Ensign Energy Services Inc.

Thank you, Sylvie. Good morning and welcome to Ensign Energy Services second quarter 2021 earnings conference call and webcast.

On our call today, Bob Geddes, President and COO; and Mike Gray, Chief Financial Officer, will review Ensign's second quarter 2021 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 several 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; the ability of oil and gas companies to pay accounts receivable balances; or other unforeseen conditions, which could impact the demand for our services supplied by the company.

Additionally, our discussion today may refer to non-GAAP financial 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 financial measures.

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

Thanks, Nicole. And good morning, everyone.

Thanks for joining the call today. Once again, it's exciting to see the solid turn off the bottom for industry as we help the world get back to business and for Ensign to play its part in delivering cost-effective and emissions-efficient energy.

We had a great second quarter, which Mike gray will expand on in a moment. We've got lots to talk about after that, on what we've been doing or what we've been up to and where we think the market is going, and the low - and to expand on Ensign's participation in that.

We'll follow up with a Q&A at the end of that. With that, I'll turn it over to Mike.

Thanks, Bob. So over the first half of 2021, we continued to see improvements in the industry conditions, supporting the recovery of the oilfield services and driving activity improvements year-over-year.

Rising COVID-19 vaccination rates in several nations have aided the recovery of crude oil demand. This in combination with economic commodity prices has continued to drive the recovery of oil and natural gas industry from a significant and adverse impacts of the COVID-19 pandemic.

Overall, operating days were higher in the second quarter of 2021. Canadian operations recorded 1,058 operating days in the second quarter, an increase of 681 operating days.

The United States recorded 2,899 operating days in the second quarter of 2021, an increase of 31% and international operations recorded 844 days, a 20% increase compared to the second quarter of 2020. For the 6 months of 2021, operating days were lower with the Canadian operations experiencing a 17% decrease, the United States operations a 25% decrease, and international operations showing a 20% decrease compared to the first 6 months of 2020.

The company generated revenue of $212.3 million in the second quarter of 2021, a 9% increase compared to revenue of $194.8 million generated in the second quarter of the prior year. For the first 6 months of 2021, the company generated revenue of $430.9 million, a 26% decrease compared to revenue of $578.6 million generated in the first 6 months of the prior year.

Adjusted EBITDA for the second quarter of 2021 was $45.6 million, 21% lower than adjusted EBITDA of $58.1 million in the second quarter of 2020. Adjusted EBITDA for the first 6 months of 2021 totaled $95.5 million, 36% lower than adjusted EBITDA of $149.3 million generated in the first 6 months of 2020.

The 3 and 6 months of 2021 decrease in adjusted EBITDA was predominantly due to lower early termination fees during the first half of 2021, when compared to the same period in 2020. Depreciation expense in the first 6 months of 2021 was $140.7 million, a decrease of 23% compared to $182 million for the first 6 months of 2020.

G&A expense in the second quarter of 2021 was 17% lower than the second quarter of 2020. G&A expense decreased as a result of cost saving initiatives implemented in March of 2020 and the wage subsidies received from the Government of Canada.

The company continues to focus on and will continue to manage cost on a go-forward basis. Total debt for the second quarter of 2021 decreased by $30.3 million to $1.33 billion as of June 30, 2021, were $1.36 billion as of March 31, 2021.

Net capital purchases for the second quarter of 2021 was $11.8 million, consisting of $9.5 million in maintenance capital, $4 million in upgrade capital, offset by proceeds of $1.8 million from disposals. Planned capital expenditures for the 2021 year remains at $50 million.

On July 29th 2021, the company acquired Nabors' fleet of 35 land-based drilling rigs located in Canada, as well as related equipment and certain real estate for $117.5 million. The company funded this purchase price with cash on hand and available credit facility.

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

Thanks, Mike. Just to come back to some highlights on the second quarter and year-to-date.

Amidst this COVID distraction, we had a safety performance record, safety performance in the company. So hats off to the operations team.

Just in the U.S., we saw U.S. drilling with demand muted still through the second quarter, but it seems just in the last few weeks, we've seen operators start to book rigs with more pace.

Just in the last week, we've picked up 6 more contracts with stacked rigs to go to work. Our U.S.

well servicing continues to deliver record performance with a record EBITDA for the second quarter and the first 6 months of any year in our U.S. well servicing history, and we're currently running about 75% capacity.

Canada has exited breakup stronger than expected activity both drilling on - and, I'm sorry, well servicing 2.5 times year-over-year for the second quarter and delivered the strongest second quarter in the last 5 years. International has had a delayed resurgence of activity in Australia and Argentina due to COVID, while Middle East business units, Kuwait and Bahrain have been maintaining operations but incremental quarantine costs have affected financial results year-to-date.

Our EDGE rig controls now is on 57 rigs with the EDGE AUTO-PILOT platform now rolled out on 19 rigs, EDGE apps generating incremental margin on average of about $700 a day on 33 rigs to date. Happy to report that we completed our first fully commercial 4-well pad with a major in the U.S.

using our EDGE AUTO-PILOT and we shaved 20% off their well plan and $3 million off their [AFE] [ph], and we're getting a full $2,600 a day for EDGE AUTO-PILOT MAX on this contract. I'll expand a little bit more on our rollout plan with that.

We also introduced the new product called the ELLS, the Enhanced Location Lighting System. It helps safety on location during dusk and evening, non-glare system and we charge out a la carte.

We also, as Mike pointed out, we're busy doing the Nabors Canada asset deal, which closed on July 29. Again it added 35 rigs, 16 of them high-spec, of which 14 are active today.

It doubles our market share in the Montney, one of the busiest areas that consolidates the market continues to drive cost synergies, which we'll enjoy. Third quarter 2021 what to expect?

Commodity prices are bouncing around $70 and $4 AECO. Improving operators cash flow will spill over to higher activity in second half 2021, but with some hesitation to accelerating any 2022 work into fourth quarter 2021.

The U.S. currently at 33 rigs will add another 6 here in September.

And we're starting to see signaling that fourth quarter 2021 should get to plus or minus 50 rigs, with rates starting to move up $2,000 to $3,000 a day. Canada also currently had 44 rigs active, looks to 50 rigs plus fourth quarter 2021 and with a 10% quarter-over-quarter rate increases contracts roll over into the fall.

Australia forecasts a pickup in fourth quarter 2021, supported by significant date activity in the last few months. Oman, unlikely to receive any awards that will provide work in second half 2021 and COVID will continue to hamper operations that affect costs worldwide, because of the high migratory workforce in the Middle East.

The restrictions are tightest in those areas. The tide is turning as operators queue for the best rigs as we enter fourth quarter 2021 and 2022.

And as I mentioned the EDGE AUTO-PILOT installs, we're moving that up to a 2 to 3 installed per month on the backs of the success of our EDGE AUTO-PILOT MAX on our first commercial application. We also were able to confirm that our EDGE portal, which is part of the AUTO-PILOT product, can be used interface seamlessly with an operator's real time operating center, and downlink rotary steerable assemblies.

This opens up a world of opportunity with operators to engage our EDGE AUTO-PILOT MAX through with our portal on either a day rate or performance based contract. On our long-term rig book, we have our international carrying the bulk of our long-term contract book moving forward.

This is quite by design as we purposely do not want to tie in current low rates for any term in North America. As we raise rates quarter-over-quarter, we will continue to avoid any long-term contracts in order to maximize our pricing opportunities.

One thing about the business - the drilling business, in an up cycle, we have lots of torque. We've seen it before and we generate lots of cash flow through the cycles.

For example, if we were to raise rates and increase days by 10% across the board, we generate an additional $110 million of EBITDA. That's 10% on rates, 10% on days equals $110 million of EBITDA.

What we're seeing for developing trends, emission reduction solutions have moved from a notion to a reality. Most discussions with clients today involve how to move off diesel and on to at least a bi-fuel discussion with many operators looking for natural gas produced or compressed, and with a few looking at how to run highline power to the pad site.

Ensign has been a pioneer in the best battery energy storage system for over 8 years now. Ensign has partnered with Cat over the last 7 years and recently showcased an Ensign rig with a Cat BESS system in Houston.

The event attracted strong interest from our client base, the notion of reducing diesel fuel costs and reducing emissions by 25% is attractive. Ensign has BESS system on rigs currently running $2,600 a day.

Another developing trend - I'm sorry, still back on the ESG front. We published our inaugural sustainability report this June.

We continue to explore enhanced ESG metrics and disclosure to showcase our ESG performance over time. With the Nabors acquisition, we acquired an additional 17 emission-friendly rigs, 2 highline, 15 bi-fuel.

Including those rigs approximately one-third of our marketed fleet is equipped with emission reducing solutions with the majority of our fleet excellent candidates for upgrades. In the first half of 2021, approximately 20% of our active fleet operated with reduced emissions resulting in approximately 23,000 tons of carbon dioxide saved equating to removing 5,000 cars off the road.

We continue to explore fuel and power alternatives with a focus on hybrid electric technology and our BESS system, particularly in Canada and the U.S., we're seeing interest from our customers. And this is an area Ensign has quite a bit of experience and expertise to share.

With our BESS system, as we pointed out, we not only achieve a reduction in emissions, but superior performance with enhanced power transition, and reduced cost of fuel savings, that now cover the cost of the BESS system. We've also discovered or discussed our AUTO-PILOT and EDGE platforms.

There are numerous benefits to this technology, including eliminating waste, optimizing resource use, and drive the operational efficiencies that make our operation overall more sustainable, environmentally friendly. Another developing trend is labor.

Labor rates are under pressure everywhere. As we come out of COVID cycle, labor has become used for the concept of a universal basic income of some sort.

And with that, the threshold to attract entry-level personnel jumped up roughly 10% to 15%. All of our contracts are covered with escalation clauses.

So these are pass-through events. But it does raise the cost of doing business on a net-net basis.

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

Thank you for taking my question. Bob, at the end of Q2, total liquidity stood at around $16-point-something-million.

While the Nabors' deal is also worth about $117 million. So where does the liquidity stand today and are there any negotiations going on to increase the revolver or how do you intend to manage the liquidity in Q3 and in the coming quarters?

Yeah, Mike, do you want to handle that?

Yeah, sure. So, definitely the Nabors' deal did reduce our liquidity.

From our perspective, this is a high variable low-fixed cost business, of which we generate free cash flow quarter-over-quarter. So from our perspective, over the next 2 quarters and beyond we'll continue to clip off our accounts receivables and working capital to add additional liquidity to our credit facility and to our balance sheet.

From our perspective, we do have some real estate that is available for sale and some redundant assets that when they're monetized will add additional liquidity to the balance sheet. So from our perspective, we're not in any discussions to do anything other than to collect accounts receivables and generate free cash flow.

So what do you expect in terms of cash inflow from working capital in Q3?

I don't have a specific number on that. We'll continue to harvest a lot of it.

It depends on collections and timings of outflows.

Fair enough, but could you give us kind of some bookends in terms of where it could be?

Currently, no.

Okay. Bob, in Australia, you mentioned that there could be activity increases.

Could you maybe talk about the magnitude of increases in active rigs? Yeah,

Yeah, Waqar, we're currently running 7 rigs. COVID has frustrated a lot of the startup of some of those rigs.

We've got visibility for another 2, getting us up to 9. And with the bid activity, we see a strong opportunity maybe to go north of that, but certainly we're going to - we're starting to see it play up again.

So these 2 rigs, could they be reactivated by the end of this year or in Q3 or Q4?

Oh, yeah, yeah, they'll be reactivated in Q3, end of Q3.

Okay. And the 6 recent - contract for 6 rigs, could you mention when do you expect those rigs to be up and running?

They'll be up and running early September.

And are these with public E&Ps or private E&Ps?

Combination of both. And I'll also point out that all 6 will have the EDGE AUTO-PILOT installed.

The recent success we've had with one of the majors down there, and ability to tie back into a real time operating center and control the rotary steerable assembly has opened up a lot of eyes down there. So, I'd point out that we were just on a call this morning, where we're putting our AUTO-PILOT on those 6 rigs.

And how does the base rate for these 6 reactivations compared to your hot rigs?

They are moving into the same space. There was a bidding process in the second quarter for third quarter work, where people were bidding down to put cold rigs or offering a discount for a cold rig.

We're not anymore. We're offering the hot rig rate for the cold rig that's starting up.

And then, with clients we're currently working for.

Okay. Great.

Thank you very much.

Thanks, Waqar.

Morning all, I just like to start in Canada. I wonder if you could maybe talk about the tightness in the high-spec market.

And we've seen some rig moves from the U.S. to Canada, maybe talk about where your utilization and pricing is at least moving on these rigs?

Yeah, yeah. Well, the Montney is probably one of the highest utilization areas and with high-spec rigs.

With the Nabors' acquisition, we basically doubled our Montney market share. We have about 35% of the market.

Another player has 40%, so the 2 of us have 75% of the market share in the Montney. The - high hurdle to get into the Montney, I mean, these are $20 - $25 million rigs with experience, and we're just starting to introduce the rig control automation to these types of rigs and to that area.

So the opportunity to move prices will continue, obviously, we're - we've come a long way down from where we were. I pulled out a price sheet from 2013 on our high-spec electric rigs with high torque top drives, and heavyweight drill pipe.

And we were at $23,000 a day back in 2013, those rigs got down to around $15,000 on an active spot market bid. So you see where the opportunity is to get back where we were before.

We've put guidance to our sales team. We want to see 10% quarter-over-quarter increases, and those types of markets to get back to where we were almost 7, 8 years ago, interestingly, so markets tightening up.

Our high-spec fleet in the busiest market has doubled. It's a good fleet.

The rig controls that they have, we've nicely with our offering, as well. So it's a seamless transition, and it's working very well.

And then following onto your comments about the labor market. Obviously, it's tight everywhere, but are you seeing more tightness in Canada or the U.S.?

Or is it pretty similar?

Very similar. While we have governments willing to pay people to stay at home, so they can get reelected.

That is a challenge. There's no shortage of jobs.

There's a shortage of people willing to go and take those jobs. But that threshold, of course, is overcome with some movement in wage rates.

And just explaining to people that, and this is a fact, you're 3 times safer working on a rig than driving to the rig. Those are the safety facts.

Got it. Thanks.

Just moving to the Nabors' acquisition. And apologies, you might have mentioned this in the preamble.

But could you give some sort of guidance around an asset sale number expected going forward?

An asset sale number…

Well the property…

On the property…

Yeah, so there's a facility up in Nisku that was part of the acquisition and moved out of our facility. Actively being marketed for on that $15 million, so you get sort of range between $10 million to $15 million over the 6 to, I'd say, 20 months?

Yeah, we've moved everyone into our facility in Nisku. So we will be putting that facility up for sale.

Got it. Thanks.

And then last one for me getting the Nabors purchase, can you give an estimated synergy number? And - if so, how fast do you expect to realize these synergies?

So, yeah, the - when you back into the day, right numbers, you get some understanding. I mean, they compete in a similar market to we do in these areas.

I'll let you guys kind of figure out where you think it's going, but we typically don't try and provide forward guidance. But these rigs, 14 of them hit the ground running last Friday.

So I think you can probably do some proportioning and come up with some numbers that would probably be pretty close in the ballpark.

Got it. Thanks.

I'll turn it back.

Okay. Thanks, John.

All right. Thanks, Emilie.

With that, we'll wrap up the second quarter call. As I mentioned, we're looking forward as we move uptick into what appears to be a good strong stretch on the demand side and a continual depletion on the supply side, bringing the need for drilling rigs back into play in a strong way.

The Nabors' acquisition, we feel quite timely into a Canadian market doubling down in certain rig categories. We'll look forward to moving that long into the future, and thanks for joining the call.