Ensign Energy Services Inc. Reports 2017 Results

CALGARY, March 5, 2018 /CNW/ – 

OVERVIEW

Revenue for the year ended December 31, 2017 was $1,000.7 million, an increase of 16 percent from 2016 revenue of $859.7 million. Revenue, net of third party, for the year ended December 31, 2017 was $873.9 million, an increase of 16 percent from Revenue, net of third party, for the year ended December 31, 2016 of $755.9 million. Adjusted EBITDA for 2017, totaled $201.8 million ($1.29 per common share), 9 percent higher than Adjusted EBITDA of $185.2 million ($1.21 per common share) for year 2016.

Net loss for the year ended December 31, 2017 was $37.6 million ($0.24 per common share), compared to net loss of $150.5 million ($0.99 per common share) for the year ended December 31, 2016. Funds flow from operations decreased 17 percent to $141.4 million ($0.90 per common share) in 2017 compared to $170.7 million ($1.12 per common share) in the prior year.

The Company's increased operating and financial results for 2017 resulted from increased demand for oilfield services caused by modest price recovery of crude oil and natural gas commodity prices. Volatile energy commodity prices significantly impact the current and future cash flows of the Company's customers and, as a result, the expected levels of future demand for oilfield services, particularly in North America. Financial results from the Company's United States and international operations were adversely impacted by translation to Canadian dollars due to the weakening of the United States dollar relative to the Canadian dollar. During 2017, a two percent decrease in the Canadian/United States dollar exchange rate negatively impacted revenues and margins generated outside Canada.

In 2017 the Company added three new-build ADR^® drilling rigs to its drilling rig fleet in the Canada and United States markets, which have been committed to long-term contracts. The Company also added one new-build well servicing rig in the United States.   

The Company declared total dividends of $0.48 per common share in 2017.

The Company exited 2017 with a working capital deficit of $342.2 million, compared to a working capital deficit of $11.2 million as at December 31, 2016. The decrease in working capital year-over-year was largely due to the Company's Global Bank Facility ($488.8 million due October 3, 2018) maturing within the next 12 months. The Company's bank credit facilities provide unused and available borrowings of $11.2 million at December 31, 2017, compared to $184.4 million at December 31, 2016, down by $173.2 million because of a reduction in the available credit under the current global facility arrangement and the repayment of Tranche A of the senior unsecured notes in February of 2017. 

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

 

2017 HIGHLIGHTS

• Revenue for 2017 was $1,000.7 million, a 16 percent increase from 2016 revenue of $859.7 million.
• Revenue amounts and percentage of total by geographic area:
• Canada – $262.8 million, 26 percent;
• United States – $459.5 million, 46 percent; and
• International – $278.4 million, 28 percent.
• Canadian drilling recorded 6,860 operating days in 2017, a 50 percent increase from 4,587 operating days in 2016. Canadian well servicing recorded 70,556 operating hours in 2017, a 14 percent increase from 61,635 operating hours in 2016.
• United States drilling recorded 10,944 operating days in 2017, a 53 percent increase from 7,152 operating days in 2016. United States well servicing recorded 90,281 operating hours in 2017, a 36 percent increase from 66,211 operating hours in 2016.
• International drilling recorded 6,106 operating days in 2017, a seven percent decrease from 6,545 operating days recorded in 2016.
• Adjusted EBITDA for 2017 was $201.8 million, a nine percent increase from Adjusted EBITDA of $185.2 million for 2016. Funds flow from operations for 2017 decreased 17 percent to $141.4 million from $170.7 million in the year prior.
• Three new ADR^® drilling rigs were added to the Company's North American equipment fleet.
• The Company declared a first quarter cash dividend on common shares of $0.12 per common share payable April 5, 2018. The Company declared total dividends of $0.48 per common share in 2017.

REVENUE AND OILFIELD SERVICES EXPENSE

 

Revenue for the year ended December 31, 2017 totaled $1,000.7 million, a 16 percent increase from the year ended December 31, 2016 of $859.7 million. The increase in revenue was a direct result of the increased demand for oilfield services resulting in higher equipment utilization rates which was offset by lower revenue rates. The Company recorded revenue of $270.0 million for the three months ended December 31, 2017, a 15 percent increase from the $234.0 million recorded in the three months ended December 31, 2016.

Revenue, net of third party, for the year ended December 31, 2017 totaled $873.9 million, an increase of 16 percent from the previous year of $755.9 million. As a percentage of Revenue, net of third party, gross margin for the year ended December 31, 2017 was 27.6 percent (2016 – 31.4 percent). As a result of slow recovery of energy prices, the Company has reduced its revenue rate and operating cost structure and made changes to reduce the cost of its administrative and supervisory structure. Revenue, net of third party, for the three months ended December 31, 2017 increased 18 percent to $242.0 million from $204.5 million in the fourth quarter of 2016.

The cautious optimism regarding oil and natural gas commodity prices increased demand for oilfield services during 2017, which resulted in higher equipment utilization rates; however, revenue rates declined during prior years and have yet to increase with demand. Financial results from the Company's United States and international operations were negatively impacted on translation, as the weaker United States dollar relative to the Canadian dollar in 2017 compared to the prior year further increased the impact of certain of the revenue rate declines experienced during the year.

CANADIAN OILFIELD SERVICES

 

The Company recorded revenue of $262.8 million in Canada for the year ended December 31, 2017, an increase of 18 percent from $222.8 million recorded for the year ended December 31, 2016. Revenue generated in Canada increased five percent to $64.3 million for the three months ended December 31, 2017, from $61.1 million for the three months ended December 31, 2016. During the year ended December 31, 2017, Canadian revenues were 26 percent of the Company's revenue, consistent with the prior year, and in the fourth quarter of 2017, Canadian revenues accounted for 24 percent of the total revenue (2016 – 26 percent) During 2017 the Company received $1.3 million in shortfall and termination revenue in Canada compared to $17.1 million in 2016.

For the year ended December 31, 2017, the Company recorded 6,860 drilling days in Canada, compared to 4,587 drilling days for the year ended December 31, 2016, an increase of 50 percent. During the fourth quarter of 2017 the Company recorded 1,649 operating days in Canada, an increase of 30 percent from 1,271 operating days recorded during the fourth quarter of the prior year. Well servicing hours increased by fourteen percent to 70,556 operating hours compared with 61,635 operating hours for the year ended December 31, 2016. Well servicing hours in the fourth quarter of 2017 were up 11 percent to 16,947 compared to the fourth quarter of the prior year of 18,967.

Demand for the Company's Canadian oilfield services was higher compared to 2016 due largely to a modest increase in oil and natural gas commodity prices. The increase in demand was offset by lower revenue rates and lower short fall revenue earned in 2017 compared to 2016. During 2017, the Company added two new-build ADR^® drilling rigs to the Canadian fleet and decommissioned one drilling rig.

UNITED STATES OILFIELD SERVICES

 

For the year ended December 31, 2017, revenue of $459.5 million was recorded in the United States, an increase of 36 percent from the $338.0 million recorded in the prior year. Revenues recorded in the United States were $129.2 million in the fourth quarter of 2017, a 41 percent increase from the $91.9 million recorded in the corresponding period of the prior year. The Company's United States operations accounted for 46 percent of the Company's revenue in 2017 (2016 – 44 percent) and were the largest contributor to the Company's consolidated revenues in 2017, consistent with the prior year. During the fourth quarter of 2017 United States operations accounted for 48 percent of the Company's revenue (2016 – 39 percent), also the largest contributor to the Company's consolidated revenues and consistent with the prior year.

In the United States, drilling operating days increased by 53 percent from 7,152 operating days in 2016 to 10,944 operating days in 2017. For the year ended December 31, 2017 well servicing activity increased 36 percent to 90,281 operating hours from 66,211 operating hours in 2016. During the fourth quarter drilling operating days increased by 48 percent from 2,067 operating days in 2016 to 3,066 operating days in 2017. For the fourth quarter ended December 31, 2017 well servicing activity increased 25 percent from 18,976 operating hours in 2016 to 23,644 operating hours.

Overall operating and financial results for the Company's United States operations were positively impacted by a significant increase in demand for oilfield services due primarily to renewed optimism regarding oil and natural gas commodity prices. The increased activity and associated operating financial results increase were partially offset by a weakening of the United States dollar, which decreased by two percent versus the Canadian dollar when compared to 2016. 

During 2017, the Company added one new-build ADR^® drilling rig and one new-build well servicing rig to the United States fleet. 

INTERNATIONAL OILFIELD SERVICES

 

 

The Company's international revenues for the year ended December 31, 2017, decreased 7 percent to $278.4 million from $298.9 million recorded in the year ended December 31, 2016. International revenue totaled $76.6 million in the fourth quarter of 2017, a 5 percent decrease from $81.0 million recorded in the corresponding period of the prior year. The Company's international operations contributed 28 percent of the Company's revenue in 2017 (2016 – 35 percent).  The Company's international operations contributed 28 percent of the Company's fourth quarter revenue in 2017 (2016 – 35 percent).

International operating days totaled 6,106 compared to 6,545 drilling days for the year ended December 31, 2017, a decrease of seven percent compared to the year prior. International operating days for the three months ended December 31, 2017 decreased 8 percent to 1,547 compared to 1,690 operating days in the fourth quarter of 2016.

Similar to the Company's United States operations, international operations were negatively impacted by the weakening United States dollar year-over-year in 2017, versus the Canadian dollar, on translation into Canadian dollars for reporting purposes compared to 2016. International operations incurred a decrease in activity as certain drilling rigs on long-term contracts completed their term and were not renewed. Moreover, the decline in crude oil prices over the past several years has been particularly challenging for Venezuela due to the heavy economic reliance on energy revenues in that country.

DEPRECIATION

 

Depreciation expense for the year decreased by seven percent to $325.8 million compared with $349.9 million for the year ended 2016. Depreciation expense totaled $91.7 million for the fourth quarter of 2017 compared with $90.1 million for the fourth quarter of 2016, an increase of two percent. Depreciation expense was lower in the year ended December 31, 2017 when compared to the year ended December 31, 2016, due to certain operating assets having become fully depreciated in which case no further depreciation expense is required. Furthermore, the impacts of a weaker United States dollar compared to the Canadian dollar on non-Canadian domiciled fixed assets decreased the expense.

GENERAL AND ADMINISTRATIVE EXPENSE

 

For the year ended December 31, 2017, general and administrative expense totaled $39.2 million (3.9 percent of revenue) compared to $52.5 million (6.1 percent of revenue) for the year ended December 31, 2016, a decrease of 25 percent. General and administrative expense decreased 30 percent to $8.4 million (3 percent of revenue) for the fourth quarter of 2017. The year over year decrease in general and administrative expense reflect the Company's initiatives to reduce costs in reaction to the oil service industry decline and lower oil and natural gas commodity prices, which began in 2015 and are ongoing.

 

SHARE-BASED COMPENSATION

 

Share-based compensation expense arises from the Black-Scholes valuation 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 year ended December 31, 2017, share-based compensation was an expense of $0.7 million compared with an expense of $10.3 million for the year ended December 31, 2016. For the three months ended December 31, 2017, share based compensation was an expense of $1.0 million compared with an expense of $5.2 million recorded for the fourth quarter of 2016. The share-based compensation expense for the year ended December 31, 2017 was a result of changes in the fair value of the share-based compensation liability and was impacted by the amortization of stock options which was offset by additional expenses in 2017 related to Performance Share Units (PSUs) issued under a long-term incentive plan implemented in 2017. 

 

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 $6.47 at December 31, 2017, compared with $9.38 at December 31, 2016.

 

During 2017 the Company granted PSUs to certain officers and employees of the Company to participate in the growth and development of the Company and to promote further alignment of interests between employees and the shareholders. PSUs are subject to the Company's pre-established performance metrics with a three year performance period. Each PSU granted permits the holder to receive a cash payment equal to the fair market value of a share as of the maturity date, adjusted for a performance multiplier. PSU holders are entitled to share in dividends which are credited as additional PSUs at the dividend record date.

 

Included in net earnings for the year ended December 31, 2017 is an expense of $1.1 million (2016 – $nil). This was calculated using the trailing ten day volume weighted average share price of the Company's underlying common shares, as the PSUs have no exercise price, are adjusted for performance factors and are subject to a two percent cap relative to Adjusted EBITDA in the final year of their three year term based on certain financial performance metrics.

 

INTEREST EXPENSE

 

Interest is incurred on the Company's $500.0 million global revolving credit facility (the “Global Bank Facility”) and the United States dollar $200.0 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.

Due to payment delays for work performed in Venezuela, the Company recognized a discount on its receivable in the amount of $4.6 million within interest expense. The receivable is discounted at 15 percent and assumes nominal collections in the first year with even collections thereafter over a five year period. 

Interest expense increased by 35 percent for the year ended December 31, 2017 compared to the same period in 2016 as a result of borrowings of an additional $42.2 million on the bank credit facilities in fiscal 2017, an increase in the interest rate and a discount applied on the Venezuela receivable.  For the three months ended December 31, 2017, interest expense increased 43 percent to $14.5 million compared to the comparative period in 2016.

FOREIGN EXCHANGE AND OTHER

 

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.

INCOME TAXES

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The effective income tax rate for the year ended December 31, 2017 was 80.0 percent compared with 26.4 percent for the year ended December 31, 2016. The United States passed comprehensive tax reform under the Tax Cut and Jobs Act (“Tax Act”) on December 22, 2017. The Federal corporate income tax rate will drop from 35% to 21% beginning January 1, 2018. Due to these changes, the Company has revalued its deferred tax liability as at December 31, 2017 and the result of this revaluation was a deferred tax recovery for the year ended December 31, 2017 of $109.3 million to reduce the deferred tax liability balance.

 

FUNDS FLOW FROM OPERATIONS AND WORKING CAPITAL

 

For the year ended December 31, 2017, the Company generated Funds flow from operations of $141.4 million ($0.90 per common share) a decrease of 17 percent from $170.7 million ($1.12 per common share) for the year ended December 31, 2016. The Company generated Funds flow from operations of $12.2 million ($0.07 per common share) in the three months ended December 31, 2017, a 75 percent decrease compared with the three months ended December 31, 2016, of $48.9 million ($0.32 per common share). The decrease in Funds flow from operations in 2017 compared to 2016 is due to the impact of foreign exchange.

 

As at December 31, 2017 the Company's working capital was a deficit of $342.2 million, compared to a working capital deficit of $11.2 million at December 31, 2016. The decrease in working capital in 2017 was mainly related to the financial statement reclassification of the portion of long-term debt ($488.8 million of the Global Bank Facility, due October 3, 2018) 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 $500.0 million, of which $11.2 million was undrawn and available at December 31, 2017.  In addition, the Company has a $50 million accordion to be included in the existing revolving global facilities but not yet exercised.

 

INVESTING ACTIVITIES

 

Net purchases of property and equipment during the fiscal year ending 2017 totaled $117.7 million (2016 – $29.1 million) and $25.2 million for the fourth quarter (2016 – net proceeds of $2.8 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 during the year. The Company completed a total of three new-build ADR^® drilling rigs for the Canadian and United States fleets that commenced work under long term contracts and one new-build well servicing rig for the United States.

 

FINANCING ACTIVITIES

 

The Global Bank 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 $500.0 million Canadian dollars. The Global Facility matures in early October 2018.

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 a $50 million accordion included in the existing Global Facility, but this has not yet been exercised. The Company also finalized a waiver with its lenders that allows the Company to maintain Global Facility unsecured.

The Company made a net withdrawal on the Global Facility of $42.2 million during the year ended December 31, 2017, increasing the outstanding long-term debt balance. As of December 31, 2017, the Global Facility is primarily being used to fund capital expenditures.

During the year ended December 31, 2017, the Board of Directors of the Company cancelled a Dividend Reinvestment Plan (the “DRIP”). The DRIP provided eligible holders of common shares with an option to elect to reinvest their dividends in common shares of the Company at a discount of up to five percent of the average market price on each dividend payment date.  

NEW BUILDS AND MAJOR RETROFITS

During the year ended December 31, 2017, the Company added two new-build ADR^® drilling rigs in Canada and one new-build ADR^® drilling rig in the United States. The additions to the drilling fleet have been contracted on long-term contracts. One new-build well servicing rig was added in the United States. The Company continues to selectively add new ADR^® drilling rigs to meet the increasing technical demands of its customers.

OUTLOOK

Industry Overview

Signs of a modest recovery for the industry started to show in 2017. In the first half of 2017 activity picked up substantially compared to 2016 before leveling off in the latter half 2017. Oil prices continued to be volatile, with the price of WTI fluctuating between the low $40's and mid $60's throughout the year and early 2018.

The rebalancing of the oil markets continues to date in 2018 with the expectation that world GDP and oil demand will increase in the current year and beyond, and that OPEC and non-OPEC members, led by Russia, remain supportive of the oil production cuts. This optimism is overshadowed by the expected increase in oil production from the United States. Until the market overall can gain a proper understanding of the United States production capability and sustainability, there appears to be a ceiling on oil prices as additional production could impact oil supply and pricing. 

In 2018 it is generally expected that oil and natural gas producers will focus more on financial returns. This will impact where and when capital investments are deployed. Areas like the United States expected to continue to see capital deployment in contrast to Canada where ongoing uncertainty of provincial and federal government policies and market pricing are expected to continue impacting the oil and natural gas industry. In addition, companies will continue to seek at contractors that capable of providing drilling and operational efficiencies that will help reduce total well costs. The challenge for oil and natural gas drilling contractors will be how to share in the financial gains that they are creating from these efficiencies.  

Canadian Activity

The AECO natural gas price, oil price differentials and takeaway capacity will likely continue to dominate the headlines in 2018 and will likely continue to cast a shadow over industry activity. Absent any major announcements or volatility in commodity pricing, 2018 drilling activity, is expected to be similar to late 2017. With the corporate tax law changes in the USA that became effective in 2018, there is a possibility for customers with assets in the North America will focus on United States activity before deploying capital in Canada.

United States Activity

In comparison to the Canada, the United States market is much more optimistic for 2018. Analysts are expecting the rig count to continue to grow in 2018, with some expecting between 50 to 100 additional drilling rigs being activated in 2018 with additional rig deployments into 2019. The tightness and continued expected tightness in the AC 1500 horse power drilling rig category is expected to place upward pressure on rates for that class of assets that could trickle down to lower specification drilling rigs. At the current pricing levels there is minimal expectation that new builds will be introduced into the market during 2018, which may allow for pricing to begin to normalize and lower spec assets to be activated. In 2017, the market experienced upgrades and modifications to drilling rigs. The magnitude of such upgrades is expected to decline in 2018 as the assets that readily could be upgraded have been completed already and the remaining rigs that can be upgraded will involve a substantial capital expenditure, which will require increased pricing and/or longer contract terms to be economical.

The reduced corporate tax rate and changes to tax regulations in the United States have and are likely to continue creating incentives for capital to be allocated to the United States. It is expected that 2018 operating activity and pricing in the United States in this market is expected to be higher than 2017.

International Activity

The Company's expectation for its International segment is contemplates some growth and continued reduction in costs. The Australian operations appear to have bottomed in 2017 with activity looking to increase in 2018, especially the latter half of 2018. Activity in the Middle East is expected to remain relatively steady with the potential for some rig activations toward the latter half of 2018 as well. There is increased potential that Argentina may add additional drilling rigs and the Company is expected to participate in certain tenders for work in 2018 and beyond. Venezuela as a country continues to have significant social, economical and political challenges and those challenges are expected to continue for some time. The Company is closely monitoring business activities in Venezuela and will react as deemed appropriate. The Company continues to operate in Venezuela and is expected to do so into 2018 and beyond. 

General Activity

The Company expects the overall market to be lower for longer. The modest recovery to date has been slow and steady as expected. The Company continues to review capital projects with returns on the forefront and only plans to proceed with projects that are expected to provide the appropriate returns for shareholders. The cost control and organizational changes that the Company has implemented during the past three years have resulted in reduced general and administrative costs that will be scalable into the future. The Company will continue to look at ways to reduce costs or increase revenue and will be focused on returns for its shareholders.

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 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. For a more detailed description of the risk factors and uncertainties that face the Company and the industry in which it operates, refer to the “Risks and Uncertainties” section of our current Management's Discussion & Analysis and the section titled “Risk Factors” in our current Annual Information Form.

CONFERENCE CALL

A conference call will be held to discuss the Company's fourth quarter 2017 results at 2:00 p.m. MDT (4:00 p.m. EDT) on Monday, March 5, 2018. 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 March 12, 2018 by dialing 1-416-849-0833 (in Toronto) or 1-855-859-2056 (outside Toronto) and entering the reservation number 39418764. 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

 

 

Ensign Energy Services Inc.
Consolidated Statements of Loss

 

 

Ensign Energy Services Inc.
Consolidated Statements of Cash Flows

         

SOURCE Ensign Energy Services Inc.

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