Ensign Energy Services Inc.

Bob Geddes - President and Chief Operating Officer Tim Lemke - Chief Financial Officer Ed Kautz - President, U.S. and Latin American Operations Tom Connors - Senior Vice President, Canadian Operations Brage Johannessen - Executive Vice President, International Operations

Jon Morrison - CIBC World Markets Ian Gilles - First Energy Jason Zhang - Cormark Securities

Good afternoon, everyone. Thank you, Steve.

Welcome to the first quarter ‘16 Ensign Energy Services’ conference call. With me today, we have our executive management team, Ed Kautz, President U.S.

and Latin American Operations; Brage Johannessen, EVP International-East; Tom Connors, Senior Vice President, Canadian Operations; and Tim Lemke, CFO. So here is how I describe the market we’re in right now.

It feels like we’re in the middle of 10-foot waves with 15-foot seas ahead of us. But we can start to see some blue sky in the horizon.

Ensign, as you know, is a global oilfield service company operating efficiently and safely in four different geographic regions; North America, Latin America, MENA and Australia. Our asset base consists of a fleet of 213 drilling rigs, 115 service rigs, a fleet of 78 directional drilling kits, 97 frac flowback units, 27 core seasonal rigs and a rental asset base of about $60 million, distributed roughly about a third in the U.S., a third international and third in Canada.

And the proxy for Ensign is efficient and safe operation. Ensign enjoyed a better-than-market share first quarter in essentially all of our geographic areas.

We also delivered a new ADR 1500S rig with our Ensign automated control system technology, which was constructed for contract with a major. So let's dive into some numbers here and a closer reflection on our first quarter.

Tim, I'll turn it over to you.

Thank you, Bob. First, the disclaimer.

Our discussion may include 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, economic and market conditions; crude oil and natural gas prices; foreign currency fluctuations; weather conditions; the Company's defense of lawsuits; and the ability of oil and natural gas companies to pay accounts receivable balance and raise capital or other unforeseen conditions, which could impact on the use of the services supplied by the Company.

As expected, continued lower levels of oil and natural gas commodity prices resulted in sharply reduced levels of demand for oilfield services in the first quarter of 2016 compared to the first quarter of 2015. Operating days across the Company's fleet were lower in the just-completed first quarter compared to the first quarter of the prior year.

Reduced financial contributions from all the three geographic segments served by the Company were partially offset by the positive translational impact of a stronger United States dollar in the first quarter of 2016, compared to the first quarter of the prior year. The Company generated revenue of $258.5 million in the first quarter of 2016, a 42% decrease compared to revenue of $449.3 million generated in the first quarter of the prior year.

Operating days were down in the first quarter with Canadian operations experiencing a 43% decrease, the United States operations 49% decrease, and International operations showing a 30% decrease in operating days compared to the first quarter of last year. As previously mentioned, financial results from the Company's United States and International operations were positively impacted by a strengthening of the United States dollar compared to the Canadian dollar.

The average United States-Canadian dollar exchange rate increased by approximately 11% in the first quarter of 2016 compared to the average exchange rate in the first quarter of 2015. Operating earnings, expressed as adjusted EBITDA, further defined as earnings before interest, income taxes, depreciation, asset decommissioning and write-downs, share-based compensation and foreign exchange and other, for the first quarter of 2016 were $59.6 million, a 47% decrease, compared to adjusted EBITDA of $112.3 million generated in the first quarter of 2015.

The first quarter decrease in adjusted EBITDA can be attributed to general industry weakness, particularly in North America in the first quarter of 2016, compared to the first quarter of last year. Net loss of $14.9 million or $0.10 per share for the first quarter of 2016 compared with net income of $15.4 million or $0.10 per share for the first quarter of 2015.

Adjusted net loss or income defined as net loss or income before asset decommissioning and write-downs, share-based compensation and foreign exchange and others, as tax affected using the expected income tax rates for each item, or an estimate of 35%, for the first quarter of 2016 was $25.1 million or $0.16 per share compared to adjusted net income of $27.7 million or $0.18 per share for the first quarter of the prior year. Funds from operations or cash flow for the first quarter of 2016 was $55.2 million or $0.36 per share, a decrease of 50% compared to $109.8 million or $0.72 per share generated in the first quarter of the prior year.

And now some geographical highlights. Canadian revenue of $75.6 million in the first quarter of 2016 was a decrease of 36% compared to revenue of $118 million in the first quarter of the prior year.

The winter drilling season in Canada was not as active as the prior year, as exploration and production companies significantly reduced their capital expenditure budgets in response to lower oil and natural gas commodity prices. Activity levels in pricing were both negatively affected by the reduction in demand for oilfield services compared to the prior year.

Canadian oilfield services accounted for approximately 29% of Ensign’s total revenues in the first quarter compared to 26% of total revenues in the first quarter of 2015. United States revenue in the first quarter of 2016 was $100.1 million, which was a decrease of 46% for revenue of $186.4 million in the prior year.

The decrease also reflects the impact of lower oil and natural gas commodity prices on the demand for oilfield services. United States oilfield services accounted for approximately 39% of the Company's total revenue in the first quarter of 2016, the corresponding figure was 42% for the first quarter of 2015.

International revenue during the first quarter was $82.8 million, a decrease of 43% from revenue of $144.9 million generated in the first quarter of the prior year. The reduction in year-over-year drilling days was partially offset by the positive impact of a stronger United States dollar on the translation of International revenues to Canadian dollars reporting purposes.

Our International oilfield services operations accounted for approximately 32% of our total revenues in the first quarter of this year and accounted for 32% same number in the first quarter of last year. Gross margin for the first quarter of 2016 was $76.2 million or 34% of revenue net of third-party costs, compared to $133.8 million or 34% of revenue net of third-party costs for the first quarter of 2015.

The decrease in gross margins in the prior year reflects the overall reduced level of operating activity in the first quarter of 2016 compared to the first quarter of last year. The gross margin percentage of revenue, net of third-party for the first quarter of 2016 was essentially consistent with that of the prior year due to a change in the mix of equipment working and management efforts to control costs in this current challenging environment for oilfield services.

Total company debt, net of cash balances, decreased by $65.3 million or 9% in the first quarter of 2016 from $753.7 million at December 31, 2015, and the net debt balance was $688.4 million as of March 31, 2016. Net capital expenditures in the first quarter of 2016 totaled $14.7 million compared to net capital expenditures of $78.7 million in the first quarter of last year.

The Company completed one new ADR drilling rig in the first quarter of 2016, and we are now targeting to exit 2016 with net capital expenditures of approximately $45 million for the year. The second quarter dividend rate remains unchanged at $0.12 per common share.

On that note, I will turn the call back to Bob.

Thanks Tim. Now what we’ll do is run around our world, starting with Ed, for an operations summary.

Okay. Good afternoon, ladies and gentlemen.

First like to start with first quarter review of the United States operations. At the end of the first quarter 2016, Ensign United States division operated a fleet of 90 drilling rigs.

The Company also operates 44 well service units and 47 flowback testing units in the U.S. and a directional business with 31 directional kits.

United States drilling recorded 1,890 operating days in the first quarter of 2016, a 49% decrease from the 3,723 operating days in the first quarter of 2015. The United States well servicing recorded 14.355 operating hours in the first quarter of 2016, which was a 27% decrease from the 19,754 operating hours in the first quarter of 2015.

Revenue was down in the U.S. 46% from the first quarter of 2016, as compared to the first quarter of 2015.

The Company's United States operation accounted for 39% of the Company's revenue in the first quarter of 2016, compared to 42% in the first quarter of 2015. The Company also added one new ADR drilling rig to its U.S.

fleet in the first quarter of 2016 and is now contracted and moving to West Texas. We maintained our 31 directional kits in the U.S.

that are located in the Rocky Mountains with the utilization between 20% and 30%. Directional has become a have very competitive business and it all comes down to the costs and service you provide.

Of the 97 frac flowback units in the Company we operate in North America, 47 of those operating in the U.S. Activity in revenue in the U.S.

drilling and well services continue to decline under pressure in the first quarter. It's still a very competitive market.

We are currently running at a utilization of 25% to 30% on the drilling side and between 30% and 40% on the well service side. With that I'll turn to our Latin American operations now.

Ensign International division operates a total of 17 rigs in Latin America. The Company currently operates nine rigs in Argentina while running approximately 45% to 55% utilization.

Ensign also has the eight rigs in Venezuela, of which we are running between 50% and 80% activity on any given day. We continue to monitor our accounts receivable in a challenging oil market and our relationship continues to be good with our national oil companies and mixture [ph] companies.

As always, the current economic employee compliance in Argentina and Venezuela will continue to play a major role in the path forward for the industry. We're currently running between 60% and 70% of our rigs in Latin America.

With that, I'll turn it back over to you, Bob.

Thanks Ed. We’ll just move further north, Tom, if you want to give us a summary on the Canadian operations.

Yes, good afternoon, everyone. In Canadian drilling, Q1 activity has decreased approximately 43%, as Tim mentioned earlier, year-over-year from 22,759 days in Q1 2015 to 1,569 days in Q1 2016, coming off an average industry utilization in Q4 2015 of 24%.

Activity peaked at approximately 33% industry utilization in the third week of January and steadily declined to approximately 10% utilization by the middle of March. As expected, the Q1 winter drilling season was relatively muted and short in duration given CapEx reductions for some operators in excess of 50% versus 2015 CapEx.

While the entire oil sands sector has significantly moderated in recent years, we continue to maintain our share of the coring work that does exist, and as in other years, a small portion of our activity in Q1 was derived from coring activity. As a result of our recent additions to the fleet and continuous process of fleet renewal, we were able to continue to grow market share in areas such as the Duverney and Montney, and maintained a market share in the overall industry at or above our portion of the total fleet for the industry in Canada.

While overall industry utilization rates continue to be low, we have been able to maintain an average utilization of 21.4% above the industry average of 19.2% on a year-to-date basis. Despite today’s current level of 5% to 6% utilization for the industry, Ensign continues to perform above market because of our focus and understanding each resource play and the ideal rig required to meet the needs of top-tiered customers looking for performance-focused drilling contractor.

Pricing pressure and pricing reductions across all rig categories throughout 2015 resulted in pricing near historic lows going into the quarter and thus had been relatively stable for Q1 activity. As the mix of rigs continue to move deeper, average total day rates remain relatively unchanged versus the prior year.

Heading into the summer, we expect a highly competitive market for the limited work that does exist with potential exploration or rational pricing coming from more stressed contractors. With much of the work on restructuring and driving costs out of the business being done in 2015, many of the one-time costs associated with those efforts will put behind us which also helped us bolster while maintain margins in the depressed environment.

Directional drilling. On a macro basis, directional drilling generally followed rig activity declines as they typically do.

While the overall market declined, we continue to maintain or show modest growth in our market share as performance-minded customers continue to recognize the value of our expertise below ground, working in tandem with our drilling technology above ground. It is a highly competitive market with pricing and day decreasing approximately 11% and 19% respectively versus the same period last year.

Despite the drop in activity, we’ve been able to maintain healthier margins than most of our peers due to having some of the lowest operating costs in the industry. In our well servicing business in Canada, similar to industry activity levels, the Canadian well servicing hours decreased by 27% versus the same period last year and experienced a utilization rate of 21%.

Despite the tough environment, the business was able to demonstrate some resiliency and protect margins due to early cost reduction activities. Our testing and MPD business, the testing business in Canada had a relatively challenging quarter as activity remained relatively robust in relation to other services through 2015, but that activity experiencing significant declines beginning in December, a little later than most of the other services side last year, with an increase in the number of complicated well bores, managed pressure and Canada continued to find some opportunities in carve-out areas for niche activity.

Our rental business, which is highly dependent on drilling activity, and as such, experienced significant reduction in rental activity while maintaining strong although reduced margins and positive cash flow for the quarter. And so our outlook for 2016, as expected, overall outlook in Q2 is minimal with less than 40 rigs running for the entire industry on typical day.

While commodity prices may experience a modest recovery by the end of the year, we do not expect that to directly translate to any kind of meaningful rig recovery in the short term. Outlook for the year remains challenged with activity for the drilling industry forecasted somewhere in the 45,000 to 50,000 day range depending on whose forecast you’re using, which translates to an industry utilization somewhere below 20%, with no foreseeable events change that outlook at this time.

Of the rigs that are expected to operate for Ensign for the remainder of the year, many of them were operating under guaranteed contracts in 2017 and beyond. And that’s all I have for Canada.

Bob, I’ll turn it back to you.

Thank Tom. To finish off on the operations summary and outlook, Brage Johannessen will update us on MENA and Australia.

Thank you, Bob, and good afternoon to everyone. Ensign’s International operations have a total of 33 rigs in its Australia, Middle East, North Africa regions.

Discounting Libya, we are currently operating at a utilization rate around 50% in eastern hemisphere. The Company operates seven rigs in Australia while running at just under 40% utilization, against an Australian rig activity level in the low 20s.

In this challenging market, Ensign International has been successful in securing term contracts with the launcher onshore operators in Australia and gain market share. We believe Australian activity level will bottom out in the current quarter.

And with the current market share of close to 50%, we are well positioned for an increase in drilling activity, having around 20 rig assets ready to go to work when market conditions improve. Moving over to the MENA region.

There is no change in our activity levels there with Oman running steady with seven active rigs or around 90% utilization all in longer term contracts. The activity level in Oman is tracking its neighbors and fellow OPEC producers of the Middle East with close to 100% utilization rates and flat to slight growth in our overall rig count.

Our superior ADR design is continuing to provide strong operational performance for our customers. Given our customers’ focus on driving down cost, rates for drilling rigs continue to be under pressure both in Australia and in MEAN, and Ensign International have been and continue to look for ways to reduce both our overhead and operating cost.

And as mentioned earlier, the overall contribution from the International operations is about 32% of the Company's revenue in the first quarter of 2016. And with that, I'll turn it back to you Bob.

Thanks Brage. Operator, we're ready for Q&A.

Good afternoon all.

Hello Jon.

Can you give an update on what the payment cycle actually looks like in Venezuela at this point, and are you ultimately having to idle equipment at this point or payment is still coming in that you haven't had to take any of those actions? I'm just thinking about some of your competitors’ moves recently.

Great question.

Hi Jon, it’s Tim here. I just actually looked into things this morning and determined that Head of ACE as well as each of the mixed two companies that we do business with has given us payments in the last month to today, and we've been getting payments consistently through first quarter not as much as we'd like but they have been paying.

And Ed, I don't know if you have any further color on discussions that have been going on but…

Yes, the only thing I’ll say, Jon, is we monitor it pretty close all the time and the rigs do come up and then they do go down depending on payments, and so far we’ve been able to navigate that fairly well.

Okay. It's fair to assume that the last three months hasn’t been dissimilar than the last six or 12?

Right.

In any material way. Is that fair?

Correct. That’s right.

Okay. Bob, in the release you make a comment about you're expecting International to be flatly stable from a utilization perspective on the back of, one, your contract status, but two, International oil companies capitalizing on lower costs.

Is that based specifically around customer conversations you're having about more IOCs [ph] looking at putting things back to work, or is that just a high-level feeling that realistically these guys don't cut as hard as North America when things get worse?

Yes. Well, just kind of finished my round of world tour and MENA is certainly, as Brage pointed out, a forgo show.

Australia of course has got ahead of itself on the drilling and catching up to the LNG trains and with a little bit of a softened - that’s an overstatement - understatement, softened LNG market. They’ve slowed down.

It's interesting that the 13 rigs that are running in Australia, seven of them are Ensign rigs. So that’s a proxy for how well we’re operating in that area.

But yes, I think that the two areas are quite different. MENA is running strong and Australia is just trying to navigate through the LNG market right now.

Would you expect Australia to help you from a contract perspective in ‘17 or ultimately you’ll largely kind of move in line with what the market does?

I think that it's going to turn over slowly. I think that ‘17 - we've already had some conversation with our clients that are talking about ‘16 kind of being the bump in the bottom and we are moving up from that.

So we'll see some positive movement in ‘17, some positive movement. It's going to be a movement but it's not going to certainly whip back to where it was.

Tim, is there any additional color you can give on the fluctuations in quarterly depreciation and what you would expect for the balance of the year?

Yes, Jon, we were looking at that again this morning, and I think comparing to a year ago is maybe not the best way to look at it, but we had indicated last quarter that we expect to see Q1 depreciation towards the Q3 number - closer to the Q3 number than the Q4 number for last year, and that's due to all the work that we've been doing on closely examining remaining asset residuals with values and lives. And on a forward basis, we are expecting less volatility in the coming year because we are starting to see things sort of settle in now.

I hope that's helpful. But again, it all depends on FX rates and then both the size of geography of the equipment that is in use.

But barring that, it should be less volatile in the coming quarters.

Okay. I realize the noise LatAm creates just because of all the currency fluctuations, but just trying to get a sense there.

When you reference the incremental depreciation charges in the release, would any of that include asset write-downs in North America, or not in any material way?

No. When you examine specific assets, those are really just ongoing judgments that you're making of an inactive nature, things like that.

So there is no significant write-downs or anything like that on a rig basis in the quarter.

Okay. Last one just for me.

Can you give any incremental details on how your non-rig-related business has performed in the quarter, and I guess, I'm just thinking is pricing or utilization in those businesses worse or better than you’ve experienced within contract drilling and well servicing?

I would say it's a blanket that's over the whole oilfield services, Jon. We are seeing strong pricing pressure in every area, well servicing, the flowback testing.

Of course it's directly tied to fracking, so it’s down quite a bit. The rentals is down quite a bit on a revenue basis but gross margins are always recently good in that business because there is very little R&M.

So those are the - our drilling business. Other than our directional drilling - directional drilling is continuing to grab more of our more market share on an area basis as we integrate services that becomes a little bit of call by the operator to optimize his drilling platform.

On that cite, can you give any color on how much of your utilization in the quarter was on Ensign rigs versus other?

Con, you want to talk about in Canada.

Just trying to do the rough math in my head. We - probably of the total rigs active of that peak, with the 25 rigs or so, so 30% of the fleet roughly, i.e., of the rigs with Ensign kits on them.

And then if you look at on the directional drilling kits we own in Canada, the ones that are active was 70%, those would be on Ensign rigs.

And Ed in U.S.?

Okay.

I would say the same. It was a lot higher couple of weeks ago when we picked up a couple of outside jobs, and probably will be at about 60%, 65% out internal; 35% to 40% external.

Appreciate the color. Good quarter, guys.

Thanks, Jon.

Hi guys.

Hi Ian.

Can you give any sense on how you’ve managed to hold in gross margins so well? You’ve had two strong quarters in a row there.

Well, it’s the beautiful thing about the drilling business is low fixed costs, high variable costs, of course when crews aren’t working they don’t get paid. I think it’s fair to say that we got ahead of this curve almost two years ago.

We started snipping back on capital expenditures. We started dusting of the corners and getting ready for a bigger storm, and we’ve always been of the preface that if you get your cost side of the business right, you can survive through any storm.

Rigs don’t require a lot of new capital to keep them running when you’re not constructing new rigs. You saw, Tim, talk to our 2016 forecast of about $45 million CapEx.

So drilling rigs once you have them up and running. And most of our contracts now are with majors, 70% with majors, 30% with others.

We’ve got a pretty good contract flow as well.

Okay. And with the rigs that will retire, was there much equipment on those rigs that you were able to take off and use on existing rigs that might inordinately lower your repairs and maintenance costs, I guess, through downturn here?

Yes, there is yes and no. Some parts are fungible like drill pipe, BOPs, things like that.

A lot of the consumables, liners, shaker screens, stuff like that, will help you get through the certain period of time. And certainly there is some of that that’s been going on over the last year and a half - Tom, fair to say?

Well, there is some of that. You got to remember that some of the retired rigs are in different category than ones that are operating today.

So the equipment does - an engine that you would run on a Faeling [ph] 2500 single is not necessarily going to run on an ADR 1500. So there is not like there is a huge inventory but deeper rigs that may have been decommissioned over time some of that equipment, you could certainly harvest for maintenance repairs if you needed to, and there is a little bit of that going on.

Yes, I think we’ll kind of settle into a good run rate right now. I wouldn’t say that there is anything that’s worth noting in the first quarter of ‘16 that would make one believe that this is an anomaly.

Okay. That’s helpful.

Thanks very much. And are you able to provide any additional clarity on which of the segments would have had better or worse margins than your corporate gross margins as we try and think about the business in modeling moving forward?

No, sorry, Ian. We don't disclose those segment-based margins.

Yes.

Okay. And then last one for me.

With the contracted rig that you're sending into West Texas, are able to provide any details on what the payback of that contract would look like relative to something you would have contracted, say two years ago?

Well, two years ago, it would have been higher. That’s why we’re assigning shorter term contracts right now.

But all kidding aside, it was for a major and it has our Ensign automated control system on it, so it’s a little bit of - the control system on it is a little unique. What we’re finding is that the majors are more concerned about well optimization and lowering their well costs.

Sure, they are a taker on day-rate pricing that currently exists in the market, but we’re finding that most of the people we work with are not three bids and a buy [ph].

Okay. And I may have missed this during the prepared notes.

Can you provide an update on your guys contracted so to see just corporately for 2016 and ‘17?

On contracted rigs?

Yes, like how many.

Yes, well, about 80% of the rigs that were running today are tied up on guaranteed, the take-or-pay contracts. About 30% to 35% of our fleet around the world is on a contract turn of some sort.

Okay. Thanks very much.

I'll turn it back over.

Thanks Ian. Operator [Operator Instructions] Your next question comes from Jason Zhang with Cormark Securities.

Your line is now open.

Thanks. Good afternoon, guys.

Hi, Jason.

Just quickly, did I hear correctly that the pricing on your directional drilling in Canada was down only 11% year-over-year?

Yes. That's correct, yes.

Okay. That seems a lot better than I probably would have expected given what's happened in the industry.

And then secondly, are you able to talk about any contract term fees that may have hit either in Canada or in the U.S. in the quarter?

Yes, we had no contract termination revenue in the quarter.

Okay, great. That's it for me.

Thanks.

Thanks Jason.

Thanks, Steve. Closing remarks.

Ensign, as you can see, is a very geographically balanced company and is designed to manage through any cycle, with a very low fixed cost base and almost all field levers of variable costs was designed to get through cycles. Balance sheet discipline and cost discipline gets us through these challenging times.

Ensign has shown again its ability to peer into the fog better than most and get ahead of the curve and react accordingly. What we are seeing today is less conversation about pricing and more about well optimization.

Sure, operators around the world have taken advantage of an oversupply oilfield services worldwide, but the more strategic operators will look to capture and lock in lower well construction costs by establishing a paradigm shift towards quality equipment and highly efficient contractors. Here is where Ensign fits, with the right people, right rigs and we’re in the right markets.

We look forward to talking to you at our second quarter ‘16 conference call. Back to you operator.