Ensign Energy Services Inc.

Good afternoon and welcome to Ensign's third quarter conference call and webcast. On our call today Bob Geddes, President and COO and Mike Gray, Chief Financial Officer will review Ensign's third quarter highlights and results followed by our operational update and outlook.

We'll then open the call for questions with the final wrap up at the end. Our discussion today 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 marketing conditions, crude oil and natural gas prices, foreign currency fluctuations, weather conditions, the company's defense lawsuits and the ability of oil and gas companies to pay accounts receivable balances and raise capital or other unforeseen conditions which could impact on the use of services supplied by the company. Additionally, our discussion today may refer to non-GAAP measures such as adjusted EBITDA.

Please see our third quarter earnings release in SEDAR filings for more information on our forward-looking statements and the company's use of non-GAAP measures. With that, I'll pass it on to Bob.

Thanks, Nicole. Quick recap here.

Good afternoon, everyone. Thank you for joining us today.

The dividend is the obvious headline news this quarter. Quite simply, the board decided to address the dilution and eliminate the drip while at the same time retain substantially the same cash payout.

The cash payout ratio drops to a very conservative 12% of free cash flow and still provides a healthy yield. We're happy to report this quarter that we substantially completed the full integration of Trinidad into the Ensign organization and are really starting to catalyze the benefits of the consolidation and the benefits of the strategic expansion of the key markets vis-à-vis the Permian and the Middle East.

The acquisition obviously contributed to the year-over-year top line in EBITDA growth up 50% year-over-year for the quarter and revenue up 80% year-over-year for the quarter on EBITDA. Also, very proud report that our operations teams around the world achieved a record safety result this quarter and year-to-date.

Both the financial results and the operational stage results are a testament to Ensign's proven track record of leveraging off acquisitions to drive benefits for both our shareholders and our employees. Ensign's diverse global footprint also continues to de-risk our business.

I'll point out that only 17% of our business is in Canada. With our international business outside of North America now surpassing our Canadian business unit with 20% of EBITDA and the U.S.

has grown to 63% of our worldwide efforts. Globally, we have about 125 drilling rigs operating today with 50% of these under long term contracts ranging from 6 months to 5 years.

We also have 35 well service rigs operating in North America today, along with about 15 direction growing jobs. In the U.S.

we have 68 rigs operating today of which 40% are still tied up on long term contracts 1 to 2 years in duration. International running about 21 rigs today, most of which 76% to be exact are under steady cash flow generating long term contracts of 3 to 5-year duration.

Canada has about 35 rigs operating today, with about 50% tied up under long term contracts. I'll go into a little more detail on those later on.

Third quarter was a bit lumpy as we had half our USS, which is our southern group Ensign and Trinidad active fleet come off contract in the third quarter. Of the 29 rigs that came off-contract, 7 were immediately re-contracted with the same clients, 11 were re-contracted with new clients.

Albeit with about a week or two of downtime between contracts, and 11 were stacked out without contract. This event caused an obvious blip in revenue and EBITDA for the quarter.

Now with sales and contracts all coordinated under one team in Houston the forward cadence for contract turnover will be more in tune with how Ensign has typically spread out its contracts in the past. In September, Ensign deployed what we call the Ensign virtual store, www.goensign.com.

That's not the RR site. That's our virtual store site, which is an online store designed specifically for our rig managers worldwide.

It's kind of our Amazon Ensign. It was rolled out in the U.S.

in September and will help to reduce operating costs for further 10% to 15% annually. Plans are to roll out worldwide through 2020.

So there's no question that headwinds prevail to both U.S. and Canadian markets with a slight tailwind in our Middle East and Australian business units to balance that.

But we continue to find ways to enhance our operational efficiencies through our edge technology, our field teams and our professional sales approach. So I'll turn it over to Mike for a third quarter financial recap.

Thanks, Bob. Operating days overall were higher in the third quarter of 2019, with Canadian operations experiencing a 54% increase.

United States recorded 6,302 operating days up from 3,330 and international operations saw a 17% decrease compared to the third quarter of 2018. The increase in days was largely due to the Trinidad acquisition with international days down due to Latin America.

The company generated revenue of $393.5 million in the third quarter of 2019, a 36% increase compared to revenue of $288.7 million generated in the third quarter of the prior year. For the first 9 months of 2019, the company generated revenue of $1.2 billion, a 50% increase compared to revenue of $810.2 million generated in the first 9 months of 2018.

Adjusted EBITDA for the third quarter of 2019 was $97 million, 41% higher than adjusted EBITDA of $68.6 million in the third quarter of 2018. Adjusted EBITDA for the first 9 months of 2019 totaled $312.9 million, 80% higher than adjusted EBITDA of $174 million generated in the first 9 months of 2018.

The 3 and 9 months increase in adjusted EBITDA was primarily a result of the Trinidad acquisition and the realization of the synergies from the transaction. General and administrative expenses in the third quarter of 2019 was 19% higher than the third quarter of 2018.

The increase in G&A rose from the Trinidad acquisition and the negative translation impact on non-Canadian operations of the strengthened United States dollar. Total company debt and out of cash balances decreased by $25.8 million in the third quarter of 2019 to $1.597 billion at September 30, 2019.

The company is targeting net debt reductions of approximately $100 million for the year, which could be impacted positively or negatively by foreign exchange rates. Net purchases of property equipment from the statement of cash flow for the third quarter 2019 totaled $35.1 million.

Net purchases property and equipment during the first 9 months of 2019 totaled $78.7 million. The company continues to be selective on capital expenditures and the net capital expenditures for the year will be approximately $100 million.

The company announced a fourth quarter dividend of $0.06 per common share in the termination of the dividend reinvestment plan. The termination of the drip will stop the dilution while the reduction in the dividend for common share will ensure that the cash paid remains similar to the previous quarters when the drip was in place.

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

Thanks, Mike. So we'll start with an operational update in the U.S.

We have 4 operational areas in the U.S. the Permian, the Eagle Ford, California and the Rockies.

In the Permian, we operate 61 rigs. We have about 40 active today.

We run about 9% market share in that market. In the Eagle Ford area where we have 25 rigs, we have 10 running today about 5% of that market.

California we own about 60% of the market share there with 9 out of 20 rigs running. And in the Rockies we have 11% market share with about 10 of the 28 active today.

No question the 25% year-over-year drop in U.S. rig count has put pressure on rates.

From our last report in the second quarter we have seen pressure on rates on all 4 of our areas but most predominantly in the Permian. Super spec rigs are obviously still the most desirable and are hanging in north of $20,000 a day for day rates all and we continue to maintain our market share and each market albeit with rates of about $1,000 a day quarter-over-quarter.

In the California and Rockies markets rates did not appreciate as quickly as it did in the Permian so while we certainly cannot move rates we're not under the same pressure as in the Permian. Despite the headwinds, we are finding anecdotal evidence that our clients are sensing a bottom.

Here is a case in point. in the last few months, we signed up a handful of rigs in the Permian on two-year contracts in the 2021 to 2022 range.

Our most calls are for annual contracts. We're starting to see a bit of a shift term.

We're also getting traction with our edge control technology. We've actually had a break-even point this year with our website technology division and are expecting net positive EBITDA contributions into 2020 and beyond.

The rollout of our Ensign portal, a cloud-based client portal that allows our clients to directly interact with the rig and our advanced performance management team should be rolled out in the first quarter of 2020. It will have an additional $90 a day fee to attach to it.

What we are discovering is that operators, in general, are not wanting to pay a drilling company any premium for rig for automation, but they are willing to pay for technology like our edge products that focus on enhancing downhill metrics, like maximizing ROP, reduce downtime, less virtuosity in the well and less dysfunction. With this in mind, we have focused our attention to our edge autopilot which like conductor of an orchestra pulls together our already tried and tested optimization apps into an integrated interactive platform that synchronizes and automates drill path process.

But in simple terms, you input the well path plan and the edge autopilot will activate the controls on the rig that will maximize your OP, reduce virtuosity, reduce the dysfunction and keep the well boring path, or while the driller in our real-time operating center keeps an eye on the process. The edge autopilot will charge out at $2,700 a day as it encompasses a handful of apps.

The directional driller will not be required to be on location anymore. And we're beta testing this on a rig in the U.S.

at this time and expect to be commercial in the second quarter of 2020. Initial market for edge autopilot will be focused on our advanced performance management contracts where we will benefit the most from the application technology.

The United States directional drilling or USDD division continues to have a strong market presence in the Rockies with 10 direction drilling jobs on the go. We were recently successful in cracking the California market with RTD services that will be rolling out on the 2 of our California rigs.

With our integrated model, we have great margins when applied on Ensign rigs that the competition just can't touch. Whether edge autopilot you can see how we'll utilize our hands with directional drilling experiencing concern with our edge control or edge rig controls experience to excel in the advanced performance management contract space.

The United States well servicing. We operate, one of the newest fleets in the U.S.

We have 50 rigs in the fleet with 70% of them active today in the Rockies, California, Permian and Eagle Ford combined. Our long-reach horizontal completion rig which we have 8 of them recently constructed in the last 3 years have been fully utilizing the Permian and Eagle Ford areas still to this day.

We see notional pricing pressure, but generally in the plus or minus 5% range quite normal market. Moving to the international area we have 3 areas Australia, Middle East and Latin America.

In the Middle East, we operate in the Oman, Kuwait, Bahrain areas, in Latin America; Argentina and Venezuela. Let's start with Australia.

Currently at 60% utilization and going to 70% in the fourth quarter of 2019 we enjoy about a 50% market share in the Australian market. We generally drill most of the wells in Australia.

All of our CapEx projects are behind us now in Australia with all the rigs out in the field having commenced their long term contracts. Our most recent rig 974 which is a new rig to the market.

It was an AC Reagan our Canadian fleet that was on reserve. It was completely refurbished and upgraded for the Australian market and placed onto a two-year contract.

Middle East, both our Kuwait rigs are now on the payroll. Also, our second 100% on Bahrain rig recently started so we have both rigs running in Bahrain.

The Kuwait rigs are on 5-year contracts, Bahrain 3-year contracts. Oman is steady with 3 rigs which have had their contracts also extended out another 2years.

So expect steady year-over-year cash flow generation from the area as we settle into our long term contracts. Latin America, Argentina's recent elections have pushed the country back to the all too familiar populist policies in the past.

We've got about 15 years of experience in Argentina. So we've seen both sides of this coin.

We're prepared for it. We only operate 2 rigs in the area.

We run as I mentioned 2 ADR 2,000 horsepower class rigs in Argentina. Both have our edge controls technology on them.

One of them setting records in the new Canaria, both under long term contracts past 2020. In Venezuela, we continue to run 2 of our rigs in Venezuela for a major who has special dispensation from the U.S.

State Department to operate. Moving to Canada, while Canada still remains challenged with take away capacity a minority federal government has pledged that it's fully committed to the new TMX pipeline.

Actually talked to someone today that actually saw some movement along the pipeline, so it is actually happening. The Enbridge line through your placement is also expected to be running by year end which will help take away capacity whilst the provincial government of Alberta still has curtailment in place.

They just announced the plan to encourage new wells to be drilled here last Friday. Those wells being exempt from curtailment.

That will encourage some operators to put a few more Ensign rigs toward this winter. Happy to report that it's not all bad news.

Ensign was just awarded a 3-year contract to 2 of our ADR 1500s with edge controls technology. With increased rates from where they were before.

We also signed up one of our ADR 1000 pad rigs on a 2-year contract with increased rates. This is certainly not the norm as most rig categories are witnessing rate pressures with market takers, especially in the oversupply and extremely competitive super single Intelli double market.

The 1500 AC market, on the other hand, enjoys a healthy 70% plus utilization rate, and hence can attract reasonable day rates. With Canadian directional drilling, our Canadian directional drilling business continues to slowly expand its client base.

When integrated with an Ensign rig it becomes very hard to compete with us. Currently, have 8 jobs running and expect to run 50% more than that this winter getting up to 12 jobs as our integrated model continues to gain traction.

On the Canadian well servicing side, we have 55 well-serviced rigs in our Canadian well service fleet mostly focused on the heavy oil market. Much like the drilling fleet, we have about 25% of the fleet active today.

Rates are generally not moving up or down. The success of being defined by how many rigs you can keep steadily active and plan your overhead accordingly.

Our well service businesses' right size continue to make reasonable margins with fleet capacity to absorb upticks and demand. So with that, I'll turn it back to the operator for Q&A.

Afternoon, everyone. So on the dividend can you maybe just walk through your thoughts behind the cuts specifically trying to get a sense of how much that was driven by concerns on Ford activity and payer ratios versus a desire to allocate more dollars towards de-leveraging.

Good question because of a combination of all of the above. I think that the first issue was certainly at the prior payer ratio, we were quite comfortable with continuing the pay there but looking at 2020 being probably somewhat more similar to 2019 with perhaps a hopeful uptick in the back end of it.

I think the board was concerned mostly about dilution, where to best put the capital. We've got no concern about our forward CapEx.

We can run the business $100 million moving forward every year for the next 3 to 5 years. We're quite certain of that.

We've got a relatively young fleet. When we think of activity running in that $120 million to $140 million range moving forward.

That's very helpful. And I guess maybe along the same lines.

I get it's tough to pinpoint one or two things or give exact measures but what would you either need to see from an activity perspective or a like target leverage or payer ratio to see incremental dividend bumps going forward?

Well, our routine response to this is every quarter the board looks at the current and the future activity viewpoint at that point in time and makes the calls. I think you've seen how we have behaved in the past.

I don't see any reason why we would behave any differently into the future with that respect. So it's a combination of we think we can put the money back to work and reward shareholders in the long term more appropriately than giving out where we were with a delusion effect it had.

Understood. Switching gears to the U.S.

So you talked about day rates being flat to down heading into 2020. You had some comments earlier on your opening statements, but when you think about the go-forward incremental pressure you could see will those comments be talking about an incremental 1,000 to 1,500 a day magnitude possible pressure or would it be any larger than that?

No, I don't see it being any larger than that. We've seen our first sign of I think maybe as well when an operator major comes to us and says, Hey, I want to sign you up for 2 years.

And we just recently signed up the last week 2 rigs on 2-year contracts with a certain major under discussion with some others. My sense is and I've been in this business a while, it's kind of leveled off.

We're running about 70% utilization in this kind of rig category, which tells us that it is still a strong market. You don't have to be price takers to opt in.

You're probably not a price maker, but you're certainly holding on. The other thing we're finding is no one is -- and this is no surprise to anyone is no one's building new rigs and popping them out there.

People are maintaining their fleet. When you look at the amount of capital that's been invested in the business in the last 7, 8 years, it's not a surprise.

There is an active, newly constructed 1,500 horsepower AC rig fleet that can run forward and generate free cash flow for some time to come.

Understood. That's very helpful.

And then just maybe sticking with the U.S. specific to the fourth quarter, can you give us a sense of how activity is shaping up heading into the year and maybe more specifically what do you expect for the typical year and slow down?

And do you think that could arrive earlier than typical this year?

Well, it's a good question. Because there's probably a little doubt that anyone will be able to bring any 2020 cash into 2019 and spend it.

Everyone's very cognizant of that. We're running about 68 rigs today in the U.S.

Looking at our forward book, it seems to be leveled off around there. We had, as I mentioned before, in my earlier comments that we had a good chunk of those turnover contracts in the third quarter, most of them in August over a 6-week period of time, which is very rare for us.

It just happened to be with the acquisition, there was a lot of serendipitous timing that we had a whole bunch of rigs coming off-contract that we had to re-contract. Re-contracting rigs, of course, you have to, generally, in a tougher market come off a little bit.

So I think that the fourth quarter will be relatively stable with a little bit of a headwind because I don't think you'll see anyone expand any projects. Plus you're getting into Christmas, you always lose a couple of weeks there anyway.

The same would probably hold true in Canada. International, it's -- we're just cranking away now.

Probably, I'd say, October will be the first month that we've got everything kicking out invoices and all of the capital projects are completed.

Understood. Last question for me and kind of following up on your last statements.

Just given some of the strength that you have been seeing in the Australian market, any desire to add new rigs there or do you kind of see that capital all spent in that region?

We started with putting basically 12 new ADR 100s and 200s which got modified into 300s over a period of time. So we have a relatively young fleet there.

We put I think 3 or 4 new 1500s into the area. We just finished generally an operator funded CapEx upgrade program on about 4 rigs.

We have 6 or 7 other rigs to take up capacity if the market were to get a little more frothy, but I think it's -- we know Australia well, and we don't see another wave happening. We've got 70% of our rigs tied up with contracts in the 2 to 3-year range.

And they were up from where they were before, $4,000 to $5,000 a day.

Understood. That's great color.

I really appreciate it. I'll turn the call back.

Afternoon, everyone. Can you may be talk about some of the dynamics that maybe make you switch from buying back your bonds in the open market versus paying down the credit facility and how you're thinking about that capital allocation strategy?

That's really going to depend on where the bonds are trading. So right now, they're sort of what's been that 70, 87 to 90 range.

So given it's a 9.25% interest rate compared to a lower rate on the facility, we'll make decisions pretty easy as you sort of start to line it up between the two. So it's really going to be on just minimizing our cash interest and our interest cost and go forward.

And with respect to CapEx as you look into 2020, I think the number that's been alluded to or been talked about is $100 million. In 2020, is that a net CapEx number inclusive of asset sales or do you think that's the number in 2020 even if you don't sell anything at this point?

Yes, that's the number in 2020 even though we don't sell anything so obviously we have $50 million of redundant assets of which we expect about $5 million to close here in the fourth quarter. All of that will go directly against debt so that $100 million is a clean number.

It goes down when we sell those other assets. And that's just real estate assets.

We also have on an ongoing basis roughly $5 million to $10 million of assets where they've had their useful life and they have a secondary market somewhere in the world with third tier contractors. That kind of happens on an ongoing basis as well.

Okay. And then, with respect to the dividend, obviously the decision was to have it, but what precluded you to taking it down to say $0.01 or $0.25 or something along those lines and just taking all that cash and redirecting it?

How did you end up at $0.24?

Well, I think it was, again, a robust conversation with the board and the balanced approach that we always find the things we do respect. There have been a lot of dividend guys that hold us with this yield there on 8% or 9%, which is still reasonable.

That may have been part of the conversation for a floor.

Okay. Thanks very much, guys.

I'll turn it back over.

Thank you. Hello, everyone.

Just looking at your consolidated G&A pretty big step down sequentially. How should we think about that going forward here?

I think on the go forward probably will be close to $50 million on our run rate, I think, on an annualized basis, kind of what we're seeing right now. So a lot of time it was expensive coming through but I think in 2020 we should probably target around there.

Got it, appreciate the color and then just looking at the JV, could you give a sense of kind of what lies ahead there here in the coming quarters?

If you look at the JV in Q3, it's becoming more of what you're going to see as a run rate go forward. Q4 will be really, I would say, a quarter-by-quarter run rate that you can use on a go-forward with both Kuwait rigs running and the Bahrain rig.

There was one delay on the Kuwaiti rig. Missing days due to the customer not having the site ready.

That would appear back some of the days we saw in that quarter. So Q4 is really going to be I think the realistic which you see on a run rate.

So Q3 was missing, probably I'd say 40 to 45 operating days.

Appreciate the color. That's it for me.

Thank you.

Thank you, operator. Thank you for joining the third quarter call by the way.

As promised, we've successfully driven our $40 million of annualized cost savings out of the business through the acquisition. We've already established $5 million of supply chain savings and expect to push up $10 million annual savings moving forward.

We've also identified $50 million of redemption facilities in North America, which we expect to be rationalized over the next 12 months. Approximately $5 million occurring in the fourth quarter.

We have managed CapEx of the year and have been successful in pushing and we'll continue most upgrade capital cost to the operator. None of these operated funded upgrades we expect to be exiting right in $100 million range as we previously mentioned.

With a relatively newer fleet, we expect to be able to operate and maintain the fleet moving forward in the $100 million maintenance CapEx range for the foreseeable future. The Ensign team stays laser-focused on differentiating through technology application to generate best in class margin leveraging its purchasing power to drive cost efficiencies, applying all free cash flow to debt reduction, and executing all this while maintaining one of the best safe directions in the business.

Thank you for attending the call. We'll chat in 3 months.

Bye.