Ensign Energy Services Inc.

Thank you. Good morning, and welcome to Ensign's First Quarter Earnings Conference Call and Webcast.

On our call today Bob Geddes, President and COO; and Michael Gray, Chief Financial Officer will review Ensign's first quarter highlights and financial results followed by an operational update and outlook. We'll then open the call for questions.

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 market conditions, crude oil and natural gas prices, foreign currency fluctuations, weather conditions, the company's defensive lawsuits, the ability of oil and gas, companies to pay accounts receivable balances, raise capital or other unforeseen conditions that could impact the use of the services supplied by the company.

In addition, our discussion today may refer to non-GAAP measures such as adjusted EBITDA. Please see our first quarter earnings release and SEDAR filings for more information on forward-looking statements and the company's use of non-GAAP measures.

With that, I'll pass it on to Bob.

Thanks, Nicole, and if there was ever a time for a thorough advisory lead-in it was -- it's now. Thank you again for joining this call today for Ensign's First Quarter 2020 Results Summary.

First off, we're hoping all of you are safe and healthy. What a world we live in today.

I also want to quickly take the opportunity to thank all the frontline health care and essential service workers that are keeping this world running while we manage through this pandemic with immediate and proactive response in the field. We at Ensign have been able to continue operations around the world essentially uninterrupted.

I've always said the drilling companies are built for cycles, but I have not in my wildest dreams imagine this stacking of macro events would occur all at once. Nonetheless, it is reality, we adjust and we figure it out.

Obviously, the entire OFS space is in a race to delever and continues to reduce costs and rightsize their businesses. Amidst these challenges in the first quarter, Ensign was able to generate a healthy cash flow, increased liquidity, further reduced fixed cost overhead, reduced debt by almost $170 million year-over-year, expand our contracted fleet book by signing up two more rigs onto long-term contracts.

Now with over $1 billion in forward contracted revenue in our global fleet going out almost five years, we successfully beta tested our EDGE Autopilot cutting 15% off the average well times in the area right off the bat and we operated with the best safety record in the company's history. With that, I'll turn it over to Mr.

Gray to provide a more in-depth summary of the quarter. Mike?

Thanks, Bob. Results in the first quarter of 2020 were negatively impacted by the oil price war and the global COVID-19 pandemic.

Global measures implemented to combat the spread of COVID-19 have led to a significant slowdown in global economic activity, which has reduced the demand for crude oil and natural gas products. This reduction in demand contributed to a sharp decline in global crude oil and natural gas prices over the quarter.

As a result, the company's operating days were lower than the first quarter of 2020 when compared to the first quarter of 2019, as customers quickly responded to the steep pricing declines, specifically in the United States. United States operations recorded 5,141 operating days in the first quarter of 2020, a decrease of 23%.

Canadian operations recorded 3,102 operating days in the first quarter of 2020, a 1% increase. And international operations recorded 1,438 operating days, an increase of 8% compared to the first quarter of 2019.

The company generated revenue of $383.9 million in the first quarter of 2020, a 14% decrease compared to revenue of $445.3 million generated in the first quarter of the prior year. Adjusted EBITDA for the first quarter of 2020 was $90.1 million, a 22% decrease from adjusted EBITDA of $115.5 million in the first quarter of 2019.

The 2020 decrease in adjusted EBITDA can be attributed to the decrease in activity across our United States operations. Depreciation expense in the first three months of 2020 was $89.8 million, 2% higher than $88.2 million for the first three months of 2019.

General and administrative expenses in the first quarter of 2020 was 16% lower than the first quarter of 2019. The overall decrease in expense was largely due to the company's focus on managing and reducing costs and management continues to look to reduce costs on a go-forward basis.

Total debt for the first quarter of 2020 was down year-over-year by $167.3 million to $1.6 billion as of March 31, 2020 for $1.8 billion as at March 31, 2019, despite an increase in debt of $46.4 million due to foreign exchange. Net purchases of property and equipment for the first quarter of 2020 totaled $22.3 million $16.4 million related to maintenance capital and $10 million related to upgrade capital.

Capital expenditures for the calendar year 2020 has been reduced to a total of $50 million. On that note, I'll turn the call back to Bob

Thanks, Mike. So let's provide a worldwide operating highlight with some forecast on what we see happening moving forward.

Starting with the United States, the U.S., which generates roughly 60% of our EBITDA saw the immediate response early in February with rigs falling off almost every day through into March, as everyone cut budgets. We went from running 60 to 70 rigs in the U.S.

down to where we are today roughly 30 rigs. Of our 122 rigs in the U.S.

approximately 30% are engaged under long-term contract and 50% of those have a remaining term of six months or greater. With some of these extending out into 2021.

Over the last few months we have worked closely with our strong client base in the U.S. to provide immediate rate relief on existing rigs in exchange for flattening out the contract curve into 2021 very important.

We're finding very quickly in the U.S. that there are the technology haves and the have nots clearly separating in the pack.

Rigs with advanced controls like our EDGE platform are continuing to work while others go down. Our U.S.

well servicing division continues to find ways to perform amongst the strong headwinds with steady but reduced activity in California, the Rockies and the Eagle Ford. While others have shut down their directional drilling business, we continue to operate ours roughly with about half a dozen jobs today running.

No question margins are tight. But again rightsized one can crank out a margin with strong field performance, strong management team, low fixed cost, high variable costs.

Moving forward in the U.S., we anticipate we'll be running roughly in that 30 to 35 rig range, 20 to 25 well service rigs and roughly five to 10 directional jobs through the next quarter. In Canada, Canada had a strong first quarter as Canadian winters are typically.

We had a high of 55 rigs in the first quarter with strong utilization in all our rig types accepting the heavy tele-doubles, which were disproportionately affected by the lack of investment into place like the Cardium in Central Alberta. We saw our margins improve in Canada for the first quarter year-over-year, mostly the result of our high utilization, again on the more technically advanced ADR 1500 type rigs.

The Canadian team was successful in securing a three-year term contract with a major for two of our ADR 1500's with EDGE controls on them. Of the 101 marketed rigs in Canada, approximately 20% are engaged under contract of various term and approximately 60% of those have a remaining term of six months or longer.

We anticipate that we'll run give or take 15 – 10 to 15 rigs through the summer and depending on how quickly the market swings back perhaps up to 20 in the fall. Canada well servicing is expecting to see our share of the Orphan Well abandonment program that the Fed's announced a few weeks back.

This should put about 10 of our well service rigs and their crews to work over the summer into the fall. Our directional drilling business in Canada has worked its way into the top three and expects to participate with again about half a dozen jobs running through this summer.

On the International, where we generate about 20% of our margin. Generally our International rigs are engaged for the most part on gas projects.

This is in contrast to our North American market which is mostly oil driven. We now generate as much in our international business as we do in Canada not to diminish Canada but it does talk to Ensign's global footprint which helps derisk geopolitical events and helps to stabilize cash flow.

Australia had a steady eight rigs operating daily down from 11 in the first quarter. The three rigs that came down were drilling for oil.

Venezuela is obviously on pause for some time to come. We basically shut down our last rig there a month back and have reduced the staff to a skeleton crew.

In Argentina, we have the one rig on a long-term contract with a major and expect to see a second rig go to work later in the year. Again these rigs require no growth CapEx or general CapEx to get them back to work.

The Middle East, another very strong area for Ensign, now with the Kuwait rigs running solidly performing after a few break-in challenges with the new rigs, we expect solid results out of the two ADR 3400 horsepower rigs as they work into their five-year contracts. We also have both of our ADR 2000 horsepower rigs running in Bahrain both of which are on long-term contracts.

Oman will probably come under some pressure this summer as we expect a three to four month pause with two of our clients in the region. We've been awarded new contracts, but the start dates have been as I mentioned put on pause.

So in general, and as Mike alluded to earlier, $10 million of the CapEx in the quarter was tied to one-time rig enhancements, which provided for long-term contracts pushing out to the end of 2023 with a fleet of roughly 50 to 60 drilling rigs running at 25 to 30 well service rigs running daily around the world. We expect the maintenance CapEx to settle into the $10 million run rate per quarter for the foreseeable future or $40 million annually.

On the technology front, we believe that you can't take your foot off the gas pedal with technology as it becomes more and more of a differentiator that not only keeps it working, it keeps you working with higher margins. To ignore this is to run a slippery slope.

As I mentioned earlier, we have our Edge system now in over -- I'm sorry, 75% of our active rigs and have it installed on 50 plus rigs worldwide. The team also successfully beta tested our first EDGE Autopilot on a program in the Permian with a major results are very impressive.

15% reduction in days right off the bat. And our charge rate for the EDGE Autopilot will be roughly in the $2,500 a day range.

So with that, operator, I'll turn it back for Q&A.

Thank you for taking my call -- my question. Bob in International division, if you look at the first quarter revenue that seemed a little bit lighter than what we were expecting.

Days -- operating days were roughly the same as in the fourth quarter, but revenue was substantially lower. Could you provide some guidance on what happened there?

Yes. There was on one of the projects in Kuwait, there were some delays with the construction on the first location and also in one of the other events, or one of the other areas we also had a slight delay.

So that caused revenue to come off a little bit. So, again, two of them on three-year contracts, the other two on five-year contracts, probably 1.5-month delay from where we were expecting things.

Okay. But as we look into the second quarter we have a pretty good idea on what the number of active rigs will be.

But in terms of revenue per day, how should we think about that? Is it more like what we saw in the first quarter or more like fourth quarter number?

You're talking back to the Middle East or generally?

For the international business as a whole.

For international, yes, I would say that the average rig day international will go up, because the larger rigs are continuing to run and the ones that slipped off were on the lower day rate end.

Okay. That's helpful.

Thank you. Were there any early termination revenues in the U.S.

or Canada in the first quarter?

No, Mike, I'm quite sure there were -- it was negligible.

No there was not.

And do you expect any in the second quarter?

No. No.

As I was mentioning in the expansion of the operating forecast, we're finding that a lot of the companies we're working for are looking more to get a lower day rate in an extension for some term going out into 2021. In other words, they're wanting to keep our rigs running and not let them down and pay an early terms.

So I think that that talks a lot to the operation and how efficient they're running out there. So I'm not expecting anything in the second quarter that I'm aware of at this point.

So as we -- in terms of revenue per day kind of projections for the U.S. business what a 10% kind of haircut, because of these reductions would that be a reasonable expectation?

On revenue that you said, Waqar?

Yes revenue per day for the U.S. rigs.

Yes, yes. I think that that would be -- I mean depending where your starting point is, but as you took on a first quarter average and we're asking what the second quarter looks like, probably safe with that 10%.

10% to 15% perhaps. Yes.

Okay, great. And thank you very much.

Appreciate the color.

Thanks, Waqar.

Hi. It's Bruce Harrop here.

I had quick couple of questions. One is regarding the repurchase of the senior notes.

And it looks like your purchase -- at least there was a purchase subsequent to the end of the quarter. And my question really is, as it relates to that, it looks like the discount -- just looking at the gain that you disclosed, the discount, it looks like it's somewhere -- looks like you're buying that back in about a $0.33 or something to the $1?

And I'm just curious, were you constrained by volume in terms of the amount you could buy back at that price level? Or were you constrained by the amount of cash you have to deploy?

Like I am trying to get a sense, like, that obviously is a huge win. If you could do as much of that as possible, it would be a huge win.

So I'm trying to figure out, if volume was a constraint? In other words, it was only so much trading or whether you could have done more, but you didn't have the cash available to buy more.

So, Hello, Bruce. Mike, do you want to handle that one?

Yes. No.

So the discount you talked about, Bruce, is in the appropriate range. That's where the volume -- I mean, there is volume.

So it's more of expectations of what pricing is going to be and then balancing it between liquidity and what the actual market can kind of support for that. So, yes, it's kind of -- we said there -- probably, the last few weeks, I mean, if you do follow what the bonds are being traded at, I would say, there isn’t a large amount of volume, but we definitely, like you said, we pay attention to what it is, where it's trading, what our expectations of it should be and you kind of go from there.

Okay. And also, I'm just trying to get a sense for the EBITDA margin for international.

You guys disclosed once a year segmented EBIT by division and you also disclosed depreciation by division. So you can calculate EBITDA that way.

And my question on international, if I do that, its $43 million for last year. Is that kind of a smooth number?

Or is there some one-timers in there? And I guess, I'm trying to figure out, international seems to be a real solid steady stream of EBITDA for you guys.

But I'm trying to get a sense for what the margin will be there. Was there anything unusual last year?

No, no. Bruce, I think, the -- you hit it right on the head, the international business is a very low beta, low volatility for us, as far as the margin goes, term contract, we're generally running on average in that three, as high as five, as low as one-year type contract.

So we generally run in low to mid-20s margin on a continuous basis, international. I don't think that's much.

Yes. Because if I do have a calculation that I just described, for 2018, you were 27% EBITDA margin, international.

But for 2019 you were only 15%. So there must have been some one-timers in there, maybe moving stuff around or something like that.

But more important to me is that number going forward, you're saying, it's low to mid-20s kind of business there, on an EBITDA basis.

Yes, that's kind of where they settle in. They settle into their metrics.

They're project metrics. And in 2019, there was some start-up costs and things like that.

That's probably what I'm expecting you saw in that 2019 margin compression there. And keep in mind, the Middle East, the Bahrain and the Kuwait rigs provide us a nice forward margin on a continuous basis.

So I think that's what you plan for.

Okay. And in the debt repurchase that you did subsequent to the end of the quarter, was that funded from drawing down the operating line?

Mike?

No, it's funded by operational cash flow and working capital harvest.

Okay. Excellent.

I mean, that seems like a highly good use of capital to me.

We agree.

That's all.

Thanks, Bruce.

Good morning everyone.

Hey, Ian.

To follow on Bruce's line of questioning, I mean, the debt repurchases were obviously done at very attractive prices more guidance surely be positive. Just curious whether there's anything within your credit facility agreements or note indentures that could potentially limit the quantum or the amount of debt you could repurchase as we go through the remainder of the year.

Mike, do you want to handle that?

Yeah. There is no restrictions.

And then in prior quarters, I mean, there has obviously been some talk of asset sales to help delever. Obviously, the world's changed a lot over the last three months.

So are you able to provide any sort of update around those events and the likelihood of execution on that front in 2020?

Yeah. I would say, there's a very high likelihood of execution on the 20% to 25% range without getting into much detail.

We're moving along on that path.

Okay. And then I mean, with respect to the credit facility you have a bit of time until it matures, but do you expect that something that gets executed or an extension gets executed at some point in 2020?

And if so be able to provide any initial feedback on the conversation with your syndicate?

Mike?

There'll be no comment really on that as of yet. We're sort of taking it month-by-month quarter-by-quarter.

Depending on how things shape out. So from our standpoint, we're in a good position and we'll kind of have those conversations as required, when they come up.

Okay. Maybe last one for me and once again probably for you Mike.

But are you able to provide any goalposts around what you think the working capital release could be in Q2? And maybe what you expect to give back through the remainder of the year?

Nothing, I'd say, specific, but I mean, if you look at the receivable balance and the payables, I mean, there is $50 million to $60 million kind of there. Q2 is usually fairly good on the working capital harvest just given the strong Q1 that we had in Canada, so those collections start to come through.

So you can probably target around that I'd say $50 million plus.

And you haven't seen any degradation in the DSO at all through Q2 yet?

No we have not. The customer base that, we have is I'd say is quite good.

Considering what's going on out there. So I mean, it's an area that we continue to monitor.

We have fairly tight credit process on that. So we haven't seen it as of yet and hopefully do not see it.

Yeah. That's very helpful.

Thank you very much. I will turn the call back over.

Thanks, Ian.

Hi. Good morning.

Thanks for taking my questions. And I hope everybody is doing well.

Just a question on the CapEx. I did notice the disclosure has mentioned the net CapEx number.

And there were some dispositions in the quarter. So, is the proper number, we should be modeling in for organic spend $50 million or $55 million?

Or any help you can give on that would be great.

Yeah. I think what you should be modeling forward is about $10 million a quarter Keith.

That's the maintenance CapEx to keep a fleet of 50 to 60 rigs and 25 give or take service rigs running safely and operationally efficiently moving forward forever. I mean, that's the run rate for those type of rigs.

So we can hang on for quite some time in that $10 million a quarter range.

Okay, thanks for that. Just on the day rates and the term extension.

So it sounds like a preferred approach. We've heard a bunch of different approaches from different market participants here.

Just thinking about recontracting, are you -- would you be looking at considering a further reduction in rate? Or would you like to -- as some operators have said get off of the day rate model a little bit more and maybe move on to a little bit more of a nontraditional or performance-based contract as you get more comfortable in your technology, or just kind of wondering how we should ultimately be thinking about any further extensions to contracts, or as things start to get rolled on?

Right, right. I mean we're finding that the recontracting of rigs, obviously, is one bucket where you're getting pulled into the notional small market pricing.

And then you're working from there with your technology suite. The second part is where we have an operator who has the rigs under contract who are coming back and saying, hey can you give me a 10% reduction in rate?

And we're saying, well, we can but we need to protect our EBITDA moving forward with a little bit of time value of money if we're going to stretch out into 2021. So we've been going through that process, again protecting the EBITDA stream just moving it out forward, keeping the rigs running.

It also allows us the opportunity to upsell some other things the big one we're working on is our EDGE Autopilot, which is quite a game changer. It seems that a few other companies have what they're calling it an autopilot of some sort.

But I always use the analogy it's like the autopilot is like the conductor of an orchestra. The music is coming out with different groups differently.

We purposely built our gateway, so that we could run it on Trinidad rigs or Ensign rigs. We're finding it to be quite an interesting platform.

First well we're able to reduce the time on the well by about 15%. Now, what we're doing is we're trying not to give it away by weaving-in performance based contracts.

The third component of your question there Keith, and that is to suggest that, we'll give you a competitive day rate. And so there's no risk on us either way, no risk on the operator either way by the way.

But what we do is we said that if we can increase the penetration rate or a few metrics in there that we know that we can control and accurately account for then we're basically able to up that by as much as $2,000 to $3,000 a day, so in some cases when we run into a brick wall with people trying to suggest that something maybe worth $2,000 or $3,000 a day. We attack it from a performance-based contract and get it that way.

In other words, we are at the old fashion way by producing performance and backing in by saving the operator money, and essentially getting paid through a notional rate increase rather than a flat per day for putting it on the rig. In other words, again, performance based contracts.

More and more of those types of conversations are starting to happen. But keep in mind, over the last month the conversations have been very straightforward.

Hey we're putting rigs down, right? I mean we're losing like a day, just like everyone else for a period of time.

So it wasn't the opportune time to bring up, hey, can we talk you into a performance-based contract? So things are selling down.

We're having a few more of those conversations now that we've beta tested our Autopilot. And so, you'll see that roll out as we roll out through the summer and the fall.

But everyone is beating other big fires right now.

Yeah, got you. No, that's very good color.

I appreciate that. Just finally for me here.

On the $1.7 billion of well decommissioning money, you did mention you expect to have about 10 crews running in Canada. Can you maybe comment on what you ultimately expect your potential market share of that money could be, and how much you might expect to potentially win?

And then, if you've -- and then, just on how many or if any applications you've submitted so far?

Yeah. That's a very good question.

It took some period of time for anyone to understand what it was about and how it was to be rolled out. And anyway, to our understanding, I've asked our well service team, what does this mean for us?

And they're figuring there should be about an incremental 10 rigs of work keeping us busy through the summer and into the fall. So the guys are on it.

I mean it is helpful. Of course, the $1.7 billion isn't all going to orphan well, but we hope to get our market share of it.

I don't think anyone's got a technical advantage or anything or a client advantage in this regard. I think that there's a big blanket that gets spread across Western Canada in that regard.

Perfect. Thank you very much.

That’s it for me.

Thank, Keith.

Thanks operator. Rest assured, the team at Ensign is focused on de-levering and working to expand the market share in every area around the world with our high-performance crews and leading EDGE, no pun intended control systems.

We look forward to hopefully a healthier and more economically stable world when we report to you in three months time. Until then, stay healthy, think positive, and we'll get through this.

Thank you.