Ensign Energy Services Inc. (ticker: ESI), a prominent oilfield service company, held its Third Quarter 2024 Results Conference Call on November 1, 2024. President Bob Geddes and CFO Mike Gray provided an overview of the company's financial and operational performance, which included a slight increase in adjusted EBITDA and a notable reduction in debt. Despite a decline in U.S. operating days, the Canadian business unit experienced strong demand, and the international operations remained stable. The company's focus on technological advancements, such as the EDGE Autopilot, is expected to enhance efficiency and performance.
Key Takeaways
- Ensign Energy Services saw a year-over-year revenue decline of 2% in Q3 2024, generating $434.6 million.
- Canadian operations reported an 18% increase in high-spec rig operating days, while U.S. operations decreased by 14%.
- The company reduced its debt by $135 million year-to-date, with a target of $600 million by the end of 2025.
- Capital expenditures for 2024 are projected at $167 million, focused on maintenance and growth projects.
- Ensign's U.S. business unit is expanding Performance-Based Incentive contracts, which now cover over half the fleet.
- The company anticipates a steady operational pace with 100 to 110 drilling rigs and 60 to 70 well service rigs daily.
Company Outlook
- Ensign expects to maintain a steady operational pace with minimal changes in U.S. rig activity for the remainder of 2024.
- The Canadian market is stable with high-spec rig demand at a decade-high and nearly 90% of the active fleet contracted until Q1 2025.
- The company is optimistic about long-term market fundamentals and is prepared to leverage its capabilities in both Canadian and international markets.
Bearish Highlights
- Low natural gas prices and recent mergers and acquisitions in the U.S. are expected to delay market improvements until late 2025.
- No significant increases in CapEx are anticipated for 2025 unless U.S. activity picks up in the latter half of the year.
Bullish Highlights
- Ensign's technological advancements, such as the EDGE Autopilot and the Ensign Edge ATC, are improving operational efficiency.
- The well-servicing sector in the Rockies and California is performing well with high utilization rates.
Misses
- U.S. operations faced a 14% decrease in operating days in Q3 2024, totaling 3,065 days.
- No current opportunities in Nevada for lithium drilling despite the market's interest in battery materials.
Q&A Highlights
- The company discussed operations in Venezuela, Australia, and the United States, with a focus on the Permian Basin.
- Ensign is transitioning rigs from the U.S. to the Canadian market, with one rig still en route, expected to complete its move by the end of Q1 2025.
- Over $800 million in forward revenue under contract, with a daily operation of 100 to 110 drilling rigs and 60 to 70 well service rigs.
Ensign Energy Services Inc. remains committed to reducing debt and enhancing free cash flow and margins. The company's next earnings call is expected in three months, where further updates on its progress and operations will be provided.
InvestingPro Insights
Ensign Energy Services Inc. (ESI) continues to navigate a challenging market environment, as reflected in the company's recent financial performance and outlook. According to InvestingPro data, the company's market capitalization stands at $384.99 million USD, with a price-to-earnings ratio of 25.44. This valuation metric, when considered alongside the company's recent operational updates, suggests that investors are pricing in expectations for future growth despite current headwinds.
One of the key InvestingPro Tips indicates that Ensign's net income is expected to drop this year. This aligns with the company's reported revenue decline of 2% in Q3 2024 and the challenges faced in the U.S. market, where operating days decreased by 14%. However, it's important to note that another InvestingPro Tip suggests that analysts predict the company will remain profitable this year, which is consistent with Ensign's focus on debt reduction and operational efficiency.
The company's revenue for the last twelve months as of Q2 2024 was $1,241.07 million USD, with a gross profit margin of 30.82%. These figures, coupled with the company's adjusted EBITDA of $326.82 million USD over the same period, underscore Ensign's ability to maintain profitability in a fluctuating market. This financial resilience is particularly noteworthy given the company's efforts to reduce debt and its strategic focus on high-demand areas such as the Canadian market and international operations.
Investors considering Ensign Energy Services may find additional value in exploring the full range of InvestingPro Tips, which includes 6 tips in total. These insights can provide a more comprehensive view of the company's financial health and market position, complementing the operational updates provided in the earnings call.
Full transcript - Ensign Energy Services Inc (ESVIF) Q3 2024:
Operator: Good afternoon, ladies and gentlemen, and welcome to the Ensign Energy Services Inc. Third Quarter 2024 Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Friday, November 1st, 2024. I would now like to turn the conference over to Nicole Romanow, Investor Relations. Please go ahead.
Nicole Romanow: Thank you, Andrew. Good morning and welcome to Ensign Energy Services Third Quarter Conference Call and Webcast. On our call today, Bob Geddes, President and COO; and Mike Gray, Chief Financial Officer, will review Ensign's third quarter highlights and financial results followed by our operational update and outlook. We'll then open the call for questions. Our discussion today may include forward-looking statements based upon current expectations that involve several business risks and uncertainties. The factors that could cause results to differ materially include but are not limited to political, economic, and market conditions, crude oil and natural gas prices, foreign currency fluctuations, weather conditions, the company's defense of lawsuits, the ability of oil and gas companies to pay accounts receivable balances, or other unforeseen conditions which could impact the demand for services supplied by the company. Additionally, our discussion today may refer to non-GAAP financial measures such as adjusted EBITDA. Please see our third quarter earnings release and SEDAR+ filings for more information on forward-looking statements and the company's use of non-GAAP financial measures. With that, I'll pass it on to Bob.
Bob Geddes: Thanks, Nicole, and good morning, everyone. So, the third quarter, buoyed by strong and increasing demand for our high-spec Ensign ADR Canadian rigs, especially our high-spec Singles, Doubles, and Triples, drove another strong quarter-over-quarter gain with a solid bump from second quarter results. The Canadian business unit led the charge and provided a substantial increase in activity year-over-year for the quarter. This was however, tempered with a decrease in activity in our US Business unit, but with relatively steady margins. We saw a steady quarter-over-quarter and year-over-year in our highly active international business unit, where we have 17 of our 30 high-spec rigs active today operating in six different countries around the world. With steady margins and solid activity levels generally around the globe, we continue to execute on our plan. In the quarter, we addressed another $45 million of debt reduction, which takes us to $135 million year-to-date and keeps us solidly on the path to reduce $600 million of debt over the next three years. This is built on a steady free cash flow stream into a solid forward book and increasing margin construct. Over to Mike for a summary of the third quarter, and then I'll come back to provide an operational update in each of the operating areas. Mike.
Mike Gray: Thanks, Bob. Customer consolidation and volatile commodity prices have impacted Ensign's operating financial results over the short-term. However, despite these headwinds, the outlook for oilfield services is constructive and the operating environment continues to look stable. Overall, operating days were consistent in the third quarter of 2024 in comparison to the third quarter of 2023. The company saw a 14% decrease in the United States to 3,065 operating days, offset by Canadian operations achieving 3,861 operating days and 18% increase. International operations recorded 1,269 days consistent with when compared to the third quarter of 2023. For the first nine months ended September 30, 2024, Overall operating days declined with the United States recording a 27% decrease, offset by an increase in Canada and international of 9% and 6% respectively when compared to the same period in 2023. The company generated revenue of $434.6 million in the third quarter of 2024, a 2% decrease compared to revenue of $444.4 million generated in the third quarter of the prior year. For the nine months ended September 30, 2024, the company generated revenue of $1.26 billion, an 8% decrease compared to revenue of $1.36 billion generated in the same period of 2023. Adjusted EBITDA for the third quarter of 2024 was $119 million, 1% higher than adjusted EBITDA of $117.3 million in the third quarter of 2023. Adjusted EBITDA for the nine months ended September 30th, 2024 totaled $336.7 million, 7% lower than adjusted EBITDA of $361.2 million generated in the same period in 2023. The 2024 decrease in adjusted EBITDA can be primarily attributed to year-over-year declines in drilling activity, primarily in the United States. Depreciation expense in the first nine months of 2024 was $261.8 million, an increase of 14% compared to $229.6 million in the first nine months of 2023. General and administrative expense in the third quarter of 2024 was 1% higher than in the third quarter of 2023. General and administrative expenses increased primarily as a result of annual wage increases. However, G&A was down 12% from Q2 2024 to Q3 2024. Interest expense decreased by 24% to $23.8 million from $31.3 million. The decrease is the result of lower debt levels and reduce effective interest rates. Our interest expense will continue to decline as our debt level decrease and interest rates continue to be cut as our interest rate on our debt is floating. During the third quarter of 2024, $44.7 million of debt was repaid and a total of $135 million was repaid during the first nine months of 2024. From January 1st, 2023 to September 30th, 2024, a total of $352.6 million of debt has been repaid, leaving $247.4 million of the $600 million debt reduction target expected to be achieved by the end of 2025. The company is on track to achieve its stated debt targets. Net purchases of property and equipment for the third quarter of 2024 totaled $33.5 million, consisting of $5 million in upgrade capital and $32.3 million in maintenance capital. Offset by disposition proceeds of $3.8 million. Capital expenditures for 2024 are targeted to be approximately $167 million, primarily related to maintenance expenditures, tubular purchases, and selected growth and upgrade projects that have been funded by customers. On that note, I will turn the call back to Bob.
Bob Geddes: Thanks, Mike. So let's [run around] (ph) the world here and do an operational update, starting with Canada. The combination of expanded pipeline capacity, both for oil and LNG, the tightening differential, and with the low Canadian dollar, the net effect is that more drilling will occur in the Western Canadian sedimentary basin. It's safe to say that the demand for high-spec singles and high-spec triples is at the highest it has been in quite some time, at least a decade. This has also helped to drive the high-spec double market to enjoy utilization above 60%, which is a typical threshold where a contractor is able to move pricing. Almost one-third of Ensign's Canadian fleet are high spec doubles, so we have lots of product to feed into this construct. Our fleet of high-spec singles and high-spec triples are essentially booked well into 2025. Canada is back to the first quarter levels of activity, which rarely happens in the Canadian market in the third quarter. Historically, over a third of the operating days typically occur in the first quarter of the winter drilling season. Our Canadian drilling business unit has 50 rigs active today and looking steady through November with a drop-off, as we get closer to Christmas and operators shut down over the Christmas break. After Xmas, we have visibility to quickly get back to 55 rigs, perhaps even peaking at 60. Rates for the high-spec singles and high-spec triples, will be moving higher as utilization in these rig categories continues to be very strong. Notwithstanding, day rates are still well below any new build metrics. Rates need to be in the 50s before we see new build super-spec triples, and for the high-spec singles and high-spec doubles rates will need to be in the very high 30s before investment could be made in new builds with a reasonable rate of return that covers at least cost capital. We're also seeing lots of interest in our EDGE autopilot with specific apps such as the ADS, the Automated Drill System, which charges out at $1,000 a day being initiated on certain high-spec triples growing into Canada. While on the incremental revenue theme, we have also expanded certain apps from our EDGE autopilot platform onto our ADR high-spec singles. Again, more opportunity to drive incremental revenue streams on existing active assets. As mentioned, we have almost 90% of the current active Canadian fleet contracted until the end of the first quarter of 2025. While we witnessed very competitive bidding into the third and fourth quarter, we did strategically place ratcheting rate increases, compounding as we moved through the fall season and into the winter drilling season. Our Canadian well servicing business continues to have a strong schedule ahead of for its rigs in the heavy oil area and is expected to pick up as we continue to capture more of the OWA work into 2025. Our rental fleet of tubulars, tanks, and other high-margin ancillary equipment continues to grow as more and more specialty equipment is called for, usually high-torque tubulars to attach to our high-spec ADR drill rigs. With accelerated wear, an issue on tubulars as a result of the high penetration rates, it is becoming the norm for tubulars to be charged separate from the rig rate and recognize the consequence of accelerated wear on full cycle tubular costs. Moving to international, we have a fleet of 30-plus drilling rigs that operate in six countries around the globe, of which 17 are under contract today. In the Middle East, we have 100% of our high-spec ADR fleet actively engaged in long-term contracts, and with half of them on PBI contracts, so it's performance-based contracts, we're able to get paid for the performance our high performance drilling team provides when coupled with our EDGE Autopilot drill rig control systems. In Oman, specifically, we drilled the project well ahead of schedule, and as a result we have two of the three ADRs on standby until year-end, at which time they'll pick [rate] (ph) back up and get after the 2025 drilling campaign with the client. In Argentina, we're running at 100% utilization with both our 2,000 horsepower high-spec ADRs operating and under long-term contracts. We have one of our drill rigs working in Venezuela with another ready to start up in the next month. Australia is staying steady with very little change. Moving to the United States, we have a fleet of 77 high spec ADRs in the US stretching from the California market up into the Rockies and with the main focus back down into the Permian West Texas. We operate roughly 37 rigs today, which is what we ran on average through the second quarter. We expect a little change for the rest of 2024, with possibly upside of one in two rigs. The challenge in the US, is that in addition to the depressed natural gas prices, we saw $0.5 trillion of M&A activity in the last 18 months occur, which has manifested itself in the less work in the short-term. The natural gas story may take a little bit longer to correct itself. The good news is that we have mainly been an oil-focused driller in the US Market. Coming back to the effects of M&A, until the combined entities get through a budget cycle and start addressing decline rates, we don't expect solid improvements in the US market until late 2025 at the earliest. Our US business unit continues to expand its PBI contract base and now has over half the fleet on a PBI contract to some degree that builds off our high-performance and highly-trained field teams coupled with our EDGE autopilot drilling rig control system technology. Excuse me. Not only do we get a superior rate for our EDGE autopilot technology, we capture the upside value generated to the operator through performance metrics. Everybody wins. The operator delivers all bores for lower costs, and we help de-risk that with our PBI contract form. Our US well-servicing business unit, which is focused primarily on the Rockies in California well-servicing market, continues to enjoy high-utilization in the upper 80s and delivered a record quarter. Our directional drilling business, which is essentially a mud motor rental business that utilizes proprietary technology, continues to provide some of the best motors with high-quality rebuilds in the Rockies. We're also expanding this into the Permian. Move to the technology. Edge autopilot drilling rig control systems, happy to report we have successfully beta-tested our Ensign Edge ATC. ATC is the Auto tool face control. This paves the way for seamless control of automated directional drilling from those operators who utilize remote operating centers and utilize in-house DGS, Directional Guidance Systems. We continue to grow and deploy EDGE Autopilot onto our active rigs across the globe. We most recently installed and commissioned our rig – our Ensign rig OS on our Bahrain rigs, which are starting to execute onto PBI contracts. We continue to expand the Edge [indiscernible] platform on each of the rigs that already have our Edge Autopilot DRC technology. This part of the business continues to grow at a rapid pace year-over-year and deliver results with reduced well times, increased P rates with reduced well tortuosity, and help differentiate Ensign from our competitors. With that, I'll turn it over to the operator for questions.
Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question is from Aaron MacNeil from TD Cowen. Please go ahead.
Aaron MacNeil: Hey, morning all. Bob, in your prepared remarks you mentioned you were essentially booked on the triples in Canada. I was wondering the impression that you had a couple idle rigs in the region. So I guess, is that still the case? And, as we look into LNG Canada coming into service, how are you thinking about marketing, either, I guess, idle rigs in Canada or the US and what do you think it costs to get them running?
Bob Geddes: So in Canada we have, today we've got a few that are ready to go to work, no capital involved in putting them back to work. They've got two or three bids out on them. I fully expect they will be contracted as we go into the first quarter. So that's what we mean by that comment. LNG, the effects, I think that you're probably going to see more of that weaving itself into the back-half. I don't see any immediate response to fill pipeline capacity today on LNG. I think everyone's got the capacity to kind of filter into that. The question is how do they keep that moving along? And, you know, with some of the debottlenecking and pipeline efficiencies working through, Yeah, you're going to need a steady platform of high-spec triples to keep that moving along. And as I mentioned, the cost to put a new rig together is right now burdensome. Rates are not up into the 50s, where they would need to be to support a $50 million super-spec triple type rig, which is what the operators are always wanting. They want the highest technology for the best price.
Aaron MacNeil: Gotcha. Maybe this one's for you. Maybe it's for Mike. I know it's not specifically disclosed, but can you speak to US gross margins for your drilling rigs and if not the specific dollars, then maybe the trend that you're observing as you think about day rates as well as sort of the prevailing cost structure?
Mike Gray: Yeah, for sure. I mean, we've seen some margin compression over the last couple of quarters, just with the sort of static to the flat activity in the US and with idle rigs and other basins but the cost structure overall has been fairly static if not slightly down the whole supply chain sort of issues that came from COVID seem to be alleviated now, so from our standpoint the margin compression is really more on potential revenue rates than really on a cost basis, but we're seeing that being fairly flat to static on a go-forward basis.
Aaron MacNeil: Very helpful. Thanks, guys. I'll turn it back.
Operator: Your next question is from Keith Mackey from RBC. Please go ahead.
Keith Mackey: Hey, thanks and good morning. Mike, can we start out on the Q4 free cash flow and liquidity? Maybe if you could just walk us through the pieces of free cash flow for Q4. We know you've got some mandatory debt repayments and now there is a credit facility liquidity coming in for Q4. Can you just kind of walk through what we should expect on the free cash flow side to help keep you on side of that -- of the revised liquidity?
Mike Gray: Yes. No, for sure. I'll start off. I mean, we're definitely going to be on the right side. When you look at the consensus right now, it was about $120 million for EBITDA CapEx with the $167 million for the quarter, we'll probably be around that $30 million gross CapEx. Interest expense will be between that $20 million to $25 million. So that leaves you about $65 million of free cash flow left over for debt repayments. There is potential for some non-operating cash inflows from some property and asset dispositions that could come into Q4. So when we look at the free cash flow based on where consensus is, CapEx and interest, we should be in a pretty good position. We exited the quarter Q3 was $66.3 million in liquidity, so with the $75 million reduction in the facility and the $27 million term loan payment, we don't foresee any issues, and we'll exit the year with liquidity. Going into Q1 with 2025 looking fairly stable to static kind of year-over-year. We don't really see a big demand for CapEx or anything like that. So everything is looking like I said on the right side going forward.
Keith Mackey: Okay. That's very clear. And just on 2025, I know you haven't given guidance yet, but what's sort of the ballpark we should be thinking about for 2025 CapEx at this point? Is it roughly a flat year given the rest of the activity level should be roughly flat?
Mike Gray: Yes. What we are seeing is probably pretty flat year-over-year. Like I said, if activity in the US picks up in the back half, that might increase a little bit. But what we are seeing right now is a fairly static year-over-year, which I think from the balance sheet perspective, is quite good.
Keith Mackey: Yes. Got it. And just one final one for me on the Canada Duvernay, specifically, I know you've got pretty high utilization on your triple rigs as it is, and you've been pretty active historically in the Duvernay. And I know that asset -- one of the assets in the Duvernay anyways has recently changed hands. Can you just talk maybe about some of the trends you're seeing in the Duvernay, do you expect activity there to pick up in the next one years to two years? Or should things there stay relatively flat?
Bob Geddes: My sense is I stay relatively flat with maybe a small uptick. But -- it seems that the Canadian market has moved away from this heavy first quarter, drill your brains out, settled down second quarter, slowed down third quarter, fourth quarter into a more stable. And that's a lot to do with the infrastructure has been more robustly built out. And we have pad rigs that can drill right through breakup. So it's taken the seasonality out of it a little bit. So you're seeing a more common static approach. So I would suggest static to maybe one or two rigs.
Keith Mackey: Got it. Okay, thanks very much.
Bob Geddes: Thanks Keith.
Operator: Your next question is from Waqar Syed from ATB Capital. Please go ahead.
Waqar Syed: Thank you for taking my questions. I have a few of those. First of all, on your EBITDA margins, they look to be up like 300 basis points year-over-year, which is fairly impressive. Is it all -- the margin uplift is all being driven by Canada drilling? Or is it also well servicing as well contributing as well in international because we know US is perhaps down.
Mike Gray: Yes. No, it's a combination of all. The Canadian market, well-servicing and then the international, predominantly in Australia. So we are seeing, let's say, margin expansion in areas like that. And then we're seeing, like I said, fairly static to slightly down on the US side just given some of the pricing constraints.
Waqar Syed: No. In Australia, you said also helping. Is it pricing is up in Australia?
Bob Geddes: Generally, it is fairly flat. We've got 2 large rigs on large -- they're almost integrated project management projects, Waqar, that can lead the way and those results two out of the seven that we have running are kind of skewing those numbers a little bit.
Waqar Syed: Now this is good that the rig mix has shifted, but it feels to me like over the last one year, Australia activity hasn't really picked up as at least how I expected. What's going on there?
Bob Geddes: Well, they -- a good question. I mean they seem to have fallen into -- they can drill enough to keep the $13 million LNG going off the coast and satisfy their internal needs which are growing, electricity needs are growing. But we see a growing construct there moving into the future. There is always been a little bit of political challenges. Australia isn't void of those, but are more generous with the gas development. I do think though that -- we think of it as a fairly static, no fundamental problems and it will grow slowly over time, but we are not expecting any rapid jumps.
Waqar Syed: Yes. And now shifting to the US market in California, what's your mix in terms of drilling between geothermal and for hydrocarbons. And then do you see any opportunity for rig activity in Nevada for drilling for lithium-bearing grinds.
Bob Geddes: We don't have any lithium wells underway today. We have one rig in California growing to -- we'll have one up in Oregon drilling geothermal. So most of it is oil and gas. I mean geothermal doesn't make a market. You get geothermal wells between other oil and gas wells when the rigs are down, but you don't get geothermal projects back-to-back to keep a rig busy. It's more anecdotal. But we've got more experience than anyone drilling geothermal wells, and we've got a great team that understands what's required, so when the engineering teams that look after the geothermal wells who don't have any experience or very little experience in the area, we can help them derisk the project.
Waqar Syed: Yes. There is -- have you -- has any one of these lithium companies in Nevada approach you guys about future needs for drilling rigs or nothing as yet, no talk as yet?
Bob Geddes: Nothing I'm aware of. Nicole? No, no. Not that we're aware of, Waqar.
Waqar Syed: Okay. And then could you talk about your rig moves from US to the Canadian market? Have they all happened? Or there is still some rigs on the move?
Bob Geddes: Yes. Basically, there is one other one underway that will weave itself in probably end of first quarter type of thing. And we had one 2,000 horsepower rig that was built for the Horn River by Trinidad, which drilled a few wells and then sat down for a period of time, drilled one or two wells after that. It is moved into Oregon to drill a deep geothermal well. And then it's contracted into the Rockies after that. Rigs, as you know are getting deeper because of 4-mile and 5-mile laterals and more racking capacity. So a 2,000 horsepower rig all of a sudden becomes a little more desirable in certain markets, but not the Horn River market in Canada.
Waqar Syed: Sure. Well, that's all from me. Thank you very much. Appreciate the comment.
Mike Gray: Thanks Waqar appreciate it.
Operator: [Operator Instructions] There are no further questions at this time. Please proceed with closing remarks.
Bob Geddes: Thank you, operator. So looking forward, it continues to be an exciting time for Ensign as we build on last quarter's robust Canadian and international market fundamentals. We are seeing an improving long-term outlook in all our US markets, but don't expect any meaningful growth until back half of '25 or into '26. With over $800 million of forward revenue booked under contract, we expect to continue the steady run rate of 100 to 110 Ensign drill rigs and roughly 60 to 70 well service rigs operating daily. One-third of those are on long-term contracts with contract tenure of about a year and roughly 25% of those contracts are on a performance-based contract of some sort. With that, we have excellent visibility for a sustained free cash flow with consistent margins which will provide the ability to continue executing on our debt reduction plan. Just as we said, we do with the application of EDGE Autopilot combined with an expanding PBI contract base backed up with our superior performance drilling teams in the field, Ensign is delivering value to operators, which supports rate increases moving forward. Again, the focus continues to be accelerating, debt reduction into a steadily improving construct for the drilling and well servicing businesses globally. I'd like to thank our highly professional crews and all of our employees, along with our customers for helping Ensign achieve the performance and industry milestones that Ensign rank -- that industry recognizes us for. Look forward to our next call in about three months' time, stay safe. Thank you.
Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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