Ensign Energy Services Inc. Reports 2014 Second Quarter Results

CALGARY, Aug. 11, 2014 /CNW/ -

Overview

Revenue for the second quarter of 2014 for Ensign Energy Services Inc. ("Ensign" or the "Company") was $511.6 million, 17 percent higher than revenue of $437.9 million recorded in the second quarter of 2013.  Revenue for the six months ended June 30, 2014 was $1,135.8 million, 11 percent higher than revenue of $1,019.0 million for the six months ended June 30, 2013.  Net income for the second quarter of 2014 increased 364 percent to $15.2 million ($0.10 per common share) compared to net income of $3.3 million ($0.02 per common share) for the second quarter of 2013.  Net income for the six months ended June 30, 2014 increased 11 percent to $75.7 million ($0.50 per common share) compared to net income of $68.3 million ($0.45 per common share) for the first six months of 2013.  Included in the prior year comparative earnings for the second quarter was the negative impact of a $21.8 million foreign exchange and other loss primarily due to the effect of a weakening Australian dollar on United States dollar debt in the Company's Australian operations.  Excluding the tax-effected impact of share based compensation expense (recovery) and foreign exchange and other, adjusted net income for the second quarter of 2014 totaled $14.4 million ($0.09 per common share), one percent lower than adjusted net income of $14.5 million ($0.09 per common share) in the second quarter of 2013.  For the six months ended June 30, 2014 adjusted net income was $68.3 million ($0.45 per common share), 16 percent lower than adjusted net income of $81.1 million ($0.53 per common share) for the six months ended June 30, 2013.  Adjusted EBITDA, defined as "income before interest, income taxes, depreciation, share-based compensation expense (recovery) and foreign exchange and other", totaled $97.1 million ($0.64 per common share) in the second quarter of 2014, 13 percent higher than adjusted EBITDA of $85.7 million ($0.56 per common share) in the second quarter of 2013.  For the first six months of 2014 adjusted EBITDA was $257.2 million ($1.68 per common share), three percent higher than adjusted EBITDA of $250.1 million ($1.64 per common share) for the first six months of 2013.  Funds from operations increased two percent to $90.4 million ($0.59 per common share) in the second quarter of 2014 from $88.7 million ($0.58 per common share) in the second quarter of the prior year.  For the six months ended June 30, 2014, funds from operations was consistent with the prior year comparable period at $227.4 million ($1.49 per common share) compared to $228.5 million ($1.50 per common share) for the six months ended June 30, 2013.

Canadian operating and financial results were improved in the current quarter compared to the prior year as Canadian operations experienced less of a reduction in the current year second quarter due to a shorter spring break-up period as a result of slightly longer winter weather conditions in Canada and a beneficial shift in the mix of drilling rigs working as the industry moves towards deeper drilling projects.  Demand for United States and international oilfield services also increased to help improve results for both the three and six months ended June 30, 2014 when compared to the same periods of the prior year.  An eight percent increase in the average United States exchange rate against the Canadian dollar for the six months ended June 30, 2014 compared to the same period of the prior year helped to further increase United States and international financial results on translation to Canadian dollars.

Gross margin increased to $120.8 million (23.6 percent of revenue) for the second quarter of 2014 compared with gross margin of $109.3 million (25.0 percent of revenue) for the second quarter of 2013.  For the six months ended June 30, 2014 gross margin increased to $303.0 million (26.7 percent of revenue) compared to $293.2 million (28.8 percent of revenue) for the six months ended June 30, 2013.  Margins were negatively impacted in the first half of 2014 by higher costs related to ongoing maintenance and start-up costs of additional equipment preparing for work later in 2014.

Working capital at June 30, 2014 was a deficit of $145.3 million, compared to a deficit of $71.1 million at December 31, 2013.  During the second quarter of 2014 the Company increased the amount available on its existing global revolving credit facility (the "Global Facility") from $400.0 million to $600.0 million.  The expanded Global Facility has a three year term and will support the Company's recently expanded new build and major retrofit program.  Available borrowings at June 30, 2014 were $207.1 million compared to $70.7 million at December 31, 2013.  Working capital resources were mainly utilized in the first half of 2014 to support dividend payments and the ongoing new build and major retrofit program that delivered three new ADR® drilling rigs and completed three major retrofits to existing drilling rigs during the first six months of 2014.

FINANCIAL AND OPERATING HIGHLIGHTS
($ thousands, except per share data and operating information)

  Three months ended June 30   Six months ended June 30
  2014     2013   % Change    2014    2013   % Change
                       
Revenue   511,581   437,874   17   1,135,775   1,019,016   11
                       
Adjusted EBITDA 1   97,137   85,746   13    257,206   250,128   3
Adjusted EBITDA per share 1                      
  Basic   $0.64   $0.56   14   $1.68   $1.64   2
  Diluted   $0.63   $0.56   13    $1.68   $1.63   3
                       
Adjusted net income 2   14,352   14,484   (1)    68,310   81,101   (16)
Adjusted net income per share 2                      
  Basic   $0.09   $0.09   -    $0.45   $0.53   (15)
  Diluted   $0.09   $0.09   -    $0.45   $0.53   (15)
                       
Net income   15,242   3,284   364    75,653    68,271    11
Net income per share                      
  Basic   $0.10   $0.02   400   $0.50   $0.45   11
  Diluted   $0.10   $0.02   400    $0.49   $0.45   9
                       
Funds from operations 3   90,431   88,677   2    227,442   228,479   -
Funds from operations per share 3                      
  Basic   $0.59   $0.58   2    $1.49    $1.50   (1)
  Diluted   $0.59   $0.58   2    $1.48   $1.49    (1)
                       
Weighted average shares - basic (000s)   152,684   152,651    -    152,772   152,679    -
Weighted average shares - diluted (000s)   153,411   153,404   -    153,469   153,363   -
                       
Drilling                      
  Number of marketed rigs                    
    Canada 4   103   120   (14)    103    120    (14)
    United States   111   117   (5)    111   117    (5)
    International 5   58    53   9   58   53    9
    Rigs in transit 6   1    -    -   1    -    -
  Operating days                      
    Canada 4   2,235   1,598   40    7,027   6,927   1
    United States   5,990   5,712   5   11,663   11,216   4
    International 5   2,828   2,805   1    5,980    5,517   8
                       
Well Servicing                    
  Number of marketed rigs                    
    Canada   91   92    (1)   91   92   (1)
    United States   45    44   2   45   44   2
  Operating hours                    
    Canada   28,703   25,343   13   63,383   60,480   5
    United States   30,599   24,897   23   59,460   47,674   25
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.
6 Drilling rig being retrofitted and transferred to a new geographic market.

Second Quarter Highlights

  • Revenue for the three months ended June 30, 2014 was $511.6 million, up 17 percent from revenue for the three months ended June 30, 2013.  The increase in revenue was mainly due to increased demand and activity in Canada in the current year second quarter as the Company continues to transition its Canadian drilling fleet to deeper drilling rigs to meet increased customer demand.
  • Second quarter revenue by segment:
    • Canada - 22 percent;
    • United States - 48 percent; and
    • International - 30 percent.
  • Canadian drilling recorded 2,235 operating days in the second quarter of 2014, a 40 percent increase from 1,598 operating days in the second quarter of 2013.  Canadian well servicing hours increased by 13 percent in the second quarter of 2014 compared to the second quarter of 2013.
  • United States drilling recorded 5,990 operating days in the second quarter of 2014, a five percent increase from 5,712 operating days in the second quarter of 2013.  United States well servicing hours increased by 23 percent in the second quarter of 2014 compared to the second quarter of 2013.
  • International drilling recorded 2,828 operating days in the second quarter of 2014, a one percent increase from 2,805 operating days recorded in the second quarter of 2013.
  • Adjusted EBITDA for the second quarter of 2013 was $97.1 million, a 13 percent increase from adjusted EBITDA of $85.7 million for the second quarter of 2013.  Funds from operations for the second quarter of 2014 increased two percent to $90.4 million from $88.7 million in the second quarter of the prior year.
  • The Company declared a quarterly cash dividend on common shares of $0.1175 per common share payable October 3, 2014.
  • During the second quarter, the Company amended its existing Global Facility, increasing the amount available from $400.0 million to $600.0 million.  The expanded Global Facility will support the Company's recently expanded new build and major retrofit program.
  • Two new ADR® drilling rigs were added to the Company's international drilling fleet in Australia in the second quarter of 2014.  The new build and major retrofit program also completed one major retrofit of a drilling rig transferred from Canada to Australia.
  • Subsequent to the second quarter, the Company's Board of Director's approved 10 additional new build ADR® drilling rigs for the Canadian fleet to be delivered over the next 12 months.  These drilling rigs will be designated as ADR® - 850 ultra-deep tele-double drilling rigs and will deepen Ensign's Canadian drilling rig fleet significantly.  Concurrent with the delivery of the new ADR® - 850 drilling rigs, 10 existing Canadian drilling rigs will be decommissioned.  Including these 10 additional new build drilling rigs, the Company's construction in progress at June 30, 2014 includes 34 new ADR® drilling rigs and nine drilling rigs under major retrofit. 

Revenue and Oilfield Services Expense

  Three months ended June 30   Six months ended June 30
($ thousands)  2014   2013   % Change   2014   2013   % Change
                       
Revenue                      
  Canada   110,687   85,453   30   337,155   341,441   (1)
  United States   246,185    219,843   12   494,548   420,313   18
  International   154,709   132,578   17    304,072   257,262   18
                       
  511,581   437,874   17    1,135,775   1,019,016   11
Oilfield services expense   390,742   328,570   19    832,762   725,771   15
                       
Gross margin   120,839   109,304   11    303,013   293,245   3
                   
Gross margin percentage (%)   23.6    25.0       26.7   28.8

Revenue for the three months ended June 30, 2014 increased 17 percent to $511.6 million compared to $437.9 million for the comparable period in 2013.  Revenue for the six months ended June 30, 2014 increased 11 percent to $1,135.8 million from revenue of $1,019.0 million recorded for the six months ended June 30, 2013.  As a percentage of revenue, gross margin for the second quarter of 2014 decreased to 23.6 percent (2013 - 25.0 percent) and decreased to 26.7 percent for the six months ended June 30, 2014 (2013 - 28.8 percent).  The gross margin decrease was attributable to increased repairs and maintenance costs incurred during the current year second quarter and start-up costs of additional equipment preparing for work later in 2014.

Revenue strengthened across all operating divisions for the three months ended June 30, 2014 compared to the three months ended June 30, 2013.  For the six months ended June 30, 2014 only Canadian revenue was down slightly with United States and international revenue increasing over the comparable period of the prior year.  Increased demand and upgrades to the Company's consolidated equipment fleet over the last few quarters helped to drive the increase in revenue in the current quarter compared to the prior year.  In addition, demand for Canadian oilfield services improved in the current quarter compared to the prior year second quarter as a result of the Company continuing to transition the fleet to deeper capacity drilling rigs to capitalize on increased levels of demand.  Year-to-date Canadian operating and financial results reflect the lower demand levels experienced by the Company in the first quarter of 2014 compared to the prior year.

Canadian Oilfield Services

Revenue increased 30 percent to $110.7 million for the three months ended June 30, 2014, from $85.5 million for the three months ended June 30, 2013. For the six months ended June 30, 2014, revenue decreased one percent to $337.2 million compared to $341.4 million for the same period in 2013. Canadian revenues accounted for 22 percent of the Company's total revenue in the second quarter of 2014, compared with 20 percent in the second quarter of 2013, and during the six months ended June 30, 2014, Canadian revenues were 30 percent of total revenue (2013 - 34 percent).

The Company's Canadian operations recorded 2,235 drilling days in the second quarter of 2014, compared to 1,598 drilling days for the second quarter of 2013, an increase of 40 percent.  For the six months ended June 30, 2014, the Company recorded 7,027 drilling days compared to 6,927 drilling days for the six months ended June 30, 2013, an increase of one percent.  Canadian well servicing hours increased by 13 percent to 28,703 operating hours in the second quarter of 2014 compared with 25,343 operating hours in the corresponding period of 2013.  For the six months ended June 30, 2014, well servicing hours increased by five percent to 63,383 operating hours compared with 60,480 operating hours for the six months ended June 30, 2013.

Improved demand for Canadian oilfield services in the second quarter of 2014 compared to the second quarter of 2013 helped to drive up second quarter revenue for this segment.  The industry has shifted towards deeper, longer reach drilling and the Company continues to transition its Canadian drilling fleet to deeper drilling rigs through the current new build and major retrofit program.  Demand levels were lower for the first three months of 2014 compared to the comparable prior year period, particularly for the oil sands coring division, bringing down year-to-date Canadian operating and financial results.  Consistent with prior years, Canadian operations were also negatively impacted in the second quarter of 2014 by the seasonal operating environment where spring break-up weather conditions hindered the mobility of the Company's equipment.

During the six months ended June 30, 2014, the Company added one retrofitted drilling rig transferred from the United States fleet to the Canadian fleet; decommissioned 14 inactive drilling rigs and four inactive well servicing rigs; and transferred two drilling rigs to the oil sands coring fleet and two retrofitted drilling rigs to Australia.  In addition one drilling rig has been removed from the Canadian fleet and is undergoing major retrofit for the Australian market.

United States Oilfield Services

The Company's United States operations recorded revenue of $246.2 million in the second quarter of 2014, a 12 percent increase from the $219.9 million recorded in the corresponding period of the prior year. During the six months ended June 30, 2014, revenue of $494.5 million was recorded, an increase of 18 percent from the $420.3 million recorded for the six months ended June 30, 2013. The Company's United States operations accounted for 48 percent of the Company's revenue in the second quarter of 2014 (2013 - 50 percent) and 43 percent of total revenue in the six months ended June 30, 2014 (2013 - 41 percent).  Drilling rig operating days increased by five percent to 5,990 drilling days in the second quarter of 2014 from 5,712 drilling days in the second quarter of 2013.  For the six months ended June 30, 2014, drilling days increased by four percent to 11,663 drilling days from 11,216 drilling days in the six months ended June 30, 2013.  Well servicing activity increased by 23 percent in the second quarter of 2014 to 30,599 operating hours from 24,897 operating hours in the second quarter of 2013.  For the six months ended June 30, 2014 well servicing activity increased 25 percent to 59,460 operating hours from 47,674 operating hours in the first six months of 2013.

Upgrades to the Company's United States equipment fleet throughout 2013 and the first three months of 2014 helped to strengthen revenue rates and this combined with an increase in demand levels helped to improve revenue in the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013.  In addition, the United States dollar strengthened against the Canadian dollar in the first six months of 2014 compared to the first six months of 2013, having a positive impact on the translation of United States financial results to Canadian dollars.  In the first six months of 2014, the average United States dollar exchange rate increased by approximately eight percent to 1.10 when compared to the same period of the prior year.

An additional ADR® was added to the United States fleet in the first quarter of 2014.  The Company also decommissioned six inactive drilling rigs and transferred one retrofitted drilling rig to Canada in the first half of 2014.  In 2013, the Company added three new build ADRs and one new well servicing rig to the United States fleet.

International Oilfield Services

The Company's international operations recorded revenue of $154.7 million in the second quarter of 2014, a 17 percent increase over the $132.6 million recorded in the corresponding period of the prior year. Similarly, international revenues for the six months ended June 30, 2014, increased by 18 percent to $304.1 million from $257.3 million recorded for the six months ended June 30, 2013. International operations contributed 30 percent of the Company's revenue in the second quarter of 2014 (2013 - 30 percent) and 27 percent of the Company's revenue in the first half of 2014 (2013 - 25 percent). International operating days for the three months ended June 30, 2014 totaled 2,828 drilling days compared with 2,805 drilling days in 2013, an increase of one percent.  For the six months ended June 30, 2014, international operating days totaled 5,980 drilling days compared with 5,517 drilling days for the six months ended June 30, 2013, an increase of eight percent.

Additions and upgrades to the Company's international drilling rig fleet over the past 12 months helped to grow revenue for the three and six months ended June 30, 2014 when compared to the three and six months ended June 30, 2013.  In the first six months of 2014, two retrofitted drilling rigs were transferred from the Canadian fleet to Australia and two new build ADRs were added in Australia.  Currently one retrofitted drilling rig is in transit from Canada to Australia and is expected to begin work in the third quarter of 2014.  In the latter half of 2013, the Company added one drilling rig into Kurdistan, a region new to Ensign's operations, resumed operations with an additional drilling rig in Libya and added one retrofitted drilling rig to Australia from the United States fleet.

Similar to the Company's United States operations, the translation of the financial results for the international operations were positively impacted by the strengthening of the United States dollar versus the Canadian dollar on translation into Canadian dollars for reporting purposes in the first six months of 2014 compared to the first six months of the prior year.

Subsequent to the second quarter of 2014, the Company suspended operations in Libya due to an escalation of civil unrest within the country and there is uncertainty as to when operations may resume.  The carrying value of assets located in Libya is approximately $41.4 million and at this time the Company does not believe that any impairment has occurred.

Depreciation

  Three months ended June 30   Six months ended June 30
($ thousands)  2014   2013   % Change   2014   2013   % Change
               
Depreciation   69,219   55,419   25   142,528   112,609   27

Depreciation expense totaled $69.2 million for the second quarter of 2014 compared with $55.4 million for the second quarter of 2013, an increase of 25 percent.  Depreciation expense for the first six months of 2014 was $142.5 million, an increase of 27 percent over the $112.6 million recorded for the first six months of 2013.  Increased depreciation reflects higher-valued equipment being utilized in the first half of 2014, new and retrofitted equipment being added to the Company's global fleet throughout the latter half of 2013 and into 2014 and the impact of the 2013 second quarter acquisitions of assets from EGOC Enviro Group of Companies Ltd. ("EGOC") and Departure Energy Services Inc. ("Departure").  In addition, an eight percent increase in the average United States dollar exchange rate against the Canadian dollar increased United States and international depreciation in the three and six months ended June 30, 2014 compared to the same periods of the prior year.

General and Administrative Expense

  Three months ended June 30   Six months ended June 30
($ thousands)  2014   2013   % Change   2014   2013   % Change
                       
General and administrative   23,702   23,558   1   45,807   43,117   6
                   
% of revenue   4.6    5.4        4.0    4.2

General and administrative expense increased one percent to $23.7 million (4.6 percent of revenue) for the second quarter of 2014 compared with $23.6 million (5.4 percent of revenue) for the second quarter of 2013. For the six months ended June 30, 2014, general and administrative expense totaled $45.8 million (4.0 percent of revenue) compared with $43.1 million (4.2 percent of revenue) recorded for the six months ended June 30, 2013, an increase of six percent. The overall increase in general and administrative expense in the current periods reflects the negative translational impact of a stronger United States dollar on United States and international administrative expenses and increased costs to support growing international operations.

Share-Based Compensation Expense (Recovery)

  Three months ended June 30   Six months ended June 30
($ thousands)  2014   2013   % Change   2014   2013   % Change
                       
Share-based compensation   615   (4,570)   (113)   (298)   1,826    (116)

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 the three months ended June 30, 2014, share-based compensation expense (recovery) was an expense of $0.6 million compared with a recovery of $4.6 million recorded in the second quarter of 2013. For the six months ended June 30, 2014, share-based compensation was a recovery of $0.3 million compared with an expense of $1.8 million for the six months ended June 30, 2013.   The change in share-based compensation expense in the three and six months ended June 30, 2014, compared to the same periods of 2013 was a result of the change in the fair value of the share-based compensation liability primarily resulting from movements in the price of the Company's common shares.  The closing price of the Company's common shares was $16.57 at June 30, 2014 ($16.28 at June 30, 2013), compared with $16.34 at March 31, 2014 ($17.32 at March 31, 2013) and $16.73 at December 31, 2013 ($15.37 at December 31, 2012).

Interest Expense

  Three months ended June 30   Six months ended June 30
($ thousands)  2014   2013   % Change   2014   2013   % Change
                       
Interest expense   5,462   4,538   20   10,888   8,659   26
Interest income   (123)    (543)    (77)   (459)   (711)   (35)
                       
  5,339   3,995    34   10,429   7,948    31

Interest is incurred on the Company's $10.0 million Canadian-based revolving credit facility (the "Canadian Facility"), the expanded $600.0 million Global Facility and the United States dollar $300.0 million senior unsecured notes (the "Notes") issued in February 2012.  The amortization of deferred financing costs associated with the issuance of the Notes was included in interest expense in both quarters.

Interest expense in the three and six months ended June 30, 2014 increased over interest expense in the comparable periods of 2013 due to increased draws on the expanded Global Facility and the negative translational impact of a stronger United States dollar on United States and international interest expense in the current quarter.  During the current year second quarter, the Company amended its existing Global Facility, increasing the amount available to $600.0 million from $400.0 million.  The amended Global Facility has a term of three years.

Foreign Exchange and Other ((Gain)/Loss)

  Three months ended June 30   Six months ended June 30
($ thousands)  2014   2013   % Change   2014    2013   % Change
                     
Foreign exchange and other   (1,984)   21,800    (109)   (10,999)   17,912   (161)

Included in this amount are foreign currency movements, mainly in the Company's subsidiaries that have functional currencies other than Canadian dollars.  During the three months ended June 30, 2014, the Australian dollar strengthened by approximately two percent against the United States dollar causing a foreign currency gain on translation of the Company's United States dollar denominated debt into Australian dollars.  During the six months ended June 30, 2014, the Australian dollar strengthened by approximately five percent.  In general the United States dollar was stronger when compared to other world currencies in the first half of 2014 compared to the first half of 2013, but weakened slightly during the three months ended June 30, 2014.

Income Taxes

  Three months ended June 30   Six months ended June 30
($ thousands)  2014   2013   % Change   2014   2013   % Change
                       
Current income tax   2,213     (679)   (426)   21,689   23,526   (8)
Deferred income tax   6,493    6,497    -   18,204   18,036   1
                         
  8,706    5,818   50   39,893   41,562    (4)
                         
Effective income tax rate (%)   36.4   63.9        34.5    37.8    

The effective income tax rate for the three months ended June 30, 2014 was 36.4 percent compared with 63.9 percent for the three months ended June 30, 2013. The effective income tax rate for the six months ended June 30, 2014 was 34.5 percent compared with 37.8 percent for the six months ended June 30, 2013.  The decrease in the effective income tax rate in the current quarter and first half of 2014 was due to a higher proportion of taxable income earned in lower tax rate jurisdictions, including Canada. The prior year tax rates had also been increased by the impact of foreign exchange translation losses for which the effective tax rate varies from statutory rates, however this was not a factor in the first half of 2014.

Financial Position

The following chart outlines significant changes in the consolidated statement of financial position from December 31, 2013 to June 30, 2014:

($ thousands)        Change      Explanation 
Cash and cash equivalents        19,852      See consolidated statements of cash flows. 
Accounts receivable  

     (19,006)     Decrease was due to reduced operating activity in Canada as
a result of spring break-up weather conditions in the second
quarter of 2014 when compared to the fourth quarter of 2013.
Inventories and other  

     (11,130)

    Decrease was due to normal course use of consumables and
amortization of prepaid expenses, offset by additional
inventory.
Property and equipment   



    135,742



    Increase was due to additions from the current new build
and major retrofit construction program and the impact of a
slight increase in the quarter-end foreign exchange rate on the
consolidation of the Company's foreign subsidiaries, offset by
depreciation.
Accounts payable and accruals   



    480



    Accounts payable and accruals was mainly consistent at June 30, 2014 when
compared to December 31, 2013.  Changes reflect a small increase in the
quarter-end foreign exchange rate on the consolidation of the Company's
foreign subsidiaries and changes in the timing of payments to external vendors
during the period.
Operating lines of credit   


    60,405


    Increase was due to additional draws during the period on the
expanded Global Facility and the impact of foreign exchange
fluctuations on the consolidation of the Company's foreign
subsidiaries, offset by repayments during the period.
Share-based compensation  

     (859)

    Decrease was due to the decrease in the price of the
Company's common shares as at June 30, 2014
compared with December 31, 2013.
Long-term debt   
    1,364
    Increase was due to foreign exchange fluctuations on the
United States dollar denominated long-term debt.
Deferred income taxes   
    18,306
    Increase was primarily due to accelerated tax depreciation of
assets added during the current quarter.
Shareholders' equity   


    41,070


    Increase was due to net income for the current quarter and
the impact of foreign exchange rate fluctuations on net assets
of foreign subsidiaries, offset by the amount of dividends
declared in the first half of 2014.

Funds from Operations and Working Capital

  Three months ended June 30   Six months ended June 30
($ thousands)  2014   2013   % Change   2014   2013   % Change
                       
Funds from operations   90,431   88,677   2   227,442   228,479    -
Funds from operations per share  $0.59   $0.58   2    $1.49    $1.50    (1)
Working capital (deficit) 1   (145,342)   (71,146)    104   (145,342)   (71,146)   104
1 Comparative figure as of December 31, 2013.

During the three months ended June 30, 2014, the Company generated funds from operations of $90.4 million ($0.59 per common share) compared with funds from operations of $88.7 million ($0.58 per common share) for the three months ended June 30, 2013, an increase of two percent. For the six months ended June 30, 2014, the Company generated funds from operations of $227.4 million ($1.49 per common share), which was consistent with funds from operations of $228.5 million ($1.50 per common share) generated in the first half of 2013. This increase in the current quarter compared to the prior year second quarter reflects improvements in demand throughout the Company's global operations whereas the decrease year-to-date was mainly a result of Canadian operations having lower activity in the first quarter of 2014 when compared to the prior year.  In addition, higher spending on continuing equipment maintenance that the Company generally expenses as incurred reduced both the three and six month funds from operations when compared to the same periods of the prior year.

At June 30, 2014, the Company had a working capital deficit of $145.3 million, compared to a deficit of $71.1 million at December 31, 2013.  The Company's working capital resources were used in the current quarter to fund the ongoing new build and major retrofits construction program that as at June 30, 2014 is anticipated to deliver an additional 34 new build ADR® drilling rigs and nine major retrofits to existing drilling rigs.  The Company expects funds generated by operations, combined with current and future credit facilities, to fully support current operating and capital requirements.  In addition, the Company may look to long-term financing to improve the current working capital position and expects future contributions from additions from the current new build and major retrofit program to help reduce the working capital deficit once the equipment starts working.  The newly expanded revolving credit facilities provide for total borrowing of $610.0 million, of which $207.1 million was available at June 30, 2014.

Investing Activities

  Three months ended June 30   Six months ended June 30
($ thousands)  2014   2013   % Change   2014   2013   % Change
                       
Acquisitions  -    (76,408)     (100)    -    (76,408)    (100)
Purchase of property and equipment (136,916)    (83,605)    64   (257,669)    (146,362)   76
Net change in non-cash working capital  (7,625)    (4,974)   53    (2,134)     (4,489)     (52)
                       
Cash used in investing activities  (144,541)    (164,987)   (12)   (259,803)    (227,259)   14

Purchases of property and equipment during the second quarter of 2014 totaled $136.9 million (2013 - $83.6 million).  Purchases of property and equipment during the first half of 2014 totaled $257.7 million (2013 - $146.4 million).  The purchase of property and equipment relates predominantly to expenditures made pursuant to the Company's ongoing new build and major retrofit program.

During the second quarter of 2013 the Company acquired the rental assets of EGOC and the directional drilling assets of Departure.

Financing Activities

  Three months ended June 30   Six months ended June 30
($ thousands)  2014   2013   % Change   2014   2013   % Change
                       
Net increase in operating lines of credit   42,765    5,646   657    60,807   78,199    (22)
Issue of capital stock   -   256   (100)    -   1,494    (100)
Purchase of shares held in trust   (4,259)    (4,848)   (12)    (4,748)   (5,358)    (11)
Dividends  (18,018)    (16,864)   7   (36,037)   (33,727)   7
Net change in non-cash working capital   (3,359)     (3,076)    9    (135)    (119)   13
                       
Cash provided by (used in) financing activities   17,129   (18,886)    (191)   19,887   40,489    (51)

The Company's available operating lines of credit consist of an expanded $600.0 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 $600.0 million Canadian dollars.  The amount available under the Canadian Facility is $10.0 million or the equivalent in United States dollars.

During the second quarter the Company amended its existing Global Facility, increasing the amount available from $400.0 million to $600.0 million.  Net draws of the operating lines of credit for the three and six months ended June 30, 2014 were mainly used to fund the ongoing new build and major retrofit program that added three new ADR® drilling rigs to the Company's global fleet in the first six months of 2014, one in the United States and two in Australia; as well as completed three major retrofits to existing drilling rigs, one in Canada and two in Australia.  As of June 30, 2014, the operating lines of credit are primarily being used to fund the completion of the most recent new build and major retrofit program and to support international operations.

During the first quarter of 2014, the Company secured a $20.0 million uncommitted facility, solely for issuing letters of credit, primarily used for bidding on contracts in the normal course of business. As at June 30, 2014, $19.0 million was drawn on the facility.

The Board of Directors of the Company has declared a third quarter dividend of $0.1175 per common share to be payable October 3, 2014 to all Common Shareholders of record as of September 19, 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 six months ended June 30, 2014, the Company commissioned one new ADR® drilling rig in the United States; retrofitted one drilling rig transferred from the United States to Canada; commissioned two new ADR® drilling rigs in Australia; and retrofitted two drilling rigs transferred from Canada to Australia.

In response to contracts and advanced bid activity for Ensign's higher technology drilling rigs, the Company has added an additional 10 new build 4000m deep tele-doubles to its existing 24 new build ADRs.  The addition of these 10 new builds, specifically targeted for the Canadian fleet, will bring the total to 34 new build ADRs that Ensign will deliver into its fleet through to the end of 2015.  Concurrent with the delivery of these 10 new builds, designated as ADR® - 850 ultra-deep tele-double drilling rigs, 10 existing Canadian drilling rigs will be decommissioned.

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 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.  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.  In addition, the Company is in discussions with numerous customers for the possible supply of a number of additional new drilling rigs that may be constructed and delivered into operations between now and December 31, 2015, beyond these 34 new ADR® drilling rigs currently set for delivery.

The estimated delivery schedule for new ADRs and major retrofits of existing drilling rigs currently under construction at June 30, 2014, and as approved by the Company's Board of Directors, is as follows:

      Estimated Delivery Date
      Q3     Q4     Q1     Q2     Q3     Q4      
      2014     2014     2015     2015     2015     2015     Total
New Build ADRs     2     7     7     8     5     5     34
Major Retrofits     7      -     2     -     -     -     9
                                           
      9     7     9     8     5     5     43

Outlook

Oil and natural gas producers benefited from favorable oil and natural gas prices throughout much of the first half of 2014.  North American natural gas prices retreated in the second quarter from peak pricing levels in the first quarter that primarily resulted from a cold winter in many natural gas consuming regions of North America.  Crude oil prices were pushed to nine month highs in the second quarter due to geopolitical turmoil and tensions in Europe and the Middle East.  While crude oil prices have recently subsided slightly, the Company expects relatively steady prices to support continuing demand growth for energy services, particularly in North America.

Operating days and revenues recorded by our Canadian operations in the second quarter were up strongly when compared with the second quarter of 2013. Equipment had been repositioned and reconfigured to take advantage of increased levels of demand that occurred during this year's spring break-up quarter in Canada.  The Company expects the overall trend to higher utilization in our Canadian operations to continue through the second half of 2014, as the equipment fleet continues to transition to deeper capacity.  While Ensign is slightly more optimistic than in the past, sustained improvements in the demand for oilfield services in Canada will ultimately depend on positive developments with respect to improving crude oil and natural gas transportation infrastructure.

Second quarter operating days in the Company's United States operations were up slightly over the immediately preceding quarter, as land-based drilling activity continues to expand in certain of the large resource plays. The United States drilling industry continues to shift further into multiple well, pad drilling projects in such resource plays, where the Company's deeper, longer reach, self-moving high-tech ADR® drilling rigs meet stringent customer demands for horizontal and lateral drilling.  Consequently, the majority of our new ADRs being constructed over the next several years will likely end up in our United States fleet to service the demand of our growing customer base.

The second quarter results for Ensign's international operations were essentially flat on a year-over-year basis.  Challenges persist in some of the Company's international markets, such as in parts of Africa and the Middle East; however start-ups of recent new drilling rig deployments and repositioning transfers will contribute to improved operating and financial results in future quarters.

The Company expanded its credit arrangements in support of the current capital program during the second quarter.  The amended Global Facility will ensure that the Company has the funds it needs to complete the current new build and major retrofit program and finance future expanded operations.

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 second quarter 2014 results at 2:00 p.m. MST (4:00 p.m. EST) on Monday, August 11, 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 August 18, 2014 by dialing 1-416-849-0833 (in Toronto) or 1-855-859-2056 (outside Toronto) and entering the reservation number 36067977.  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     June 30     December 31
    2014     2013
           
(Unaudited, in thousands of Canadian dollars)          
           
Assets          
Current Assets          
  Cash and cash equivalents     $ 98,710   $ 78,858
  Accounts receivable         421,784     440,790
  Inventories and other         55,717     66,847
  Income taxes receivable         3,750      8,572
           
    579,961     595,067
           
Property and equipment         2,924,073     2,788,331
Note receivable         4,410     4,280
           
  $ 3,508,444   $ 3,387,678
Liabilities          
Current Liabilities           
  Accounts payable and accruals    $ 307,627   $ 307,147
  Operating lines of credit         386,930     326,525
  Dividends payable          18,019     18,019
  Share-based compensation         12,727     14,522
           
    725,303     666,213
           
Long-term debt         318,771     317,407
Share-based compensation         3,929     2,993
Deferred income taxes         456,802     438,496
           
    1,504,805     1,425,109
Shareholders' Equity          
  Share capital        165,787     168,155
  Contributed surplus        3,827     4,614
  Foreign currency translation reserve   29,674     25,065
  Retained earnings         1,804,351     1,764,735
           
    2,003,639     1,962,569
           
  $ 3,508,444   $ 3,387,678
             
           

                 
Ensign Energy Services Inc.                
Consolidated Statements of Income                
For the three and six months ended June 30                
                 
(Unaudited, in thousands of Canadian dollars, except per share data)                
    Three months ended     Six months ended
    June 30     June 30      June 30     June 30
    2014     2013      2014     2013
                       
Revenue   $ 511,581   $ 437,874   $ 1,135,775   $ 1,019,016
                       
Expenses                      
  Oilfield services        390,742     328,570      832,762     725,771
  Depreciation        69,219     55,419     142,528     112,609
  General and administrative        23,702     23,558     45,807     43,117
  Share-based compensation        615     (4,570)     (298)     1,826 
  Foreign exchange and other       (1,984)     21,800     (10,999)     17,912
                       
    482,294     424,777     1,009,800     901,235
                       
Income before interest and income taxes      29,287     13,097     125,975     117,781
                       
Interest income       123     543     459     711
Interest expense       (5,462)     (4,538)     (10,888)     (8,659)
                       
Income before income taxes      23,948     9,102     115,546     109,833
                       
Income taxes                      
  Current tax       2,213      (679)     21,689     23,526
  Deferred tax       6,493     6,497     18,204     18,036
                       
    8,706      5,818     39,893     41,562
                       
Net income   $ 15,242   $ 3,284   $  75,653   $ 68,271
                       
                       
Net income per share                      
  Basic    $ 0.10   $    0.02   $  0.50   $ 0.45
  Diluted   $  0.10   $  0.02   $  0.49   $  0.45
                         
                       

                 
Ensign Energy Services Inc.                
Consolidated Statements of Cash Flows                
For the three and six months ended June 30                
                 
(Unaudited, in thousands of Canadian dollars)                
    Three months ended     Six months ended
    June 30     June 30      June 30      June 30
    2014     2013      2014       2013
Cash provided by (used in)                      
Operating activities                      
Net income  $ 15,242   $ 3,284   $ 75,653   $  68,271
Items not affecting cash                      
    Depreciation      69,219     55,419      142,528     112,609
    Share-based compensation, net of cash paid      789     (2,776)       607     4,060
    Unrealized foreign exchange and other      (1,399)     26,171     (9,725)     25,341
    Accretion on long-term debt        87     82      175       162
    Deferred income tax        6,493      6,497     18,204      18,036
Net change in non-cash working capital      98,971     77,251       40,104     44,293
                       
    189,402     165,928      267,546     272,772
Investing activities                      
Purchase of property and equipment      (136,916)     (83,605)     (257,669)     (146,362)
Acquisitions        -      (76,408)      -     (76,408)
Net change in non-cash working capital     (7,625)      (4,974)       (2,134)      (4,489)
                       
    (144,541)     (164,987)     (259,803)     (227,259)
Financing activities                      
Net increase in operating lines of credit      42,765      5,646     60,807     78,199
Issue of capital stock        -     256      -     1,494
Purchase of shares held in trust        (4,259)      (4,848)      (4,748)      (5,358)
Dividends        (18,018)       (16,864)      (36,037)      (33,727)
Net change in non-cash working capital      (3,359)      (3,076)     (135)      (119)
                       
    17,129      (18,886)       19,887     40,489
                       
Net increase (decrease) in cash and cash equivalents    61,990     (17,945)      27,630     86,002
    Effects of foreign exchange on cash and cash equivalents       (3,773)      (7,995)      (7,778)      (6,471)
Cash and cash equivalents                      
    Beginning of period        40,493     138,679     78,858     33,208
    End of period    $  98,710   $   112,739   $ 98,710   $ 112,739
                       
                       
Supplemental information                      
    Interest paid    $  8,716   $ 7,312   $ 9,615   $  7,419
    Income taxes paid    $  8,936   $ 3,135   $ 16,867   $  34,723
                           
                       

 

SOURCE Ensign Energy Services Inc.

For further information:

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