Ensign Energy Services Inc. Reports 2016 Second Quarter Results

CALGARY, Aug. 9, 2016 /CNW/ - 

OVERVIEW

Revenue for the second quarter of 2016 was $175.9 million, a decrease of 47 percent from revenue for the second quarter of 2015 of $333.8 million. Revenue for the six months ended June 30, 2016 was $434.4 million, a decrease of 45 percent from revenue for the six months ended June 30, 2015 of $783.1 million. Revenue, net of third party, for the second quarter of 2016 was $156.4 million, a decrease of 47 percent from Revenue net of third party, for the second quarter of 2015 of $294.2 million. Revenue, net of third party, for the six months ended June 30, 2016 was $383.3 million, a decrease of 45 percent from Revenue, net of third party, for the six months ended June 30, 2015 of $692.9 million. Adjusted EBITDA totaled $31.5 million ($0.21 per common share) in the second quarter of 2016, 55 percent lower than Adjusted EBITDA of $69.5 million ($0.46 per common share) in the second quarter of 2015. For the first six months of 2016 Adjusted EBITDA totaled $91.1 million ($0.60 per common share), 50 percent lower than Adjusted EBITDA of $181.9 million ($1.19 per common share) in the first six months of 2015.

Net loss for the second quarter of 2016 was $40.0 million ($0.26 per common share) compared to a net loss of $1.0 million ($0.01 per common share) for the second quarter of 2015. Net loss for the six months ended June 30, 2016 was $54.9 million ($0.36 per common share), compared to net income of $14.4 million ($0.09 per common share) for the six months ended June 30, 2015. Adjusted net loss for the second quarter of 2016 was $35.0 million ($0.23 per common share) compared to Adjusted net income of $1.3 million for the second quarter of 2015 ($0.01 per common share). For the six months ended June 30, 2016 Adjusted net loss was $60.1 million ($0.39 per common share), compared to Adjusted net income of $29.0 million ($0.19 per common share) for the six months ended June 30, 2015.

Funds from operations decreased 48 percent to $36.3 million ($0.24 per common share) in the second quarter of 2016 compared to $69.4 million ($0.46 per common share) in the second quarter of the prior year. Funds from operations decreased 49 percent to $91.5 million ($0.60 per common share) in the first six months of 2016 as compared to $179.2 million ($1.18 per common share) in the first six months of the prior year.

Operating days across the Company's fleet were lower in the second quarter of 2016 when compared to the second quarter of 2015 due to weaker demand for oilfield services caused by continued low oil and natural gas commodity prices. A strengthening year-over-year of the United States dollar against the Canadian dollar positively impacted United States and international financial results on translation to Canadian dollars. The average United States exchange rate was 1.33 for the first six months of 2016 (first six months of 2015 - 1.24) versus the Canadian dollar, an increase of seven percent, compared to the first six months of 2015.

Gross margin decreased to $45.4 million (29.0 percent of Revenue, net of third party) for the second quarter of 2016 compared to gross margin of $88.8 million (30.2 percent of Revenue, net of third party) for the second quarter of 2015. Gross margin decreased to $121.6 million (31.7 percent of Revenue, net of third party) for the six months ended June 30, 2016 compared to a gross margin of $222.7 million (32.1 percent of Revenue, net of third party) for the six months ended June 30, 2015. The decrease in gross margin in the second quarter of 2016 compared to the second quarter of 2015 was primarily attributed to weaker activity levels and lower revenue rates across the oilfield service equipment fleet.

Working capital at June 30, 2016 was a deficit of $10.9 million, compared to a surplus of $144.2 million at December 31, 2015, largely due to a portion of long-term debt (USD $100.0 million of senior unsecured notes bearing interest at 3.43 percent, due February 22, 2017) maturing within the next 12 months. The Company's bank credit facilities provide unused and available borrowings of $278.9 million at June 30, 2016, up by $58.8 million, compared to $220.1 million at December 31, 2015.


FINANCIAL AND OPERATING HIGHLIGHTS
(Unaudited, in thousands of Canadian dollars, except per share data and operating information)




Three months ended June 30


Six months ended June 30


2016


2015


% change


2016


2015


% change

Revenue


175,924


333,800


(47)


434,388


783,089


(45)

Revenue, net of third party 1


156,423


294,241


(47)


383,285


692,856


(45)

Adjusted EBITDA 2


31,485


69,534


(55)


91,052


181,867


(50)

Adjusted EBITDA per share 2














Basic

$

0.21

$

0.46


(54)

$

0.60

$

1.19


(50)


Diluted

$

0.21

$

0.46


(54)

$

0.60

$

1.19


(50)

Adjusted net (loss) income 3


(35,016)


1,316


nm


(60,082)


29,029


nm

Adjusted net (loss) income per share 3














Basic

$

(0.23)

$

0.01


nm

$

(0.39)

$

0.19


nm


Diluted

$

(0.23)

$

0.01


nm

$

(0.39)

$

0.19


nm

Net (loss) income


(39,979)


(1,036)


nm


(54,890)


14,391


nm

Net (loss) income per share














Basic

$

(0.26)

$

(0.01)


nm

$

(0.36)

$

0.09


nm


Diluted

$

(0.26)

$

(0.01)


nm

$

(0.36)

$

0.09


nm

Funds from operations 4


36,328


69,389


(48)


91,508


179,150


(49)

Funds from operations per share 4














Basic

$

0.24

$

0.46


(48)

$

0.60

$

1.18


(49)


Diluted

$

0.24

$

0.46


(48)

$

0.60

$

1.17


(49)

Total debt, net of cash


664,560


716,659


(7)


664,560


716,659


(7)

Weighted average shares - basic (000s)


152,310


152,295



152,349


152,409


Weighted average shares - diluted (000s)


152,492


152,295



152,497


152,668


Drilling


2016


2015


% change


2016


2015


% change


Number of rigs















Canada 5


83


90


(8)


83


90


(8)



United States


90


98


(8)


90


98


(8)



International 6


50


54


(7)


50


54


(7)


Operating days















Canada 5


674


902


(25)


2,243


3,390


(34)



United States


1,609


2,987


(46)


3,499


6,710


(48)



International 6


1,544


2,206


(30)


3,334


4,746


(30)

Well Servicing


2016


2015


% change


2016


2015


% change


Number of rigs













Canada


71


72


(1)


71


72


(1)



United States


44


46


(4)


44


46


(4)


Operating hours















Canada


13,779


14,330


(4)


27,454


33,076


(17)



United States


15,229


17,452


(13)


29,584


37,206


(20)

nm - calculation not meaningful.

1.

Revenue, net of third party is defined as "gross revenue less third party reimbursable items".

2.

Adjusted EBITDA is defined as "(loss) income before interest, income taxes, depreciation, asset decommissioning and write-downs, share-based compensation and foreign exchange and other". Management believes that, in addition to Net (loss) income, Adjusted EBITDA is a useful supplemental measure as it provides 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 are not recognized measures under International Financial Reporting Standards and thus may not be comparable to measures used by other companies.

3.

Adjusted net (loss) income is defined as "Net (loss) income before asset decommissioning and write-downs, share-based compensation and foreign exchange and other, tax-effected using the expected income tax rate for each item or an estimate of 35 percent". Management believes that, in addition to Net (loss) income, Adjusted net (loss) income is a useful supplemental measure as it provides an indication of the results generated by the Company's principal business activities prior to consideration of how the results are impacted by non-cash charges for equipment write-downs, 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 (loss) income and Adjusted net (loss) income per share are not recognized measures under International Financial Reporting Standards and thus may not be comparable to measures used by other companies.

4.

Funds from operations are defined as "cash provided by operating activities before the change in non-cash working capital". Management believes that, in addition to Net (loss) income, funds from operations constitute a measure that provides additional information regarding the Company's liquidity and its ability to generate funds to finance its operations. Management utilizes this measure 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 thus may not be comparable to similar measures used by other companies.

5.

Excludes coring rigs. 2015 restated to exclude coring rigs.

6.

Includes workover rigs.

 

SECOND QUARTER HIGHLIGHTS

  • Revenue for the second quarter of 2016 was $175.9 million, a 47 percent decrease from the second quarter of 2015 revenue of $333.8 million.
  • Revenue by geographic area:
    • Canada - $34.1 million, 19 percent;
    • United States - $73.0 million, 42 percent; and
    • International - $68.8 million, 39 percent.
  • The process of turning over our fleet towards high specification, high quality ADR® drilling rigs is delivering higher market share in all areas of our business.
  • The additional ADR® - 1500 completed in the first half of the year was commissioned on a long-term contract.
  • Canadian drilling recorded 674 operating days in the second quarter of 2016, a 25 percent decrease from 902 operating days in the second quarter of 2015. Canadian well servicing recorded 13,779 operating hours in the second quarter of 2016, a four percent decrease from 14,330 operating hours in the second quarter of 2015.
  • United States drilling recorded 1,609 operating days in the second quarter of 2016, a 46 percent decrease from 2,987 operating days in the second quarter of 2015. United States well servicing recorded 15,229 operating hours in the second quarter of 2016, a 13 percent decrease from 17,452 operating hours in the second quarter of 2015.
  • International drilling recorded 1,544 operating days in the second quarter of 2016, a 30 percent decrease from 2,206 operating days recorded in second quarter of 2015.
  • Adjusted EBITDA for the second quarter of 2016 was $31.5 million, a 55 percent decrease from Adjusted EBITDA of $69.5 million for the second quarter of 2015. Funds from operations for the second quarter of 2016 decreased 48 percent to $36.3 million from $69.4 million in second quarter of the prior year.
  • Total debt, net of cash, decreased by $23.8 million (three percent) in the second quarter of 2016 from $688.4 million at March 31, 2016 to $664.6 million at June 30, 2016.
  • Net capital expenditures for the calendar year 2016 are now targeted between $40 to $45 million compared to the original estimate of $60 million.
  • The Company has had no termination payments in the current quarter or year-to-date, as our customers have chosen to keep our contracted rigs working, a positive sign reflecting our service quality and the high performance standards of our ADR® rigs.
  • The Company declared a third quarter cash dividend on common shares of $0.12 per common share, payable on October 5, 2016.

REVENUE AND OILFIELD SERVICES EXPENSE


Three months ended June 30


Six months ended June 30









($ thousands)

2016

2015

% change


2016

2015

% change

Revenue









Canada

34,123

45,607

(25)


109,684

163,597

(33)


United States

73,049

146,910

(50)


173,179

333,310

(48)


International

68,752

141,283

(51)


151,525

286,182

(47)

Total revenue

175,924

333,800

(47)


434,388

783,089

(45)









Revenue, net of third party

156,423

294,241

(47)


383,285

692,856

(45)









Oilfield services expense

130,561

244,975

(47)


312,828

560,417

(44)

Gross margin

45,363

88,825

(49)


121,560

222,672

(45)

Gross margin as a percentage of
Revenue, net of third party

29.0

30.2



31.7

32.1


 

Revenue for the three months ended June 30, 2016 totaled $175.9 million, a decrease of 47 percent from the second quarter of 2015 of $333.8 million. Revenue for the six months ended June 30, 2016 totaled $434.4 million, a 45 percent decrease from the six months ended June 30, 2015. As a percentage of Revenue, net of third party, gross margin for the second quarter of 2016 decreased to 29.0 percent (2015 - 30.2 percent) and decreased to 31.7 percent for the six months ended June 30, 2016 (2015 - 32.1 percent).

The continuing lower levels of oil and natural gas commodity prices reduced demand for oilfield services, which resulted in lower equipment utilization rates and revenue rates in 2016 compared to 2015. Financial results from the Company's United States and international operations were positively impacted upon translation, as the stronger United States dollar relative to the Canadian dollar in the first six months of 2016 compared to the same period in 2015 served to reduce the impact of some of the revenue rate declines experienced during the quarter.

CANADIAN OILFIELD SERVICES

Revenue decreased 25 percent to $34.1 million for the three months ended June 30, 2016 from $45.6 million for the three months ended June 30, 2015. The Company recorded revenue of $109.7 million in Canada for the six months ended June 30, 2016, a decrease of 33 percent from $163.6 million recorded for the six months ended June 30, 2015. Canadian revenues accounted for 19 percent of the Company's total revenue in the second quarter of 2016, compared to 14 percent in the second quarter of 2015. During the six months ended June 30, 2016, Canadian revenues were 25 percent of the Company's revenue, compared with 21 percent in the six months ended June 30, 2015.

The Company's Canadian operations recorded 674 drilling days in the second quarter of 2016, compared to 902 drilling days for the second quarter of 2015, a decrease of 25 percent. For the six months ended June 30, 2016, the Company recorded 2,243 drilling days compared to 3,390 drilling days for the six months ended June 30, 2015, a decrease of 34 percent. Canadian well servicing hours decreased by four percent to 13,779 operating hours in the second quarter of 2016 compared to 14,330 operating hours in the corresponding period of 2015. For the six months ended June 30, 2016, well servicing hours decreased by 17 percent to 27,454 operating hours compared with 33,076 operating hours for the six months ended June 30, 2015.

Demand for the Company's Canadian oilfield services was lower compared to prior quarters due to continued lower oil and natural gas commodity prices. Consistent with prior years, Canadian operations were also negatively impacted in the second quarter of 2016 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, 2016, the Company disposed of one well servicing rig. 

UNITED STATES OILFIELD SERVICES

The Company's United States operations recorded revenue of $73.0 million in the second quarter of 2016, a 50 percent decrease from the $146.9 million recorded in the corresponding period of the prior year. During the six months ended June 30, 2016, revenue of $173.2 million was recorded, a decrease of 48 percent from the $333.3 million recorded in the corresponding period of the prior year. The Company's United States operations accounted for 42 percent of the Company's revenue in the second quarter of 2016 (2015 - 44 percent) and 40 percent of the Company's revenue in the first six months of 2016 (2015 - 43 percent).

Drilling rig operating days decreased by 46 percent to 1,609 drilling days in the second quarter of 2016 from 2,987 drilling days in the second quarter of 2015. Drilling operating days decreased by 48 percent from 6,710 operating days in the first six months of 2015 to 3,499 operating days in first six months of 2016. Well servicing activity expressed in operating hours decreased by 13 percent in the second quarter of 2016 to 15,229 operating hours from 17,452 operating hours in the second quarter of 2015. For the six months ended June 30, 2016 well servicing activity decreased 20 percent to 29,584 operating hours from 37,206 operating hours in the first six months of 2015.

Overall operating and financial results for the Company's United States operations were negatively impacted by the decline in demand for oilfield services due to lower oil and natural gas commodity prices. Activity levels and revenue rates in the United States continued to decline in the first half of 2016. The reduced activity and associated pricing declines were partially offset by a strengthening of the United States dollar, which increased seven percent versus the Canadian dollar when compared to the first half of 2015. During the first six months ending June 30, 2016, the Company added one new build ADR® drilling rig to the United States fleet.

INTERNATIONAL OILFIELD SERVICES

The Company's international operations recorded revenue of $68.8 million in the second quarter of 2016, a 51 percent decrease from the $141.3 million recorded in the corresponding period of the prior year. Similarly, international revenues for the six months ended June 30, 2016, decreased 47 percent to $151.5 million from $286.2 million recorded in the six months ended June 30, 2015. The Company's international operations contributed 39 percent of the total revenue in the second quarter of 2016 (2015 - 42 percent) and 35 percent of the Company's revenue in the first six months of 2016 (2015 - 36 percent).

International operating days for the three months ended June 30, 2016, totaled 1,544 drilling days compared to 2,206 drilling days in 2015, a decrease of 30 percent. For the six months ended June 30, 2016, international operating days totaled 3,334 operating days compared to 4,746 drilling days for the six months ended June 30, 2015, a decrease of 30 percent.

Similar to the Company's United States operations, international operations were positively impacted by the strengthening United States dollar year-over-year in the first half of 2016, versus the Canadian dollar, on translation into Canadian dollars for reporting purposes compared to the first half of 2015.

DEPRECIATION


Three months ended June 30


Six months ended June 30

($ thousands)

2016

2015

% change


2016

2015

% change

Depreciation

81,383

61,384

33


175,861

125,211

40

 

Depreciation expense totaled $81.4 million for the second quarter of 2016 compared with $61.4 million for the second quarter of 2015, an increase of 33 percent. Depreciation expense for the first six months of 2016 increased by 40 percent to $175.9 million compared with $125.2 million for the first six months of 2015. Depreciation expense was higher in the six months ended June 30, 2016 when compared to the six months ended June 30, 2015, due to additional depreciation charges relating to idle equipment, the impact of higher dollar value equipment being utilized and the negative translational impact of a stronger United States dollar compared to the Canadian dollar on non-Canadian domiciled fixed assets. The increase was partially offset by the overall decrease in operating activity during the first half of 2016, when compared with the first half of 2015.

GENERAL AND ADMINISTRATIVE EXPENSE


Three months ended June 30


Six months ended June 30

($ thousands)

2016

2015

% change


2016

2015

% change

General and administrative

13,878

19,291

(28)


30,508

40,805

(25)

% of revenue

7.9

5.8



7.0

5.2


 

General and administrative expense decreased 28 percent to $13.9 million (7.9 percent of revenue) for the second quarter of 2016 compared to $19.3 million (5.8 percent of revenue) for the second quarter of 2015. For the six months ended June 30, 2016, general and administrative expense totaled $30.5 million (7.0 percent of revenue) compared to $40.8 million (5.2 percent of revenue) for the second quarter of 2015. The decrease in general and administrative expense arose from the Company's initiatives to reduce costs in reaction to lower oil and natural gas commodity prices. The decrease was partially offset by the negative translational impact on non-Canadian operations of the strengthening United States dollar versus the Canadian dollar for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. We expect normalized general and administrative expenses to run in a $12.5 to 13.5 million range per quarter on a go-forward basis, subject to variability due to foreign exchange rates.

SHARE-BASED COMPENSATION


Three months ended June 30


Six months ended June 30

($ thousands)

2016

2015

% change


2016

2015

% change

Share-based compensation

1,631

4,684

(65)


1,206

5,476

(78)

 

Share-based compensation expense 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 market price of the Company's common shares.

For the three months ended June 30, 2016 share-based compensation was an expense of $1.6 million compared with an expense of $4.7 million recorded in the three months ended June 30, 2015. For the six months ended June 30, 2016 share-based compensation was an expense of $1.2 million compared with an expense of $5.5 million for the six months ended June 30, 2015. The share-based compensation expense for the first half of 2016 was a result of changes in the fair value of the share-based compensation liability, offset by amortization of stock options. The fair value of share-based compensation is impacted by both the input assumptions used to estimate the fair value and the price of the Company's common shares during the period.  The closing price of the Company's common shares was $7.25 at June 30, 2016 ($12.24 at June 30, 2015), compared with $5.98 at March 31, 2016 ($9.93 at March 31, 2015) and $7.38 at December 31, 2015 ($10.20 at December 31, 2014).

INTEREST EXPENSE


Three months ended June 30


Six months ended June 30

($ thousands)

2016

2015

% change


2016

2015

% change

Interest expense

6,268

5,484

14


12,596

11,561

9

Interest income

(19)

(95)

(80)


(359)

(193)

86


6,249

5,389

16


12,237

11,368

8

 

Interest is incurred on the Company's $10.0 million Canadian-based revolving credit facility (the "Canadian Facility"), the $600.0 million global revolving credit facility (the "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 is included in interest expense. During the second quarter of 2016, the Company extended the Global Facility maturity date to October 3, 2017.

Interest expense increased by nine percent for the first half of 2016 compared to the same period in 2015 despite overall net debt repayments of $40.0 million on the bank credit facilities in the six months ended June 30, 2016. The increased interest expense was due to the negative translational impact on United States dollar-denominated debt of a strengthening United States dollar versus the Canadian dollar on a year-over-year basis.

FOREIGN EXCHANGE AND OTHER


Three months ended June 30


Six months ended June 30

($ thousands)

2016

2015

% change


2016

2015

% change

Foreign exchange and other

6,004

(1,065)

nm


(9,194)

17,045

nm

nm - calculation not meaningful

 

Included in this amount is the impact of foreign currency fluctuations in the Company's subsidiaries that have functional currencies other than the Canadian dollar. During the three months ended June 30, 2016, the Australian dollar weakened by approximately three percent against the United States dollar causing a foreign currency loss on translation of the Company's United States dollar denominated debt into Australian dollars. During the six months ended June 30, 2016, the Australian dollar strengthened against the United States dollar by approximately four percent, compared with the Australian dollar weakening by six percent against the United States dollar during the six months ended June 30, 2015.

INCOME TAXES


Three months ended June 30


Six months ended June 30

($ thousands)

2016

2015

% change


2016

2015

% change

Current income tax

(9,325)

(1,690)

nm


(9,611)

(4,419)

nm

Deferred income tax

(14,478)

1,868

nm


(24,557)

12,795

nm

Total income tax

(23,803)

178

nm


(34,168)

8,376

nm

Effective income tax rate (%)

37.3

(20.7)



38.4

36.8


nm - calculation not meaningful

 

The effective income tax rate for the three months ended June 30, 2016 was 37.3 percent compared to negative 20.7 percent for the three months ended June 30, 2015. The effective tax rate for the second quarter of 2015 is not considered to be meaningful, due to the small amounts used in the calculation. The effective income tax rate for the six months ended June 30, 2016 was 38.4 percent compared with 36.8 percent for the six months ended June 30, 2015. The effective tax rate in the first half of the current year was higher than the effective tax rate in the first half of 2015 due to tax rate increases in Alberta and Oman, further increased by the impact of foreign exchange gains for which effective tax rates vary from statutory rates.

FINANCIAL POSITION

Significant changes in the consolidated statement of financial position from December 31, 2015 to June 30, 2016 are outlined below:

($ thousands)

Change

Explanation

Cash and cash equivalents

6,910

See consolidated statements of cash flows.




Accounts receivable

(71,969)

Decrease is due to an increase in collections, a decline in activity in the first six months of 2016 compared to the fourth quarter of 2015, and the decrease in the quarter-end foreign exchange rate on translation of accounts receivable in the Company's foreign subsidiaries.




Inventories and other

(9,842)

Decrease is due to the impact of a decrease in the quarter-end foreign exchange rate on the translation of the inventory and prepaid balances in the Company's foreign subsidiaries as well as amortization of prepaid expenses during the quarter.




Income taxes receivable

11,113

Increase is due to the current year income tax recovery, net of refunds and payments made during the quarter.




Property and equipment

(270,853)

Decrease is primarily due to the impact of a decrease in the quarter-end translation rate to 1.30, compared to the December 31, 2015 translation rate of 1.38, as well as current period depreciation.




Accounts payable and accruals

(39,431)

Decrease is due to a reduction in operating activity in the first six months of 2016, a reduction in the size of the Company's new build and major retrofit program, and from the decrease in the quarter-end foreign exchange rate on translation of accounts payable and accrued liabilities in the Company's foreign subsidiaries.




Share-based compensation

1,575

Increase was mainly a result of changes in the fair value of the share-based compensation. The fair value of share-based compensation expense is impacted by both the input assumptions used to estimate the fair value, and the price of the Company's common shares during the period.




Long-term debt, including current portion

(82,253)

Decrease is due to net repayments of $40.0 million during the first half of 2016 and to the weakening of the United States dollar from December 31, 2015 to June 30, 2016.




Deferred income taxes

(30,725)

Decrease arises from the deferred tax recovery for the first half of 2016 and the effect of the quarter-end foreign exchange rate on translation of the deferred tax liability of the Company's foreign subsidiaries.




Shareholders' equity

(183,807)

Decrease is due to the impact of foreign exchange rate fluctuations on net assets of foreign subsidiaries, the net loss incurred and the amount of dividends declared in the first six months of 2016.

 

FUNDS FROM OPERATIONS AND WORKING CAPITAL


Three months ended June 30


 

Six months ended June 30

($ thousands, except per share amounts)


2016


2015

% change



2016


2015

% change

Funds from operations


36,328


69,389

(48)



91,508


179,150

(49)

Funds from operations per share

$

0.24

$

0.46

(48)


$

0.60

$

1.18

(49)

Working capital 1


(10,890)


144,239

nm



(10,890)


144,239

nm

nm - calculation not meaningful

1 Comparative figure as of December 31, 2015

 

During the three months ended June 30, 2016, the Company generated Funds from operations of $36.3 million ($0.24 per common share) compared to Funds from operations of $69.4 million ($0.46 per common share) for the three months ended June 30, 2015, a decrease of 48 percent. For the six months ended June 30, 2016, the Company generated Funds from operations of $91.5 million ($0.60 per common share) a decrease of 49 percent from $179.2 million ($1.18 per common share) for the six months ended June 30, 2015. The decrease in Funds from operations in 2016 compared to 2015 is due to the decline in demand for both North American and international oilfield services, attributed to lower global energy prices.

At June 30, 2016 the Company's working capital was a deficit of $10.9 million, compared to a working capital surplus of $144.2 million at December 31, 2015. The decrease in working capital in the first six months of 2016, was mainly related to a reduction in operating levels by the Company in 2016 and the financial statement reclassification of the portion of long-term debt (USD $100.0 million of senior unsecured notes bearing interest at 3.43 percent, due February 22, 2017) maturing within the next 12 months to current liabilities. 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 $610.0 million, of which $278.9 million was undrawn and available at June 30, 2016.

INVESTING ACTIVITIES


Three months ended June 30


Six months ended June 30

($ thousands)

2016


2015


% change


2016


2015


% change

Purchase of property and equipment

(13,402)


(48,550)


(72)


(31,276)


(129,061)


(76)

Proceeds from disposals of property and equipment

3,836


1,434


nm


7,031


3,260


nm

Net change in non-cash working capital

447


(586)


nm


(18,503)


(41,437)


(55)

Cash used in investing activities

(9,119)


(47,702)


(81)


(42,748)


(167,238)


(74)

nm -  calculation not meaningful












 

Net purchases of property and equipment for the second quarter of 2016 totaled $9.6 million (2015 - $47.1 million). Net purchases of property and equipment during the first six months of 2016 totaled $24.2 million (2015 - $125.8 million). The purchase of property and equipment relates predominantly to expenditures made pursuant to the Company's new build and major retrofit program, and for maintenance capital costs incurred in the current quarter and first half of this year.

FINANCING ACTIVITIES


Three months ended June 30


Six months ended June 30

($ thousands)

2016

2015

% change


2016

2015

% change

Net decrease in bank credit facilities

(7,233)

(42,640)

(83)


(39,963)

(72,635)

(45)

Purchase of shares held in trust

(1,265)

(5,635)

(78)


(1,548)

(6,189)

(75)

Dividends

(18,367)

(18,367)


(36,734)

(36,734)

Net change in non-cash working capital

(3,868)

(3,669)

5


(83)

(29)

nm

Cash used in financing activities

(30,733)

(70,311)

(56)


(78,328)

(115,587)

(32)

nm - calculation not meaningful








 

The Company's available bank credit facilities consist of a $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 Global Facility matures in early October 2017. The amount available under the Canadian Facility is $10.0 million or the equivalent in United States dollars.

In addition, the Company has a $20.0 million uncommitted facility, solely for issuing letters of credit, primarily used for bidding on contracts in the normal course of business.

The Company has made repayments of $40.0 million during the six months ended June 30, 2016, reducing the outstanding balance. As of June 30, 2016, the credit facilities are primarily being used to fund capital expenditures and to support international operations.

The Board of Directors of the Company has declared a third quarter dividend of $0.12 per common share to be payable on October 5, 2016 to all Common Shareholders of record as of September 20, 2016. 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, 2016, the Company added another new build ADR® drilling rig to its expansive tier one fleet worldwide, which has been contracted on a long-term contract. The Company continues to selectively add new ADR® drilling rigs to meet the increasing technical demands of its customers.

OUTLOOK

A little over two years ago, crude oil prices began a steep prolonged decline. Some stabilization and improvement in pricing was not experienced until recent months. On June 30, 2014 West Texas Intermediate was approximately US$105/barrel compared to June 30, 2016 at approximately US$47/barrel, representing a 55 percent decline in two years.

The first half of 2016 has been very volatile, with new lows of approximately $26/barrel seen in February and support appearing in the mid-$40/barrel range in the second quarter. This volatility is expected to continue as the tepid growth in the global economy may be further impacted by events such as implementation of the "Brexit" vote, increased terrorist attacks throughout the world, and the upcoming U.S. Presidential election. 

An emerging view of the crude oil and natural gas market by energy analysts suggests that energy commodity demand growth will not be as important as supply adjustment in the rebalancing. Supply and inventory adjustments are starting to buoy prices and capital investments.

Although global demand may be of secondary importance, demand for oil and gas is still expected to increase in the coming years. According to the U.S. Energy Information Administration, the United States is expected to see consumption of motor gasoline increase by 1.5 percent in 2016, which would constitute the highest annual gasoline consumption on record, beating the previous record set in 2007 by 0.1 percent. When these increases are paired with a decrease in production outside of OPEC countries, predicted by the International Energy Agency at 900,000 barrels per day, we believe prices should stabilize.

Oilfield services activities in Canada continue to be subdued, with the month of June having only an average of 65 operating rigs compared to an average of 123 in June of 2015. The warmer than average winter in Western Canada and low energy commodity prices created a drilling season that was brief and muted. The lower Canadian dollar versus the U.S. dollar has improved economics somewhat for Canadian crude oil producers, and natural gas pricing has recently shown an uptick. While capital continues to be tight for a number of exploration and production companies, equity markets continue to be open for the best performers with large positions in major resource plays.

Similar to the first quarter of 2016, the Company's Canadian fleet continues to track with industry levels. Due to the Company's shift to a deeper capability rig mix in Canada, we expect to participate favourably in increased activity if market conditions allow. However, Canadian activity could be constrained regardless of commodity price increases if pipelines and tidewater takeaway capacity are not built. The recent decision by the Canadian Federal Court of Appeal to overturn the Northern Gateway pipeline highlights the risks to the future prospects for the Canadian market.

United States crude production is down one million barrels per day from just over one year ago. However, liquids storage levels are at record-high levels and are showing limited prospects for meaningful reductions before late 2017. Similarly, natural gas storage levels are also near record highs and are projected to build through the coming injection season. Management sees mixed prospects for the next several quarters, with positive signs being the 10 percent increase in U.S. operating rigs over the past two months since the count bottomed in May, and increased levels of customer inquiries. These positives are negatively offset by ongoing competitive pressures on day rates as the U.S. rig market moves in toward a spot rate market due to the excess capacity of equipment. The Company's investment over the years into a deeper US drilling rig fleet will allow it to compete more effectively in a market recovery.

Second quarter activity levels in the Company's international operations were down approximately 30 percent from those of one year earlier, similar to the general decreases estimated by Baker Hughes for the markets in which the Company currently operates. Given recent improvements in energy commodity pricing and current activity levels representing multi-year lows, the Company expects future overall improvements in its existing international markets, particularly with respect to some larger international customers. However, the pace of change will likely be gradual, consistent with the longer-term nature of development activities in these regions. The Company generally expects market share and activity levels in its international operations for the second half of 2016 to be solid as a result of the highly efficient ADR®  type drilling rig fleet, which represents 75% of Ensign's worldwide fleet.

Priorities for the Company are unchanged from those of the past six quarters. Our continued emphases will focus on cost reductions, minimization of capital outlays, service quality optimization, close monitoring of customer credit conditions, and business process improvements. Balance sheet preservation continues to be a principal focus, together with ongoing evaluation of alternative strategies to respond to the eventual recovery in activity levels as energy markets rebalance. The Company's strategy to reinvest over $3 billion to build one of the most modern, high quality ADR® drilling rig fleets in the business continues to deliver market share and help drive well costs down, as evidenced by our customers' recent trend toward keeping our contracted fleet active in their drilling programs. At the same time, our peers with similar contract coverage are disclosing relatively large payout receipts from early terminations of contracts.

ACKNOWLEDGEMENT

Tim Lemke will be retiring as Ensign's Vice President Finance and Chief Financial Officer ("CFO") in the fourth quarter of 2016. Tim joined Ensign as Vice President Finance in early 2010 and has been a strong support to the Company during his time with us. The Company and the Board of Directors would like to thank Tim for his service. Pursuant to our established succession plan, Mike Gray will be replacing Tim as the Company's CFO. Mike joined Ensign in early 2015 as Corporate Controller after several years with another public drilling company and has the background and skills necessary to ensure a seamless transition.

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, economic and market conditions, crude oil and natural gas prices, foreign currency fluctuations, weather conditions, the Company's defense of lawsuits and the ability of oil and 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 2016 results at 2:00 p.m. MDT (4:00 p.m. EDT) on Tuesday, August 9, 2016. The conference call number is 1-647-427-7450 (in Toronto) or 1-888-231-8191 (outside Toronto). A taped recording will be available until August 16, 2016 by dialing 1-416-849-0833 (in Toronto) or 1-855-859-2056 (outside Toronto) and entering the reservation number 50623150. 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

2016


December 31

2015

(Unaudited - in thousands of Canadian dollars)





Assets





Current assets






Cash and cash equivalents


$

47,296


$

40,386


Accounts receivable


143,452


215,421


Inventories and other


61,964


71,806


Income taxes receivable


16,060


4,947

Total current assets


268,772


332,560

Property and equipment


2,994,727


3,265,580

Total assets


$

3,263,499


$

3,598,140






Liabilities





Current liabilities






Accounts payable and accruals


$

128,450


$

167,881


Dividends payable


18,367


18,367


Share-based compensation


2,926


2,073


Current portion of long-term debt


129,919


Total current liabilities


279,662


188,321

Long-term debt


581,937


794,109

Share-based compensation


1,657


935

Deferred income taxes


497,454


528,179

Total liabilities


1,360,710


1,511,544






Shareholders' equity






Share capital


169,335


169,171


Contributed surplus


3,262


2,538


Foreign currency translation reserve


239,159


332,230


Retained earnings


1,491,033


1,582,657

Total shareholders' equity


1,902,789


2,086,596

Total liabilities and shareholders' equity


$

3,263,499


$

3,598,140

 

Ensign Energy Services Inc.
Consolidated Statements of (Loss) Income




Three months ended



Six months ended




 June 30

2016


June 30

2015



June 30
2016


June 30

2015

(Unaudited - in thousands of Canadian dollars, except per share data)





















Revenue


$

175,924

$

333,800


$

434,388

$

783,089

Expenses












Oilfield services



130,561


244,975



312,828


560,417


Depreciation



81,383


61,384



175,861


125,211


General and administrative



13,878


19,291



30,508


40,805


Share-based compensation



1,631


4,684



1,206


5,476


Foreign exchange and other



6,004


(1,065)



(9,194)


17,045

Total expenses



233,457


329,269



511,209


748,954

(Loss) income before interest and
income taxes



(57,533)


4,531



(76,821)


34,135

Interest income



(19)


(95)



(359)


(193)

Interest expense



6,268


5,484



12,596


11,561

(Loss) income before income taxes



(63,782)


(858)



(89,058)


22,767

Income taxes












Current tax



(9,325)


(1,690)



(9,611)


(4,419)


Deferred tax



(14,478)


1,868



(24,557)


12,795

Total income taxes



(23,803)


178



(34,168)


8,376

Net (loss) income


$

(39,979)

$

(1,036)


$

(54,890)

$

14,391

Net (loss) income per share












Basic


$

(0.26)

$

(0.01)


$

(0.36)

$

0.09


Diluted


$

(0.26)

$

(0.01)


$

(0.36)

$

0.09

 

Ensign Energy Services Inc.
Consolidated Statements of Cash Flows



Three months ended


Six months ended



June 30
2016


June 30
2015


June 30
2016


June 30
2015

(Unaudited - in thousands of Canadian dollars)













Cash provided by (used in)













Operating activities













Net (loss) income


$

(39,979)


$

(1,036)


$

(54,890)


$

14,391

Items not affecting cash














Depreciation



81,383



61,384



175,861



125,211


Share-based compensation, net of cash paid



4,981



6,872



5,762



8,816


Unrealized foreign exchange and other



4,318



203



(10,880)



17,740


Accretion on long-term debt



103



98



212



197


Deferred income tax



(14,478)



1,868



(24,557)



12,795

Funds provided by operations



36,328



69,389



91,508



179,150

Net change in non-cash working capital



30,526



50,075



40,425



97,495

Cash provided by operating activities



66,854



119,464



131,933



276,645

Investing activities













Purchase of property and equipment



(13,402)



(48,550)



(31,276)



(129,061)

Proceeds from disposals of property and equipment



3,836



1,434



7,031



3,260

Net change in non-cash working capital



447



(586)



(18,503)



(41,437)

Cash (used in) provided by investing activities



(9,119)



(47,702)



(42,748)



(167,238)

Financing activities













Net decrease in bank credit facilities



(7,233)



(42,640)



(39,963)



(72,635)

Purchase of shares held in trust



(1,265)



(5,635)



(1,548)



(6,189)

Dividends



(18,367)



(18,367)



(36,734)



(36,734)

Net change in non-cash working capital



(3,868)



(3,669)



(83)



(29)














Cash used in financing activities



(30,733)



(70,311)



(78,328)



(115,587)














Net increase (decrease) in cash and cash equivalents



27,002



1,451



10,857



(6,180)

Effects of foreign exchange on cash and cash equivalents



(8,159)



(3,573)



(3,947)



3,430














Cash and cash equivalents – beginning of period



28,453



53,369



40,386



53,997














Cash and cash equivalents – end of period


$

47,296


$

51,247


$

47,296


$

51,247

Supplemental information














Interest paid


$

10,136


$

9,143


$

12,677


$

11,356


Income taxes paid (recovered)


$

(421)


$

(9,131)


$

1,502


$

(6,212)

 

SOURCE Ensign Energy Services Inc.

Image with caption: "Ensign Energy Services Inc. (CNW Group/Ensign Energy Services Inc.)". Image available at: http://photos.newswire.ca/images/download/20160809_C1372_PHOTO_EN_749600.jpg

For further information: Timothy Lemke, Vice President Finance and Chief Financial Officer, (403) 262-1361.

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http://www.ensignenergy.com

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