Ensign Energy Services Inc. (ESVIF) Q4 2019 Results - Earnings Call Transcript
Ensign Energy Services Inc. (OTCPK:ESVIF) Q4 2019 Results Conference Call March 9, 2020 12:00 PM ET
Nicole Romanow - IR
Bob Geddes - President and COO
Mike Gray - CFO
Conference Call Participants
Ian Gillies - Stifel
Keith Mackey - RBC
Ladies and gentlemen, thank you for standing by and welcome to the Ensign Energy Services Fourth Quarter 2019 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Bob Geddes, President and Chief Operating Officer. Please go ahead.
Thank you, Christina. Good morning and welcome to Ensign’s fourth quarter and year-end 2019 conference call and webcast.
On our call today Bob Geddes, President and COO and Mike Gray, Chief Financial Officer will review Ensign’s fourth quarter and year-end 2019 highlights and financial results, followed by an operational update and outlook. We’ll then open the call for questions with the final wrap at the end.
Our discussion today may include forward-looking statements based on current expectations and involve a number of 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 natural gas companies to pay accounts receivable balances and raise capital or other unforeseen conditions that could impact the use of services supplied by the Company.
Additionally, our discussion today may refer to non-GAAP measures such as adjusted EBITDA. Please see our fourth quarter earnings release and SEDAR filings for more information on forward-looking statements and the Company’s use of non-GAAP measures.
With that, I’ll pass it on to Bob.
Well, if there is ever a day for that reference to forward-looking statements that is it. Well, I’m not quite sure where to start this call today. Good morning just does not seem to be appropriate. If coronavirus and the government’s pathetic response to the blockades is not enough, the Saudi response to the Russians walking away from the table just cranked up the hurricane level winds even higher. I’m just now waiting for the seas to turn red.
All kidding aside, it’s unfortunate that the great work of the entire Ensign team worldwide having just completed our first year of incredibly successful Trinidad integration are overshadowed by these monumental macro events today. Anyway, as we say, let’s not let a crisis go to waste.
So to summarize the highlights for 2019. The team successfully integrated the largest acquisition in Ensign’s history with the $1 billion Trinidad deal. We solidified and strengthened our capital structure with the issuance of US$700 million, the high yield bonds, we reduced debt by $135million, we successfully contracted about half of our fleet on forward long-term contracts, we drove cost synergies with $50 million of annualized forward savings expected, and on the technology front, we surpassed all of our Edge implementation goals with 42 Edge control installations, now on our fleet worldwide. And we did all this with a record safety year, the safest in Ensign’s history. And with our hybrid rigs, we reduce carbon dioxide emissions by about 45,000 tons annually.
So, over to Mike Gray for deeper dive on the financials for the period.
Results for the fourth quarter 2019 were materially impacted by Trinidad acquisition, notably through increased activity levels due to the increase in rig fleet size and expanded customer base and additional exposure internationally and in key basins in the United States market when compared to the fourth quarter of 2018.
Operating days were up in the fourth quarter of 2019 with the Canadian operations experiencing a 31% increase, United States operation a 13% increase, and international operations showing a 10% decrease in operating days compared to the fourth quarter of 2018. For the year ended December 31, 2019 operating days were up in the Canadian operations, experiencing a 49% increase, United States operations with 75% increase and international operations showing a 12% decrease in operating days compared to the year ended December 31, 2018.
Adjusted EBITDA for the fourth quarter of 2019 was $93.9 million, 15% higher than adjusted EBITDA of $81.7 million in the fourth quarter of 2018. Adjusted EBITDA for the year ended December 31, 2019 was $406.8 million, the 59% increase compared to adjusted EBITDA of $255.7 million generated in the year ended December 31, 2018. The 2019 increase in adjusted EBITDA can be attributed primarily to the Trinidad acquisition, as discussed before.
The Company generated revenue of $375.8 million in the fourth quarter of 2019, a 9% increase compared to revenue of $346.1 million, generated in the fourth quarter of the prior year. For the year ended December 31, 2019, the Company generated revenue of $1.6 billion, a 38% increase, compared to revenue of $1.2 billion generated in the prior year.
Depreciation expense in the year was $363.1 million, 13% lower than $415 million from the prior year. The reason for the decline was due to the change in estimates on useful life that took place in the first quarter of 2019.
G&A expense in the fourth quarter of 2019 was 7% higher than in the fourth quarter of 2018. G&A expense for the year ended December 31, 2019 was 23% higher than in the year ended December 31, 2018. The increase was due primarily to the Trinidad acquisition. However, synergies and cost savings realized following the acquisition have led to a decrease in G&A as a percentage of revenue. The Company continues to focus on initiatives to manage costs and realize further synergies and cost savings.
Total Company debt net of cash balances decreased by $44 million or 3% in the fourth quarter of 2019 from $1.6 billion at September 30, 2019 to $1.55 billion at December 31, 2019. The Company reduced its debt by $135.4 million for the year through the purchase and cancellation of US$58 million of senior notes and the repayment of the credit facilities.
Net purchases of property and equipment for the fourth quarter of 2019 totaled $17.3 million compared to net purchases of $16.9 million in the corresponding period of 2018. Net purchases of property and equipment during the fiscal year ended 2019 totaled $96 million, compared to net purchases of $73.3 million for the corresponding period of 2018. The Company added one drilling rig to its international operations and one well servicing rig in the United States, during 2019. The Company decommissioned 18 drilling rigs and 12 well servicing rigs in Canada and 14 drilling rigs in the United States during 2019.
On that note, I’ll turn the call back to Bob.
So, let’s start with the worldwide operations summary. Today, we have 132 or roughly half of our 273 high-spec drilling rigs running worldwide with over 40 of them operating with our Edge controls technology. We also have 40 of our 99 well servicing rigs running in North America today. We have about 30 directional drilling kits on the go today and we have our APM, Advanced Performance Management team on a PBC, Performance Based Contracts today, double the amount of the prior year.
Let’s look at each of our areas starting with the U.S. where we generate close two-thirds of our EBITDA. Our southern drilling division, which is primarily Permian-focused, we gained market share throughout 2019 with our super-spec fleet and we currently have about 48 rigs running today. California is running 13 drill rigs today and the Rockies 8. Our U.S. well servicing fleet continues to enjoy 50% activity utilization. Most of our clients are hedged out a few quarters, but there’s no doubt today’s market response will affect everyone.
In the international front, 2020 looks to be a solid year for our international segment, which contributes approximately 20% of our EBITDA while the Middle East was still off the line in fourth quarter ‘19, we have hit the ground running in 2020. And only after the second well, we have drilled the second fastest well in Kuwait, a great start with a five-year contract on those two Kuwait rigs.
Both rigs in Bahrain are operating and are just at the beginning of their three-year contracts. Also, our 3 ADRs are still drilling record wells in Oman, and it appears they be pre-contracted for another two to three-year period.
Our Australian business unit saw 2019 as a transition year where certain rigs were upgraded by operators and put onto long-term contracts; currently running 10 of our 18 rigs today in Australia and look to be bang on with budget through 2020. Most of our drilling rigs are long-term contracts two to three years in duration.
In Canada, we hit a peak of 55 rigs in the first quarter, and our Canadian business unit was well ahead of budget. Today, we have 40 rigs running. The short term effects of the oil price crash are somewhat muted in Canada, today, as we move into breakup with most rigs, falling off as planned because of breakup, and we’ll come back when road bans fall -- come off and we return in the spring summer season. We do expect to have 10 to 12 rigs running steady over breakup on long-term contracts. And at the moment, we do expect 20 to 25 to operate over the summer. Well servicing rigs will stay steady with plus or minus 15 operating ahead in the Canadian business unit.
Coming back to the bigger picture and relevant to the current oil price crash, we would suggest that our CapEx needs for 2020 will align with activity levels. We expect CapEx to probably fall closer to $75 million rather than $100 million. We continue to stay laser-focused on our $100 million debt reduction through 2020.
With that, I’ll turn it over back to the operator for Q&A.
[Operator instructions] Your first question comes from Ian Gillies from Stifel. Your line is open.
Acknowledging this is all pretty new to us, but can you talk a bit about the appetite to keep the dividend in place and how quickly you can make a decision there, or the Board can make a decision?
Yes, the -- of course, it’s a robust discussion in every Board meeting every quarter. So, we’ll see what happens. We always make sure we do the right thing in the context of the market conditions at the time.
But it is coming under pressure.
With respect to the debt repayments made in the fourth quarter, how does your view change on making those with whatever capital is available, given that the credit facilities maturity is obviously much sooner than the notes, and that’s primarily going to be viewed as a point of risk here moving forward?
Yes. I mean there is lots of discussions at the management level on that. So, I mean, from day-to-day, we’ll look where the bonds are trading and look where the liquidity on the facility is and make sure that we have ample facility liquidity, and we kind of go from there. it will change day from day -- day-to-day, depending on where the bonds are trading, and what liquidity looks like kind of go forward and how operations responds to the potential downturn.
Okay. And then, you mentioned that you can -- you can flex CapEx down to $75 million. Are there any other points within the system or within the company where you think you can flex things lower or even CapEx can even get a lower than $75 million?
Yes. I think, there’s a couple of points. We operate one of the lowest fixed overhead costs in the business. We’ve got -- obviously our CapEx of $100 million was premised on running certain number of rigs with this certain news that will come on. So, it’s just relative to that. So, I think we are quite confident that we can skinny that down to $75 million. That’d be appropriate. The other thing you need to keep in mind is we have about $50 million of redundant assets around North America that we can - that are on the market and can be disposed off through 2020. We’re not selling those at fire sale prices, but that’s a relevant number there too.
[Operator instructions] Your next question comes from Keith Mackey from RBC. Your line is open.
Good morning. Thanks for taking my questions. Just a couple of couple of them here. In the U.S., just wondering what you’re seeing and hearing on recontracting rigs, particularly in the Permian. We’ve heard things about potentially Exxon and companies dropping rigs. And that was even before the last couple of days’ news. So, just some commentary on that would be appreciated, please.
Yes. I think, with respect to that particular client, we saw their aspirations of adding rigs trim back a little bit as operations seem to be getting ahead of itself, and they wanted to stay within an efficiency range. I think that -- I mean, they did announce that they’re going to drop 20 rigs that would affect one or two of our rigs only. They’ve been looking to try and pick up more of our rigs while they transition into a higher spec fleet and being able to work out the data and the controls technology and with their bigger platform, which has become a have or have not with Exxon XTO. So, yes, we haven’t heard any news today obviously. So, I can’t imagine there is much great news coming out of the corner these days in the last 24 hours. But, a lot of our guys -- a lot of our clients in the U.S. hedge out, but those hedges will be turning over if there is some continuation of this pricing platform.
Okay, makes sense. And just with respect to the impairment on the Mexico rigs. Is that two rigs within the JV, so now it’s down a couple, is that how we should be thinking about it?
Yes. So, those related to the two rigs that are in Mexico within the joint venture. So, those rigs were written down to a sort of the market value.
And then, just finally, on the Ensign Edge implementations. So, just running over -- or have it deployed on over 42 rigs now. Just wondering what you’re seeing on rates with that technology and uptake, and are customers still paying the 90K installation fee?
Yes. I would say that that’s come under pressure here, lately. Also, we’re not pushing the implementation as hard on new rigs. What we are doing is on the rigs that they are on, we’re pushing the implementation of the apps, like the Edge portal, like Z-Torque, the enhanced slip-stick mitigation, and we’re in the process of beta testing our autopilot. It should be on the market here six months, regardless of what the market conditions are. That project is a low cost initiative to deploy. And we’ve got a client that’s working with us. So, that will continue. We’ve always said never let a crisis go to waste. So, it gives us an opportunity to deploy that and get ready for commercialization into the fall.
Okay, great. That’s it for me. Thanks so much.
There are no further questions at this time. I turn the call back over to Bob Geddes for closing remarks.
A couple of sayings come to mind. Again, don’t let a crisis go to waste and don’t throw the baby out with the bathwater. And Ensign with one of the newest fleets in the business, the lowest overhead cost structure and the benefits of the large international presence, which are generally contracted out two to five years, Ensign’s management has navigated through many storms in the past, and we’ll get through this one. It’s hunker down time once again.
Thank you for joining us today on this ceremonious day. Look forward to updating you on our first quarter results in three months’ time. Thank you.
Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.
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