66 percent to $220.9 million ($1.44 per common share) from $132.8 million ($0.87 per common share) recorded in the same period in 2010. Increased demand for oilfield services in the second quarter and first half of 2011 compared to similar periods in the prior year resulted in improved operating and financial results from the Company's Canadian and United States operations. This was in spite of the "spring break up" and wet weather setbacks experienced by the Company's Canadian segment during the second quarter of 2011. The Company's international financial contributions in the first half of 2011 also improved slightly from the prior year despite the negative translational impact from a weakening United States dollar. Working capital at June 30, 2011 was $83.1 million compared to $84.5 million at December 31, 2010. A continuing focus on maintaining strong liquidity and selective use of debt, combined with improved levels of funds generated from operations, helps to support the Company's growth initiatives, including the new build program, which upon completion will deliver an additional 19 new state-of-the-art drilling rigs and 12 well servicing rigs over the next 12 to 15 months. FINANCIAL AND OPERATING HIGHLIGHTS ($ thousands, except per share data and operating information)
Revenue and Oilfield Services Expense
Revenue recorded in the second quarter of 2011 totaled $334.4 million, an increase of 30 percent over the second quarter of 2010. Revenue was $836.7 million for the six months ended June 30, 2011, a 37 percent increase from $610.4 million for the six months ended June 30, 2010. As a percentage of revenue, gross margin for the second quarter of 2011 increased slightly to 23.9 percent (2010 - 23.8 percent) and 30.1 percent for the six months ended June 30, 2011 (2010 - 28.0 percent). Higher activity levels in the North American market led to increases in revenues in both the three and six months ended June 30, 2011. Increased demand allowed for improvements in day rates in 2011 as pricing pressures arising from the excess supply of oilfield services equipment experienced over the past two years subsided in the first half of 2011. Despite challenges in the Company's international segment, revenues were up slightly for the three and six months ended June 30, 2011 compared to similar periods in the prior year. The Company's Latin American operations continue to improve as demand for oilfield services increases, while operations in the eastern hemisphere continue to be held back by temporary weather setbacks in Australia and ongoing geopolitical issues in parts of the Middle East and North Africa. Gross margin increased to $79.9 million (23.9 percent of revenue) for the second quarter of 2011 compared with gross margin of $61.3 million (23.8 percent of revenue) for the second quarter of 2010. Similarly, gross margin increased to $251.8 million (30.1 percent of revenue) in the first six months of 2011 compared to $170.9 million (28.0 percent of revenue) for the same period in 2010. Improved margins are a result of the increased demand for oilfield services in 2011. Partially offsetting the improved level of spot prices in the second quarter is the impact of major maintenance expenditures, particularly in Canada, as the Company continues to expense such costs as incurred. Such expenditures are often incurred during the "spring break up" period in anticipation of higher levels of demand for oilfield services through the remainder of the year. Canadian Oilfield Services Canadian operating and financial results are affected by seasonality in the second quarter; when "spring break-up" and wet weather conditions hinder the Company's ability to move heavy equipment and access Canadian drilling locations. In 2011, a longer than normal wet weather season hindered operating activity levels in this segment, however, the impact on operating results was offset by improvements in day rates. Revenue increased 39 percent to $93.1 million for the three months ended June 30, 2011, from $66.8 million for the three months ended June 30, 2010. For the six months ended June 30, 2011, revenue increased 50 percent to $368.3 million compared to $245.7 million for the same period in 2010. In the second quarter of 2011, Canadian revenues accounted for 28 percent of total revenue (2010 - 26 percent), and during the six months ended June 30, 2011, Canadian revenues were 44 percent of total revenue (2010 - 40 percent). Drilling days recorded by the Company's Canadian operations in the second quarter of 2011 increased 17 percent from the comparable quarter in the prior year. During the six months ended June 30, 2011, drilling days increased 27 percent from the same period of the prior year. Similarly, Canadian well servicing hours increased by 14 percent in the second quarter of 2011 and by seven percent in the six months ended June 30, 2011 compared to the corresponding periods in the prior year. United States Oilfield Services The Company's United States operations recorded revenue of $153.2 million in the second quarter of 2011, a 32 percent increase from the $115.6 million recorded in the corresponding period of the prior year. During the six months ended June 30, 2011, revenue of $301.7 million was recorded, an increase of 37 percent from the $219.6 million recorded in the six months ended June 30, 2010. The increases in revenue in the three and six months ended June 30, 2011 were negatively impacted on translation by the weakening of the United States dollar, which decreased approximately six percent relative to the Canadian dollar in the second quarter of 2011 compared to the second quarter of 2010. The United States operations accounted for 46 percent of the Company's revenue in the second quarter of 2011 (2010 - 45 percent) and 36 percent of total revenue in the six months ended June 30, 2011 (2010 - 36 percent). Higher activity levels were the main driver of increased revenue in the three and six months ended June 30, 2011 as compared to the same periods in 2010. The number of drilling days recorded by the Company's United States operations in the second quarter of 2011 increased 17 percent from the same period of the prior year. Drilling days for the first six months of 2011 increased 24 percent from the comparable period in the prior year. United States well servicing hours in the second quarter of 2011 were up 57 percent compared to the prior year and well servicing hours for the first half of 2011 were up 54 percent compared to the first half of 2010. The increase in United States operating activity experienced by the Company is mainly due to stronger demand for oilfield services as well as additional oilfield services equipment being added to the Company's United States fleet in connection with the Company's new build program. The Company mobilized three additional drilling rigs and five additional well servicing rigs during the second quarter of 2011, bringing the total to five drilling rigs and seven well servicing rigs added to the United States fleet during the first half of 2011. International Oilfield Services The Company's international operations recorded revenue of $88.2 million in the second quarter of 2011, a 17 percent increase from $75.1 million recorded in the corresponding period of the prior year. International revenues for the six months ended June 30, 2011 increased by 15 percent to $166.7 million from $145.1 million recorded for the six months ended June 30, 2010. International operations contributed 26 percent of the Company's revenue in the second quarter of 2011 (2010 - 29 percent) and 20 percent of the Company's revenue in the first half of 2011 (2010 - 24 percent). International operating days for the three months ended June 30, 2011 totaled 2,604 days compared with 2,480 days in the second quarter of 2010, an increase of five percent. For the six months ended June 30, 2011 international operating days totaled 5,269 days compared with 4,708 days in the same period in 2010, an increase of 12 percent. Increases in the Company's Latin American operations were offset by challenges in the eastern hemisphere as the Company continued to see the impacts of temporary weather setbacks in Australia and regional geopolitical issues in parts of the Middle East and North Africa. In addition, the weakening of the United States dollar relative to the Canadian dollar negatively impacted operating results on translation. Certain of the Company's assets located in areas of the Middle East and North Africa that are subject to civil unrest have not worked since early 2011. Based on recent physical inspections, the assets remain intact; however, there is uncertainty as to when operations may resume. The carrying value of these assets is approximately $40.0 million and at this time, the Company does not believe that any impairment has occurred. Depreciation
The Company uses the unit of production method of calculating depreciation for the majority of its property and equipment. Depreciation expense totaled $35.1 million for the second quarter of 2011 compared with $29.9 million for the second quarter of 2010. Depreciation expense for the first six months of 2011 was $75.9 million, an increase of 20 percent over the $63.4 million recorded in the first six months of 2010. The increase in depreciation expense is consistent with the increase in the operating activity levels during the three and six months ended June 30, 2011 compared to the operating activity levels in the same periods of 2010. General and Administrative Expense
General and administrative expense decreased 11 percent to $13.2 million (3.9 percent of revenue) for the second quarter of 2011 compared with $14.8 million (5.8 percent of revenue) for the second quarter of 2010. For the six months ended June 30, 2011, general and administrative expense totaled $28.2 million (3.4 percent of revenue) compared with $27.8 million (4.6 percent of revenue) recorded in the six months ended June 30, 2010, an increase of two percent. Share-Based Compensation Expense (Recovery)
Share-based compensation expense (recovery) arises from the Black-Scholes valuation accounting associated with the Company's share-based compensation plans, whereby the liability associated with share-based compensation is adjusted for the effect of granting and vesting of employee stock options and changes in the underlying price of the Company's common shares. For the three months ended June 30, 2011, share-based compensation expense was $4.4 million compared with a recovery of $9.2 million recorded in the second quarter of 2010. For the six months ended June 30, 2011, share-based compensation expense was $16.7 million compared with a recovery of $9.5 million for the six months ended June 30, 2010. The increase in share-based compensation expense in the three and six months ended June 30, 2011 arises from the fair value accounting under International Financial Reporting Standards and an increase in the price of the Company's common shares during these periods. The closing price of the Company's common shares was $19.12 at June 30, 2011 ($12.52 at June 30, 2010), compared with $18.26 at March 31, 2011 ($14.70 at March 31, 2010) and $15.03 at December 31, 2010 ($15.00 at December 31, 2009).
Interest Expense
Interest is incurred on the Company's $200.0 million global revolving credit facility at prime interest rates or bankers' acceptance rates/LIBOR plus 0.75 percent. Foreign Exchange and Other
Included in this amount is a foreign exchange gain on the conversion of the Australian operations from Australian dollars to United States dollars. The Australian currency strengthened against the United States dollar during the three and six months ended June 30, 2011, but weakened during the first half of 2010. Income Taxes
The effective income tax rate for the three months ended June 30, 2011 was 36.9 percent compared with 38.6 percent for the three months ended June 30, 2010. The effective income tax rate for the six months ended June 30, 2011 was 32.7 percent compared with 36.2 percent for the six months ended June 30, 2010. The slight decrease in the effective income tax rate in the current quarter is due to a higher proportion of taxable income earned in Canada, compared with the prior comparative quarter. The effective income tax rate for the first six months of 2010 was higher than the first six months of 2011, due to the tax effects of the currency devaluation in Venezuela in early January 2010 and a greater proportion of taxable income that had been generated in higher tax rate jurisdictions during that period. Financial Position The following chart outlines significant changes in the consolidated statements of financial position from December 31, 2010 to June 30, 2011:
Funds from Operations and Working Capital
During the three months ended June 30, 2011, the Company generated funds from operations of $66.4 million ($0.43 per common share) compared with funds from operations of $46.0 million ($0.30 per common share) for the three months ended June 30, 2010, an increase of 44 percent. For the six months ended June 30, 2011, the Company generated funds from operations of $220.9 million ($1.44 per common share), an increase of 66 percent over funds from operations of $132.8 million ($0.87 per common share) generated in the first half of 2010. At June 30, 2011, the Company's working capital totaled $83.1 million, compared to $84.5 million at December 31, 2010, a decrease of two percent. The increases in funds generated from operations are a direct result of the increased demand for oilfield services, primarily in North America, in the three and six months ended June 30, 2011 over the comparable periods of 2010 as well as the expansion of the Company's fleet as a result of the new build program. The Company currently has no long-term debt and continues to have strong liquidity as a result of positive working capital. The strong working capital position, combined with future and currently available credit facilities are expected to provide sufficient support for the Company's capital expansion initiatives and future operations. Investing Activities
Purchases of property and equipment during the second quarter of 2011 totaled $114.3 million (2010 - $64.6 million). For the six months ended June 30, 2011, purchases of property and equipment totaled $181.0 million (2010 - $91.4 million). The purchases of property and equipment relates predominantly to expenditures made pursuant to the Company's ongoing new build program, as well as other capital expenditures. Financing Activities
The Company's available operating lines of credit consist of a $200.0 million global revolving credit facility (the "Global Facility") and a $10.0 million Canadian based revolving credit facility (the "Canadian Facility"). The Global Facility is available to the Company and any of its wholly-owned subsidiaries, and may be drawn in Canadian, United States or Australian dollars, up to the equivalent value of $200.0 million Canadian dollars. The amount available under the Canadian Facility is $10.0 million or the equivalent United States dollars. Net repayments of the operating lines of credit were the result of operating cash flows generated by the Company's United States and international divisions in excess of capital expenditure requirements. As of June 30, 2011, the operating lines of credit are primarily being used to fund the completion of the most recent new build program and to support international operations. On May 18, 2011, the Company announced its intent to file with the Toronto Stock Exchange a Normal Course Issuer Bid (the "Bid") to acquire for cancellation up to five percent of the Company's issued and outstanding common shares. On June 3, 2011, the Company received approval from the Toronto Stock Exchange to purchase up to 7,660,512 common shares for cancellation. The Bid commenced on June 7, 2011 and will terminate on June 6, 2012 or such earlier time as the Bid is completed or terminated at the option of the Company. As at June 30, 2011, no common shares have been purchased and cancelled pursuant to the Bid. The Company previously had a Bid that commenced on June 1, 2010 and terminated on May 31, 2011, under which the Company purchased and cancelled 200,000 common shares. The Board of Directors of the Company has declared a third quarter dividend of $0.095 per common share to be payable October 5, 2011 to all Common Shareholders of record as of September 20, 2011. The dividend is pursuant to the quarterly dividend policy adopted by the Company. Pursuant to subsection 89(1) of the Canadian Income Tax Act ("ITA"), the dividend being paid is designated as an eligible dividend, as defined in subsection 89(1) of the ITA. Subsequent Event On July 20, 2011 the Company announced that it had entered into a definitive agreement to acquire the land drilling division of Rowan Companies, Inc. ("Rowan Land Drilling"), for a purchase price of USD $510 million plus working capital, subject to certain closing adjustments, payable in cash on closing. The transaction is expected to close following the receipt of all necessary regulatory approvals. Rowan Land Drilling owns and operates 30 deeper capacity electric land drilling rigs in the southern United States. The purchase price will be funded through the Company's existing working capital, available lines of credit and a new term facility of up to USD $400 million. The acquisition of Rowan Land Drilling will provide the Company with a substantial presence in the southern United States, complementing the Company's existing operations in the Rocky Mountain region and California. The addition of Rowan Land Drilling enhances the Company's ability to capitalize on strengthening industry fundamentals in the United States and to access a diverse customer base in the increasingly important oil and natural gas resource plays in the southern United States. New Builds During the first half of 2011, the Company commissioned five new ADRTM style drilling rigs and seven well servicing rigs in the United States and two well servicing rigs in Canada. The remaining new build estimated delivery schedule, by geographic area, is as follows:
Outlook The general outlook for oilfield services remains cautiously positive in spite of potential negative pressures from a slow-down in the economic recovery, particularly in the United States, and continuing concerns over United States and Eurozone debt issues. While these factors weigh on overall levels of demand for energy, the market appears to be focused on the supply side of the equation. Continuing unrest in key energy producing regions of Africa and the Middle East has resulted in robust prices for crude oil. This favorable pricing has increased demand for oilfield services in many of the areas serviced by the Company that have less geopolitical risk than certain other energy exporting countries. In early June, the Canadian Association of Oilwell Drilling Contractors ("CAODC") revised its forecast of drilling operating days for 2011 to 154,300, an increase of 20 percent over its earlier forecast from October 2010. The CAODC now expects 13,128 wells to be completed in 2011, an increase of 11 percent from its previous estimate. Despite normal seasonal restrictions to road access for the Company's equipment and unusually wet weather conditions during the "spring break-up" quarter, the Company's Canadian operations generated 17 percent more drilling days during the second quarter in comparison to the number of drilling days generated in the comparative quarter last year. Third quarter activity levels are expected to reflect pent up demand for oilfield services due to the negative impact of wet weather conditions in the second quarter. The Company's United States operations also surpassed last year's second quarter drilling days by 17 percent, attributable to strong activity levels in crude oil and liquids-rich resource plays. NYMEX natural gas prices have increased slightly over those in the first quarter of 2011 and similarly against the second quarter of 2010, but continue to disappoint. The positive driver for activity continues to be strong crude oil prices and positive economics in liquids-rich natural gas plays, as well as those activities which retain land holdings for future development. The net result has been continued growth in the number of rigs drilling for crude oil, while the number of rigs drilling for natural gas has been relatively flat since early March 2011. Going forward, the Company expects more of the same from its soon to be expanded United States operations. The Company's international operations continue to experience challenges in certain regions due to weather and geopolitical issues. Overall, the Company's international operations had a five percent increase in operating days in the current quarter, when compared to the comparative quarter last year. While there continues to be challenges with international operations in certain areas of Africa and Latin America, the Company remains hopeful that such matters will come to a positive resolution and in the interim continues to focus on its core international markets. The recently disclosed definitive agreement to acquire Rowan Land Drilling and its fleet of 30 deeper capacity electric drilling rigs represents an important entry into the southern United States market for the Company. The Rowan Land Drilling division is active in many of the key resource plays and, upon closing of the transaction (expected within the next 60 days upon receipt of regulatory approvals), will fill a gap in the Company's access to such plays. This proposed transaction transforms the Company from being considered a regional oilfield service provider to being a national player in the United States market with a marketed fleet of 115 drilling rigs. The operational excellence of the Rowan Land Drilling employees will provide instant expertise in some key resource plays in a very important energy producing region of the United States. The Company is very excited about this acquisition and is keen to welcome the Rowan Land Drilling employees to the Ensign team. Risks and Uncertainties This document contains forward-looking statements based upon current expectations that involve a number of business risks and uncertainties. The factors that could cause results to differ materially include, but are not limited to, political and economic conditions, crude oil and natural gas prices, foreign currency fluctuations, weather conditions and the ability of oil and natural gas companies to raise capital or other unforeseen conditions which could impact on the use of the services supplied by the Company. Conference Call A conference call will be held to discuss the Company's second quarter 2011 results at 11:00 a.m. MDT (1:00 p.m. EDT) on Friday, August 5, 2011. The conference call number is (647) 427-7450 (in Toronto) or 1-888-231-8191 (outside Toronto). A taped recording will be available until August 12, 2011 by dialing 1-416-849-0833 (in Toronto) or 1-855-859-2056 (outside Toronto) and entering the reservation number 82249979. 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.
For further information: Glenn Dagenais, Executive Vice President Finance and Chief Financial Officer, (403) 262-1361 |
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