Ensign Energy Services Inc.

Bob Geddes - President and Chief Operating Officer Mike Gray - Chief Financial Officer Ed Kautz - President U.S. and Latin America Operations Brage Johannessen - Executive Vice President for International-East Operations Tom Connors - Executive Vice President for Canadian Operations

Jon Morrison - CIBC Capital Markets Ian Gilles - GMP

Thank you, Berger. With us today is Mike Gray, our CFO; Ed Kautz, in our Denver office, President U.S.

Operations and Latin America Operations; Tom Connors, Executive Vice President for Canadian Operations; as well Brage Johannessen, in our Huston office, EVP for International-East Operation. So welcome everyone, good afternoon for the first quarter '17 earnings release call for Ensign.

A quick introduction and then I'll get into some details of Mike and the rest of the guys here. Well, it's hard to get excited about anything when we're all staring at our WTI with a $46 handle, Ensign executed well in the first quarter outside of some onetime cost for international group in Oman in the quarter, which Brage will expand on and the fact that we had six renewed area 1500 AC rigs sidelined in the Permian, while they were being upgraded to super spec rigs in the first quarter and into the second quarter.

Today, we have 19 in the 23 US southern 1500 AC rigs all now converted to super spec rigs, so you will see that becoming a very significant contributor going forward. Also, all of those are having our edge control system installed at additional charge off rate.

Canada saw better than industry utilization in the first quarter, but did not see the usual winter price appreciation normally seen into the season nor did it see the shortfall payments that were relevant in the first quarter of '16. With utilization just touching 60% in the first quarter, it's hard to get pricing moving the right direction.

Now we're standing that, we're seeing the markets starting to firm up for our 1500 horsepower AC ADRs and the heavy TELE DOUBLE rig types. Tom will expand a little bit more in detail on that.

On average we run about 80 drilling rigs around the world today, 50 service rigs, 20 directional drilling rigs, being we're still inspiring break up in Canada, we have 60 of those rigs riding today with roughly one third of those in the active Permian area. We're also right back up to 50 well serviced rigs in North America post winter.

We're also in the process of completing one new ADR 1500 rig as for the Permian and one new ADR 1000 AC heavy TELE Double for the Canadian Montney area. I'll turn it over to Mike now, Mike Gray for a financial summary of the first quarter.

Thanks Bob. I'll start with the usual disclaimer.

Our discussion may include forward-looking statements based upon current expectations and involve a number of business risks and uncertainties. And 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 balances and raise capital or unforeseen conditions, which could impact the use of the services supplied by the Company.

Now, to start with an overview of Q1 2017, the modest increase in oil and natural gas prices has resulted in an increased level of demand for oil field services in the first quarter of 2017 compared to the first quarter of 2016. Operating days were up in the first quarter of 2017 overall, with Canadian operations experiencing 48%, the United States operations 19% and the international operations showing 12% decrease in operating days compared to first quarter of 2016.

Adjusted EBITDA for the first quarter was 50.1 million, 17% lower than adjusted EBITDA of 60.1 million in the first quarter of 2016. For 2017, decrease in adjusted EBITDA can be attributed to lower revenue rates across the equivalent fleet and normal shortfall revenue earned in the first quarter of 2017.

The Company generated revenue of 251.3million in the first quarter of 2017, a 3% decrease compared to revenue of 258.5 million generated in the first quarter of the prior year. Gross margin decreased 60.6 million or 29% of revenue net of third-party for the first quarter of 2017 compared to gross margins of 76.2 million or 33.6% of revenue net of third-party for the first quarter of 2016.

The 20% decrease in overall margin reflects lower revenue rate have not increased with demand. Depreciation expense in the first three months of 2017 was 79.4 million, 16% lower than the 94.5 million for the first three months of 2016.

This reduction was due to certain operating assets now being fully depreciated and thus no further depreciation expense is required, as well as depreciation on certain ideal equipment in the prior year that is no longer ideal in the current year. General and administrative expense in the first quarter of 2017 was 33% lower than in the first quarter of 2016.

The decrease expense in the expense resulted from the Company's continued initiatives to reduce cost. We expect normalized G&A expenses to run at 9.5 million to 10.5 million range per quarter on a go forward basis, which would exclude share based compensation and is subject to variability due to foreign exchange rates.

Total company debt net of cash balances increased by 20.6 million or 3% in the first quarter of 2017 to 709.1 million. Net purchases of property and equipment for the first quarter of 2017 totaled 29.5 million.

The purchases predominantly related to the construction of two new ADR drilling rigs and upgrade for certain drilling rigs to higher specification in addition to maintenance capital incurred in the current quarter. Net capital expenditures for the calendar year 2017 are currently targeted at around 60 million.

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

Thanks Mike. So let's jump into each area for more details, starting with Ed Kautz, with the U.S.

and Latin American Operations. Ed?

Thank you, Bob and good afternoon, ladies and gentlemen. I'd like to start off with the United States if I could.

At the end of first quarter of 2017, Ensign United States division operated a fleet of 84 premium drilling rigs. The Company also operates 44 well service units and 47 flowback testing units in the U.S.

and a directional drilling business with 31 directional kits currently working in the Rocky Mountains. United States drilling recorded 2,253 operating days in the first quarter of 2017, a 19% decrease from the 1,890 operating days in the first quarter of '16.

United States well servicing recorded 20,081 operating hours in the first quarter of '17, a 40% increase from the 14,305 operating hours in the fourth quarter '16. Revenue was essentially flat in the first quarter of 2017 compared to the first quarter of '16.

The Company's United States operation accounted for 39% of the Company's revenue in the first quarter of '16 and has remained constant compared to the first quarter of 2016. The Company added one new ADR drilling rig to its fleet in 2016 on a contract with a major, is also our first ADR outfitted with our new Edge system, controls and is drilling in West Texas and doing a very good job.

The Company moved two ADR 1500s from Canada to the U.S. for terms projects last fall and both are up and running and doing good.

We're also in the process of upgrading, as Bob mentioned, six of our ADR 1500s to 7,500 PSI, which they all should be done by the end of the second quarter of 2017. And we're also completing one of our ADR 1500s from the new build program we put on hold back in 2015.

Our directional business in United States is currently focused in the Rocky Mountains running approximately five and seven jobs daily. We have opened an office in the Permian Basin and we'll be expanding our directional drilling business into the active Permian area.

Of the 97 flowback units in the Company, we operate North America, 47 are in the U.S. The Company's three main operating areas in the United States include the Rockies, California and the Permian Basin and we've seen increase in activity in the second half of 2016.

As of today, we have currently eight rigs running in the Rockies, five in California and 17 in the Permian Basin with one running in the Northeast. Of these rigs, 25 are under contract within, under contract longer than six months or roughly 40% of our marketed fleet.

There is still a tight market in the West Coast, in the Rockies region, but we're seeing some price increases in the Permian Basin for higher spec walking rigs moving close to the 20s and above that for any new rig. Activity in our United States is expected to continue to increase throughout the remainder of the year.

However, the increase in revenue day rates is still unknown. Our well service divisions in both California and the Rockies with 50 hour plus oil has picked up as you can see from the increase in hours.

Moving now to Latin America if I could, Ensign's international division operates a total of 16 rigs in its Latin American with approximately 60% to 70% utilization on any given day. The Company operates eight rigs in Argentina, while running between 55% and 65% utilization, while we continue to focus working with the international major oil companies in Argentina.

Ensign has eight rigs in Venezuela, of which we're 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 the national oil company and mix to companies.

However, the past couple of years, we have moved to more of the majors of our contracts to mix the company's, to segregate our accounts receivable challenges with the NOC. We continue to monitor the accounts receivable and take necessary precautions to ensure to keep in line.

We've also secured a labor maintenance contract with one of the national oil company's rigs working for a mix of company and we're working on a second. A mix of company is made up of a partnership of national oil company which owns 51% and an international company which owns 49%.

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

Thanks, Ed. On deck we've got Brage Johannessen for a recap of international east operations.

Thank you, Bob. The available rig counts for Ensign's international operations has remained unchanged quarter-on-quarter from Q4 '16 to Q1 '17 with the total count of 29 rigs in its Australia and Middle-East, North Africa regions at a utilization rate at around 35%.

In Australia, we are flat quarter-on-quarter operating six rigs with utilization just north of 30% against an Australian overall utilization rate of around 25%. As announced in our Q4 '116 earnings call we just recently commenced work on a new long-term contract for a large Australian operator in the Queensland, CSG play.

Due to our late Q1 rig termination for another Australian operator, our overall active rig count in Queensland and Australia in total will remain flat quarter-over-quarter. Apart from short-term work, we do not see any signs of changes to overall activity levels in Australia in Q2 2017.

We remain engaged with several customers regarding potential work commencing in Q3 and Q4 of this year and given Ensign's strong position in Australia, we feel confident of our chances of success in an otherwise highly competitive market. And let's turn to MENA, as a result of the previously announced rig terminations in Oman, activity level in our MENA region was down in first quarter of '17 compared to the prior quarter, with negative impact to our results on a sequential basis.

We continue to exercise diligent cost control in order to minimize the overall impact on our margins. We expect our active rig count to remain relatively flat for the remainder of 2017 and we're actively participating in tenders for work commencing in 2018.

The overall activity level in the MENA or Middle East North Africa region is expected to be flat, but could be impacted by the outcome of the upcoming OPEC meeting in June, although we do not expect this will have any material impact on Ensign's activity level in the region for 2017. All upcoming tenders and opportunities for additional work will be heavily contestant.

Our contract backlog for Australia and MENA regions currently stands at around 15 rig years and the Company's total international operations, inclusive of Latin America, accounted for about 27% of the Company's revenue in the first quarter of 2017. And with that, I will turn it back over to Bob.

Thanks, Brage. And lastly we have Tom Connors for a summary on our Canadian operations.

Good afternoon, everyone. I'm again first with Canadian drilling and then I'll move briefly through our other Canadian business operating units.

From Canadian drilling in the first quarter, industry utilization averaged 40% for the quarter, peaking at approximately 350 rigs or more about 50% more active in the peak of activity in Q1 2016. Ensign tract utilization for the quarter mirrored a similar average utilization of 40%.

Average base day rates in the quarter, excluding shortfall payments decreased about 10% versus the same quarter last year and as indicated earlier and as indicated earlier in the quarter. The decrease in rates is attributable to two factors; one, rig mix, a higher portion of the rigs operating were shallow rigs competing in an over supplied market space with lower rates and two, it will take time for new contracts to turn over at higher day rate levels.

New contracts particularly for rigs best suited for active resource plays are being signed at higher rates than those signed at the trough of 2016, but it will take time and will continue into at least for us to have 2017 or early 2018 full evidence that increases in average day rates will become evident. While rates are gradually trading upwards including the impact of shortfall payments, it is likely that the average base day rates as a whole will be 5% to 10% lower on a year-over-year basis versus 2016.

With Canada being a net importer of condensate used for diluance in the oil sands, the deep basin including Montney and Duvernay was by far the most active area in the quarter with 120 active rigs at the peak, being the second most active area in North America's second owing to the Permian by active rig count. All of our premium spec rigs and the AC triple or heavy TELE DOUBLE category were active in this area in the quarter.

Despite the challenges in the current environment, having a modern fleet with the portfolio mix that matches the activity in the market bears fruit in strong relative financial performance versus our peers with top cortile revenue gross margin, EBITDA margin, adjusted for third party revenue and cost. Our new ADR 1000 introduced in the last conference call will be completed mid July and is expected to be contracted at that time.

In our directional business, as independent directional drilling contractors continue to pursue market share with ever increasing prices, the integrated model of directional drilling combined with drilling rigs continues to gain traction as we grow market share while maintaining margins significantly healthier than those of our independent peers. In the well servicing area, Canadian well servicing activity also increased approximately 50% versus the same quarter last year and is experiencing a similar lag on rates to that of drilling.

As activity increase there was some pressure on cost with rig startups and recruiting efforts. Activity in our testing business was relatively slow in the quarter and is expected to increase as the wells drilled in the first quarter are completed in the coming quarters.

Our rental activity and our rental business improved with rental rates beginning to increase in Q1 versus Q1 2016, in addition particular product lines like matting have experienced a rebounding activity and are helping to improve better revenue rates over the previous year. Our overall outlook for 2017 looks 50% more active than 2016 with the industry in Canada estimated to attain somewhere near 70,000 days versus the roughly reported 60,000 days in 2016.

Depending on weather conditions, Q3 activity looks to return to rig activity numbers similar to those experienced Q1, which for Ensign would be 30 to 35 rigs. Pricing has started move half bottom as we rig renew contracts, but it continues to be a gradual process over the next several quarters with those rig segments had experienced higher levels of utilization having the most traction.

That's it for me Bob. I'll turn it back to you.

Thanks Tom. So we'll turn it back to the operator for the Q&A.

Good afternoon, all. Mike, removing the impacts of the shortfall payments would you expect 2017 margins to be relatively flat with 2016 based on everything you're seeing right now?

Yeah, I think without any increase in day rates, I think for the most part it will be relatively flat. I think maybe towards the end of H2 I think we might see some pricing increase, but overall to be fairly consistent.

Yeah, yeah, I would say that it is moving. When you take the shortfall payments out on per operating day basis the margins are moving upwards.

There is definitely some push also on the - on certain rig types and others.

Within North America can you - can you just talk about the pricing dynamic across regions, I'm thinking more US, but anything you can provide in Canada would be helpful as well.

Yeah, but we start in the - on the West Coast, let's do that for a moment. Generally what's been happening is I mean we're drilling wells a lot more efficiently than we have in the past, so even what was termed a breakeven point a year or two ago in the different regions has been tested little differently here recently.

People worry about price appreciation on the service side, as long as that's delivering an efficiency it kind of neutralizes itself out. But what we're seeing on the west side is - not today at $46 oil, but in the 50s we did put another couple of rigs back to work in the California area.

We're starting to see in the Rockies, certainly it's bottomed out in pricing. We're certainly not having to drop prices to get work, it's more so having the right rig and timing it.

We're starting to see - of course in the Permian, most of the rigs are in the Permian, the super spec rig, we got after that almost a year ago and started modifying the 7500 [ph] PSI systems because we knew that rigs would be killing off contracts at some point in time and we wanted to have our super spec fleet ready to go and ready work into that pricing increase. So prices are going up in the Permian, but we're also drilling wells faster, so that price increase is being offset by efficiency.

And in Canada, Tom you may want to just expand on what you're seeing in Canada.

I mean certainly as we go on the new contracts, I would say we're sounding for more, what I'd call more historically normal rates and I'll give an example. I mean at the trough of 2016, July last year you would assigned a single up some contractors down the $8,000 to $9,000 day range.

Those are moving more up into more in the 11,000, 12,000 range now or 10 to 12 let's say depending on the rig, maybe 12.5, so those are more normal doubles we're starting to increase, but for every contract you sign, you still have some rigs on legacy contracts depending on the timing. So it's just because it takes time to growing through it, so I would say, if you look at AC triple for heavy doubles in Canada, even in spring breakup they're still experiencing fairly high levels of utilization, but on average 60% plus utilization in Q1 and you typically need two or more quarters of 60% utilization.

So the categories with a high utilization have the most pricing traction and you got to look at the timing of contract. So I would say as we're signing new contracts, we've definitely been hiring for - signing for higher rates.

I think most customers have accepted the fact that they're going to be paying higher rates, so it's a matter of trying to keep it to a dollar roar and then for the most part I think customers tying to guide to a reasonable level. So you won't see big prices increases, but you will see moderate price increases first and mostly on the rig categories that have the highest level of utilization which the AC triple, heavy TELE DOUBLE and in some cases the more premium spec singles in areas like the Viking.

You guys provided some fairly good color in the release about the number of rigs that are running 100 contracts in each region, can you give any sort of a sense of average pricing in those contracted rigs versus the spot market and is roll over that you guys mentioned few minutes ago, something we should really be cognizant about and thinking about average revenue per operating day in the coming quarters?

Yeah, I would say that generally the roll over rates have been happening through most part of fourth quarter '16 and first quarter of '17, so I wouldn't suggest that there's a cliff, the cliff has already gone through '16.

Bob just on your comment about California and you guys are putting a couple of rigs back to work obviously at a higher output, does that mean you're thinking inflection point might be in the mid 50s to upper 50s to getting more rigs working in that market as compared to the 60 plus levels that you previously told as a bit as an inflection point?

Yeah, I think so Jon. It seems to be, I mean the proxy is always when they put a rig back to work it's indicating something.

Okay, you referenced Ensign's international platform being relatively flat, I think that's from an activity perspective in '17, with the Middle East and Australia being down. Does that mean that you would expect Venezuela and Argentina to be up a touch year-over-year?

I can talk to Venezuela and Argentina. Venezuela I think it would be a stretch to suggest it will be up year-over-year, but as Ed had pointed out, from how we operate in Venezuela is basically, we work while they're paying us and when they stop paying us for a certain period of time, we have to shut the rig down and a few months later it goes back to work.

So 50% utilization in Venezuela and I think it's going to be the norm for some period of time. Obviously, anything else can happen in Venezuela, but it's been operating under this regime for some period of time that way.

Its stable chaos I call it. Argentina, I mean they're getting 7.50 for the gas in Argentina coming out of Neuquén and we're working for majors there.

They seem to be quite happy with their returns. It is a more difficult place to operate because of the restrictive labor issues down there, but they're finding a way.

I think that Argentina will be, quite possibly some blue sky into the future for us. Having said that, I'll tape that with maybe it's a rig or two type of thing.

Brage you mentioned bidding in the Middle East, the Iraq is on that could be taken hold in 2018, does any of that contemplate new builds or you largely able to lean on your existing rigs to satisfy any of those contracts even relative?

Yeah, from I guess one country to another and from one NOC to another they do operate under fairly restrictive rig specs there. So in up until now, you have not usually been in position to take ideal assets from North America and automatically slot it in to meet the specs of an NOC in the Middle East.

Now, with the - that might be changing going forward. For Oman, the specs there are and they required amounts of some of these tenders are actually pretty much calling for new builds.

They have to be less than certain vintage that might preclude us from using existing assets. So it is a mix, but with the I guess this - what we see of super spec rigs in North America and what's needed there, the specifications of those rigs are certainly getting closer to some of the specifications and rig requirements you see in the Middle East.

So for right now some tenders call for new builds, going forward that landscape might change. That we're getting closer, the North American super spec rig might get closer to what you see in some of the big areas of the Middle East.

Appreciate the color. Tom last one for me, within Canada was coring rigs an issue at all, either on the drilling or the well servicing line within Q1?

Not particularly on the drilling rig side at all. No, we haven't seen that squeeze, I mean we did kind of double down the 18 I will say to 2016 and once we entered customers enjoy the benefit of having only the best of the best out there.

What we did, I think we kept enough of our more experienced people active through 2016 that as you pick up more rigs in 2017, you could cliff rate and move onto and draw the drillings rigs back to the home rig. So we didn't really see too much of a squeeze there.

Well, I wouldn't say it was sliding down easy, but certainly not shortage of labor. The challenge on the well servicing side is just when you have the shorter term nature of work.

So when you call out work for 10 days at a time or 12 days at a time, that's a little bit tougher, but we were able to accrue most of the active rigs. I would say, the bit more of challenge in well servicing is not really a challenge on the drilling rig side in summary, but we were able to accrue all of the rigs, just a bit more of a struggle on well servicing.

So on the drilling side you're running large three crews per rig all throughout Q1?

Yeah.

Okay, I appreciate the color. I'll turn it back.

Thanks Jon.

Good afternoon everyone.

Hi, Ian.

Could you provide a bit of an update on your intentions to may be put a bit more liquidity on the balance sheet with only 22 million available on the line and 50 million accordingly and it's not a huge piece, so do you need to go expand the line to make it bigger, do you think you need to go to market issue more dead at this point to free up some cash?

Currently we are kind of taking it sort of day by day depending on sort of the CapEx that we need. The cash flow we're generating with the CapEx we've announced with the dividend and interest payment speaking kind of little bit of what we have.

So I think if there is some capital expenditures that we want to look at doing and we do have quite a bit of options I think at hand. So if there's some capital expenditures that we want to look at doing then we do have quite a bit of options I think at hand.

So like I said we're kind of going to take it day by day and not jump in until we fully realize and understand what we need going forward.

Okay, with respect to international business and to specifically Australia, are you able to revise any context for how many rig contract that could become available do you think across the country over the I guess next year or so, just trying to get a better understanding the suite of available options?

Brage, do you want to fill that in?

Sure. There are some moving pieces.

We don't see - we don't have any indications of major upswing in activity. A large portion of the domestic onshore market is driven by - still by the LNG needs and also domestic gas needs.

Now, there's a lot of writing and commentary around this that you see higher domestic gas prices and what they sell an export through the LNG and some states and territories have different long term plans and targets than others and that could of course have an impact, but that's not going to happen in the near term scenario here, so from what we - our discussions with the operators there some certainly are talking about some uptick in activity going into '18, others I think are paying attention to commodity prices. So even though it's a gas driven market it very much ties into oil price and how that turns out.

But short answer, no major uptick in activity, but we do expect somewhat higher overall activity levels in '18 than what we're seeing in '17.

Just to add some color to that Ian, of course everyone just read about the brown house in Australia which talked to the need for more local electrical generation within the country that would do nothing, but do good for our business.

Okay and with respect to the most of the rigs in Australia, would they typically working on day rate contracts or performance contracts at this point?

Day rate.

Okay. Mike may be for you, in the international business there's been some lumpiness in revenue I guess over the last three quarters.

Can you maybe provide some color on what drove some of the differences between Q3 of last year, Q4 of last year and Q1 of this year? Just trying to get an understanding of what's been happening there?

Yeah, Brage do you want to take a crack at that?

Yeah, for - of course the big change from Q4 to Q1 is the rig terminations in Oman. Q3 to Q4 the activity levels were there.

We did have some one offs hire on end related, personnel related cost that drove some weaker margins in Q4 versus Q3, but activity level was unchanged. So the big change in MENA was Oman rig terminations from Q4 to Q1.

Australia, we - as I remember back, Q3 to Q4, there shouldn't have been anything, but one offs, no change in activity levels up or down and we've seen the same going into Q1 now. We did renegotiate and extended some contracts that in a very competitive market meaning that some of those rates came down and this is in line with what you see international in general.

There's a lag in both pricing and activity there. So some of that have impacted us going into Q1, although the activity levels remains the same.

Yeah, I don't know if that answers your question.

Yeah, that does. That's helpful.

But just on top of that, even Latin America specifically Venezuela just would be sort of the movement in the Bolivar, we have some those contracts where there is US dollars versus Bolivar payments. That's going to affect your day rates on that as well.

So there's quite a bit of foreign exchange that's going to be known through that.

Okay, that's helpful. And then lastly from me, with respect to now having some assets fully depreciated, I mean at this point does Ensign go into another thorough review of its fleet and think about retiring some additional assets?

No, no. We've taken a reasonable approach over the last three to four years on rationalizing the fleet.

We have 170 rigs that are marketable rigs that are ready to go to work basically. So that's kind of a fleet foundation that you're going to see on a go forward basis.

Okay, thanks very much. I'll turn it back over.

Thanks Ian.

Thanks, Berger. So to summarize, what we're seeing in the contract drilling business is very typical of how contract is behaved in a tight market.

The market is still full of price takers. This is why days are up for everyone, but margins did not fall sequentially.

That coupled with a fact that most contractors have had trim contracts with shortfall premiums at a dispute rate 2016. This is now the real market and companies like Ensign had to manage cost and handle the balance sheet with care will be the survivors.

Ensign has essentially one third of its total fleet of 170 rigs contracted over the past six months. Some of those being taken pay contracts extending out to 2Q '20 and with most of the capital required to modify ADRs in the super spec category rigs behind us, we expect nice run rates going forward.

We continue to deploy growth CapEx strategically in the right markets, so as mentioned previously we will be commissioning two new AC rigs in the third quarter, one 1500 AC in the Permian and one ADR 1000 AC heavy TELE DOUBLE in Canada. Ensign's fleet of new ADR installed rigs is well positioned to work into the next decade with very little maintenance CapEx and one of the most efficient operation teams to the business.

We look forward to the next call in August. Thanks everyone for attending.