Ensign Energy Services Inc. Reports 2011 Third Quarter Results2011-11-07 CALGARY, Nov. 7, 2011 /CNW/ - Overview Strong continuing demand for oilfield services in the third quarter and first nine months of 2011 when compared with similar periods in the prior year resulted in improved operating and financial results from the Company's Canadian and United States operations. As expected, improved field conditions in Canada allowed operators to address the pent up demand for oilfield services after a particularly wet second quarter through much of the Western Canadian Sedimentary Basin. The Company's international operations continued the trend established in the first half of the year in improving financial contributions in 2011 versus those in 2010. The Company recorded revenue of $475.7 million in the three months ended September 30, 2011, an increase of 39 percent from revenue of $341.3 million recorded in the third quarter of the prior year. The Company recorded revenue of $1,312.4 million for the nine months ended September 30, 2011, a 38 percent increase over revenue of $951.7 million for the nine months ended September 30, 2010. EBITDA (defined as earnings before interest, taxes, depreciation, amortization, and share-based compensation expense) totaled $111.5 million ($0.73 per common share) in the third quarter of 2011, 38 percent higher than EBITDA of $80.6 million ($0.53 per common share) in the third quarter of 2010. EBITDA for the nine months ended September 30, 2011 totaled $346.9 million ($2.27 per common share), an increase of 57 percent from EBITDA of $221.6 million ($1.45 per common share) recorded in the first nine 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 $52.1 million ($0.34 per common share) in the third quarter of 2011, 61 percent higher than Adjusted net income of $32.4 million ($0.21 per common share) in the third quarter of 2010. Adjusted net income for the nine months ended September 30, 2011 totaled $158.7 million ($1.04 per common share), an increase of 96 percent over Adjusted net income of $81.1 million ($0.53 per common share) recorded in the first nine months of 2010. Net income for the third quarter of 2011 increased 98 percent over the comparable prior year period to $64.0 million ($0.42 per common share) compared with net income of $32.3 million ($0.21 per common share) for the third quarter of 2010. Net income for the nine months ended September 30, 2011 totaled $159.8 million ($1.05 per common share), an increase of 83 percent from net income of $87.2 million ($0.57 per common share) recorded in the first nine months of 2010. Funds from operations increased 49 percent to $114.2 million ($0.75 per common share) in the third quarter of 2011 from $76.7 million ($0.50 per common share) in the third quarter of the prior year. Funds from operations for the first nine months of 2011 increased 60 percent to $335.1 million ($2.19 per common share) from $209.4 million ($1.37 per common share) recorded in the corresponding period in 2010. The acquisition of the land drilling division of Rowan Companies, Inc. ("Rowan Land Drilling") on September 1, 2011, the Company's largest acquisition in its history, has significantly expanded the Company's presence in the southern United States land-based drilling market. Rowan Land Drilling owns and operates 30 deeper capacity electric land drilling rigs in the southern United States. The purchase price of USD $510 million was funded through the Company's existing working capital, available lines of credit and a new 18-month term facility of USD $400 million. Although the financing of the acquisition resulted in long-term debt and negative working capital on the Company's balance sheet as at September 30, 2011, current and future credit facilities, together with growing funds from operations, are expected to be sufficient in supporting the Company's growth initiatives, including the current new build program, which upon completion will deliver an additional 15 new state-of-the-art drilling rigs and nine well servicing rigs over the next nine months.
1 EBITDA is defined as "income before interest expense, income taxes,
depreciation and share-based compensation (recovery)/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
share-based compensation plans. EBITDA and EBITDA per share as defined
above are not recognized measures under International Financial
Reporting Standards and accordingly may not be comparable to measures
used by other companies.
Revenue recorded in the third quarter of 2011 totaled $475.7 million, an increase of 39 percent over $341.3 million recorded in the third quarter of 2010. Revenue was $1,312.4 million for the nine months ended September 30, 2011, a 38 percent increase from $951.7 million for the nine months ended September 30, 2010. As a percentage of revenue, gross margin for the third quarter of 2011 increased to 31.3 percent (2010 - 25.4 percent) and 30.5 percent for the nine months ended September 30, 2011 (2010 - 27.1 percent). The Company continues to capitalize on increased demand for oilfield services in the North American market leading to increased revenues in both the three and nine months ended September 30, 2011 as a result of higher activity levels and improvements in day rates. Revenues from the Company's international operations also improved over the prior year as the Company's Latin American operations continue to see higher activity levels as a result of improved demand for oilfield services and the operations in Australia started to recover from temporary weather setbacks present in the first half of 2011. Gross margin increased to $148.7 million (31.3 percent of revenue) for the third quarter of 2011 compared with $86.8 million (25.4 percent of revenue) for the third quarter of 2010. Similarly, gross margin increased to $400.5 million (30.5 percent of revenue) in the first nine months of 2011 compared to $257.7 million (27.1 percent of revenue) for the corresponding period in 2010. Higher demand for oilfield services in 2011 compared to the prior year resulted in improved margins, particularly in the Canadian and United States segments. Major maintenance costs partially offset the increases to gross margin in the three and nine months ended September 30, 2011 due to higher costs being incurred in 2011 compared to 2010 as a result of the additional costs incurred on the equipment fleet to meet the higher activity levels. Canadian Oilfield Services Revenue generated in Canada increased 52 percent to $192.7 million for the three months ended September 30, 2011, from $126.8 million for the three months ended September 30, 2010. For the nine months ended September 30, 2011, revenue increased 51 percent to $561.0 million compared to $372.4 million for the same period in 2010. In the third quarter of 2011, Canadian revenues accounted for 40 percent of total revenue (2010 - 37 percent), and during the nine months ended September 30, 2011, Canadian revenues were 43 percent of total revenue (2010 - 39 percent). Increased revenues are a result of higher demand for oilfield services which led to higher equipment utilization and improvements to revenue rates. Drilling days recorded by the Company's Canadian operations in the third quarter of 2011 increased 32 percent from the comparable quarter in the prior year. During the nine months ended September 30, 2011, drilling days increased 29 percent from the same period of the prior year. Similarly, Canadian well servicing hours increased by 28 percent in the third quarter of 2011 and by 14 percent in the nine months ended September 30, 2011 compared to the corresponding periods in the prior year. United States Oilfield Services The Company's United States operations recorded revenue of $189.2 million in the third quarter of 2011, a 44 percent increase from the $130.9 million recorded in the corresponding period of the prior year. During the nine months ended September 30, 2011, revenue of $490.9 million was recorded, an increase of 40 percent from the $350.5 million recorded in the nine months ended September 30, 2010. Although the United States dollar strengthened briefly towards the end of the period against the Canadian dollar, it weakened during the three and nine month periods ended September 30, 2011 compared to the same periods in 2010, negatively impacting the operating results of the Company's United States operations upon translation to Canadian dollars. The United States dollar decreased approximately six percent relative to the Canadian dollar in the third quarter of 2011 compared to the third quarter of 2010. The United States operations accounted for 40 percent of the Company's revenue in the third quarter of 2011 (2010 - 38 percent) and 37 percent of total revenue in the nine months ended September 30, 2011 (2010 - 37 percent). The number of drilling days recorded by the Company's United States operations in the third quarter of 2011 increased 37 percent from the same period of the prior year. Drilling days for the nine months ended September 30, 2011 increased 28 percent from the comparable period in the prior year. United States well servicing hours in the third quarter of 2011 were up 46 percent compared to the prior year and well servicing hours for the first nine months of 2011 were up 51 percent compared to the first nine months of 2010. The third quarter of 2011 saw the expansion of the Company's United States operations with the September 1, 2011 acquisition of Rowan Land Drilling and its fleet of 30 drilling rigs. This acquisition, combined with seven new drilling rigs and 10 additional well servicing rigs added from the Company's new build program, led to higher operating activity and improved operating and financial results in the United States segment. Subsequent to the closing of the acquisition, Rowan Land Drilling changed its name to Ensign US Southern Drilling LLC. International Oilfield Services The Company's international operations recorded revenue of $93.9 million in the third quarter of 2011, a 12 percent increase from $83.6 million recorded in the corresponding period of the prior year. International revenue for the nine months ended September 30, 2011 increased by 14 percent to $260.5 million from $228.7 million recorded for the nine months ended September 30, 2010. International operations contributed 20 percent of the Company's revenue in the third quarter of 2011 (2010 - 25 percent) and 20 percent in the first nine months of 2011 (2010 - 24 percent). International drilling days for the three months ended September 30, 2011 increased seven percent over the comparable prior year period. International drilling days for the nine months ended September 30, 2011 increased 10 percent over the same period of last year. The Company's international operations improved over the comparable prior year periods as a result of higher activity levels in the Company's Latin American and eastern hemisphere operations as Australia began to recover from temporary weather setbacks in the first half of 2011. Challenges in the Middle East and North Africa continue to occur as a result of regional geopolitical issues, however the Company is hopeful operations may restart in the near future. Consistent with the Company's United States operations, the weakening of the United States dollar relative to the Canadian dollar negatively impacted the operating results of the Company's international operations upon translation into Canadian dollars. 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 significant impairment has occurred. If on further physical inspection of the assets a deterioration of the equipment has occurred, a write down may be required. Depreciation
The Company uses the unit of production method of calculating depreciation for the majority of its property and equipment. Depreciation expense totaled $44.5 million for the third quarter of 2011 compared with $34.5 million for the third quarter of 2010. Depreciation expense for the first nine months of 2011 was $120.4 million, an increase of 23 percent over the $97.9 million recorded in the first nine months of 2010. The increase in depreciation expense is mainly due to the increase in operating activity levels during the three and nine months ended September 30, 2011 compared to the operating activity levels in the corresponding periods of 2010. General and Administrative Expense
General and administrative expense increased 44 percent to $21.2 million (4.5 percent of revenue) for the third quarter of 2011 compared with $14.7 million (4.3 percent of revenue) for the third quarter of 2010. For the nine months ended September 30, 2011, general and administrative expense totaled $49.4 million (3.8 percent of revenue) compared with $42.5 million (4.5 percent of revenue) recorded in the nine months ended September 30, 2010, an increase of 16 percent. The increase in general and administrative expense reflects the expansion of the Company's operations in all regions in which the Company is active and includes some one-time costs associated with the acquisition and integration of Rowan Land Drilling. Share-Based Compensation (Recovery) Expense
Share-based compensation (recovery) expense 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 September 30, 2011, share-based compensation recovery was $18.3 million compared with an expense of $0.1 million recorded in the third quarter of 2010. For the nine months ended September 30, 2011, share-based compensation recovery was $1.6 million compared with $9.4 million for the nine months ended September 30, 2010. The change in share-based compensation (recovery) expense in the three and nine months ended September 30, 2011 arises from the fair value accounting under IFRS and the change in the price of the Company's common shares during these periods. The closing price of the Company's common shares was $13.75 at September 30, 2011 ($12.63 at September 30, 2010), compared with $19.12 at June 30, 2011 ($12.52 at June 30, 2010), $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 global revolving credit facility, that was increased by $50.0 million in the third quarter to a total of $250.0 million, the $10.0 million Canadian-based revolving credit facility and the Company's new USD $400.0 million 18-month term loan, incurred to partially fund the acquisition of Rowan Land Drilling. Transaction fees related to the Company's recent debt financing and renewal are also included in interest expense in the third quarter of 2011. Foreign Exchange and Other ((Gain)/Loss)
Included in this amount is a foreign exchange loss on the conversion of the Australian operations from Australian dollars to United States dollars. The Australian currency weakened against the United States dollar during the three and nine months ended September 30, 2011, but had strengthened during the three and nine months ended September 30, 2010. Income Taxes
The effective income tax rate for the three months ended September 30, 2011 was 23.6 percent compared with 29.3 percent for the three months ended September 30, 2010. The effective income tax rate for the nine months ended September 30, 2011 was 29.3 percent compared with 33.8 percent for the nine months ended September 30, 2010. The decrease in the effective income tax rate in the three and nine months ended September 30, 2011 is primarily due to a larger proportion of taxable income generated in Canada, in combination with reduced taxable income from higher rate jurisdictions. Financial Position The following chart outlines significant changes in the consolidated statements of financial position from December 31, 2010 to September 30, 2011:
Funds from Operations and Working Capital
1 Comparative figure as of December 31, 2010. During the three months ended September 30, 2011, the Company generated funds from operations of $114.2 million ($0.75 per common share) compared with $76.7 million ($0.50 per common share) for the three months ended September 30, 2010, an increase of 49 percent. For the nine months ended September 30, 2011, the Company generated funds from operations of $335.1 million ($2.19 per common share), an increase of 60 percent over $209.4 million ($1.37 per common share) generated in the first nine months of 2010. 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 nine months ended September 30, 2011 over the comparable periods of 2010 as well as the expansion of the Company's fleet as a result of the acquisition of Rowan Land Drilling and completions under the new build program. At September 30, 2011, the Company's working capital was negative $12.7 million, compared to a positive working capital of $84.5 million at December 31, 2010, a decrease of 115 percent. Financing of the acquisition of Rowan Land Drilling during the latter half of the third quarter of 2011 resulted in long-term debt and temporary negative working capital on the Company's statement of financial position as at September 30, 2011. Despite this recent shift in capital structure, current and future credit facilities, together with funds from operations, are expected to be sufficient in supporting the Company's current operating and capital requirements. Investing Activities
Effective September 1, 2011 the Company acquired Rowan Land Drilling for USD $510.0 million. Rowan Land Drilling is comprised of 30 deeper capacity electric land drilling rigs in the southern United States. The purchase was funded with existing cash balances and expanded credit facilities, including a new 18-month term loan of USD $400.0 million. Purchases of property and equipment during the third quarter of 2011 totaled $71.6 million (2010 - $61.0 million). For the nine months ended September 30, 2011, purchases of property and equipment totaled $252.6 million (2010 - $152.4 million). The purchases of property and equipment relates predominantly to expenditures made pursuant to the Company's ongoing new build program. Financing Activities
The Company's global revolving credit facility (the "Global Facility") was increased by $50.0 million during the third quarter to a new limit of $250.0 million. Additionally, the Company has available 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 $250.0 million Canadian dollars. The amount available under the Canadian Facility is $10.0 million or the equivalent United States dollars. Net draws of the operating lines of credit were the result of the acquisition of Rowan Land Drilling which was completed on September 1, 2011. As of September 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. In connection with the purchase of Rowan Land Drilling, the Company entered into an unsecured term loan of USD $400,000. There are no mandatory principal repayments and the debt matures on February 28, 2013. The Company incurred financing costs associated with the term loan that are being deferred and amortized using the effective interest method. 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 September 30, 2011, no common shares have been purchased and cancelled pursuant to the Bid. New Builds During the first nine months of 2011, the Company commissioned seven new ADRTM style drilling rigs and 10 new well servicing rigs in the United States and one new ADR TM style drilling rig and four well servicing rigs in Canada. The remaining new build estimated delivery schedule, by geographic area, is as follows:
Outlook Equity markets and oil and natural gas commodity prices weakened during the third quarter over growing concerns of the possibility of global recessionary conditions that could be triggered by worsening Eurozone debt issues. While it may be too soon to call a return to recessionary economic conditions or an end to the latest debt crisis, at best there appears to be a softening in global economic activity/growth. Amid this backdrop of rising concern over weakening global economic health, oilfield service activity levels generally remained strong in the third quarter of 2011. Only time will tell whether the recent weakness in the equity markets is but a temporary blip in reaction to another potential financial crisis or if it is a precursor to weaker global energy demand that will lead to a significant decrease in future demand for oilfield services. As expected, third quarter oilfield services activity in Canada picked up substantially from the seasonally low activity levels of the second quarter of 2011. Improved field conditions allowed operators to address the pent up demand for oilfield services after a particularly wet second quarter through much of the Western Canadian Sedimentary Basin. Activity levels for the fourth quarter of 2011 and first quarter of 2012, the Canadian winter drilling season, are expected to remain strong and, subject to favorable weather and field conditions, should be improved over the prior year for most rig classes. The only area of weakness right now appears to be with respect to shallow drilling rigs where demand is not as strong as for other rig classes. As these rigs are generally targeting shallow natural gas plays, the Company believes the demand will not improve until natural gas prices move meaningfully higher. The United States oilfield services activity levels remained strong as the industry active rig count remained close to 2,000 active drilling rigs for the third quarter and has remained at that level for the start for the fourth quarter. The demand for oilfield services equipment to address oil and liquids rich natural gas resource plays remain strong at current crude oil price levels. The Company's recent acquisition of Rowan Land Drilling addresses the equipment requirements of many such resource plays in the southern United States. The transaction closed on September 1, 2011, and 90% of the 30 drilling rigs acquired are scheduled to be active through the next several quarters. As with Canada, the demand for oilfield services in the United States is directly related to the prices of crude oil and natural gas. The outlook for the Company's international segment improved in the third quarter as the operations in Australia returned to normal after having endured the impact of flood conditions in the first half of 2011; and certain areas of the Middle East and North Africa appeared to be moving closer to resolving the civil unrest that has negatively impacted operations since the first quarter of this year. The Company does not expect to resume operations in certain suspended areas until security has been established and it is safe for personnel to return. The other areas in the international segment are expected to remain steady as the longer term approach to international energy investment means that oilfield service activity levels should continue at current levels in the face of short-term uncertainty with respect to crude oil prices. 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 2011 results at 2:00 p.m. MDT (4:00 p.m. EDT) on Monday, November 7, 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 November 14, 2011 by dialing 1-416-849-0833 (in Toronto) or 1-855-859-2056 (outside Toronto) and entering the reservation number 15906624. 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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