Ensign Energy Services Inc.

Thank you. Good morning, and welcome to Ensign's second 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 second quarter highlights and financial results, followed by our 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 materially different 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 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.

Additionally, our discussion today may refer to non-GAAP measures such as adjusted EBITDA. Please see our second 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. Good morning, everybody.

Good morning, everybody. It's not lost on anyone on the call that this world is still being severely impacted by COVID-19 which continues to wreak havoc with the macro demand for energy.

In light of the COVID-19 pandemic, we are happy to report that the team in the field and the office has been able to stay operational with essentially little or no impact to fuel operations revenue. Also in the second quarter, we completed Phase 3 of the overhead restructuring plan which puts our fixed cost overhead structure 35% below where it was last year second quarter.

So, I'll put the call back over to Mike Gray, CFO; for a detailed financial summary of the quarter. Over to you, Mike?

Thanks. Bob.

Results for the second quarter of 2020 were negatively impacted by the COVID-19 pandemic. Global measures implemented to combat the spread of the COVID-19, including stay-at-home restrictions led to a significant slowdown in global economic activity that subsequently reduced the demand for crude oil and natural gas over the short-term.

This significant reduction in demand contributed to a sharp decline in global crude oil and natural gas prices over the first half of the quarter. As a result, the company's operating days were lower in the second quarter of 2020 when compared to the second quarter of 2019, as customers quickly responded to steep declines in commodity prices and an uncertain industry outlook by reducing capital expenditures and winding down drilling programs.

Operating days overall were lower in the second quarter of 2020, with Canadian operations experiencing a 71% decrease; United States, a decrease of 66%; and our international operations, a 41% decrease compared to the second quarter of 2019. For the six months of 2020, operating days were also lower with Canadian operations experiencing a 21% decrease, United States operations a 44% decrease, and international operations showing a 15% decrease compared to the first six months of 2019.

The company generated revenue of $194.8 million in the second quarter of 2020, a 48% decrease compared to revenue of $377.5 million generated in the second quarter of the prior year. For the six months of 2020 the company generated revenue of $578.6 million, a 30% decrease compared to revenue of $822.5 million generated in the first six months of the prior year.

Adjusted EBITDA for the second quarter of 2020 was $58.1 million, 43% lower than adjusted EBITDA of $101.8 million in the second quarter of 2019. Adjusted EBITDA for the first six months of 2020 totaled $149.3 million, 32% lower than adjusted EBITDA of $219.1 million generated in the first six months of 2019.

The decrease in adjusted EBITDA was primarily due to the decrease in activity across global operations. Depreciation expense in the first six months of 2020 was $182 million, an increase of 3% compared to $177.2 million for the first six months of 2019.

General and administrative expense in the second quarter of 2020 was 33% lower than the second quarter of 2019. G&A expenses decreased as a result of cost saving initiatives, various subsidies received from various governments and organizational restructuring.

Total debt for the second quarter of 2020 decreased year-over-year by $107.3 million to $1.56 billion [ph]; the decrease in total debt was partially offset by $30.1 million in foreign currency exchange fluctuations. Net capital proceeds for the second quarter of 2020 was $3.7 million consisting a $13.2 million maintenance capital offset by proceeds of $17 million from disposals.

Planned capital expenditures for the 2020 year remains at $50 million of which approximately $40 million will be maintenance capital. On that note, I'll turn the call back to Bob.

Thanks, Mike. So let's run around the world in an operational update.

Worldwide we have 55 drilling rigs under contract with roughly 45 drilling rigs active today, and also 33 well service rigs active today across our five basic regions around the globe; 20 in the U.S. are running, 3 in California, 1 in the Rockies, 16 in Southern, 9 are on IBC for 29 under contract.

We have 11 rigs in Canada, 13 under contract; 7 in Australia, 8 under contract; 1 is waiting on location. And we have 4 in the Middle East, 2 in Kuwait, 2 in Bahrain, not operating in Oman at this point.

In Latin America, where we operate in Venezuela and Argentina, we have just 1 running in Argentina at this point in time. It's coming back to the U.S.

The U.S. business unit has certainly been hit the hardest and has had the largest year-over-year impact in Ensign’s earnings, while we had a generous EBITDA pop in the quarter, as Mike pointed out.

In the U.S. it was bittersweet, as we saw roughly 10 rigs have their contracts cancelled as operators shut down drilling programs.

While we had some hope that drilling may claw back in the fourth quarter of 2020, we are doubtful that will occur in 2020. And depending on commodity prices, we see any rebound being a 2021 event and not a 2020 event.

The well servicing business unit continues to drives utilization, with 25 of its 49 well service were executive [ph]. We have 12 in California, 10 in the Rockies, two in the Permian, and one in the Eagle Ford.

We continue, of course, to drive cost efficient efficiencies through the business but the meaningful gains are getting tougher and tougher to capture. Ensign continues to expand its performance-based contract, PBC platform.

This is where the rig is offered at a market-competitive day rate with performance bonuses earned for beating established metrics. With the platform, Ensign decides what EDGE technology is best introduced and turned on at the rig.

The EDGE technology earned its way at no risk to the operator. We also put our APM team, our advanced performance management team, on projects to enhance performance specifics and work with the operators engineering teams.

While we were on the technology theme, our EDGE technology is now installed and ready for use on over 50 of our rigs worldwide. Also happy to report that our EDGE autopilot, which would charge out at about $2700 a day, on a-la-carte basis outside of a PBC, has been successfully beta tested on two wells now and is now being installed on the rig, which will be on a PBC contract here in the next few months.

In the Middle East as we announced a few weeks back, we took out Halliburton 40% ownership in the JV, July 1st, we have the two 300 to 400 horsepower Super-Spec rigs operating in fully contract and Kuwait until mid-2024. And we also have our Bahrain rigs, one of which was a JV rig contracted out until late 2023.

Our Oman business has been pulled back to standby mode with skeleton staff, as we await indications of when rigs may be going back to work. In Venezuela and our Latin American business units, Venezuela is still shut down, subject to us US OFAC sanctions.

In Argentina, we have one rig operating for a major in the New Canaria, which looks like it'll be busy till mid-2021 at this point. We have some active bids for other rigs, but nothing firm at this point.

In Australia, we have eight out of our 16 rigs in Australia, seven operating today, one waiting on location as I mentioned before, we're experiencing challenges moving across between states and Australia due to COVID-19 travel restrictions, but have not impacted operations as of yet. In Canada, we have 11 rigs out of 99 running today.

We've gained market share in the last few months and are running close to 25% market share in Canada, as our high-spec rig started to go back to work after breakup. Canada had arguably one of the worst second quarters and record for rig activity and since then, only 50 running today.

The back half of 2020 looks painfully optimistic, but our scheduled booking is still quite loose. The Canadian emergency wage subsidy is helping to keep crews active where we can find work, but operator’s budgets remain tight for obvious reasons.

Our directional growing business unit has two or three jobs on the go today, and we should get to five jobs in the fourth quarter. While servicing is running about eight rigs over the summer with an expected bump to 15 in the back half as the abandonment programs of the OWA and the SRP is the site reclamation plan start to actually hit the ground.

While the government-funded abandonment program as well intended, it has had its challenges through the application process in any case, so this will help put more of our well service rigs and move some of our crews back to work here over the next three or four months, and it's 2021. For an outlook, it's clear, with almost every drill company and the office space reporting large ETFs in the quarter.

This is the proxy that operators will continue to pull in their horns to reduce drilling programs at least until well into 2021. As reported, Ensign had roughly CAD20 million of ETFs and IBCs in the second quarter alone.

We expect the combination of ETFs and IBC to drop off about 30% to 40%, quarter-over-quarter until mid-2021 as we move forward. Well, a few months back, we thought that Q3 would be the trough.

We're not so sure of that anymore. With that, I'll turn it over to the Q&A back to the operator.

Hi, good morning. Just a quick question on the Oman rigs so they rolled off contract, is it just a matter of timing due to due to the pandemic that's keeping those from going back into the field or do you have to re-contract them kind of entirely?

Well, we were awarded a contract which got put on pause about six months ago. I suspect that it'll be rebid again, once they get their understanding together and when they want to do the project.

Our guess is it's pushed into 2021, at least at this point.

Okay, thanks for that. Just moving to Western Canada, looking at where the rig activity is running, you mentioned about 50 rigs across the industry.

We see kind of 20-some in the Montney from the data that we have. You guys seem to be running a little bit behind where you'd normally be in the Montney as far as market share goes.

So question there is, is that more of a matter of customer mix or have you seen incremental rate pressure there that's made that region a bit more competitive than maybe it was last year?

I would say that it's customer mix. We now have a rig active in the Montney, Rig 60 working for a measure and it's not lost on us that I think it's fair to say that we fell behind in the Montney market share, and that is changing.

Okay, okay. Thanks for that.

That's pretty much all I have. Thanks for the color.

Thanks for taking my question. Mike, what's your guidance for DDNA with your increase here in the TDI rigs or does not change?

There will be an increase just given the value of those rigs but do not have a specific number.

Okay. Then what portion of these wage subsidies in $5.1 million, how much was that in the G&A line and how much in the OpEx line?

Probably close to 15% to 20% was in the G&A line and then the remainder would be under the services expensive.

Make sense. Rob, could you comment on the rate and margin environment in the U.S.

business?

Yes, it really hasn't changed much from our last call. We're finding that we're not necessarily bidding on rate, we're bidding on performance and experience in an area and most of the contracts we're negotiating and talking about now have a PBC, performance-based contract, theme to them.

So I would say that not much has changed. It's just the big thing in the second quarter was, you know, we had 10 or 12 rigs come off.

With an ETF where the contract was cancelled, some additional rigs were put onto an IBC base, where the operator has the option to bring them back to work within the contract rather than paying the lump sum ETF.

Okay, and for these rigs, on standby earnings, standby revenues, is are back for them zero, and any revenues that come in is really 100% margin or how should we be thinking about those revenues?

Yes, essentially we have stack off costs where we rent a yard or in most cases we're in the operators area, so the costs are essentially nominal, zero.

Okay, and are you still seeing additional rigs going on standby or do you think that standby number kind of stays flat?

Well, as I mentioned, we're seeing probably a 30% to 40% quarter-over-quarter drop. Some of that will be the IBCs that fall off and some of it may be more rigs, but I think we've kind of hit the bottom as far as number of rigs active are running.

We're not seeing any visibility into number of active rigs dropping but, as I mentioned, we'll be seeing ETFs in the future quarters fall off by about 30% to 40% sequentially quarter-over-quarter as we move forward.

Thank you very much.

Morning. Just on your debt repayment versus liquidity.

I know your bonds are trading at attractive levels, but given your soft activity level outlook, do you expect to lean more towards managing liquidity or buying back bonds and has this stance sort of changed in the last few weeks?

No, I mean, some of the previous quarters, I mean, we don't have specific program, we assess it kind of on a day-to-day basis. So liquidity is important, specifically in this market.

So we'll continue to monitor it as we go.

And then just on the well [ph] program, how impactful do you think this could be? And I guess, would it be more of a Q4 thing?

And I guess, just a little more color on when it can show up in your year and financials here?

That was on the abandonment program you're talking about?

Yes. Just on the rebuilt.

Yes, I think that hits -- we're wishing for it to be a third quarter event. And I think that was the plan, but the application process has been just horrendous.

But we've been working with the government and the associations to get that cleaned up. I think it will have more impact in the fourth quarter.

And then, you know, bleeding well into 2021, but I'm sensing that, I mean, for us, we'll probably add another seven or eight rigs into the back half on the well servicing side. And so, a more pleasant back half on well servicing than originally thought, by that amount of rigs.

Okay, great. And then the last one for me, and this one is just kind of touched on this already, but just on that 30% to 40% decline in IBC and early turn revenue, your reference, is this more related to IBC revenue or early term payments, or is it a combination of both?

I guess I'm trying to get out is do you expect to see more early term payments next quarters?

Yes, I think the ETF as far as a lump sum-- the balance between ETFs and the IBCs will change where the number of rigs with a heart flat sum ETF will diminish at a faster pace than the IBC. So you'll see the IBC as the term of the contract falls off, so does the IBC fall off.

Just to give you some sense of modeling, you can probably take the $20 million that were in the second quarter and adjust that by 30% to 40% quarter-over-quarter sequentially as we move through the rest of the year and into half of 2021.

Morning, guys. A couple of clarification questions.

First of all on CapEx. So your $50 million budget for the year, is that a gross or net number?

That'd be a gross number.

And so last quarter Bob, you mentioned about a $10 million per quarter cadence for spend. Looking at the second half of the year your cadence would be about half of that.

What do you expect on a go-forward basis of the current activity that your normalized cadence would look like?

I would say it's probably in that $7.5 million per quarter range. It's all completely driven by how many active rigs you think are going to be running, right?

So if you think of 45 to 50 rigs running on a go-forward annual basis, you're probably looking at about $7.5 million, as high as $10 million a quarter with that range.

Is there anything else from an asset sale standpoint that you expect to transact in the foreseeable future?

Well, we have some other real estate assets that are going on the market. Keep in mind, that TDM facility we just sold was on the market for almost four years up in Edmonton [ph].

So you said foreseeable future. I'm not seeing anything in the foreseeable future.

If we think of that as six months to a year, it's going to take some time to dispose of these properties.

Then on the U.S. side, just to clarify a couple of data points, so in Q2, you said you had 10 rig contracts that were terminated for that US$13.2 million?

Correct.

Have you seen thus far in Q3, any additional contracts get terminated?

There are a few under negotiation. When it's entered negotiation, the operator may want to hang on to the rig or may decide to flat summit on EFT but it would be notional two to three.

Okay. And did I hear correctly earlier that he currently has nine rigs under IBC in the U.S.?

Correct.

Okay. Do you expect that there's going to be any other rigs go under IBC?

I know you mentioned sort of a stabilized active rig count going forward but are you concerned or do you have any visibility for additional rigs to go idle?

Well, the two or three I mentioned that might go to fund some ETF. The other consequence would be they go to IBC where they operate.

Okay, so those two or three would currently be running today? It's not like they're on IBC and potentially going to be bought out, they would actually be running and could go into the other two categories?

Correct.

Okay, great. Thanks for the call.

Appreciate it.

All right. Thanks, operator.

Thanks for the questions, everyone. For wrap up comments.

As we mentioned, we continue to drive costs down and operational efficiency metrics up. We continue to move to institutionalize the PVC contracts in a very tough environment.

While we remain optimistic for the back half of 2020 we certainly do not see the macro changing as a business until well into 2021. Thank you for listening in on our second quarter call.

Look forward to reporting to you with our third quarter in three months' time.