Ensign Energy Services Inc.

Thanks, Cheryl. With me today is Mike Gray, our CFO.

So, hello, and thank you for joining our first quarter '19 call today. Well, it would be an understatement to say we haven't been busy over the last three months.

Ensign, in short order, was able to successfully integrate Trinidad's business into the Ensign world with little or no disruption or incident. The transition plan was simple.

Keep operations focused on the task at hand both safety and operationally, connect with our clients, move swiftly on the reorganization plan to get the team settled as quick as possible and get onetime cost behind us and have all this accomplish in the first quarter so the team can be laser-focused without distraction on a go-forward basis. The transaction is obviously accretive and drives further value in Ensign.

We've identified already over $40 million of annualized savings and roughly $50 million of redundant facilities that will be sold. You can see how quickly we synergized value in this transaction.

Ensign's first quarter gross margin was 31% versus 28% first quarter '18, a 3% point gain year-over-year. With Trinidad transaction, we've become one of the largest land-based drillers in the world with 302 rigs, 45% of our fleet is in the U.S., roughly 35% in Canada and 20% international.

Trinidad had a relatively new high-spec fleet, which tripled our Permian exposure, doubled our Canadian exposure and added two more countries to our Middle East business unit. The combined fleets provide Ensign a worldwide fleet now, as I mentioned, of 302 rigs on 11 different countries, over 80% of the fleet being high-spec super-spec-type rigs and 1/3 of the fleet are 1500-horsepower AC rigs, basically the workforce of the Permian and the Duvernay.

It doubles runway for application of our Edge Controls and rig automation platform. Also in the quarter, we divested of a noncore business unit, the testing and wireline division for proceeds of $24 million.

And additionally, we strengthened our capital structure with the successful issuance of a $700 million bond. Turn it over to Mike Gray for detailed synopsis of our first quarter.

Thanks, Bob. The usual disclaimer, our discussion may include forward-looking statements based upon 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 and the ability of oil and natural gas companies to pay accounts receivable balances and raise capital or other unforeseen conditions, which could impact the use of the services supplied by the company. The additional days from the Trinidad acquisition as well as the stabilization of oil prices resulted in increased levels of demand for oilfield services in our Canadian and United States operations in the first quarter of 2019, compared to the first quarter of 2018.

Canadian operations recorded 3,061 operating days in the first quarter of 2019, a 56% increase. The United States operations recorded 6,657 operating days in the first quarter of 2019, an increase of 3,753 operating days.

And International operations recorded 1,329 operating days, a 2% decrease compared to the first quarter of 2018. Adjusted EBITDA for the quarter of 2019 was $115.5 million, an increase by $64.4 million from adjusted EBITDA of $52.3 million in the first quarter of 2018.

The 2019 increase in adjusted EBITDA can be attributed to the increase in activity, the effective cost controls, synergies obtained from Trinidad acquisition and positive impacts of the strength in United States dollar against the Canadian dollar. The adoption of IFRS 16 contributed a small increase of approximately $1.3 million in the quarter.

The company generated revenue of $445.3 million in the first quarter of 2019, a 72% increase compared to revenue of $258.5 million generated in the first quarter of prior year. Gross margin increased to $127.6 million or 30.9% of revenue, net of third party, for the first quarter of 2019, compared to gross margin of $63.1 million, or 27.8% of revenue net of third party for the first quarter of 2018.

The increase in overall margins reflects higher revenue rates, while maintaining cost control. Depreciation expense in the first 3 months of 2019 was $88.2 million, 11% lower than $98.6 million for the first 3 months of 2018.

In the first quarter of 2019, due to the acquisition of Trinidad, management reviewed the makeup of the age of the drilling rig fleet and equipment and determined that based on age specification and the type of re-certifications that were taking place, the useful life estimates previously used did not appropriately represent the useful life of this equipment. On this basis, the company believes the new useful life estimates for its equipment accurately reflects the future economic benefits related to these assets.

G&A expense in first quarter of 2019 was 30% higher than the first quarter of 2018. The increase was primarily due primarily to the Trinidad acquisition.

Management continues to focus on managing costs and realization of additional synergies from the acquisition of Trinidad. Total company debt net of cash was $1.7 billion at March 31, 2019.

Subsequent to the quarter, the company has reduced the amount outstanding on the bank facility by approximately $86 million. Net purchase of the property and equipment for the first quarter of 2019 totaled $39.6 million.

The purchase of property equipment relates predominantly to maintenance capital for certain drilling rigs and the construction of 1 service rig for the United States market. Net capital expenditures for the calendar year 2019 remain targeted at $102 million.

On that note, I will turn it back to Bob.

Thanks, Mike. So let's just walk around the regions around the world here, starting with our biggest area and busiest area, the U.S., where we generate about 60% of our EBITDA.

While we see some operators skinny down there rigs under contract, we are finding that our sales team is quickly re-contacting the rigs. In fact, we actually have a few rigs since start of the year.

We recently contracted three 1500-horsepower high-spec rigs for a major on 1-year firm term contracts in the Permian. Our super-spec rigs, which enjoy 90-plus percent utilization, are able to hold rigs in the plus or minus $25,000 range.

In addition, our average first quarter '19 day rate is up about $2,500 a day versus our first quarter '18 day rates. We also successfully transferred from Canada another ADR 1500 AC rig into the Rockies on a 2-year contract.

With business for the 1500-horsepower AC rig in Canada that's strengthening and the availability of those types of rigs tightening up, we don't expect further migration of 1500-horsepower AC rigs into the U.S. at this point in time.

This will help establish a floor on pricing in both areas, and we expect strength in the back half of '19 as a result. We continue to deploy our Edge Controls platform in about a rig every other month in the U.S.

The Edge Controls is deployed with a chart of $900 a day with an installation cost of about $75,000 to $80,000, which the operator pays for. In California, we successfully re-contracted one of our Huntington Beach high-spec rigs, which just came off-contract it is being modified at cost to the operator and is expected to start up in August on its two year contract.

Of note, in California, our well service group was successful in obtaining a large P&A project on an offshore platform with a major. It's a two to three year contract with strong margins.

Today, we have 86%, or 64%, of the 134 rig fleet in the U.S. contracted.

We expect to run between 85 to 90 rigs over the next few quarters. For our U.S.

well servicing group, we have approximately 30 out of 49 well servicing rigs operating in the U.S., roughly 60% utilization. We're also running nine directional drilling kits mostly in the Rockies.

In Canada, while the government-imposed curtailment certainly cut into first quarter activity in Canada, it did serve the purpose of reducing differential and with that, operators have free cash flow to put towards drilling projects. We currently have 15 rigs operating over breakup and have contract visibility to run 45 to 50 rigs over third quarter with further buildup into the fourth quarter.

Trinidad and Ensign operations and sales teams have dovetailed seamlessly, and our client base here in Canada are extremely happy with the transaction. Most of the rework costs relating to the merger did occur in Canada.

With the migration of roughly 2000 and 1500-horsepower type rigs out of Canada over the last few years, we have seen the market tighten right up for the 1500-horsepower type rig. We recently signed up two of our 1500 rigs into two year contracts with rate increases pushing into the mid to high-20s all in.

That is a $5,000 a day delta over where these rigs bottomed out over a year back. The lighter capacity rig fleet margin in Canada is still very tight in the Western Canadian basin.

But again, with the operators trying to generate more free cash flow, we're already starting to see bookings for the back half of the year. Our well service division in Canada is currently running between18 to 25 well service rigs at a fleet of 66.

We fully expect to see pickup in the back half of the year similar to drilling. As mentioned earlier, we divested our testing group in this quarter for $24 million.

This was a noncore asset. On the International side, we operate 50 rigs in an International division with approximately 25 of these rigs operating on any given day.

The Trinidad transaction expanded our presence quite significantly in the Middle East. We now have two 3400 AC super-spec rigs getting ready to spud in June in Kuwait.

These are five plus year contracts, which will generate significant free cash flow. The Kuwait rigs, along with the Bahrain rig and two Mexican rigs are operated within the Halliburton joint venture where we have 60% majority interest.

We have just recently contracted our two Bahrain 2000-horsepower rigs onto a three year term contracts with rate increases. In addition, the operator will cover all the requested rig modifications specific to the project.

In Mexico, all four JV rigs are currently idle. Our 2000-horsepower rigs are very active in Argentina, working steadily on the Neuquén area.

We have four of these rigs in that area with all of them contracted. Venezuela still has two rigs working for U.S.

major, who has sanctioned exemptions. As we pointed out in prior calls, our Australian business unit is ramping up to '19 as the area ramps its drilling back up, faster depletion and with all the LNG trains on stream now, supply needs to be replenished.

We own about 50% market share in Australia, and we have 10 of our 20 rigs currently operating today in Australia and expect to ramp up to 13 in third quarter. So with that, operator, I'll turn it back to Q&A.

Afternoon all.

Hey Jon.

Mike, on IFRS 16, you said it was about a $1.3 million EBITDA tailwind in the quarter. Did, sorry, if I missed it, but did you share what the net debt headwind would have been?

Approximately around $22 million, I believe.

Okay. So it's modestly positive for your evaluation on an EBITDA basis looking back?

Yes.

Perfect. Bob, just you talked about the tightness in the high-spec market in Canada just because we've seen so many rigs move out of Canada, and there is still a decent amount of work.

At this stage, what would it take for you guys to make the decision to move more rigs from Canada to the U.S.? Is it just the function of getting the mob covered by the customer and then having a decent term or would you need to see something more than just that?

I think we've seen some normalization between the two areas. They're both kind of settling into the mid-25s.

I would say the utilization is similar, the high-spec rigs in the area. So to see a movement down into the U.S., I think we'd have to see some appreciation in the day rates.

The last rigs we did move down were in fact, all the rigs we did move down were paid for by the operator and any modifications that they requested through a pump or whatever the case maybe were also put up by the operator. So I think that you'll see other rigs go to work first in the U.S.

and rates move. So we've kind of seen what I call a normalization between the 2 countries in the 1500-horsepower class area.

Okay. And when you say paid for by the operator in terms of those rig moves, you're just talking about an incremental day covered in the base duration of the contract.

Is that fair?

No, the full move cost was put up by the operator, however, its first move to location at cost to the operator plus any incremental rig modifications were put up by the operator as well, included in the day rate incremental upfront.

Upfront, okay. Bob, in terms of the California P&A work that you mentioned, is that just one rig?

Or is there more than that?

Yes, that's one rig. But it's an interesting piece of work with good margins, and I guess, the point being that our well service teams in the U.S.

are highly competent group, we typically work in more complex areas.

Okay very helpful. Mike, can you just talk about incremental restructuring cost on a go-forward basis and whether everything was largely seen in the quarter or whether there's going to be incremental outside of that $8.5 million cash that you obviously mentioned in Q1?

Yes, that was largely incurred in Q1. I can't see any material class being incurred for the remainder of the year.

Has your view around the likelihood of the potential windfalls from any real estate sales materially changed as you started to actively market those assets?

No, no, I would say that we have a good handle on what they're worth and one of them is in the market right now, the other ones are getting ready to be put out on the market.

Okay. Bob, we talked about this after Q4, but has your degree of confidence around the $40 million synergy number materially changed in the past couple of months either from a degree of potential upside scenario or just the overall confidence that you have been hitting that number?

Yes, I think that we're absolutely confident in the number, and I would suggest that we may see that number drifting up closer to $50 million.

Okay. Last one just for me in terms of Venezuela, outside of the two rigs that you are operating that are not subject to the sanctions, is it largely just kind of an holding pattern where all the other rigs are laid down, but you're obviously monitoring things closely and then you will react?

Or is it in more of a cold, lying down most rigs at this plant?

Yes, the other rigs that are down have been cold stacked to back in our facility, our secure facilities, and we'll see where it goes. It represents two out of our 302-rig fleet.

But they are running, and we are not shy on pricing, and we're doing it safely in the context of everything that's going on down there, but it is a tough piece of business, but it's only two of our rigs.

Yes, obviously. Actually just one more quick follow-up.

Of the incremental international ADR deployment that you guys talked about in Q2, what market is that going to?

I'm -- say that again, Jon, the...

You guys mentioned having one more ADR deployment in Q2 internationally. What market was that going to?

That's the Bahrain rig going from the UAE over to Bahrain.

Okay. I appreciate the color.

I’ll turn back.

Thank you, operator. Just to wrap up then, with the successful execution of the Trinidad integration in the rearview mirror, the team is laser-focused on realizing the cost synergies we've stated and driving value to the clients and our shareholders to the process.

It's become obvious that the Trinidad acquisition is highly accretive and catapults Ensign into an exciting space ahead with high-spec fleet and diverse operations worldwide. We see the back half of the year already starting to contract up notionally better than last year at this time, and with supply tight on high- and super-spec rigs, we'll see some price appreciation develop through the year.

In addition, we see continued fall from one of our Edge Controls systems on rigs. This provides an incremental $900 a day bump and is an addition to our day rates.

Our Edge Analytics and technology offerings are solidifying Ensign as one of the top three or four innovators in the land drilling space. And with the Trinidad acquisition, our platform has just doubled.

So look forward to our next call in a few months' time. Thank you, everyone, for joining in.