Ensign Energy Services Inc. Reports 2013 Results

CALGARY, March 17, 2014 /CNW/ -

Overview

Ensign Energy Services Inc. ("Ensign" or the "Company") generated the second highest revenue in its history of $2,098.0 million for the year ended December 31, 2013, a decrease of five percent over revenue of $2,197.3 million recorded in the prior year.  Operating earnings, expressed as adjusted EBITDA (defined as earnings before interest, income taxes, depreciation, share-based compensation expense (recovery) and foreign exchange and other), for 2013 were $485.7 million ($3.18 per common share), a 13 percent decrease from adjusted EBITDA of $561.0 million ($3.67 per common share) for the year ended December 31, 2012.  Net income for the year ended December 31, 2013 was $128.9 million ($0.84 per common share), a 41 percent decrease from $217.5 million ($1.42 per common share) recorded in 2012.  Excluding the tax-effected impact of share-based compensation expense (recovery) and foreign exchange and other, adjusted net income for the year ended December 31, 2013 totaled $143.9 million ($0.94 per common share), 34 percent lower than adjusted net income of $219.5 million ($1.44 per common share) recorded for the year ended December 31, 2012.  Funds from operations for 2013 decreased 14 percent to $435.6 million ($2.85 per common share) from $506.4 million ($3.32 per common share) in the prior year.

During the fourth quarter of 2013, the Company generated revenue of $536.0 million, an increase of one percent from revenue of $530.1 million recorded in the fourth quarter of 2012.  Adjusted EBITDA was $112.5 million ($0.74 per common share) for the fourth quarter of 2013, a decrease of nine percent from adjusted EBITDA of $123.9 million ($0.81 per common share) recorded in the fourth quarter of 2012.  Net income decreased 45 percent to $26.9 million ($0.18 per common share) compared to $48.5 million ($0.32 per common share) recorded in 2012.  Adjusted net income for the fourth quarter of 2013 totaled $27.9 million ($0.18 per common share), 42 percent lower than adjusted net income of $48.4 million ($0.32 per common share) recorded for the fourth quarter of 2012.  Funds from operations were $101.2 million ($0.66 per common share) for the fourth quarter of 2013, a 13 percent decrease from $116.6 million ($0.76 per common share) recorded in the fourth quarter of 2012.

North American customers reduced their demand for oilfield services in late 2012 and into the start of 2013 in reaction to unfavorable global economic conditions and concerns regarding the economics of oil and natural gas projects.  The reduced demand for North American oilfield services negatively impacted operating and financial results in 2013 compared to 2012.  In addition, Canadian oilfield services were hindered in 2013 by a particularly wet spring break-up that impeded the movement of the Company's equipment.  Results from the Company's international operations were stronger in 2013 compared to 2012, mainly due to increased demand in the eastern hemisphere and the strategic growth of the Company's fleet to meet rising levels of demand for oilfield services.  International and United States financial results were positively impacted by the strengthening of the average United States dollar foreign exchange rate on translation to Canadian dollars.  During 2013, the average United States dollar foreign exchange rate increased by approximately three percent against the Canadian dollar when compared to 2012.

Despite a decrease in demand for oilfield services in some of the areas where the Company operates, growth of the Company's global equipment fleet helped to mitigate the overall decrease to activity levels.  In 2013 the Company added five new Automated Drill Rigs ("ADR®") to its drilling rig fleet: two in the Canadian market and three in the United States market through the new build program.  All of the newly constructed ADRs are subject to long-term contracts.  The new build program also added seven new well servicing rigs:  six in Canada and one in the United States.    In addition, the Company expanded its existing directional drilling business in Canada through the acquisition of substantially all of the assets of Departure Energy Services Inc. ("Departure") and expanded its existing oilfield rental business in Canada through the acquisition of substantially all of the assets of EGOC Enviro Group of Companies ("EGOC"), both in the second quarter of 2013.  During 2013, an additional drilling rig was relocated to the international market from the Company's United States fleet.

Consistent with prior years, the Company increased its dividend in the fourth quarter of 2013 to a quarterly dividend rate of $0.1175 per common share, a 6.8 percent increase from the previous quarterly dividend rate of $0.1100 per common share.  The Company first started paying a dividend in 1995 and has increased its annual dividend at a 17 percent compound annual growth rate from 1995 to the current year.

The Company exited 2013 with a working capital deficit of $71.1 million compared to positive working capital of $13.9 million at December 31, 2012.  The working capital deficit position was due to existing cash resources being utilized in 2013 to fund the second quarter acquisitions of Departure and EGOC mentioned above, as well as funding the current new build program.  The Company's revolving credit facilities provide for available borrowings of $70.7 million at December 31, 2013 compared to $164.3 million at December 31, 2012.

FINANCIAL AND OPERATING HIGHLIGHTS

($ thousands, except per share data and operating information)

  Three months ended December 31   Year ended December 31
  2013   2012   % change   2013    2012   % change
Revenue   536,044   530,106   1   2,098,011   2,197,321    (5)
Adjusted EBITDA 1   112,461   123,915   (9)   485,712    560,975   (13)
Adjusted EBITDA per share 1                      
  Basic   $0.74   $0.81    (9)    $3.18   $3.67   (13)
  Diluted   $0.73    $0.81    (10)   $3.16    $3.67   (14)
                       
Adjusted net income 2  27,947   48,367   (42)   143,909   219,504   (34)
Adjusted net income per share 2                      
  Basic $0.18   $0.32   (44)    $0.94   $1.44   (35)
  Diluted  $0.18   $0.32   (44)    $0.94    $1.43   (34)
                       
Net income 26,895   48,489   (45)   128,865   217,522    (41)
Net income per share                      
  Basic $0.18   $0.32   (44)   $0.84   $1.42   (41)
  Diluted $0.18    $0.32   (44)    $0.84   $1.42   (41)
                       
Funds from operations 3 101,209   116,555   (13)   435,611   506,355   (14)
Funds from operations per share 3                      
  Basic $0.66   $0.76   (13)    $2.85   $3.32    (14)
  Diluted $0.66   $0.76   (13)    $2.84   $3.31    (14)
                       
Weighted average shares - basic (000s) 152,809   152,617      152,693   152,664   -
Weighted average shares - diluted (000s) 153,613   152,921      153,620   152,995    -
                       
Drilling                      
  Number of marketed rigs                      
    Canada4 121   124   (2)    121   124     (2)
    United States 117   121   (3)    117   121   (3)
    International 5 54   54   -   54   54    -
  Operating days                      
    Canada 4 3,457   4,135   (16)   14,183   18,398    (23)
    United States 5,778   5,555   4   22,955   24,226   (5)
    International 5 2,888   3,010   (4)   11,384   11,612    (2)
                       
Well Servicing                      
  Number of marketed rigs                      
    Canada 95   99   (4)   95   99   (4)
    United States 45   46   (2)    45   46    (2)
  Operating hours                      
    Canada 30,324   35,054   (13)   121,159   140,978   (14)
    United States 30,057   28,097    7   105,260   121,766   (14)

1 Adjusted EBITDA is defined as "income before interest expense, income taxes, depreciation, share-based compensation expense (recovery) and foreign exchange and other".  Management believes that in addition to net income, Adjusted EBITDA and Adjusted EBITDA per share are useful supplemental measures as they provide an indication of the results generated by the Company's principal business activities prior to consideration of how these activities are financed, how the results are taxed in various jurisdictions, how the results are impacted by foreign exchange or how the results are impacted by the accounting standards associated with the Company's share-based compensation plans.  Adjusted EBITDA and Adjusted EBITDA per share as defined above are not recognized measures under International Financial Reporting Standards and accordingly may not be comparable to measures used by other companies.
2 Adjusted net income is defined as "net income before share-based compensation expense (recovery) and foreign exchange and other, tax-effected using an income tax rate of 35 percent".  Adjusted net income and Adjusted net income per share are useful supplemental measures as they provide an indication of the results generated by the Company's principal business activities prior to consideration of how the results are impacted by foreign exchange and how the results are impacted by the accounting standards associated with the Company's share-based compensation plans, net of income taxes.  Adjusted net income and Adjusted net income per share as defined above are not recognized measures under International Financial Reporting Standards and accordingly may not be comparable to measures used by other companies.
3 Funds from operations is defined as "cash provided by operating activities before the change in non-cash working capital".  Funds from operations and Funds from operations per share are measures that provide additional information regarding the Company's liquidity and its ability to generate funds to finance its operations.  Management utilizes these measures to assess the Company's ability to finance operating activities and capital expenditures.  Funds from operations and Funds from operations per share are not measures that have any standardized meaning prescribed by International Financial Reporting Standards and accordingly may not be comparable to similar measures used by other companies.
4 Excludes coring rigs.
5 Includes workover rigs.

2013 Highlights

  • Revenue for 2013 was the second highest in the Company's history at $2,098.0 million, down five percent from the record level set in 2012.  For the fourth quarter of 2013 revenue was comparable to the fourth quarter of 2012, increasing one percent.
  • Five new ADRs were added to the Company's drilling fleet: two in the Canadian market and three in the United States market.  The new build program also added seven new well servicing rigs:  six in Canada and one in the United States.  In addition, the Company retrofitted four drilling rigs in 2013:  two in Canada, one in the United States and one in the international market.
  • Revenue by geographic area for the three and twelve months ended December 31, 2013:
    • Canada - fourth quarter: 30 percent, 2013: 32 percent;
    • United States - fourth quarter: 44 percent, 2013: 42 percent; and
    • International - fourth quarter: 26 percent, 2013: 26 percent.
  • Adjusted EBITDA for 2013 was $485.7 million, a 13 percent decrease from adjusted EBITDA of $561.0 million for the year ended December 31, 2012.  For the fourth quarter of 2013, adjusted EBITDA was $112.5 million, down nine percent from adjusted EBITDA of $123.9 million recorded in the fourth quarter of 2012.  Funds from operations for 2013 decreased 14 percent to $435.6 million from $506.4 million in the prior year and decreased 13 percent in the fourth quarter of 2013 to $101.2 million from $116.6 million recorded in the fourth quarter of the prior year.
  • Canadian drilling recorded 14,183 operating days in 2013, a 23 percent decrease from 18,398 operating days in the previous year.  Canadian well servicing hours decreased by 14 percent in the year ended December 31, 2013 from the prior year.  For the fourth quarter of 2013, Canadian drilling recorded 3,457 operating days, a 16 percent decrease from 4,135 operating days in the fourth quarter of 2012.  Canadian well servicing hours decreased by 13 percent in the fourth quarter of 2013 compared to the fourth quarter of 2012.
  • United States drilling recorded 22,955 operating days in 2013, a five percent decrease from 24,226 operating days in the previous year.  United States well servicing hours decreased by 14 percent in 2013 compared to 2012.  For the fourth quarter of 2013, United States drilling recorded 5,778 operating days, a four percent increase over 5,555 operating days in the fourth quarter of 2012.  United States well servicing hours increased by seven percent in the fourth quarter of 2013 compared to the fourth quarter of 2012.
  • International drilling recorded 11,384 operating days in 2013, a two percent decrease from 11,612 operating days recorded in 2012. For the fourth quarter of 2013, international drilling recorded 2,888 operating days, a four percent decrease from 3,010 operating days in the fourth quarter of 2012.
  • The Company declared a quarterly cash dividend on common shares of $0.1175 per common share payable April 4, 2014.  In 2013 the Company declared dividends of $0.4475 per common share, an increase of five percent over dividends of $0.4250 per common share declared in 2012.  The Company has increased its dividend every year since the first dividend was paid in 1995.

Revenue and Oilfield Services Expense

    Three months ended December 31   Year ended December 31
($ thousands)   2013   2012   % change   2013    2012   % change
                         
Revenue                        
  Canada     158,488   176,693    (10)    661,008   774,444   (15)
  United States     235,829   213,667   10   890,767   944,580   (6)
  International     141,727   139,746   1    546,236   478,297   14
                         
    536,044   530,106   1   2,098,011   2,197,321   (5)
Oilfield services expense     399,856   384,553   4   1,524,173   1,555,509   (2)
                         
Gross margin     136,188   145,553   (6)   573,838   641,812   (11)
                         
Gross margin percentage %     25.4   27.5         27.4   29.2

Revenue for the year ended December 31, 2013 was the second highest in the Company's history totaling $2,098.0 million, a decrease of five percent from the record level set for the year ended December 31, 2012 of $2,197.3 million.  The Company recorded revenue of $536.0 million for the three months ended December 31, 2013, a one percent increase from the $530.1 million recorded in the three months ended December 31, 2012.  Reduced demand for North American oilfield services that began late in 2012 continued into 2013 weakening financial results in the current year.  Demand in the current year was hampered by continuing uncertainty in oil and natural gas economics in North America.  However, demand for international oilfield services remained firm in many of the areas in which the Company operates, producing generally stronger results in 2013 compared to 2012. Demand for North American oilfield services began to show signs of recovery late in 2013, particularly in the United States, with revenue rates returning to levels more comparable with 2012 however Canada still remained at slightly reduced demand levels.  United States results for the current year fourth quarter also reflect the additions to the fleet from the new build program.  Throughout 2013, three new ADRs and one new well servicing rig were added to the United States fleet which helped to bring operating and financial results up in the fourth quarter of 2013 when compared to the fourth quarter of 2012. 

Gross margin as a percentage of revenue decreased in 2013 to 27.4 percent from 29.2 percent in 2012.  Gross margin as a percentage of revenue for the fourth quarter of 2013 decreased to 25.4 percent compared to 27.5 percent for the fourth quarter of the prior year.  Increased costs for labor and higher major maintenance expenditures, which are generally expensed as incurred, negatively impacted margins in the current year.  In addition several international rigs, which are expected to begin work early in 2014, incurred start-up costs towards the end of 2013.  Such expenditures negatively impacted 2013 gross margins.

Canadian Oilfield Services

  Three months ended
December 31
  Year ended
December 31
  2013   2012   % change   2013   2012   % change
Drilling rigs1                      
  Opening balance 121   133       124   131    
    Additions -   1       2   6    
    Transfers2 -   (10)       -   (10)    
    Decommissions / Disposals -   -       (5)   (3)    
  Ending balance 121   124   (2)   121   124   (2)
Drilling operating days1 3,457   4,135   (16)   14,183   18,398   (23)
Drilling rig utilization %1 31.1   36.2   (14)   32.3   38.8   (17)
                       
Well servicing rigs                      
  Opening balance 94   99       99   103    
    Additions 1   -       6   -    
    Decommissions / Disposals -   -       (10)   (4)    
  Ending balance 95   99   (4)   95   99   (4)
Well servicing operating hours 30,324   35,054   (13)   121,159   140,978   (14)
Well servicing utilization % 34.7   38.5   (10)   35.8   38.1   (6)

1 Excludes coring rigs.
2 Includes transfers to coring rigs.

The Company recorded revenue of $661.0 million in Canada for the year ended December 31, 2013, a 15 percent decrease from $774.4 million recorded in the year ended December 31, 2012.  Revenue generated in Canada decreased 10 percent to $158.5 million for the three months ended December 31, 2013, from $176.7 million for the three months ended December 31, 2012.  In the fourth quarter of 2013, Canadian revenues accounted for 30 percent of total revenue (2012 - 33 percent), and during the year ended December 31, 2013, Canadian revenues were 32 percent of total revenue (2012 - 35 percent).

Unfavorable price differentials for Canadian commodities and continued industry uncertainty weakened demand for the Company's Canadian oilfield services in 2013 compared to 2012.  Additionally, the Company's Canadian operations were hampered in 2013 as the industry continued its transition from shallow to deeper and longer reach drilling.  The resulting impact to activity levels, combined with a particularly wet spring break-up in the current year, reduced operating and financial results for the year ended December 31, 2013 compared to the year ended December 31, 2012.  These negative impacts were somewhat offset by the positive impact from the expansion of the Company's Canadian oilfield rentals and directional drilling equipment fleets in the second quarter of 2013.

During the year ended December 31, 2013, operating days recorded by the Company's Canadian operations decreased 23 percent compared to the level of activity in the prior year.  Operating days in the fourth quarter of 2013 decreased 16 percent from the fourth quarter of 2012.  Similarly, Canadian well servicing hours decreased by 14 percent in the year ended December 31, 2013 and by 13 percent in the fourth quarter of 2013 compared to the corresponding periods in the prior year.

The Company decommissioned or disposed of five inactive drilling rigs and 10 inactive well servicing rigs during 2013 and added two new build ADRs and six new well servicing rigs to the Company's Canadian equipment fleet in 2013.  The Company continues to transition its Canadian drilling fleet from shallow drilling rigs to deeper drilling rigs in response to changing market dynamics.  In January, 2013, the Company disposed of its non-rig manufacturing facility located in Calgary, Alberta.

United States Oilfield Services

    Three months ended
December 31
  Year ended
December 31
    2013   2012   % change   2013   2012   % change
Drilling rigs                        
  Opening balance   117   116       121   117    
    Additions   -   -       3   5    
    Transfers   -   5       (1)   5    
    Decommissions / Disposals   -   -       (6)   (6)    
  Ending balance   117   121   (3)   117   121   (3)
Drilling operating days   5,778   5,555   4   22,955   24,226   (5)
Drilling rig utilization %   53.7   50.2   7   54.0   57.4   (6)
                             
Well servicing rigs                        
  Opening balance   45   46       46   36    
    Additions   -   1       1   12    
    Decommissions / Disposals   -   (1)       (2)   (2)    
  Ending balance   45   46   (2)   45   46   (2)
Well servicing operating hours   30,057   28,097   7   105,260   121,766   (14)
Well servicing utilization %   72.6   66.4   9   64.2   78.1   (18)

The Company's United States operations recorded revenue of $890.8 million for the year ended December 31, 2013, down six percent from revenue of $944.6 million for the year ended December 31, 2012.  Revenue recorded in the United States was $235.8 million in the fourth quarter of 2013, a 10 percent increase from the $213.7 million recorded in the corresponding period of the prior year.  The United States segment accounted for 44 percent of the Company's revenue in the fourth quarter of 2013 (2012 - 40 percent); and 42 percent of the Company's revenue in the current year (2012 - 43 percent), making it the largest contributor to consolidated revenues in 2013, consistent with the prior year.

The number of operating days recorded by the Company's United States operations for the year ended December 31, 2013 decreased by five percent to 22,955 operating days from 24,226 operating days in 2012.  During the fourth quarter of 2013 the Company recorded 5,778 operating days in the United States, an increase of four percent over 5,555 operating days recorded during the fourth quarter of the prior year.  United States well servicing hours in the fourth quarter of 2013 were up seven percent compared to the fourth quarter of the prior year and well servicing hours for 2013 were down 14 percent compared to 2012.

Activity levels were down in the United States for the majority of 2013 compared to the prior year as the demand for oilfield services by the Company's customers continued to be held back in certain regions through much of the year and did not start to show signs of recovery until later in the year.  As a result, revenue rates were held down for the start of 2013 but gradually increased throughout the year as demand began to pick up.  Overall, this led to reduced operating and financial results for the year ended December 31, 2013 compared to the year ended December 31, 2012.  Partially offsetting this decrease was the strengthening of the United States dollar against the Canadian dollar in the current year compared to 2012 and additions to the United States fleet throughout 2013 as described below. The average United States dollar foreign exchange rate increased approximately three percent during 2013 compared to 2012.

During 2013, the Company added three new build ADRs and one new well servicing rig to its United States fleet, transferred one drilling rig to its international equipment fleet and decommissioned or disposed of six inactive drilling rigs and two inactive well servicing rigs.

International Oilfield Services

    Three months ended
December 31
  Year ended
December 31
    2013   2012   % change   2013   2012   % change
Drilling and workover rigs                        
  Opening balance   54   58       54   59    
    Additions   -   -       -   2    
    Transfers   -   (4)       1   (4)    
    Decommissions / Disposals   -   -       (1)   (3)    
  Ending balance   54   54       54   54   -
Drilling operating days   2,888   3,010   (4)   11,384   11,612   (2)
Drilling rig utilization %   58.1   59.9   (3)   58.4   56.9   3

International revenue totaled $546.2 million for the year ended December 31, 2013, a 14 percent increase from $478.3 million in 2012.  International revenue totaled $141.7 million in the fourth quarter of 2013, a one percent increase from $139.7 million recorded in the corresponding period of the prior year.  International operations contributed 26 percent of the Company's revenue in the fourth quarter of 2013 (2012 - 27 percent) and 26 percent in the year ended December 31, 2013 (2012 - 22 percent).

The Company's international operations recorded 11,384 operating days in 2013, a two percent decrease from 11,612 operating days recorded in 2012.  International operating days for the three months ended December 31, 2013 decreased four percent over the comparable prior year period to 2,888 operating days compared to 3,010 operating days in the fourth quarter of 2012.

Strategic investments made in 2012 and 2013 in the Company's international operations helped to increase the average revenue rates per day for international operations in the current year compared to the prior year.  Revenues for international oilfield services were mainly consistent in the fourth quarter of 2013 compared to the fourth quarter of 2012.  The Company expanded its operations late in 2013 with the start-up of one drilling rig deployed in Kurdistan. Two new build ADR's were added to the Australian equipment fleet late in 2012 and two existing drilling rigs were relocated to the international market from North America.  An additional drilling rig was relocated during the current year to Australia from the Company's United States fleet.  Despite strength in certain international areas, the Company continues to experience challenges in Latin America.

Consistent with the translation of results from the Company's United States operations, the operating results from the Company's international operations were improved on translation into Canadian dollars by the three percent strengthening of the United States dollar relative to the Canadian dollar in 2013 when compared to the prior year.

As part of the Company's international operations it provides oilfield services in Venezuela pursuant to long-term contracts. These existing contracts are set to expire in the next 12 months and due to the current political unrest in Venezuela there is no assurance that the Company will be able to renew these contracts in Venezuela or on financial terms acceptable to the Company. In addition, as at December 31, 2013, the Company had net accounts receivable of approximately $38.5 million for work performed in Venezuela and again, due to the current political unrest in Venezuela, there is no assurance that the Company will be successful in collecting all or any of such outstanding balance.

Depreciation

    Three months ended December 31   Year ended December 31
($ thousands)   2013   2012   % change   2013    2012   % change
Depreciation     69,153   54,029   28   248,026   220,227   13

Depreciation expense increased 13 percent to $248.0 million for the year ended December 31, 2013 compared with $220.2 million for the year ended December 31, 2012.  Depreciation expense totaled $69.2 million for the fourth quarter of 2013 compared with $54.0 million for the fourth quarter of 2012, an increase of 28 percent.  Higher depreciation expense in 2013 over 2012 was attributable to higher-valued equipment being added to the Company's global fleet throughout the latter half of 2012 and 2013 in addition to the impacts of the second quarter acquisitions of assets from EGOC and Departure. 

General and Administrative Expense

    Three months ended December 31   Year ended December 31
($ thousands)     2013   2012   % change   2013   2012   % change
General and administrative     23,727   21,638   10   88,126   80,837   9
% of revenue     4.4   4.1       4.2    3.7

General and administrative expense totaled $88.1 million (4.2 percent of revenue) for the year ended December 31, 2013 compared with $80.8 million (3.7 percent of revenue) for the year ended December 31, 2012, an increase of nine percent.   General and administrative expense increased 10 percent to $23.7 million (4.4 percent of revenue) for the fourth quarter of 2013 compared with $21.6 million (4.1 percent of revenue) for the fourth quarter of 2012.  The increase in general and administrative expense reflects the negative translational impact of a stronger United States dollar on United States and international administrative expenses in the current year and increased costs to support growing international operations.

Share-Based Compensation Expense (Recovery)

    Three months ended December 31   Year ended December 31
($ thousands)     2013    2012   % change   2013   2012   % change
Share-based compensation     (4,045)    (840)    382    2,049    (3,397)   (160)

Share-based compensation expense (recovery) arises from the Black-Scholes valuation accounting associated with the Company's share-based compensation plans, whereby the liability associated with share-based compensation is adjusted for the effect of granting and vesting of employee stock options and changes in the underlying price of the Company's common shares.

For 2013, share-based compensation was an expense of $2.0 million compared with a recovery of $3.4 million for the year ended December 31, 2012.  For the three months ended December 31, 2013, share-based compensation recovery was $4.0 million compared with a recovery of $0.8 million recorded in the fourth quarter of 2012.  The change in share-based compensation expense for the three and twelve months ended December 31, 2013 arises from the change in the fair value of share-based compensation liability primarily due to changes in the price of the Company's common shares during the year and the expiry of options at the end of the year.  The closing price of the Company's common shares was $16.73 at December 31, 2013, compared with $15.37 at December 31, 2012 and $17.64 at September 30, 2013.

Interest Expense

    Three months ended December 31   Year ended December 31
($ thousands)     2013   2012   % change    2013   2012   % change
Interest expense     5,395   3,862   40   18,795   18,666   1
Interest income     (307)    (139)   121   (1,320)   (504)   162
    5,088   3,723   37   17,475   18,162   (4)

Interest is incurred on the Company's $10.0 million Canadian-based revolving credit facility (the "Canadian Facility"), the $400.0 million global revolving credit facility (the "Global Facility") and the USD $300.0 million Notes issued in February 2012.  The amortization of deferred financing costs associated with the issuance of the Company's long-term debt is included in interest expense for the years ended December 31, 2013 and 2012.

Interest expense in 2013 compared to 2012 was mainly consistent, increasing only one percent.  For the three months ended December 31, 2013 interest expense increased 40 percent to $5.4 million compared to $3.9 million for the three months ended December 31, 2012 due to increased draws on the Global Facility.  Interest income was higher in 2013 compared to 2012 as a result of higher average balances of interest-earning cash and cash equivalents in 2013 compared to 2012.

Foreign Exchange and Other

    Three months ended December 31   Year ended December 31
($ thousands)     2013   2012   % change   2013   2012   % change
Foreign exchange and other     5,664   653   767   21,095   6,446   227

Included in this amount are foreign currency movements in the Company's subsidiaries which have functional currencies other than Canadian dollars and the impact of the conversion of the Australian operations from Australian dollars to United States dollars.  For the three months ended December 31, 2013 the Australian dollar weakened by approximately five percent against the United States dollar causing a foreign currency loss on translation of the Company's USD denominated debt into Australian dollars.  During the year ended December 31, 2013 the Australian dollar weakened by approximately 16 percent against the United States dollar.  In general the United States dollar strengthened in 2013 compared to 2012 when compared to other world currencies.

Income Taxes

    Three months ended December 31   Year ended December 31
($ thousands)     2013    2012   % change    2013   2012   % change
Current income tax     6,601   4,172   58   43,171   45,189   (4)
Deferred income tax     3,105   13,689    (77)   25,031   56,826   (56)
    9,706   17,861   (46)   68,202   102,015   (33)
Effective income tax rate %     26.5   26.9       34.6   31.9

For the year ended December 31, 2013, the effective income tax rate was 34.6 percent compared with 31.9 percent for the year ended December 31, 2012.  The effective income tax rate for the three months ended December 31, 2013 was 26.5 percent compared with 26.9 percent for the three months ended December 31, 2012.  The increase in the overall effective rate in 2013, when compared with 2012, is due to the tax impact of the currency devaluation that occurred in Venezuela in February 2013, as well as the impact of foreign exchange translation losses for which the effective tax rate varies from statutory rates.  The decrease in the effective income tax rate for the three months ended December 31, 2013 as compared to the three months ended December 31, 2012 is due to a higher proportion of income earned in low rate jurisdictions.

For the three and twelve months ended December 31, 2013, the increased proportion of the current income tax expense when compared to the total tax expense is primarily attributable to the phased elimination of the deferral of income tax related to the Company's partnerships operating in Canada.  The decreased deferred income tax expense portion for the three and twelve months ended December 31, 2013 when compared with the comparable prior year periods is primarily attributable to the decrease in pre-tax profits.

Financial Position

The following chart outlines significant changes in the consolidated statement of financial position from December 31, 2012 to December 31, 2013:

($ thousands)        Change      Explanation 
Cash and cash equivalents        45,650     See consolidated statements of cash flows.
Accounts receivable        17,630     Increase reflects foreign exchange fluctuations on the consolidation of the Company's foreign subsidiaries and was offset by a decrease in Canadian operating activity in the fourth quarter of 2013 compared to the fourth quarter of 2012.
Inventories and other        (9,498)     Decrease was due to normal course use of consumables offset by additional inventory.
Property and equipment        255,088     Increase was due to additions to fixed assets from the current new build construction program; the acquisitions of the EGOC and Departure assets during the second quarter; and a strengthening of the USD year-end foreign exchange rate on the consolidation of the Company's foreign subsidiaries, offset by depreciation.
Note receivable         (741)     Decrease was due to the reclassification of the current portion to accounts receivable offset by accretion of interest income during 2013.
Accounts payable and accruals        62,535     Increase reflects foreign exchange fluctuations on the consolidation of the Company's foreign subsidiaries and timing of payments to external vendors during the year.
Operating lines of credit        94,535     Increase was due to additional draws during the year on the global revolving credit facility and the impact of foreign exchange fluctuations on the consolidation of the USD denominated debt held by the Company's foreign subsidiaries, offset by repayments during the year.
Share-based compensation        (804)     Decrease was due to options which expired at the end of the current year, offset by an increase in the price of the Company's common shares as at December 31, 2013 compared with December 31, 2012.
Income taxes payable        (19,769)     Decrease was due to tax instalments net of the current income tax provision for the year.
Dividends payable        1,166     Increase was due to a 6.8 percent increase in the quarterly dividend rate in the fourth quarter of 2013 compared to the dividend rate in the fourth quarter of 2012.
Long-term debt        20,818     Increase was due to foreign exchange fluctuations on the USD denominated long-term debt.
Deferred income taxes        45,037     Increase primarily due to accelerated tax depreciation of assets added during the current year.
Shareholders' equity        104,611     Increase due to net income for the year and the impact of foreign exchange rate fluctuations on net assets of foreign subsidiaries, offset by the amount of dividends declared in the year.

Funds from Operations and Working Capital

    Three months ended December 31    Year ended December 31
($ thousands)     2013   2012   % change    2013   2012   % change
Funds from operations     101,209   116,555   (13)    435,611   506,355   (14)
Funds from operations per share     $0.66   $0.76   (13)   $2.85   $3.32   (14)
Working capital      (71,146)   13,861   (613)    (71,146)   13,861   (613)

Funds from operations totaled $435.6 million ($2.85 per common share) for 2013, a decrease of 14 percent compared to $506.4 million ($3.32 per common share) generated in 2012.  During the three months ended December 31, 2013, the Company generated funds from operations of $101.2 million ($0.66 per common share) compared with $116.6 million ($0.76 per common share) for the three months ended December 31, 2012, a decrease of 13 percent.  The decrease in funds from operations in 2013 compared to 2012 is mainly due to reduced demand for North American oilfield services in 2013 when compared to 2012.

At December 31, 2013, the Company's working capital was a deficit of $71.1 million compared to positive working capital of $13.9 million at December 31, 2012.  The Company's working capital was utilized in the second quarter of the current year for the acquisitions of the assets of EGOC and Departure, in addition to funding the Company's current new build program and dividend payments throughout the year.  The Company expects funds generated by operations, combined with current and future credit facilities, to fully support current operating and capital requirements.  Existing revolving credit facilities provide for total borrowings of $410.0 million, of which $70.7 million was available as at December 31, 2013.

Investing Activities

    Three months ended December 31   Year ended December 31
($ thousands)     2013    2012    % change   2013   2012   % change
Purchase of property and equipment     (106,912)   (80,329)   33   (342,225)   (306,689)   12
Acquisitions     -   -   -    (76,408)     -   -
Net change in non-cash working capital     20,687   (23,392)   (188)   17,845    (15,040)    (219)
Cash used in investing activities     (86,225)   (103,721)   (17)   (400,788)   (321,729)     25

During the second quarter of 2013 the Company acquired the rental assets of EGOC and the directional drilling assets of Departure with existing cash balances and credit facilities. These acquisitions increased the Company's presence in the rental and directional drilling markets in Western Canada.  The Company did not complete any significant acquisitions in 2012.

Purchases of property and equipment for the year ended December 31, 2013 totaled $342.2 million (2012 - $306.7 million) and for the three months ended December 31, 2013 totaled $106.9 million (2012 - $80.3 million).  The purchases of property and equipment relate primarily to expenditures made pursuant to the Company's ongoing new build program.  Significant additions in 2013 as a result of the new build program include:

  • Completion of two new ADR® drilling rigs in Canada (one in the first quarter and one in the third quarter);
  • Completion of three new ADR® drilling rigs in the United States (one in each of the first, second and third quarters);
  • Construction of six new well servicing rigs in Canada (two in each of the first and third quarters; and one in each of the second and fourth quarters); and
  • Construction of one new well servicing rig in the United States (third quarter).

Financing Activities

    Three months ended December 31   Year ended December 31
($ thousands)     2013   2012   % change   2013   2012   % change
Net (decrease) increase in operating lines of credit     (1,772)   (30,586)   (94)    76,285   (1,398)   (5,557)
Issue of senior unsecured notes     -   -   -    -   300,000   (100)
Repayment of term loan     -    -   -    -   (403,279)   100
Issue of capital stock      -    -   -   2,002   43   4,556
Purchase of shares held in trust     (580)   (535)   8    (6,497)   (8,579)   (24)
Deferred financing costs      -   -   -    -   (2,156)    (100)
Dividends     (18,019)    (16,854)   7   (68,614)   (65,116)    5
Net change in non-cash working capital     (964)   2,570   (138)   1,912   3,500    (45)
Cash (used in) provided by financing activities     (21,335)   (45,405)   (53)   5,088    (176,985)   (103)

The Company's available operating lines of credit consist of a $400.0 million Global Facility and a $10.0 million Canadian Facility.  The Global Facility is available to the Company and certain of its wholly-owned subsidiaries, and may be drawn in Canadian, United States or Australian dollars, up to the equivalent value of $400.0 million Canadian dollars.  The amount available under the Canadian Facility is $10.0 million or the equivalent in United States dollars.

The change in the operating lines of credit for the year ended December 31, 2013 reflects funding for the ongoing new build program which is anticipated to deliver an additional 12 new ADR® drilling rigs, one new well servicing rig and 10 major retrofits of existing drilling rigs throughout 2014 and early 2015.  As of December 31, 2013, the operating lines of credit are primarily being used to fund the Company's new build program and to support growth in international operations.

In February 2012, the Company completed the private placement of USD $300.0 million of senior unsecured notes, with the proceeds from the issuance being used to repay a portion of the USD $400.0 million unsecured term loan with the remaining balance repaid in full in the second quarter of 2012.

On June 21, 2013 the Company received approval from the Toronto Stock Exchange to acquire for cancellation up to three percent of the Company's issued and outstanding common shares under a Normal Course Issuer Bid (the "Bid").  The Company may purchase up to 4,599,367 common shares for cancellation.  The Bid commenced on June 25, 2013, and will terminate on June 24, 2014, or such earlier time as the Bid is completed or terminated at the option of the Company.  As at December 31, 2013, no common shares have been purchased and cancelled pursuant to the Bid.

The Company previously had a Bid that commenced on June 18, 2012, and terminated on June 17, 2013, under which no common shares were purchased and cancelled.

The Company increased its dividend in 2013 with a 6.8 percent fourth quarter increase in the quarterly dividend rate to $0.1175 per common share from the previous quarterly dividend rate of $0.1100 per common share.  During the year ended December 31, 2013, the Company declared dividends of $0.4475 per common share, an increase of five percent over dividends of $0.4250 per common share declared in 2012.  The Company received $2.0 million from the issuance of common shares in connection with exercises pursuant to the employee stock option program in 2013 compared to nominal receipts for stock option exercises in 2012. 

Subsequent to December 31, 2013, the Company declared a dividend for the first quarter of 2014. A quarterly dividend of $0.1175 per common share is payable April 4, 2014 to all Common Shareholders of record as of March 25, 2014.  The dividend is pursuant to the quarterly dividend policy adopted by the Company.  Pursuant to subsection 89(1) of the Canadian Income Tax Act ("ITA"), the dividend being paid is designated as an eligible dividend, as defined in subsection 89(1) of the ITA.

New Builds and Major Retrofits

During the year ended December 31, 2013, the Company commissioned three new ADR® drilling rigs, one new well servicing rig and retrofitted one drilling rig in the United States; two new ADR® drilling rigs, six new well servicing rigs and retrofitted two drilling rigs in Canada; and retrofitted one drilling rig transferred from the United States to Australia.

The Company continues to build new ADR® drilling rigs and upgrade existing drilling rigs to meet the increasing technical demands of its customers.  In Canada the Company is continuing to transition from shallow drilling to deeper drilling, building new ADRs and upgrading existing drilling rigs for deeper resource plays in the northwest part of the Western Canada Sedimentary Basin.  In the United States the Company builds new ADRs for specific resource plays and has been upgrading existing drilling rigs for pad drilling operations in the southern United States.  Internationally, the Company has been increasing its capabilities, through a combination of new ADRs and major retrofits of existing drilling rigs, to meet the requirements of specific markets.

The estimated delivery schedule for new ADRs, major retrofits of existing drilling rigs and new well servicing rigs, by geographic area currently under construction at December 31, 2013 is as follows:

    Estimated Delivery Date 
    Q1-2014   Q2-2014   Q3-2014   Q4-2014   Q1-2015   Total
New Build ADRs:                        
  Canada     -   -   2   2   -   4
  United States     1    -   -   3    2   6
  International     2    -    -    -   -   2
                           
Major Retrofits to Drilling Rigs:                        
  Canada     1   -   2   -    -   3
  United States     -    -    -   1   1   2
  International     2   1   2   -   -   5
Total     6    1   6   6   3   22
                         
Well Servicing Rigs:                        
  Canada     -   -   -   1   -   1
  United States     -   -   -   -   -   -
  International     -   -   -   -   -   -
Total     -   -   -   1   -   1

Outlook

Management believes that the apparent recovery in the global economy provides reasonable support for crude oil and natural gas prices. Additionally, recent global political tensions and North American winter weather conditions have resulted in crude oil trading above USD$100 per barrel and natural gas in the USD$4.50 per mcf to USD$5.00 per mcf range.  Crude oil and natural gas commodity prices at these levels do not appear to be stimulating a lot of extra demand for oilfield services as exploration and production companies will undoubtedly look for sustainability of commodity prices before altering their investment plans; however, higher commodity prices, even if temporary in nature, are positive for their corporate cash flows.  Improved cash flows will help fund current planned levels of oilfield services expenditures and will likely result in increases in expenditures at some point in the future.

The number of wells drilled in Canada during 2013 was essentially unchanged from the prior year (2013 - 11,102 wells; 2012 - 11,043 wells).  In this environment of flat activity levels and excess industry capacity, particularly in shallower depth categories, the Company's Canadian operations recorded a year-over-year reduction in utilization rates in 2013. To improve its competitiveness in the Canadian market the Company is continuing to transition its equipment fleet to deeper depth categories in recognition of the shift in the Canadian oilfield services market that has occurred in the last 12 to 15 months.  In addition to the two new deeper ADRs and two drilling rig retrofits completed in 2013, the Company is currently constructing four new deeper capacity ADRs and three major retrofits to existing drilling rigs for its Canadian fleet.  While a colder winter throughout much of North America this year has been positive for natural gas consumption levels and related commodity prices, the price of natural gas does not appear to be at a level that will generate increased levels of demand for drilling natural gas wells in Canada in the near term.  Recent improvements in natural gas prices will have a positive effect on the cash flows of the exploration and production companies and is expected to help to fund continued oilfield expenditures in crude oil and natural gas liquids plays.  Further development of Canadian resources and related oilfield service activity levels, other than current expenditures to delineate certain resource plays, will depend on favorable infrastructure and regulatory developments.

The United States oilfield services activity levels started out slower in 2013 compared to the prior year due to rationalization of operations by some of the Company's key customers.  However, demand for oilfield services began to modestly recover in the summer and industry utilization levels (as indicated by the onshore active drilling rig count) have been relatively stable over the last couple of quarters. As with Canada, current natural gas prices are not expected to drive a meaningful increase in natural gas drilling, but the improvements to the cash flows of exploration and production companies should benefit crude oil and natural gas liquids rich drilling activity levels. Initial 2014 spending guidance from United States exploration and production companies has been encouraging as supported by positive recent well permitting trends.  Accordingly, the Company is optimistic that its United States operations will record improvements in 2014 compared to the prior year.  In support of increased customer demand the Company added three new ADRs and completed one drilling rig retrofit to its United States drilling fleet in 2013; and is currently constructing six new ADRs and two major retrofits to existing drilling rigs for delivery over the next 12 months.

The Company's international operations continued to perform well throughout 2013, particularly in eastern hemisphere regions. Crude oil and natural gas prices remain attractive in foreign markets, positively impacting demand for oilfield services in many key regions being served by the Company.  Tempering this optimism in international operations are regional geopolitical concerns and risks in certain African and Latin American countries. The Company continues to focus on these areas in an attempt to manage such heightened risk levels.  Overall, the Company anticipates continued improvements in the operating and financial results from its international operations in 2014, as drilling rigs recently added or repositioned into international markets commence operations during the year. The Company completed one major drilling rig retrofit in 2013; and is constructing two new ADRs and five major retrofits to existing drilling rigs for the international market in 2014.

Risks and Uncertainties

This document contains 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 and economic conditions, crude oil and natural gas prices, foreign currency fluctuations, weather conditions, the Company's defense of lawsuits and the ability of oil and natural gas companies to pay accounts receivable balances and raise capital or other unforeseen conditions which could impact on the use of the services supplied by the Company.

Conference Call

A conference call will be held to discuss the Company's year-end 2013 results at 2:00 p.m. MDT (4:00 p.m. EDT) on Monday, March 17, 2014.  The conference call number is (647) 427-7450 (in Toronto) or 1-888-231-8191 (outside Toronto).  A taped recording will be available until March 24, 2014 by dialing 1-416-849-0833 (in Toronto) or 1-855-859-2056 (outside Toronto) and entering the reservation number 36547763.  A live broadcast may be accessed through the Company's web site at www.ensignenergy.com.

Ensign Energy Services Inc. is an international oilfield services contractor and is listed on the Toronto Stock Exchange under the trading symbol ESI.

Ensign Energy Services Inc.              
Consolidated Statements of Financial Position              
As at        December 31       December 31
      2013       2012
(Unaudited, in thousands of Canadian dollars)                 
               
Assets              
Current Assets              
  Cash and cash equivalents       $   78,858     $   33,208
  Accounts receivable           440,790       423,160
  Income taxes receivable           8,572       -
  Inventories and other          66,847         76,345
               
      595,067        532,713
               
Property and equipment           2,788,331       2,533,243
Note receivable           4,280         5,021
    $ 3,387,678     $ 3,070,977
               
Liabilities              
Current Liabilities              
  Accounts payable and accruals       $ 307,147     $ 244,612
  Operating lines of credit           326,525       231,990
  Income taxes payable           -        11,197
  Dividends payable            18,019       16,853
  Share-based compensation           14,522         14,200
               
      666,213       518,852
               
Long-term debt           317,407        296,589
Share-based compensation           2,993       4,119
Deferred income taxes           438,496         393,459
               
      1,425,109       1,213,019
               
Shareholders' Equity              
  Share capital           168,155       164,670
  Contributed surplus           4,614       4,811
  Foreign currency translation reserve           25,065       (16,007)
  Retained earnings         1,764,735       1,704,484
               
      1,962,569       1,857,958
               
    $ 3,387,678     $ 3,070,977
               

     

 
Ensign Energy Services Inc.
Consolidated Statements of Income
For the three months and year ended December 31
 
(Unaudited, in thousands of Canadian dollars, except per share data)
       
      Three months ended     Year ended
        December 31     December 31     December 31     December 31
        2013     2012     2013     2012
                             
Revenue     $   536,044   $   530,106   $  2,098,011   $   2,197,321
                         
Expenses                        
  Oilfield services          399,856     384,553     1,524,173     1,555,509
  Depreciation          69,153      54,029     248,026     220,227
  General and administrative          23,727     21,638      88,126      80,837
  Share-based compensation          (4,045)     (840)      2,049     (3,397)
  Foreign exchange and other         5,664     653     21,095     6,446
                         
      494,355     460,033     1,883,469     1,859,622
                         
Income before interest and income taxes        41,689     70,073     214,542     337,699
                         
Interest income         307     139     1,320     504
Interest expense         (5,395)      (3,862)     (18,795)      (18,666)
                         
Income before income taxes        36,601      66,350     197,067     319,537
                         
Income taxes                        
  Current tax         6,601     4,172     43,171     45,189
  Deferred tax         3,105     13,689      25,031     56,826
                         
      9,706     17,861     68,202     102,015
                         
Net income    $   26,895   $   48,489   $  128,865   $  217,522
                         
                           
Net income per share                        
  Basic     $  0.18   $    0.32   $  0.84   $    1.42
  Diluted     $ 0.18   $  0.32   $   0.84   $   1.42

      

 
Ensign Energy Services Inc.
Consolidated Statements of Cash Flows
For the three months and year ended December 31
 
(Unaudited, in thousands of Canadian dollars)
                   
          Three months ended     Year ended
          December 31     December 31     December 31     December 31
          2013     2012     2013     2012
                             
Cash provided by (used in)                        
                         
Operating activities                        
Net income     $   26,895   $   48,489   $  128,865   $  217,522
Items not affecting cash                        
    Depreciation      69,153     54,029     248,026     220,227
    Share-based compensation, net of cash paid        (3,588)     805     6,492     4,363
    Unrealized foreign exchange and other        5,560     (533)     26,869     5,838
    Accretion on long-term debt          84     76      328     1,579
    Deferred income tax          3,105     13,689     25,031     56,826
Net change in non-cash working capital        13,218     18,164     17,026     20,966
                         
      114,427     134,719     452,637      527,321
                         
Investing activities                        
Purchase of property and equipment         (106,912)     (80,329)     (342,225)     (306,689)
Acquisitions          -     -      (76,408)      -
Net change in non-cash working capital        20,687     (23,392)     17,845     (15,040)
                         
      (86,225)     (103,721)     (400,788)      (321,729)
                         
Financing activities                        
Net (decrease) increase in operating lines of credit        (1,772)     (30,586)     76,285      (1,398)
Issue of senior unsecured notes          -      -     -     300,000
Repayment of term loan          -     -      -      (403,279)
Issue of capital stock          -     -     2,002      43
Purchase of shares held in trust          (580)      (535)      (6,497)     (8,579)
Deferred financing costs          -      -      -      (2,156)
Dividends          (18,019)     (16,854)      (68,614)     (65,116)
Net change in non-cash working capital        (964)     2,570     1,912     3,500
                         
      (21,335)     (45,405)     5,088     (176,985)
                         
Net increase (decrease) in cash and cash equivalents      6,867      (14,207)     56,937     28,607
    Effects of foreign exchange on cash and cash equivalents          (8,935)        (1,724)      (11,287)      1,988
                         
Cash and cash equivalents                        
    Beginning of period          80,926      49,139     33,208      2,613
    End of period     $    78,858   $   33,208   $  78,858   $   33,208
                             
                         
Supplemental information                        
    Interest paid     $    8,364   $    6,840   $  17,452   $    16,162
    Income taxes paid     $    9,618   $   8,572   $  62,940   $    45,486
                           

  

SOURCE Ensign Energy Services Inc.

For further information:

Glenn Dagenais, Executive Vice President Finance and Chief Financial Officer, (403) 262-1361