Ensign Energy Services Inc.

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00:34 Thank you, Sylvie. Good morning and welcome to Ensign Energy Services third quarter twenty twenty one earnings 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 twenty twenty one highlights and financial results followed by our operational update and outlook. We'll then open the call for questions.

00:59 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.

01:31 Additionally, our discussion today may refer to non-GAAP financial measures such as adjusted EBITDA. Please see our third quarter earnings release and SEDAR filings for more information on forward-looking statements and the company's use of non-GAAP financial measures.

01:46 With that, I'll pass it on to Bob.

01:49 Thanks, Nicole. Good morning, everyone.

Ensign, as you know as an energy services company that operates in countries around the world. We employ about three thousand people, we have about three billion dollars of assets, two sixty high spec drill rigs and one hundred well service rigs.

So the third quarter produced strong results with sixty nine dollars EBITDA in the quarter, this includes the benefits of the two months of the Nabors' Canada acquisition, August and September, which went very seamlessly. 02:21 The effect of the rate traction mid-summer should or showed positive gross margin growth in the quarter, Ensign’s firm stance on COVID protocol that being proof of vaccination or on-site rapid test has provided worker protection at the rig site and has resulted in essentially no shutdowns.

We continue to keep a tight rein on CapEx in the quarter and have been pushing most upgrades over to the operator at cost. In the quarter, we had seven cold stacked rigs in our US Southern division, that were reactivated about five hundred thousand -- five hundred thousand dollars per rig on average.

03:01 In the quarter, we had three million dollars of standby revenue which is affirmation that our clients don't want to let the best rates go and are prepared to keep the best rigs under contract while they prepare for the next project. We also had five million dollars of ETF on one particular rig, which we expect to be re-contracted here in the next month.

03:18 The team also delivered on another great safety result for the quarter in spite of all the COVID related challenges and distractions. The numbers really speak for themselves.

And with that, I'll turn the call over to Mike Gray, our CFO for some detail. Mike?

03:31 Thanks, Bob. The outlook and demand for oilfield services continues to improve.

Tight supply and demand fundamentals for crude oil and natural gas continue to support strong commodity prices, supporting the recovery of oilfield services and driving activity and pricing improvements year over year. 03:47 Overall, operating days increased in the third quarter of twenty twenty one.

Canadian operations recorded two thousand eight hundred and forty six operating days, an increase of two thousand one hundred and sixty days. U.S.

operations recorded three thousand seventy four operating days, an increase of one thousand six hundred and thirty seven operating days and international operations recorded nine hundred and twenty nine days, an eighteen percent increase compared to the third quarter of twenty twenty. 04:13 For the nine months of twenty twenty one, operating days were higher with the Canadian operations experiencing a thirty eight percent increase, offsetting a three percent decrease in United States operations and a ten percent decrease in the international operations when compared to the same period in twenty twenty.

04:29 The company generated revenue of two sixty eight point six million dollars in the third quarter of twenty twenty one, a seventy one percent increase compared to revenue of one hundred and fifty six point nine million dollars generated in the third quarter of the prior year. For the first nine months ended September thirty, twenty twenty one, the company generated revenue of six hundred and ninety nine point four million dollars, a five percent decrease compared to revenue of seven hundred and thirty five point six million dollars generated in the same period of twenty twenty.

04:55 Adjusted EBITDA for third quarter of twenty twenty one was fifty nine point eight million dollars, fifty one percent higher than adjusted EBITDA of thirty nine point five million dollars in the third quarter of twenty twenty. Adjusted EBITDA for the nine months ended September thirty, twenty twenty one totaled one hundred and fifty five point three million dollars, which was eighteen percent lower than adjusted EBITDA of one hundred and eighty eight point eight million dollars generated in the first nine months of twenty twenty.

05:18 The third quarter increase in adjusted EBITDA was predominantly due to increased activity in Canada and the United States, partially offset by lower termination fees during the third quarter of twenty twenty one when compared to the same period in twenty twenty. The nine month decrease in adjusted EBITDA was due to lower early termination fee during the nine months ended September thirty twenty twenty one when compared to the same period in twenty twenty.

05:41 Depreciation expense in the first nine months of twenty twenty one was two fourteen million dollars, a decrease of twenty three percent compared to two hundred and seventy eight point four million dollars for the first nine months of twenty twenty. 05:53 G&A expense in the third quarter of twenty twenty one was nine percent higher than in the third quarter of twenty twenty.

G&A expense increased as a result of increased activity, which was partially offset by cost saving initiatives, wage subsidies, overall reductions in personnel and organizational restructuring. The company continues to focus on and will manage cost going forward.

06:13 Net capital purchases for the third quarter of twenty twenty one were one hundred and thirty four point three million dollars. During the third quarter of twenty twenty one the company acquired a fleet of thirty five land based drilling rigs located in Canada, as well as related equipment and certain real property for one hundred and seventeen point nine million dollars.

The remaining purchases consisting of eight point five million dollars in maintenance capital and nine point five million dollars in upgrade capital, offset by proceeds of one point seven million dollars from disposals. 06:40 Planned capital expenditures for twenty twenty one year is expected to be between sixty million dollars to sixty five million dollars, of which approximately twenty million dollars will be targeted to capital upgrade projects tied to contracts.

06:50 On that note, I'll turn the call back to Bob.

06:54 Thanks, Mike. Let's run around the world with bit of an operational update starting with Canada.

In Canada, we’ve run one hundred and twenty five drill rigs, which includes thirty five Nabors' rigs as Mike had mentioned. We also run about fifty well service rigs.

07:10 Canadian Drilling has forty three rigs currently contracted and running today with visibility of fifty rigs by year end. Canadian Drilling has set a ten percent quarter over quarter rate increases for each of our rig categories falling into the third quarter.

And also into the fourth quarter, an additional ten percent quarter over quarter increase. Basically, the rate increases reflect roughly two thousand dollars a day increased cover off one of the loss of wage subsidies and with a net bump of one thousand and fifteen hundred dollars a day to the bottom line.

07:43 While industry utilization is still sub fifty percent, generally there are pockets such as the high spec triple for utilization is above seventy percent, accessibility to crews is an anchored point now for pushing rates. Crude utilization is more important today than fleet utilization and driving rates up.

Rates still have a long way to come back in this everlasting demand market. Recall, we used to get thirty thousand dollars a day for high spec fifteen hundred horsepower rigs not that long ago.

08:11 Well servicing. Our Canadian well service business unit is currently running at thirty percent utilization and should keep close to forty five percent to fifty percent in first quarter twenty twenty two.

By drilling, we are pushing rates up ten to percent quarter over quarter and getting it. In directional drilling, we have five directional drilling jobs running today with visibility to double that here and into first quarter twenty two.

08:38 In the U. S.

we run ninety two drilling rigs and fifty plus well service rigs. Our U.S.

business unit has forty six of our high spec rigs currently on the payroll today with visibility at fifty by year end and are continuing up from there into twenty twenty two. We currently have nine running in California, nine in the Rockies, twenty eight in the Southern Permian, Haynesville, etcetera.

With a wider distribution of competitors in the Permian specifically, we saw our competitors jockey to recapture market share first. Now, everyone seems settled in with their market share and with tight crew availability and bids coming in strong, everyone is raising rates above five hundred and twelve thousand dollars every month now.

9:22 Well servicing, another strong quarter out of our U.S. well servicing team, our P&A rigs still start -- will start to pick up again in the fourth quarter after crop season ends.

Horizontal completion work also picking up at Rockies of eighteen to twenty rigs out every single day, in California about the same, around eighteen rigs as well, running about thirty six of our fifty seven well service rigs in the U.S.. Our U.S.

directional drilling business works closely with drilling team in the Rockies on all of our turnkey projects, having the directional driller under the same roof helps them with excellent project margins. 10:01 Moving to international, starting with Australia, we run forty two rigs international.

International was about twenty percent of our business. Australia has some COVID related issues and that's not a statement.

Those COVID related issues have hampered the build-up of rigs that had projects planned through twenty twenty one that will get pushed into twenty twenty two. We operate sixteen rigs, we currently have seven running today.

We expect it wil be up to eight by the end of the year, pushing towards tenants twenty twenty two. 10:35 In the Middle East, we have our three four hundred horsepower power rigs that remain under contracts until the end of twenty twenty four.

They continue to be top in performance. Our two rigs in Bahrain remain under contract and are fully expected to be renewed here later in twenty twenty two.

In Oman, we are shortlisted on a couple of projects, but we have no rigs active today in Oman. In Latin America, we operate sixteen rigs, we have six in Argentina, two in Mexico, eight in Venezuela.

11:09 In Argentina, we have one rig working for major under long term contract well into twenty twenty two. And we're shortlisted on a second rig, which we expect to start out in the first quarter, second quarter, twenty twenty two.

In Mexico, we've got two three -- thirty four hundred horsepower rigs, there are rigs in Kuwait. They're perfect for the PMX deep tender, but we may start bidding those on to extend and reach people also into the U.S.

11:38 In Venezuela, we're waiting on the November election behavior and the INFs willingness to support Venezuela move forward. It is looking somewhat encouraging.

Generally, we're currently running one hundred and two rigs worldwide. We expect to grow that about ten percent quarter over quarter and rate increases ten percent quarter over quarter.

Debt reduction remains partly one, CapEx for twenty twenty one should come in around sixty million to sixty five million dollars as planned. And as we reactivate rigs moving forward, we anticipate that cost to reactivate, will of course increase, but not significantly.

12:16 Rate increases will continue to stay ahead of any cost increases. We also are now commercial on our EDGE AutoPilot rig controls platform with thirty installs under our belt and one to two installs per month moving forward.

We also developed new product called the auto dam linking app, which allows operators with real time operating centers to send instructions to our driller to steer the rotary steerable assembly, which inputs right into our EDGE AutoPilot controls platform that goes a la carte at three hundred dollars a day. 12:49 We're expecting by the end of twenty twenty two we will have all of our high spec AC fleet with our EDGE AutoPilot rig controls platform installed and drillers highly trained.

We have performance drillers that grow and they actually train the almost like pilots onto our AutoPilot system. Our revenue per operating day for EDGE suite of drilling optimization products is compounding at about ten percent to fifteen percent every quarter.

13:16 With that, I'll turn it back to the operator for some Q&A.

13:52 Hi, good morning, all. Thanks for taking my questions.

Bob, can you speak to the specifics of the contract cancellation in Canada? Candidly, I'm surprised to see anyone cancel a contract in light of the rig count?

14:09 Yeah. It ties into -- the rig was basically on standby without crews for longest period of time as they were developing a second program and the second program never came together.

They didn't want to let the rig go, but the finally got to a position where we'll buy out the contract and let the rig go back to the market. So we benefited both ways.

We got a lump sum for an ETF. And we also have the rig back and it's out on two bids right now, so it'll be going back to work before Christmas here.

14:50 Got it. Can you give some update on your performance based contracts?

And I guess in light of the increased automation adoption on your rigs, what kind of appetite that you have to pursue this model more broadly?

15:08 Well, in the U.S. as we're adding rigs for certain couple of clients they're all on performance based contracts.

We probably have twenty percent of fleet in the U.S. on a performance based contract of some mechanism in Canada, we've got probably ten percent of the fleet on contracts with performance metrics.

15:34 And our performance based contracts are constructed differently with different clients depending on what the specific needs are. But basically we're focused also non drilling time events, nickeling up the OPs, things like that, the total rig spectrum and because in most cases, we're also getting our EDGE AutoPilot platform in addition to all of that.

In some cases, it's included in the day rate and we make the benefit on the performance based contract side of the three thousand dollars a day. So, it's continuing to develop and evolve.

But I would look at it as roughly twenty percent of eight to ten rigs in the U.S., three to four in Canada right now.

16:41 Okay, great. Maybe a question for Mike.

Can you speak to the go forward expectations for stuff like reactivation costs, labor cost inflation or any other supply train or transitory cost pressures that you're seeing?

16:58 On the rig activation, I mean, it's coming in line with what we're expecting. We did activate seven rigs in the U.S during the quarter and looking to activate another five plus, so it's coming in line between that sort of two to I’d say five hundred thousand dollars.

On the labor side, I mean, we are seeing some increases, but those do flow through predominantly to the customer. So I would say we are slightly protected on that side.

Supply chain, I mean, it's definitely, you can see it getting tighter. So we are making sure that we have the inventory and the spare capital as required.

So it doesn't have an impact on operations, but our supply chains is doing a very good job in maintaining and making sure that we're seeing minimal to no increases where possible.

17:49 Understood. Thanks guys.

I turn it over.

17:57 Hey good morning, everyone. One of your peers recently talked about that they see drilling demand in Canada next year, reaching twenty eighteen levels.

I mean is that consistent with what you're seeing at this point? And obviously, labor is going to become a huge issue.

I mean, how confident are you that you can sort of mitigate any labor constraints over the next few quarters in Canada?

18:30 Yeah. Well two questions there.

When you say twenty eighteen levels, you're talking about number of rigs operating is that what you mean or percent utilization?

18:38 Yeah, I think number of rigs operating.

18:42 Yeah. So, I think the industry will have challenge getting to those levels.

But I think that we're going to be working at higher rates than we were back at those levels as we run through twenty twenty two. The constraint is, I think it was a couple of things.

One is, I mean, capital is just not getting thrown at the business, thank God, like it used to be and it's more of a controlled ramp up. 19:16 The other big issue is people, we might touched on the fact that any inflation on the people side with crews is passed on to the operator.

I mean we are drilling wells faster every year. So, we are creating true value.

So the crews have to be attracted and trained. It’s going to be the biggest challenge industry has over the next year for sure.

19:51 So -- and I'm wishing a lot of our competitors as well, bid their rigs based on their crew availability. We're running about forty percent utilization as an industry, yet people are starting to go, hey, I've capped out and close.

This -- we've got two thousand dollars a day premiums for hot rigs. If we have a rig that got a crew and it’s hot, we saw it as a window.

Operating wants us to pick it up, we're raising the rate quarter over quarter plus if it's hot another two thousand dollars a day because the pace for it sell very quickly.

20:25 Okay. Perfect.

That's helpful. Thanks.

And maybe on the debt side, obviously there was kind of minimal availability on the credit facility. As you generate some free cash flow into Q4 but also balance out with the need for working capital investments.

I mean, are you fairly confident that you'll get a bit more breathing room in that realm by the end of the year?

20:52 Yes, for sure, I mean, we've seen this before and we manage our balance sheet quite effectively. So, as the accounts receivable picks up and collections started coming in, we will have some flows, but definitely we'll start to go into the deleveraging mode.

The Nabors' acquisition did take a bite into our liquidity, but with the rigs that we picked up and the EBITDA potential from those rigs, I think we're definitely going to see some cash flow generation from them.

21:22 Okay, perfect. That's helpful.

Thanks. I guess maybe thinking about the Canadian rig fleet, obviously you kind of increased your position meaningfully with that acquisition.

So if we think about twenty twenty two, I guess, obviously there's a ton of visibility at this point, but with both oil and gas very strong. I mean, how do you see the rig composition in Canada evolving between the different plays?

Do you think it stays relatively similar to current levels?

21:51 Well, I think -- I mean, gas is such a different market than oil. Even the gas well and it stay strong for fifteen years.

Two percent declines -- different than the oil spectrum, but higher gas prices will increase higher demand for the products. So we're starting to see some demand for two thousand horsepower rigs come back mostly down in the U.S.

down in the Haynesville area. 26 We've got one of our two thousand horsepower rigs that’s about to go back to work here.

22:32 So that's an indication, Obviously, henry hub is driving that. And in Canada, the coastal pipeline, it's got to get said by something.

That's I think one point TCF capacity I'm not mistaken. But anyway, yes, it's more and more conversations about putting deeper rigs to work in Northeast DC and some of the challenges that are getting resolved, it's coming along, yes.

23:10 Okay. Perfect.

That's all for me. I'll turn it back.

Thanks.

23:14 Thanks, Cole.

23:23 Hi good morning and thanks for taking my questions. First one I just wanted to start on, in Canada for Q1 how are you thinking about the peak rig count for your fleets as far as both -- what the demand is and then what you can actually supply.

23:42 Yeah. Well, it's -- we're already having what we expect to be up to around fifty rigs by the end of the year.

And probably think it’s sixty in the first quarter. We're already having conversations with the clients about picking up, getting going and not slowing down through Christmas, New Year.

In the past people would move a rig on and shut down at fifteenth of December come back in January the fifth. We're pushing clients hard to say what, you're going to need to get you program drilled, we want to hang on to crews.

They'll probably get some special bonuses over the Christmas period. But we're finding that the crews we have want to work.

And so I think we're going to see that happen, but we'll probably get the fifty five by end of the year -- first quarter I'm thinking.

24:38 Got it. Thanks for that.

And just as you think about your rig count footprint in Canada and the U.S. Obviously it changed a little bit in the last quarter.

Are you still relatively happy with where you've got your high and super spec rigs? Or could you see some of those moving around a little bit as demand and supply in various areas that are kind of shifts?

25:05 Yeah. No, I think we're kind of happy where they've all landed and they’ve landed there for a reason.

We're seeing some uptick in the Jonah gas fields. Rockies division, we've got lots of that.

So we're running hundred and two out of our two sixty rigs worldwide. Those are all rigs that can go to working and turn to the right.

So we've got the capacity and we've got -- over the years, we've put the right rigs into the right place. We've got -- we're a little different than our competitors.

We've got a more diverse rig gate size. So different projects sometimes require different types of rigs.

And so, we're quite comfortable with where our rig type depth capacity is positioned here currently.

26:02 Got it. Okay.

And one final one, just on the balance sheet with the credit facility highly utilized, is there any thoughts or inclination to maybe turn some of that debt out into longer time in the future or are you comfortable having the flexibility to pay it all off as cash comes in?

26:26 Yeah, We're comfortable with where we are right now. I mean, we'll definitely look into it as we kind of go into this market in the future years, but I think for right now, the credit facilities is a good way of being able to de deleverage because, you can put cash towards it where you can do term out debts, you do have some limitations of being able to deleverage into the future.

So from our perspective right now, we will hold the course is what we're doing, increased activity, increased cash flow and put that towards the balance sheet.

26:57 Got it. Okay.

That's it for me. Thanks very much.

27:00 Thanks, Keith.

27:08 Okay. So that's Waqar Syed.

So couple of questions here. Bob, in the well servicing business, do you expect any seasonality in Q4 this year with like stoppages around Thanksgiving and Christmas, are you seeing the same kind of trends that are playing out in the drilling rig business?

27:35 Well in the U.S. for example, around the Rockies, we have a sub crop season which is starting to get over that.

So that happens every year, that's kind of cyclical, but we're back added into the fourth quarter here in Canada. I'm not seeing any abnormal cyclicality for Thanksgiving or anything like that certainly in Canada.

Well servicing is probably less likely to work over Christmas on a drilling rig, because of the nature of its work. But I'm not expecting anything abnormal.

28:10 Okay. Then, Mike, if I look at your receivables, Q3 versus Q2 they went up by about forty four million dollars, but payables went up by about sixty.

As we get into Q4 do you see working capital to be a source of cash? Or do you think there will be more bleeding from working capital as you catch up on your payables?

28:41 It's can be I think a bit of a blend. So I mean, we're definitely seeing activity pick up into Q4.

So with the reactivation we saw in the U.S. that will come to fruition in Q4, while the cash flow from there where we had the AP kind of build-up in Q3 related to that.

So, there'll probably be somewhat neutralized, but I think definitely we'll see, I think some excess working capital come back to the balance sheet as we continue to work through this and continue to go from there. So, I would say it's probably going to be slightly muted, but definitely into Q1 and Q2, we'll see the fruits of the labor from that.

29:22 Okay. And Bob, just a big picture question.

When we hear from drilling contractors and even pumpers and others, the feeling is that service pricing could be up meaningfully next year. And certainly on the drilling side, it looks to be year over year well in excess of ten percent.

Now when you talk to the E&P companies, I mean, most of them are budgeting somewhere around ten percent kind of year over year pricing increases. 29:57 So, could you help us reconcile these two different views mean the service industry and the E&P industry?

30:07 Yeah. Well, it's a classic case, isn't it.

I think what they're doing is, they're increasing their well cost, total well cost in their projects by ten percent. Keep in mind that year over year we clip another five percent of efficiency.

So, you think of the five, ten that's fifteen. So, specifically they expect day rates on rigs start only move up ten percent, they're underestimated it absolutely.

30:42 Yes. But do you expect efficiencies to improve next year or actually come down, because typically we see in the industry -- industry is most efficient when activity is low and as activity continues to increase and you have more green labor into the workforce, efficiency actually come down.

31:02 Yes. That's generally true.

Keep in mind that we've been running forty rigs most of the summer here going up to fifty by the end of the year and then moving up to maybe sixty. You're absolutely correct.

There's more of a notion to keep projects going and to come up and down, but there will always be the winter push. We've never seen a winter where it hasn't push.

31:28 You are correct that the first quarter is where the most inefficient wells get drilled, there's no question about that, green crews, colder weather, other logistics, things like that. So, I think the operators maybe be underestimating that number.

31:47 Okay. All right.

Thank you very much. Thanks for your answers.

31:52 Thanks, Waqar.

32:07 Good morning all. First one for me, just given the tightness of the Canadian high spec market, would you maybe look to move some rigs or crews from the US to Canada as we move into twenty twenty two?

Are you kind of happy where the balance sits right now?

32:23 Yes. Well, it's -- I don't think there's availability of crews in the US.

We have the same issue in the U. S.

attracting crews to come work on rigs since they are resting. The entry level roughneck wage used to be four times minimum wage, today it's about two times minimum wage.

And so I don't think the notion of bring the U.S. crews up to Canada has ever crossed our mind at this point.

32:57 Okay, got it. Thanks.

Second one, just given the first full quarter of the Nabor rig integration, are you seeing some additional synergies or maybe some other positive aspects of the deal or I guess maybe just provide some color on how the first quarter went and particularly increase the market inevitably.

33:15 Yeah. Well, it was our sixty acquisition, and it went so seamlessly well that I was starting to get worried of what I was missing, but the team did a great job, Mike and is team and the operations, Eldon Culshaw and our group in Canada.

33:32 We also added to the fifteen rigs that are contracted when we acquired them, we since added four more rigs on top of those fifteen rigs as contracted grid. Great culture, very similar to our, safety organic performance oriented.

And yes, it worked extremely well for us.

33:58 Got it. And last from me, it's kind of a two part I guess.

When you look at the CapEx increases, the incremental growth capital mostly going go to your North American platform. And then as we look into twenty twenty can we maybe assume a similar level of growth CapEx or could this push even higher just given your outlook for next year?

34:15 Yes, it's not going to be too much different for sure. It's not going to too much different.

We continue to have conversations where operators want specialty drill pipe. We're pushing that on to the operator.

Where they want us to buy it, we're arranging for it, so it gets paid in one year EBITDA type of thing. So, we'll always continue to do good deals that make sense.

But the CapEx will be up but just notionally I expect.

34:48 Okay great. I'll turn it back.

Thanks.

34:51 Thanks, John.

34:58 Thank you. So closing remarks.

Market buoyed by strong commodity prices is not overreacting with the capital infusion we saw in the last cycle. This is a good thing.

We can continue to drive cost efficiencies and safe delivery of our services and drive much higher returns in the near future through higher utilization of our high-spec fleet and with our advanced rate controls and drilling automation features. I look forward to our next call in three months from now.

Thank you everyone for attending.