Ensign Energy Services, Inc. (ESVIF) Q4 2020 Results - Earnings Call Transcript

Ensign Energy Services, Inc. (OTCPK:ESVIF) Q4 2020 Results Conference Call March 5, 2021 12:00 PM ET

Company Participants

Nicole Romanow - Head, IR

Robert Geddes - President & COO

Michael Gray - CFO

Conference Call Participants

Cole Pereira - Stifel

Keith MacKey - RBC Capital Markets

John Gibson - BMO Capital Markets

Waqar Syed - ATB Capital Markets

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Ensign Energy Services Inc. Fourth Quarter 2020 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, Ms. Nicole Romanow. Please go ahead.

Nicole Romanow

Thank you, Gabriel. Good morning, and welcome to Ensign Energy Services fourth quarter and year-end 2020 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 2020 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 on 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, economic and market conditions; crude oil and natural gas prices; foreign currency fluctuations; weather conditions; the company's defensive lawsuits; the ability of oil and gas companies to pay accounts receivable balances; or other unforeseen conditions, which could impact the demand for the services supplied by the company. Additionally, our discussion today may refer to non-GAAP financial measures such as adjusted EBITDA. Please see our fourth quarter earnings press 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.

Robert Geddes

Thanks, Nicole. Good morning, everyone. Well, to say 2020 was anything but a very unique year would be nothing short of a complete understatement. 2020 tested management and systems like no other year in our history. Like we always say, never let a crisis go to waste. Ensign's quick proactive response early on in 2020 enabled Ensign to get ahead of the obvious significant change in business brought on by the COVID and all the subsequent macro dynamics that came along with that.

In spite of the serious COVID challenges keeping Ensign rigs operating out in the field, it is not lost on any of us the extraordinary personal commitment and dedication made by all our professional crews on all our rigs around the world. I'd like to take this opportunity to thank all of them for keeping all our rigs around the world running without any significant disruptions. It is amazing that our crews also recorded our best safety record in the company's history amongst all the COVID distractions.

For Ensign, 2020 was a year where the team never lost track of its laser focus on debt reduction. Again, we reacted quickly to the market decline with further rightsizing, cost reductions, capital constraint and further debt reduction. Mike Gray, our CFO, will get into the numbers with you in a few moments, but here are some of the highlights we accomplished through 2020.

We were able to generate free cash flow sufficient to reduce net debt by over $200 million. We were able to maintain the fleet and keep market share with a $50 million maintenance CapEx we guided The Street to. We continue to reduce R&M costs and deliver on a new supply chain model for the field, which helped drive costs even further lower. We successfully completed the beta testing of our EDGE AutoPilot technology and commercialized it recently. We successfully purchased Halliburton's 40% in the joint venture, 5 rigs. And once again, we were able to deliver all this with the base safety metrics in our history. All in all, we ended the year with a strong fourth quarter.

I'll let Mike run over the financial details. Over to you, Mike.

Michael Gray

Thanks, Bob. Results for the fourth quarter and year ended December 31, 2020 were negatively impacted by the macroeconomic conditions due to the pandemic. Operating days were down in the fourth quarter of 2020, with Canadian operations experiencing a 35% decrease; the United States operation, a 60% decrease; international operations showing a 37% decrease in operating days compared to the fourth quarter of 2019.

For the year ended December 31, 2020, operating days were down with Canadian operations experiencing a 37% decrease; the United States operations, a 56% decrease; and international operations showing a 29% decrease in operating days compared to the year ended December 31, 2019. Even with the significant slowdown in activity, the company's total debt net of cash, decreased $88.1 million or 6% in the fourth quarter of 2020 from $1.47 billion at September 30, 2020 to $1.38 billion at December 31, 2020. Year-over-year, total debt decreased by $169.9 million to $1.38 billion at December 31, 2020 from $1.58 billion at December 31, 2019.

Over the 2020 year, the company repurchased US$198.7 million face value of senior notes and recorded a gain of $162.8 million. Adjusted EBITDA for the fourth quarter of 2020 was $52.7 million, 45% lower than adjusted EBITDA of $95.4 million in the fourth quarter of 2019. Adjusted EBITDA for the year ended December 31, 2020 was $241.5 million, a 41% decrease compared to adjusted EBITDA of $412.5 million generated in the year-ended December 31, 2019. The 2020 decrease in adjusted EBITDA is due to the macroeconomic and industry conditions caused by the pandemic and COVID-19.

The company generated revenue of $201.3 million in the fourth quarter of 2020, a 46% decrease compared to revenue of $375.4 million generated in the fourth quarter of the prior year. For the year ended December 31, 2020, the company generated revenue of $0.9 billion, a 41% decrease compared to revenue of $1.6 billion generated in the prior year. Depreciation expense for the year was $374.7 million, 3% higher than $363.1 million from the prior year. G&A expense for the fourth quarter of 2020 was 12% lower than the fourth quarter of 2019. G&A for the year ended December 31, 2020 was 21% lower than the year ended December 31, 2019, as a result of cost-saving initiatives, rate subsidies and organizational restructuring.

The company recorded $11.4 million in non-cash expenses related to the classification of its Kurdistan operations into discontinuing operations. Net proceeds of property and equipment for the fourth quarter for 2020 totaled $3.3 million compared to net purchases of $17.3 million in the corresponding period of 2019. Net purchases of property and equipment during the fiscal year 2020 totaled $18.4 million compared to net purchases of $96 million in the corresponding period of 2019.

On that note, I'll turn it back to Bob.

Robert Geddes

Thanks, Mike. Starting with the U.S., today, we have 36 of our 90 high-spec fleet in the U.S. running in the 3 areas of predominance, the Permian, the Rockies and California. We are seeing the bid book strengthen with the smaller cap companies, while the majors who most were active in M&A activity through 2020 will remain somewhat muted to what we believe will be a [indiscernible] as they settle into figuring out their budgets for the combined entities and establish their drilling plans.

We're also getting serious traction with our EDGE technology suite. And now with our EDGE AutoPilot, fully field beta tested and commercial, we have seen a strong early response from our client base with our EDGE AutoPilot suite into performance-based contracts, which will have up to $3,000 a day upticks in performance metrics, which the EDGE AutoPilot helps to enhance. Our well servicing business continues to work quietly in the background with recompletions and servicing getting stronger as operators push to bring production back with these commodity prices.

Our directional drilling business is generally focused in the Rockies on our turnkey contracts in the U.S., where the professional team can maximize its impact. Generally, we see market pricing improving and operators looking to tie rigs up longer term, a sign that the market has definitely troughed. Our strategy is to respond to these requests for term with step day rates tied to WTI prices. We have a few of these that have already effectively pulled our rates up in the 20s. Notwithstanding, there is an excess of high-spec rigs that need to be contracted before we generally see significant uptick in day rates. Once we see 60% or greater utilization in any rig category or geographic area, that is always the sign that contractors will turn from being price takers and become market makers. I think we are still at least a few quarters away from that occurring, and would anticipate we'll see that starting to happen in the back half of 2021.

Internationally, we have a fleet of 40 rigs in our international business unit, operating in the Middle East area, Australia and South America areas. The Middle East and Australia business units are our most active areas and are areas where we have the longest contract coverage out as far as 2024. Approximately 75% of our guaranteed contract term rigs are in our international arena. Recall, we purchased Halliburton's 40% interest in the international business unit last summer, which gave us 100% ownership of the two 3,400 horsepower super-spec rigs in Kuwait, which I'll point out are tied up on long-term contracts until 2024, also the 2,000 horsepower super-spec rig in Bahrain, which is tied up for 3 more years and two 3,400 horsepower AC super-spec rigs in Mexico, which are currently down.

In Oman, where we have 6 of our rigs, all are currently down, but we started to see more bids come out and fully expect at least half of those rigs to get back to working before the end of the year. Venezuela is still quiet for obvious reasons. Argentina, where we have 6 rigs and 1 operating today on a long-term contract, is starting to see more bid activity. We fully expect to see at least 1 more rig go back to work in Argentina before year-end. Australia, where we operated a fleet of 16 high-spec rigs with 8 under contract, today is basically steady as she goes business. Our long-term contract renewal staging process provides us a steady diet of consistent work in the various basins in Australia. We have a few contract extension negotiations underway on 4 of our rigs, which will push our contracted fleet in Australia with solid work out a few more years again.

Canada, we operate the second largest drilling fleet in Canada with 92 rigs and have about 20% of the market share. We hit a peak of 34 rigs this winter and with breakup upon us, rigs are dropping fast. Today, we have about 17 running. After breakup, we have about 10% of our total fleet tied up on firm contracts and are starting to see a few requests for longer-term contracts with associated circulating system upgrades, which will allow operators to drill out further. These notional capital upgrades will, of course, be all tied to incremental rate increases and long-term contracts.

As mentioned before, our strategy on any long-term contract negotiations is to have a step day rate approach tied to WCS. Based on the strong WCS and gas prices in Canada, we fully anticipate we'll see an uptick coming out of summer and into September, and expect to climb up over 40 rigs running into the fourth quarter. Well servicing under this new management team is already coming out of the gate with better utilization and also winning more SRP, OWA abandonment work over the summer. We expect to have at least 11 well service rigs stay on this work over this summer and into the fall. Our directional drilling business has been surprising us to the upside with 12 jobs running today and what looks to be a strong book after breakup. Rentals had a strong matting revenue for this quarter, and we expect that to roll over into breakup.

In summary, we will see the after effects of high commodity pricing, but in a more buffered response than in prior swings. This is a result of a tight capital market presence, whom are unwilling to jump back into the space and also the effect of all the recent M&A activity, which will push plans to the back half of the year as they get organized. Also because utilization levels are still low and lots of high-spec rigs ready to go to work to fill that rise in demand, we are confident that rates will move but they will move slowly as we get back into the -- as we get into the back half of the year.

Thank you. I'll turn the call back to the operator for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Cole Pereira of Stifel.

Cole Pereira

Just as we think about rig additions in the U.S., can you talk about which basins you're seeing more of that coming from? And just wanted to clarify that again, that still kind of remains more from the private operators?

Robert Geddes

Yes. The -- California is fairly steady. We've seen some increased activity in well servicing in California and the Rockies, some smaller upticks in both drilling and well servicing. But the predominant talk is, in the Permian, where we're starting to see month-over-month rise in rig count. And it is, yes, predominantly with the smaller cap guys.

Cole Pereira

Okay. Got it. That's helpful. And some comments earlier on upgrade CapEx. Should I be thinking that there's maybe a little bit of a cushion in the $50 million budget for that? Or would that be incremental to that $50 million spend?

Robert Geddes

Yes. At this point in time, our plan is to stay within the $50 million. We've got, in some cases, operators are covering the cost with a notional increase in day rate on top of that. In other cases, we're weaving it in -- we had plans that some expectations that this would be coming with certain operators, and we budgeted for that. So the plan is to stay right into that number, that $50 million number.

Cole Pereira

Mike, as we think about debt repayment, acknowledging you're a little limited with the credit facility update, can you just talk about how you're thinking about prioritizing buying back more notes versus paying down the credit facility?

Michael Gray

Yes. I think our methodology hasn't changed from sort of the prior year. So if there's potential opportunity to buyback notes, we'll look at that opportunity to continue to reduce our facility. We do have that $25 million limit. So we do have some limitations on what we can do. Also, I'd say the bond market has really tightened up in the last 2 months, with our bonds trading in the 30s to 40s, and close to the 80s now. So like you said, we'll continue managing the balance sheet like we have over the last basically 4 quarters.

Operator

The next question will come from Keith MacKey of RBC.

Keith MacKey

I just wanted to maybe start off on those performance-based contracts tied to WTI in the U.S., WCS in Canada and so forth. Would those be set on to breakeven at current rates -- current day rates, rather? Or how do those contracts step? Just curious.

Michael Gray

Bob, are you there? I'll take that. Do you want to just repeat that question real quick?

Keith MacKey

Yes. Just the contracts tied to WTI and WCS in Canada for the performance-based contracts. Just curious in how you set those? Is it -- like are they meant to breakeven with just using a standard day rate at where WTI or prices currently sit? Or just how do those contracts step through the different pricing ranges? If you can provide any color there, that would be great.

Michael Gray

Yes, sure. So I mean the base level is still going to have margin in it. And then really, it's going to be, as the WTI increases and the day rate goes up, there's additional margin going to us because you'd assume there'll be some cost inflation and everything like that. So I'd say the base rate that we have is in a breakeven. There is margin on there. And then the margin increases of the price of WTI goes up.

Keith MacKey

Got it. Okay. And one more question just on the EDGE AutoPilot. Is it still a pilot phase now? Like can you run basically 1 rig with that now? Or how many could you actually start to operate if there was demand for it?

Michael Gray

The pilot project went quite well. So I think if customers start to ask for it, then we can definitely start to roll it out to additional rigs.

Keith MacKey

Got it. And that would just require any capital to do that? Or is it…

Michael Gray

Some capital and then some additional sort of manpower.

Operator

Your next question will come from John Gibson of BMO.

John Gibson

In the release, you mentioned potential for Canadian early terminations. I'm just wondering if you could provide some specific color on the class of rigs you're referring to that could be subject to these types turns?

Michael Gray

On the early termination of the sort of mix of the high-spec doubles to the high-spec triples.

John Gibson

Okay. And then can you give any guidance around future expectations for early termination in IBC revenue in both international and U.S. regions?

Michael Gray

So I would say the -- we've sort of been since about November, I'm discussing it kind of go down a 1/3 to a 1/3. So Q1 we'll have probably about a 1/3 of what we saw in Q4 and then really by Q2, I think, pretty much all that IBC and the early term will be wrapped up.

John Gibson

Okay. When you -- going back to the pricing discussions in North America, I'm just wondering if just general conversations have improved over the last few weeks, given the better commodity prices of late? And specifically, producers are generating quite a bit better in terms of free cash flows in this environment. So I'm just wondering if just general sentiment has picked up? I know you expect an increase not to have until the back half of the year, but just where sentiment is right now?

Michael Gray

Yes. I'd say it's increased. I think a lot of producers are still -- hey Bob, are you back?

Robert Geddes

Yes, I'm back. Somehow the phone disappeared. The last question I heard was from Keith on the AutoPilot. We probably moved on from that.

Michael Gray

Yes, we're discussing sentiment with customers in North America with the pricing increases.

Robert Geddes

Yes. Yes. Just before, is Keith still on the line?

Operator

He is still on the call, but his line is closed now.

Robert Geddes

Okay. I just want to come back to the AutoPilot question. The AutoPilot is going to be our platform, which will get pushed out to all of the rigs. It's basically a software and hardware application that is easily installed on the rigs. It becomes basically our -- it becomes like a Microsoft Office out at the rig, where all of our other applications reside and coordinate. And that's the way to look at it. So it pulls all the other apps like ROPtimizer and Quill Oscillation and everything else, Slip-Stick auto tool phase together into what we're calling the AutoPilot suite. So the way to look at it is much like Microsoft Office. So it will go out in all the rigs eventually over time, and we can remotely turn it on or off from Houston, from our control center there as we see fit. And operators -- some request it, some don't. Some we have tie -- will tie into performance-based contracts, where we'll turn it on, and we'll make our money through performance metric kickers. So anyway, I just wanted to come back to that for clarity.

Sorry. So the current question on the table is -- I'm sorry, again, Mike?

Michael Gray

Well just on a customer sentiment with the increase in WTI in North America?

Robert Geddes

Yes. Well, they certainly like it. There's -- first of all, I mean they're moving to clean up their balance sheets. They're not looking to grow production. If you -- the story, if you grow more than 5% production, you're going to get hammered. So they are starting to collect the cash flow. They are starting to make plans into the back half of the year for sure. We're starting to see that in our book. So it's coming along.

Operator

[Operator Instructions]. Your next question will come from Waqar Syed of ATB.

Waqar Syed

Bob, you mentioned that in the back half of the year, there could be incremental rigs based on your conversations. Could you maybe talk about in the U.S., how many incremental rigs do you think you could have running in the fourth quarter versus your current activity levels?

Robert Geddes

Yes. I think how we're seeing it right now, I think that the fourth quarter will probably see a 50% bump to current levels in both the U.S. and Canada in the fourth quarter. A build up through the summer, into the third quarter and the fourth quarter with about a 50% increase. I think we'll probably exit the year with about 100 rigs running, would be my sense right now, and we're currently running 70. I think we'll dip down to about 60 as we come out of breakup in through the summer. The U.S. is slowly matching that rig up or rig down. And -- but it will slowly start building from about June to the end of the year up to fourth quarter, I'm thinking closer to 100 rigs.

Waqar Syed

Do you think in Canada you could have more rigs running in the fourth quarter on average than you have in the first quarter?

Robert Geddes

No. I think that it will be very close, though. I think it will be very close.

Waqar Syed

And then, Bob, in the fourth quarter of '20 last quarter, in international markets, you had 9.9 rigs that you reported working on average. Could you break that number down, like regionally, how did that kind of stack up?

Robert Geddes

Yes. It would have been 7 plus 1 in Australia. The 1 is on a standby. We had 2 in Kuwait, 1 in Bahrain, zero in Oman, 1 in Argentina, zero in Venezuela.

Waqar Syed

Okay. So right now, then you have 7 in Australia, 2 and 2 in Middle East, so 4, so 11, and then 1 in Argentina, so 12 rigs working?

Robert Geddes

Correct.

Waqar Syed

On revenues? Okay. And then by the end of the year, do you think you could have maybe a couple more?

Robert Geddes

Yes. I think, Oman, as I mentioned, we're currently at zero rigs running in Oman right now. We've got 2 or 3 bids out for some of our rigs there. So we'll nail 1 of them. I expect half of our rigs in Oman should go back to work by the end of the year, fourth quarter, let's say. Yes.

Waqar Syed

And how would your G&A cost kind of trend going forward?

Robert Geddes

Well, as I mentioned in the call, we never let a crisis go to waste. We basically cut our overhead in half in April, and we run a pretty lean machine in the first place. And we focused on systems efficiency and Mike and his team, basically -- and a lot of this was kind of forced through people working at home and COVID, and all those other things. There was a lot of discoveries we made cleaning up, streamlining systems, basically building the companies again, where we can run -- we continue to add rigs without adding any office staff. And that's the whole purpose of the exercise here through 2020 was to -- right out to our rig manager, where we've got a rig manager portal, the rig manager does all his business out at the rig.

We found that -- 2 years ago, we did a study and we found that rig managers, 70% of their time was -- I'm sorry, 50% of their time was spent doing paperwork for the benefit of the office. So we turned that around, and we built a complete new rig manager portal system, where the rig manager's business is done out at the field in about a 1/4 of the time. That frees up his time to do more training, et cetera, which he is supposed to do at the rig. So anytime we add 5 or 6 rigs, we'll probably have to add a superintendent for supervision. But other than that, our fixed cost model, low fixed cost model, continues to drive more efficiency on a G&A or operating day basis into the future. So we -- again, we took advantage of 2020 to get that nailed down.

Waqar Syed

Yes. But there were also some salary cuts that were implemented, and one would assume at some point, those would start to come back on. So based on that, do you see that overall G&A that you report numbers to go up?

Robert Geddes

There'll be some inflation as the market improves. Yes, probably. But it's not going to be significant at all.

Waqar Syed

And then just last question. Anything on the ESG front that you could talk, like what are your customers asking for? And then in terms of either use of line electricity or dual fuel or anything?

Robert Geddes

Yes. Nicole, do you want to handle that?

Nicole Romanow

Hi, Waqar, yes, our customers are -- we do have biofuel kits are in the field. We have our hybrid rig down in the U.S., and we have another rig actually operating with natural gas. So we are seeing our customers focus on predominantly fuel alternatives right now. And in particular, we are seeing interest pick up with our hybrid rig setup. So that's the [battery] management system along with the natural gas set up.

Waqar Syed

Is it mostly just still the U.S. side? Are you seeing interest in Canada or in the international markets as well?

Nicole Romanow

International is a little quieter, I'd say, on this front. Canada, we are seeing more interest, particularly in the biofuel system. So in Canada, we were running about 11 biofuel rigs on average, and we're seeing interest pick up in that particular market.

Operator

And we have no further questions at this time. I'll now turn the call back over to the presenters for any closing remarks.

Robert Geddes

Yes. Thanks again, everyone, for chiming in. And we'll look forward to our next call here in 3 months' time. Thank you.

Operator

This concludes today's conference call. Thank you very much for joining. You may now disconnect.