Ensign Energy Services Inc. Reports 2010 Second Quarter Earnings

CALGARY, Aug. 9 /CNW/ -

Overview

Ensign Energy Services Inc. (the "Company") recorded revenue for the three months ended June 30, 2010 of $257.6 million, a 14 percent increase from the $226.0 million recorded for the second quarter of the prior year. The Company recorded revenue of $610.4 million for the six months ended June 30, 2010, a three percent decrease from revenue of $626.4 million for the six months ended June 30, 2009. The Company's net income for the second quarter of 2010 was $9.3 million ($0.06 per share), a decline of 30 percent compared with net income of $13.2 million ($0.09 per share) for the second quarter of 2009. Net income for the six months ended June 30, 2010 totalled $49.3 million ($0.32 per share), a decrease of 43 percent from net income of $85.9 million ($0.56 per share) recorded in the first six months of 2009.

In spite of overall increased levels of operating activity in the second quarter and first half of 2010 compared to the corresponding periods of the prior year, the Company's financial results declined compared to 2009. The reduced financial results are a result of lower revenue rates in certain geographic segments, temporarily higher operating costs associated with the deployment of additional equipment and the seasonality impact of spring conditions in Canada that limit or prevent the movement of oilfield services equipment. Additionally, the reported results from the Company's United States and international segments were negatively impacted by the stronger Canadian dollar compared to the prior year. In the six months ended June 30, 2010, the Canadian dollar strengthened by approximately 14 percent compared to the United States dollar when compared to the same period in 2009.

Gross margin decreased in the second quarter of 2010 to 23.2 percent compared to 31.0 percent recorded in the second quarter of 2009. For the six months ended June 30, 2010, gross margin was 27.4 percent compared to 33.6 percent for the same period in 2009. Gross margin deterioration was attributable to generally lower revenue rates in certain geographic segments and higher operating costs in Canada. Canadian costs included major maintenance expenditures incurred to activate additional oilfield services equipment needed to meet customer demand in the near term.

Working capital at June 30, 2010 was $125.5 million, compared with $107.9 million at December 31, 2009. Positive working capital and no long-term debt means that the balance sheet remains a source of strength for the Company.

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Revenue and Oilfield Services Expense

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The Company recorded revenue of $257.6 million in the second quarter of 2010, an increase of 14 percent over $226.0 million recorded in the second quarter of 2009. Revenue was $610.4 million for the six months ended June 30, 2010, a three percent decrease from $626.4 million recorded in the six months ended June 30, 2009. As a percentage of revenue, gross margin fell to 23.2 percent for the second quarter of 2010 (2009 - 31.0 percent), and 27.4 percent for the six months ended June 30, 2010 (2009 - 33.6 percent).

The increased revenue in North America was a reflection of stronger demand for oilfield services equipment as evidenced by the increased operating days for the three months ended June 30, 2010. While operating activity levels have also increased in the six months ended June 30, 2010 relative to the comparable period of 2009, pricing pressures continue to persist resulting in slightly overall lower revenues for the first half of 2010 compared to the prior year. Spot prices for uncontracted oilfield services equipment appear to have bottomed in the second quarter of 2010 with the increased activity levels in most regions.

Further, the financial results generated by the United States and international operations in the three and six month periods ended June 30, 2010 were negatively impacted upon translation to Canadian dollars due to the strengthening of the Canadian dollar, compared to the corresponding periods in 2009.

Canadian Oilfield Services

Revenue generated in Canada increased 28 percent to $66.8 million for the three months ended June 30, 2010, from $52.1 million for the three months ended June 30, 2009. For the six months ended June 30, 2010, revenue increased five percent to $245.7 million compared to $233.2 million for the same period in 2009. In the second quarter of 2010, Canadian revenues accounted for 26 percent of total revenue (2009 - 23 percent), and during the six months ended June 30, 2010, Canadian revenues were 40 percent of total revenue (2009 - 37 percent).

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 to gain access to Canadian drilling locations. Generally, the demand for Canadian oilfield services improved gradually throughout the first half of 2010 as crude oil prices stabilized and operators focused drilling efforts on oil plays and liquids rich natural gas projects. Operating activity levels recorded in Canada in the second quarter of 2010 exceeded the Company's initial estimates and surpassed the total operating days recorded in the second quarter of 2009.

Drilling days recorded by the Canadian division in the second quarter of 2010 increased 62 percent from the comparable period of the prior year. During the six months ended June 30, 2010, Canadian drilling days increased 34 percent from the same period of the prior year. Similarly, Canadian well servicing hours increased by 27 percent in the second quarter of 2010 and by 23 percent in the six months ended June 30, 2010 compared to the corresponding periods in the prior year.

The Canadian financial results in the three and six month periods ended June 30, 2010 were negatively impacted by a decrease in pricing compared to the same periods of the prior year. These pricing pressures were partially offset by improved Canadian operating levels in the first half of 2010 compared to 2009. Further, during the first half of 2010, higher operating and maintenance costs were incurred as the Company prepared additional equipment to return to work in anticipation of growing levels of customer demand for oilfield services through the remainder of the year.

United States Oilfield Services

The Company's United States operations recorded revenue of $115.6 million in the second quarter of 2010, a 22 percent increase from $94.6 million recorded in the second quarter of 2009. During the six months ended June 30, 2010, revenue of $219.6 million was recorded, comparable to revenue of $222.3 million recorded in same period of 2009. The United States segment accounted for 45 percent of the Company's revenue in the second quarter of 2010 (2009 - 42 percent), and 36 percent of the Company's revenue for the six months ended June 30, 2010 (2009 - 36 percent).

The number of drilling days recorded by the United States segment in the second quarter of 2010 increased 77 percent from the same period of the prior year. United States drilling days for the first six months of 2010 increased 41 percent from the prior year. United States well servicing hours in the second quarter of 2010 were up 76 percent compared to the prior year and well servicing hours for the first half of 2010 were up 44 percent compared to the first half of 2009. The increase in United States operating activity experienced by the Company is consistent with the overall increase seen in the United States industry's land drilling rig count through the first half of 2010.

The increase in revenue recorded by the Company in the United States in the second quarter of 2010 compared to the second quarter of 2009 is mainly attributable to improved levels of operating activity in the unconventional natural gas plays and in crude oil focused areas, such as North Dakota and California. The impact of improved activity levels was partially offset by lower revenue rates and the translational impact of a weakening United States dollar relative to the Canadian dollar. The average Canadian/United States dollar exchange rate at which the Company's United States results were translated to Canadian dollars for presentation purposes was 1.034 for the first half of 2010 compared to 1.206 for the first half of 2009, a 14 percent decrease.

International Oilfield Services

The Company's international operations recorded revenue of $75.1 million in the second quarter of 2010, a five percent decrease from the $79.3 million recorded in the second quarter of 2009. International revenues for the six months ended June 30, 2010 decreased by 15 percent to $145.1 million from $170.9 million recorded in the corresponding period of the prior year. Similar to the United States segment, the decrease in revenues is mainly attributable to the weakening United States dollar relative to the Canadian dollar during the first half of 2010 compared to the first half of 2009.

The international segment contributed 29 percent of the Company's revenue in the second quarter of 2010 (2009 - 35 percent). During the six months ended June 30, 2010, international revenue accounted for 24 percent of the Company's revenue (2009 - 27 percent). Drilling days recorded by the Company's international operations in the quarter ended June 30, 2010 increased 34 percent from the second quarter of 2009, while drilling days recorded in the six months ended June 30, 2009 increased 23 percent from the same period in 2009.

Consistent with the past few quarters, certain regions of the Company's international segment are continuing to meet expectations and such positive financial results are being offset by continued challenges in the Latin American market.

Depreciation

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The Company uses the unit of production method for calculating depreciation for the majority of its property and equipment. Depreciation expense totalled $31.2 million for the second quarter of 2010 compared with $22.9 million for the second quarter of 2009. Depreciation expense increased to $65.4 million for the six months ended June 30, 2010 compared with $51.8 million for the six months ended June 30, 2009.

The increase in depreciation expense is consistent with the increase in the operating days during the three months and six months ended June 30, 2010 compared to the operating days in the same periods of 2009. Further, depreciation increased due to the utilization of recently constructed higher value equipment added to the Company's fleet over the course of 2009 and 2010.

General and Administrative Expense

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General and administrative expense decreased by six percent to $12.6 million (4.9 percent of revenue) for the second quarter of 2010 compared with $13.4 million (5.9 percent of revenue) for the second quarter of 2009. For the six months ended June 30, 2010, general and administrative expense totalled $24.0 million (3.9 percent of revenue), compared with $27.3 million (4.4 percent of revenue) for the six months ended June 30, 2009, a decline of 12 percent. The reduction in general and administrative expense reflects the ongoing efforts of the Company to reduce fixed costs and the translational impact of a weaker United States dollar on United States and international administrative expenses.

Stock-Based Compensation

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Stock-based compensation expense arises from the intrinsic value accounting associated with the Company's stock option plan, whereby the liability associated with stock-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 quarter-ended ended June 30, 2010, stock-based compensation recovery was $1.4 million compared with an expense of $15.2 million recorded in the second quarter of 2009. For the six months ended June 30, 2010, stock-based compensation recovery was $1.7 million compared with an expense of $11.3 million in the same period of 2009. These recoveries result from a decline in the price of the Company's common shares over these periods, net of the impact of additional granting and vesting of stock options. The closing price of the Company's common shares was $12.52 at June 30, 2010 compared with $14.70 at March 31, 2010 and $15.00 at December 31, 2009.

Interest Expense

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Interest is incurred on the Company's $200 million global revolving credit facility at prime interest rates or bankers' acceptance rates/LIBOR plus 0.75 percent.

Other

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This amount consists primarily of foreign exchange gains and losses on the translation of the Australian operations from Australian dollars to United States dollars. The Australian dollar weakened relative to the United States dollar in the first six months of 2010 compared to the same period in 2009.

Income Taxes

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The effective income tax rate for the second quarter of 2010 was 40.0 percent, consistent with the 39.7 percent rate in the second quarter of 2009. For the six months ended June 30, 2010, the effective income tax rate was 35.0 percent compared with 31.0 percent for the six months ended June 30, 2009.

The Company's effective tax rate on a quarter-over-quarter basis increased slightly due the cumulative effect of tax rates on income in higher rate jurisdictions. Current income tax increased due to increased taxable income in both Canada and the United States. The effective income tax rate for the six months ended June 30, 2009 is lower due to the impact of future income tax recoveries in the Canadian partnerships. During the six months ended June 30, 2010, the effective income tax rate increased due to a greater proportion of income being generated in foreign jurisdictions that have higher income tax rates.

Financial Position

The following chart outlines significant changes in the consolidated balance sheet from December 31, 2009 to June 30, 2010:

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Funds from Operations and Working Capital

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During the three months ended June 30, 2010, the Company generated funds from operations of $43.6 million ($0.28 per common share) compared with funds from operations of $61.9 million ($0.40 per common share) for the three months ended June 30, 2009, a decrease of 30 percent. Funds from operations totalled $130.9 million ($0.85 per common share) in the first six months of 2010, a decrease of nine percent compared to $143.9 million of funds from operations ($0.94 per common share) generated in the six months ended June 30, 2009. The decrease in funds from operations in both the second quarter of 2010 and the six months ended June 30, 2010 compared to the same periods in 2009 is due to lower margin levels resulting from a continued over-supply of oilfield services equipment.

At June 30, 2010, the Company's working capital totalled $125.5 million, compared to $107.9 million at December 31, 2009. The Company's strong working capital position and existing credit facilities are expected to adequately support its future operations and capital expansion initiatives. Existing credit facilities provide for total borrowings of $210.0 million, of which approximately $36.3 million was available as at June 30, 2010. The Company continues to operate with no long-term debt and exited the second quarter with a strong balance sheet.

Investing Activities

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Net purchases of property and equipment during the second quarter of 2010 totalled $62.2 million compared to $26.7 million during the second quarter of the prior year. Net purchases of property and equipment for the six months ended June 30, 2010 totalled $87.7 million compared with $72.8 million for the six months ended June 30, 2009. The net purchase of property and equipment relates predominantly to the Company's most recent new build program. Additional details regarding the new build program are provided in the "New Builds" section below.

Financing Activities

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The Company's available operating lines of credit consist of a $200 million global revolving credit facility (the "Global Facility") and a $10 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 million Canadian dollars. The amount available under the Canadian Facility is $10 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, 2010, 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.

The Board of Directors of the Company has declared a third quarter dividend of $0.0875 per common share to be payable October 5, 2010 to all Common Shareholders of record as of September 23, 2010. 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.

Normal Course Issuer Bid

On May 10, 2010, 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 May 28, 2010, the Company received approval from the Toronto Stock Exchange to purchase up to 7,661,411 common shares for cancellation. The Bid commenced on June 1, 2010 and will terminate on May 31, 2011 or such earlier time as the Bid is completed or terminated at the option of the Company. As at June 30, 2010, no common shares have been purchased pursuant to the Bid.

New Builds

In anticipation of continued opportunities for new oilfield services equipment to meet the growing technical demands of exploration and production companies, the Company has commenced a 2010 new build program that will result in 12 new ADR™ style drilling rigs being constructed for delivery starting late in 2010 and early 2011 and six new well servicing rigs being constructed for delivery in 2010. Currently, two well servicing rigs from this latest new build program have been commissioned in the United States. Ten drilling rigs and three of the remaining well servicing rigs have been allocated to the United States, while the remaining two drilling rigs and one well servicing rig will be operated in Canada. The Company plans to fund the construction program using internally generated cash flows and available operating lines of credit. All of the new build drilling rigs are expected to be contracted prior to the completion of their construction.

The new build delivery schedule, by geographic area, is as follows:

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Outlook

Economic developments in the most recent quarter have maintained the sense of uncertainty regarding the extent and timing of the global recovery. While credit easing and economic improvements have occurred in several advanced economies, equity markets in general have faltered in response to sovereign debt issues in the Eurozone and the potential impact on large trading partners such as China. Expectations for persistently high unemployment, even under current conditions, as well as worries about a potential double-dip recession, have led policy-makers in some jurisdictions to advocate a delay in stimulus withdrawals, even though these are necessary to restore national balance sheets. The demand for energy and related oilfield services depends on improved general economic conditions. Another quarter of relatively stable and robust crude oil pricing has further increased oil-directed drilling, but lack luster natural gas prices, a consequence of a current over-supply of the commodity, continue to disappoint. Until natural gas fundamentals improve, the North American oilfield services industry will not be able to once again attain its potential.

The Company's Canadian operations exited the "spring break-up" quarter with a 34 percent increase in drilling operating days for the first half of 2010 versus the first half of 2009. Conditions in Canada are expected to remain at improved levels for the remainder of the year, based on the continued strength of crude oil and unconventional natural gas resource plays, along with some positive reaction to the apparent resolution of uncertainties in the new Alberta royalty regime. In late May, the Canadian Association of Oilwell Drilling Contractors increased its forecast for rig activity levels by approximately 75 percent for the second half of 2010. Similarly, the Company expects utilization to increase through the balance of the year, however it may take several quarters of sustained growth in demand to abate competitive pricing pressures. In addition to new builds already in progress for Canada, the Company continues to cautiously evaluate opportunities for additional capital investment.

The United States oilfield services sector continues to be relatively active, with the land-based drilling industry's active rig count recently reaching the highest levels since early 2009, but still below the peak level recorded in the latter half of 2008. The proportion of industry drilling directed at crude oil versus natural gas has increased considerably, based on the relative commodity price shifts. Additionally, the number of natural gas-directed active rigs in the industry has recovered to early 2009 levels, based on the continued strength of natural gas shale plays and the economics associated with liquids rich natural gas production. However, caution regarding the sustainability of high activity levels in natural gas drilling is warranted, as these are not fully supported by pricing and new permitting; approximately half of current shale play activity is driven by lease retention requirements. Drilling days in the Company's United States operations for the first six months of 2010 were up 41 percent over the same period in 2009, based on strong demand for crude oil drilling projects and increasing positions in key natural gas resource plays. The Company anticipates a continuation of higher drilling days and utilization for the remainder of 2010 in the United States, together with reasonable prospects for pricing improvements from increased levels of demand for oilfield services.

Our international operations experienced a 23 percent increase in drilling days in the first half of 2010 versus the same period in 2009, reflecting a similar growth in activity levels for the industry. Other than in Mexico, where disappointing second quarter results are expected to carry forward for the balance of the year, improving results in Latin America are expected to add to strong and steadily growing results from the Company's eastern hemisphere operations.

The 2010 fiscal year continues to present both challenges and opportunities, as we expected. Expansion of the current new build program to a total of 12 drilling rigs and six well servicing rigs is underway; and other value creation opportunities will be pursued as these present themselves.

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 2010 results at 2:00 p.m. MST (4:00 p.m. EST) on Monday, August 9, 2010. The conference call number is (647) 427-7450 in Toronto and internationally or 1-888-231-8191 for Canada and the United States. A taped recording will be available until August 16, 2010 by dialing 1-800-642-1687 (local calls 1-416-849-0833) and entering reservation number 88393132. A live webcast of the conference call can be accessed via the Company's website at www.ensignenergy.com. An archived version of the call will be available shortly after the call ends.

Ensign Energy Services Inc. is an international oilfield services contractor and is listed on the Toronto Stock Exchange under the trading symbol ESI.

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