Ensign Energy Services Inc. Reports 2010 Second Quarter Earnings
CALGARY, Aug. 9 /CNW/ -
Overview
Ensign Energy Services Inc. (the "Company") recorded revenue for the three months ended June 30, 2010 of $257.6 million, a 14 percent increase from the $226.0 million recorded for the second quarter of the prior year. The Company recorded revenue of $610.4 million for the six months ended June 30, 2010, a three percent decrease from revenue of $626.4 million for the six months ended June 30, 2009. The Company's net income for the second quarter of 2010 was $9.3 million ($0.06 per share), a decline of 30 percent compared with net income of $13.2 million ($0.09 per share) for the second quarter of 2009. Net income for the six months ended June 30, 2010 totalled $49.3 million ($0.32 per share), a decrease of 43 percent from net income of $85.9 million ($0.56 per share) recorded in the first six months of 2009.
In spite of overall increased levels of operating activity in the second quarter and first half of 2010 compared to the corresponding periods of the prior year, the Company's financial results declined compared to 2009. The reduced financial results are a result of lower revenue rates in certain geographic segments, temporarily higher operating costs associated with the deployment of additional equipment and the seasonality impact of spring conditions in Canada that limit or prevent the movement of oilfield services equipment. Additionally, the reported results from the Company's United States and international segments were negatively impacted by the stronger Canadian dollar compared to the prior year. In the six months ended June 30, 2010, the Canadian dollar strengthened by approximately 14 percent compared to the United States dollar when compared to the same period in 2009.
Gross margin decreased in the second quarter of 2010 to 23.2 percent compared to 31.0 percent recorded in the second quarter of 2009. For the six months ended June 30, 2010, gross margin was 27.4 percent compared to 33.6 percent for the same period in 2009. Gross margin deterioration was attributable to generally lower revenue rates in certain geographic segments and higher operating costs in Canada. Canadian costs included major maintenance expenditures incurred to activate additional oilfield services equipment needed to meet customer demand in the near term.
Working capital at June 30, 2010 was $125.5 million, compared with $107.9 million at December 31, 2009. Positive working capital and no long-term debt means that the balance sheet remains a source of strength for the Company.
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FINANCIAL AND OPERATING HIGHLIGHTS
($ thousands, except per share data and operating information)
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Three months ended Six months ended
June 30 June 30
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% %
2010 2009 change 2010 2009 change
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Revenue 257,578 226,010 14 610,417 626,430 (3)
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EBITDA(1) 45,710 60,151 (24) 140,653 188,566 (25)
EBITDA per
share(1)
Basic $ 0.30 $ 0.39 (23) $ 0.92 $ 1.23 (25)
Diluted $ 0.30 $ 0.39 (23) $ 0.92 $ 1.23 (25)
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Adjusted net
income(2) 8,387 23,083 (64) 48,211 93,233 (48)
Adjusted net
income per
share(2)
Basic $ 0.05 $ 0.15 (67) $ 0.31 $ 0.61 (49)
Diluted $ 0.05 $ 0.15 (67) $ 0.31 $ 0.61 (49)
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Net income 9,305 13,212 (30) 49,335 85,898 (43)
Net income per
share
Basic $ 0.06 $ 0.09 (33) $ 0.32 $ 0.56 (43)
Diluted $ 0.06 $ 0.09 (33) $ 0.32 $ 0.56 (43)
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Funds from
operations(3) 43,592 61,924 (30) 130,888 143,929 (9)
Funds from
operations
per share(3)
Basic $ 0.28 $ 0.40 (30) $ 0.85 $ 0.94 (10)
Diluted $ 0.28 $ 0.40 (30) $ 0.85 $ 0.94 (10)
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Weighted average
shares - basic
(000s) 153,228 153,144 - 153,228 153,140 -
Weighted average
shares -
diluted (000s) 153,229 153,707 - 153,297 153,383 -
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Drilling
Number of
marketed
rigs
Canada
Conventional 146 158 (8) 146 158 (8)
Oil sands
coring/
coal-bed
methane 28 28 - 28 28 -
United States 80 77 4 80 77 4
International(4) 58 48 21 58 48 21
Operating days
Canada 2,051 1,264 62 8,605 6,400 34
United States 3,760 2,121 77 7,022 4,996 41
International 2,480 1,856 34 4,708 3,824 23
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Well Servicing
Number of marketed
rigs/units
Canada 112 108 4 112 108 4
United States 20 18 11 20 18 11
Operating hours
Canada 25,504 20,098 27 63,784 51,747 23
United States 12,041 6,843 76 23,545 16,379 44
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(1) EBITDA is defined as "income before interest expense, income taxes,
depreciation and stock-based compensation (recovery)/expense".
Management believes that in addition to net income, EBITDA and 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 or
how the results are impacted by the accounting standards associated
with the Company's stock-based compensation plan. EBITDA and EBITDA
per share as defined above are not recognized measures under Canadian
generally accepted accounting principles and accordingly may not be
comparable to measures used by other companies.
(2) Adjusted net income is defined as "net income before stock-based
compensation (recovery)/expense, tax-effected using an income tax
rate of 35%". 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 the
accounting standards associated with the Company's stock-based
compensation plan, net of income taxes. Adjusted net income and
adjusted net income per share as defined above are not recognized
measures under Canadian generally accepted accounting principles 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 shareholders and potential investors with 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 Canadian generally accepted accounting
principles and accordingly may not be comparable to similar measures
used by other companies.
(4) Includes workover rigs.
Revenue and Oilfield Services Expense
Three months ended Six months ended
June 30 June 30
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% %
($ thousands) 2010 2009 change 2010 2009 change
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Revenue
Canada 66,799 52,108 28 245,677 233,222 5
United States 115,635 94,617 22 219,590 222,321 (1)
International 75,144 79,285 (5) 145,150 170,887 (15)
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257,578 226,010 14 610,417 626,430 (3)
Oilfield services
expense 197,927 155,993 27 443,095 415,790 7
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59,651 70,017 (15) 167,322 210,640 (21)
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Gross margin 23.2% 31.0% 27.4% 33.6%
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The Company recorded revenue of $257.6 million in the second quarter of 2010, an increase of 14 percent over $226.0 million recorded in the second quarter of 2009. Revenue was $610.4 million for the six months ended June 30, 2010, a three percent decrease from $626.4 million recorded in the six months ended June 30, 2009. As a percentage of revenue, gross margin fell to 23.2 percent for the second quarter of 2010 (2009 - 31.0 percent), and 27.4 percent for the six months ended June 30, 2010 (2009 - 33.6 percent).
The increased revenue in North America was a reflection of stronger demand for oilfield services equipment as evidenced by the increased operating days for the three months ended June 30, 2010. While operating activity levels have also increased in the six months ended June 30, 2010 relative to the comparable period of 2009, pricing pressures continue to persist resulting in slightly overall lower revenues for the first half of 2010 compared to the prior year. Spot prices for uncontracted oilfield services equipment appear to have bottomed in the second quarter of 2010 with the increased activity levels in most regions.
Further, the financial results generated by the United States and international operations in the three and six month periods ended June 30, 2010 were negatively impacted upon translation to Canadian dollars due to the strengthening of the Canadian dollar, compared to the corresponding periods in 2009.
Canadian Oilfield Services
Revenue generated in Canada increased 28 percent to $66.8 million for the three months ended June 30, 2010, from $52.1 million for the three months ended June 30, 2009. For the six months ended June 30, 2010, revenue increased five percent to $245.7 million compared to $233.2 million for the same period in 2009. In the second quarter of 2010, Canadian revenues accounted for 26 percent of total revenue (2009 - 23 percent), and during the six months ended June 30, 2010, Canadian revenues were 40 percent of total revenue (2009 - 37 percent).
Canadian operating and financial results are affected by seasonality in the second quarter, when spring break-up and wet weather conditions hinder the Company's ability to move heavy equipment and to gain access to Canadian drilling locations. Generally, the demand for Canadian oilfield services improved gradually throughout the first half of 2010 as crude oil prices stabilized and operators focused drilling efforts on oil plays and liquids rich natural gas projects. Operating activity levels recorded in Canada in the second quarter of 2010 exceeded the Company's initial estimates and surpassed the total operating days recorded in the second quarter of 2009.
Drilling days recorded by the Canadian division in the second quarter of 2010 increased 62 percent from the comparable period of the prior year. During the six months ended June 30, 2010, Canadian drilling days increased 34 percent from the same period of the prior year. Similarly, Canadian well servicing hours increased by 27 percent in the second quarter of 2010 and by 23 percent in the six months ended June 30, 2010 compared to the corresponding periods in the prior year.
The Canadian financial results in the three and six month periods ended June 30, 2010 were negatively impacted by a decrease in pricing compared to the same periods of the prior year. These pricing pressures were partially offset by improved Canadian operating levels in the first half of 2010 compared to 2009. Further, during the first half of 2010, higher operating and maintenance costs were incurred as the Company prepared additional equipment to return to work in anticipation of growing levels of customer demand for oilfield services through the remainder of the year.
United States Oilfield Services
The Company's United States operations recorded revenue of $115.6 million in the second quarter of 2010, a 22 percent increase from $94.6 million recorded in the second quarter of 2009. During the six months ended June 30, 2010, revenue of $219.6 million was recorded, comparable to revenue of $222.3 million recorded in same period of 2009. The United States segment accounted for 45 percent of the Company's revenue in the second quarter of 2010 (2009 - 42 percent), and 36 percent of the Company's revenue for the six months ended June 30, 2010 (2009 - 36 percent).
The number of drilling days recorded by the United States segment in the second quarter of 2010 increased 77 percent from the same period of the prior year. United States drilling days for the first six months of 2010 increased 41 percent from the prior year. United States well servicing hours in the second quarter of 2010 were up 76 percent compared to the prior year and well servicing hours for the first half of 2010 were up 44 percent compared to the first half of 2009. The increase in United States operating activity experienced by the Company is consistent with the overall increase seen in the United States industry's land drilling rig count through the first half of 2010.
The increase in revenue recorded by the Company in the United States in the second quarter of 2010 compared to the second quarter of 2009 is mainly attributable to improved levels of operating activity in the unconventional natural gas plays and in crude oil focused areas, such as North Dakota and California. The impact of improved activity levels was partially offset by lower revenue rates and the translational impact of a weakening United States dollar relative to the Canadian dollar. The average Canadian/United States dollar exchange rate at which the Company's United States results were translated to Canadian dollars for presentation purposes was 1.034 for the first half of 2010 compared to 1.206 for the first half of 2009, a 14 percent decrease.
International Oilfield Services
The Company's international operations recorded revenue of $75.1 million in the second quarter of 2010, a five percent decrease from the $79.3 million recorded in the second quarter of 2009. International revenues for the six months ended June 30, 2010 decreased by 15 percent to $145.1 million from $170.9 million recorded in the corresponding period of the prior year. Similar to the United States segment, the decrease in revenues is mainly attributable to the weakening United States dollar relative to the Canadian dollar during the first half of 2010 compared to the first half of 2009.
The international segment contributed 29 percent of the Company's revenue in the second quarter of 2010 (2009 - 35 percent). During the six months ended June 30, 2010, international revenue accounted for 24 percent of the Company's revenue (2009 - 27 percent). Drilling days recorded by the Company's international operations in the quarter ended June 30, 2010 increased 34 percent from the second quarter of 2009, while drilling days recorded in the six months ended June 30, 2009 increased 23 percent from the same period in 2009.
Consistent with the past few quarters, certain regions of the Company's international segment are continuing to meet expectations and such positive financial results are being offset by continued challenges in the Latin American market.
Depreciation
Three months ended Six months ended
June 30 June 30
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% %
($ thousands) 2010 2009 change 2010 2009 change
-------------------------------------------------------------------------
Depreciation 31,180 22,854 36 65,430 51,794 26
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The Company uses the unit of production method for calculating depreciation for the majority of its property and equipment. Depreciation expense totalled $31.2 million for the second quarter of 2010 compared with $22.9 million for the second quarter of 2009. Depreciation expense increased to $65.4 million for the six months ended June 30, 2010 compared with $51.8 million for the six months ended June 30, 2009.
The increase in depreciation expense is consistent with the increase in the operating days during the three months and six months ended June 30, 2010 compared to the operating days in the same periods of 2009. Further, depreciation increased due to the utilization of recently constructed higher value equipment added to the Company's fleet over the course of 2009 and 2010.
General and Administrative Expense
Three months ended Six months ended
June 30 June 30
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% %
($ thousands) 2010 2009 change 2010 2009 change
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General and
administrative 12,634 13,375 (6) 24,013 27,317 (12)
% of revenue 4.9% 5.9% 3.9% 4.4%
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General and administrative expense decreased by six percent to $12.6 million (4.9 percent of revenue) for the second quarter of 2010 compared with $13.4 million (5.9 percent of revenue) for the second quarter of 2009. For the six months ended June 30, 2010, general and administrative expense totalled $24.0 million (3.9 percent of revenue), compared with $27.3 million (4.4 percent of revenue) for the six months ended June 30, 2009, a decline of 12 percent. The reduction in general and administrative expense reflects the ongoing efforts of the Company to reduce fixed costs and the translational impact of a weaker United States dollar on United States and international administrative expenses.
Stock-Based Compensation
Three months ended Six months ended
June 30 June 30
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% %
($ thousands) 2010 2009 change 2010 2009 change
-------------------------------------------------------------------------
Stock-based
compensation (1,413) 15,186 (109) (1,729) 11,284 (115)
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Stock-based compensation expense arises from the intrinsic value accounting associated with the Company's stock option plan, whereby the liability associated with stock-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 quarter-ended ended June 30, 2010, stock-based compensation recovery was $1.4 million compared with an expense of $15.2 million recorded in the second quarter of 2009. For the six months ended June 30, 2010, stock-based compensation recovery was $1.7 million compared with an expense of $11.3 million in the same period of 2009. These recoveries result from a decline in the price of the Company's common shares over these periods, net of the impact of additional granting and vesting of stock options. The closing price of the Company's common shares was $12.52 at June 30, 2010 compared with $14.70 at March 31, 2010 and $15.00 at December 31, 2009.
Interest Expense
Three months ended Six months ended
June 30 June 30
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% %
($ thousands) 2010 2009 change 2010 2009 change
-------------------------------------------------------------------------
Interest 445 197 126 1,088 926 17
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Interest is incurred on the Company's $200 million global revolving credit facility at prime interest rates or bankers' acceptance rates/LIBOR plus 0.75 percent.
Other
Three months ended Six months ended
June 30 June 30
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% %
($ thousands) 2010 2009 change 2010 2009 change
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Other expense
(income) 1,307 (3,509) (137) 2,656 (5,243) (151)
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This amount consists primarily of foreign exchange gains and losses on the translation of the Australian operations from Australian dollars to United States dollars. The Australian dollar weakened relative to the United States dollar in the first six months of 2010 compared to the same period in 2009.
Income Taxes
Three months ended Six months ended
June 30 June 30
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% %
($ thousands) 2010 2009 change 2010 2009 change
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Current income
tax 1,673 (7,425) (123) 8,637 38,253 (77)
Future income
tax 4,520 16,127 (72) 17,892 411 4,253
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6,193 8,702 (29) 26,529 38,664 (31)
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Effective income
tax rate (%) 40.0% 39.7% 35.0% 31.0%
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The effective income tax rate for the second quarter of 2010 was 40.0 percent, consistent with the 39.7 percent rate in the second quarter of 2009. For the six months ended June 30, 2010, the effective income tax rate was 35.0 percent compared with 31.0 percent for the six months ended June 30, 2009.
The Company's effective tax rate on a quarter-over-quarter basis increased slightly due the cumulative effect of tax rates on income in higher rate jurisdictions. Current income tax increased due to increased taxable income in both Canada and the United States. The effective income tax rate for the six months ended June 30, 2009 is lower due to the impact of future income tax recoveries in the Canadian partnerships. During the six months ended June 30, 2010, the effective income tax rate increased due to a greater proportion of income being generated in foreign jurisdictions that have higher income tax rates.
Financial Position
The following chart outlines significant changes in the consolidated balance sheet from December 31, 2009 to June 30, 2010:
($ thousands) Change Explanation
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Cash and cash equivalents 15,325 See consolidated statement of
cash flows.
Accounts receivable (10,467) Decrease is consistent with a
decrease in operating activity
levels in the second quarter of
2010 compared with the fourth
quarter of 2009.
Income taxes recoverable (4,895) Decrease due to the current income
tax provision for the period, net
of tax instalments.
Inventory and other (6,726) Decrease due to normal course use
of consumables and spare parts.
Property and equipment 28,214 Increase due to the new build
construction program and the
impact of foreign exchange
fluctuations on the consolidation
of the Company's foreign self-
sustaining subsidiaries, offset
by depreciation.
Long-term note receivable (292) Decrease due to the partial
collection of the long-term note
receivable.
Accounts payable and (10,985) Decrease is consistent with a
accrued liabilities decrease in operating activity
levels in the second quarter of
2010 compared with the fourth
quarter of 2009.
Operating lines of credit (12,402) Decrease due to net repayments of
the operating lines of credit.
Stock-based compensation (1,769) Decrease due to a reduction in the
price of the Company's common
shares as at June 30, 2010
compared with December 31, 2009.
Dividends payable 4 Increase due to a slight increase
in the number of outstanding
common shares.
Future income taxes 14,280 Increase due to a higher estimated
tax depreciation in Canada.
Shareholders' equity 32,031 Increase due to net income for the
period and the impact of foreign
exchange rate fluctuations on net
assets of foreign self-sustaining
subsidiaries offset by the amount
of dividends declared in the
period.
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Funds from Operations and Working Capital
Three months ended Six months ended
June 30 June 30
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($ thousands, except % %
per share data) 2010 2009 change 2010 2009 change
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Funds from
operations 43,592 61,924 (30) 130,888 143,929 (9)
Funds from
operations
per share $ 0.28 $ 0.40 (30) $ 0.85 $ 0.94 (10)
Working
capital(1) 125,515 107,894 16 125,515 107,894 16
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(1) Comparative figure as of December 31, 2009.
During the three months ended June 30, 2010, the Company generated funds from operations of $43.6 million ($0.28 per common share) compared with funds from operations of $61.9 million ($0.40 per common share) for the three months ended June 30, 2009, a decrease of 30 percent. Funds from operations totalled $130.9 million ($0.85 per common share) in the first six months of 2010, a decrease of nine percent compared to $143.9 million of funds from operations ($0.94 per common share) generated in the six months ended June 30, 2009. The decrease in funds from operations in both the second quarter of 2010 and the six months ended June 30, 2010 compared to the same periods in 2009 is due to lower margin levels resulting from a continued over-supply of oilfield services equipment.
At June 30, 2010, the Company's working capital totalled $125.5 million, compared to $107.9 million at December 31, 2009. The Company's strong working capital position and existing credit facilities are expected to adequately support its future operations and capital expansion initiatives. Existing credit facilities provide for total borrowings of $210.0 million, of which approximately $36.3 million was available as at June 30, 2010. The Company continues to operate with no long-term debt and exited the second quarter with a strong balance sheet.
Investing Activities
Three months ended Six months ended
June 30 June 30
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% %
($ thousands) 2010 2009 change 2010 2009 change
-------------------------------------------------------------------------
Net purchase of
property and
equipment (62,193) (26,688) 133 (87,745) (72,782) 21
Net change in
non-cash
working capital (393) (38,695) (99) 3,090 (18,865) (116)
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Cash used in
investing
activities (62,586) (65,383) (4) (84,655) (91,647) (8)
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Net purchases of property and equipment during the second quarter of 2010 totalled $62.2 million compared to $26.7 million during the second quarter of the prior year. Net purchases of property and equipment for the six months ended June 30, 2010 totalled $87.7 million compared with $72.8 million for the six months ended June 30, 2009. The net purchase of property and equipment relates predominantly to the Company's most recent new build program. Additional details regarding the new build program are provided in the "New Builds" section below.
Financing Activities
Three months ended Six months ended
June 30 June 30
-------------------------------------------------------
% %
($ thousands) 2010 2009 change 2010 2009 change
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Net decrease in
operating lines
of credit (2,234) (2,761) (19) (12,402) (39,263) (68)
Net decrease in
promissory note
payable - (20,000) (100) - (20,000) (100)
Issue of capital
stock - 152 (100) - 152 (100)
Dividends (13,408) (13,018) 3 (26,815) (26,034) 3
Net change in
non-cash working
capital 198 2 9,800 296 2 14,700
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Cash used in
financing
activities (15,444) (35,625) (57) (38,921) (85,143) (54)
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The Company's available operating lines of credit consist of a $200 million global revolving credit facility (the "Global Facility") and a $10 million Canadian-based revolving credit facility (the "Canadian Facility"). The Global Facility is available to the Company and any of its wholly-owned subsidiaries, and may be drawn in Canadian, United States or Australian dollars, up to the equivalent value of $200 million Canadian dollars. The amount available under the Canadian Facility is $10 million or the equivalent United States dollars.
Net repayments of the operating lines of credit were the result of operating cash flows generated by the Company's United States and international divisions in excess of capital expenditure requirements. As of June 30, 2010, the operating lines of credit are primarily being used to fund the completion of the most recent new build program and to support international operations.
The Board of Directors of the Company has declared a third quarter dividend of $0.0875 per common share to be payable October 5, 2010 to all Common Shareholders of record as of September 23, 2010. 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.
Normal Course Issuer Bid
On May 10, 2010, the Company announced its intent to file with the Toronto Stock Exchange a Normal Course Issuer Bid (the "Bid") to acquire for cancellation up to five percent of the Company's issued and outstanding common shares. On May 28, 2010, the Company received approval from the Toronto Stock Exchange to purchase up to 7,661,411 common shares for cancellation. The Bid commenced on June 1, 2010 and will terminate on May 31, 2011 or such earlier time as the Bid is completed or terminated at the option of the Company. As at June 30, 2010, no common shares have been purchased pursuant to the Bid.
New Builds
In anticipation of continued opportunities for new oilfield services equipment to meet the growing technical demands of exploration and production companies, the Company has commenced a 2010 new build program that will result in 12 new ADR(TM) style drilling rigs being constructed for delivery starting late in 2010 and early 2011 and six new well servicing rigs being constructed for delivery in 2010. Currently, two well servicing rigs from this latest new build program have been commissioned in the United States. Ten drilling rigs and three of the remaining well servicing rigs have been allocated to the United States, while the remaining two drilling rigs and one well servicing rig will be operated in Canada. The Company plans to fund the construction program using internally generated cash flows and available operating lines of credit. All of the new build drilling rigs are expected to be contracted prior to the completion of their construction.
The new build delivery schedule, by geographic area, is as follows:
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Actual Forecast
----------------------------------------------------- Total
Q2-2010 Q3-2010 Q4-2010 Q1-2011 Q2-2011 Q3-2011
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ADR's
Canada - - - - - 2 2
United States - - 1 4 3 2 10
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Total - - 1 4 3 4 12
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Well Servicing
Canada - - 1 - - - 1
United States 2 2 1 - - - 5
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Total 2 2 2 - - - 6
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Outlook
Economic developments in the most recent quarter have maintained the sense of uncertainty regarding the extent and timing of the global recovery. While credit easing and economic improvements have occurred in several advanced economies, equity markets in general have faltered in response to sovereign debt issues in the Eurozone and the potential impact on large trading partners such as China. Expectations for persistently high unemployment, even under current conditions, as well as worries about a potential double-dip recession, have led policy-makers in some jurisdictions to advocate a delay in stimulus withdrawals, even though these are necessary to restore national balance sheets. The demand for energy and related oilfield services depends on improved general economic conditions. Another quarter of relatively stable and robust crude oil pricing has further increased oil-directed drilling, but lack luster natural gas prices, a consequence of a current over-supply of the commodity, continue to disappoint. Until natural gas fundamentals improve, the North American oilfield services industry will not be able to once again attain its potential.
The Company's Canadian operations exited the "spring break-up" quarter with a 34 percent increase in drilling operating days for the first half of 2010 versus the first half of 2009. Conditions in Canada are expected to remain at improved levels for the remainder of the year, based on the continued strength of crude oil and unconventional natural gas resource plays, along with some positive reaction to the apparent resolution of uncertainties in the new Alberta royalty regime. In late May, the Canadian Association of Oilwell Drilling Contractors increased its forecast for rig activity levels by approximately 75 percent for the second half of 2010. Similarly, the Company expects utilization to increase through the balance of the year, however it may take several quarters of sustained growth in demand to abate competitive pricing pressures. In addition to new builds already in progress for Canada, the Company continues to cautiously evaluate opportunities for additional capital investment.
The United States oilfield services sector continues to be relatively active, with the land-based drilling industry's active rig count recently reaching the highest levels since early 2009, but still below the peak level recorded in the latter half of 2008. The proportion of industry drilling directed at crude oil versus natural gas has increased considerably, based on the relative commodity price shifts. Additionally, the number of natural gas-directed active rigs in the industry has recovered to early 2009 levels, based on the continued strength of natural gas shale plays and the economics associated with liquids rich natural gas production. However, caution regarding the sustainability of high activity levels in natural gas drilling is warranted, as these are not fully supported by pricing and new permitting; approximately half of current shale play activity is driven by lease retention requirements. Drilling days in the Company's United States operations for the first six months of 2010 were up 41 percent over the same period in 2009, based on strong demand for crude oil drilling projects and increasing positions in key natural gas resource plays. The Company anticipates a continuation of higher drilling days and utilization for the remainder of 2010 in the United States, together with reasonable prospects for pricing improvements from increased levels of demand for oilfield services.
Our international operations experienced a 23 percent increase in drilling days in the first half of 2010 versus the same period in 2009, reflecting a similar growth in activity levels for the industry. Other than in Mexico, where disappointing second quarter results are expected to carry forward for the balance of the year, improving results in Latin America are expected to add to strong and steadily growing results from the Company's eastern hemisphere operations.
The 2010 fiscal year continues to present both challenges and opportunities, as we expected. Expansion of the current new build program to a total of 12 drilling rigs and six well servicing rigs is underway; and other value creation opportunities will be pursued as these present themselves.
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 and the ability of oil and natural gas companies to 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 2010 results at 2:00 p.m. MST (4:00 p.m. EST) on Monday, August 9, 2010. The conference call number is (647) 427-7450 in Toronto and internationally or 1-888-231-8191 for Canada and the United States. A taped recording will be available until August 16, 2010 by dialing 1-800-642-1687 (local calls 1-416-849-0833) and entering reservation number 88393132. A live webcast of the conference call can be accessed via the Company's website at www.ensignenergy.com. An archived version of the call will be available shortly after the call ends.
Ensign Energy Services Inc. is an international oilfield services contractor and is listed on the Toronto Stock Exchange under the trading symbol ESI.
CONSOLIDATED BALANCE SHEETS
As at June 30, 2010 and December 31, 2009
(Unaudited - in thousands of Canadian dollars)
June 30 December 31
2010 2009
------------- -------------
Assets
Current assets
Cash and cash equivalents $ 150,478 $ 135,153
Accounts receivable 231,885 242,352
Income taxes recoverable 1,531 6,426
Inventory and other 54,305 61,031
Future income taxes - 377
---------------------------
438,199 445,339
Property and equipment 1,703,358 1,675,144
Long-term note receivable 7,315 7,607
---------------------------
$ 2,148,872 $ 2,128,090
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---------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 142,675 $ 153,660
Operating lines of credit 156,602 169,004
Current portion of stock-based compensation - 1,378
Dividends payable 13,407 13,403
---------------------------
312,684 337,445
Stock-based compensation - 391
Future income taxes 273,360 259,457
---------------------------
586,044 597,293
---------------------------
Contingencies and commitments
Shareholders' Equity
Capital stock (note 3) 170,932 170,932
Accumulated other comprehensive loss (86,853) (96,364)
Retained earnings 1,478,749 1,456,229
---------------------------
1,562,828 1,530,797
---------------------------
$ 2,148,872 $ 2,128,090
---------------------------
---------------------------
See accompanying notes to the interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For the three and six months ended June 30, 2010 and 2009
(Unaudited - in thousands of Canadian dollars - except per share data)
Three months ended Six months ended
June 30 June 30
2010 2009 2010 2009
-------------------------------------------------------
Revenue
Oilfield services $ 257,578 $ 226,010 $ 610,417 $ 626,430
Expenses
Oilfield services 197,927 155,993 443,095 415,790
Depreciation 31,180 22,854 65,430 51,794
General and
administrative 12,634 13,375 24,013 27,317
Stock-based
compensation (1,413) 15,186 (1,729) 11,284
Interest 445 197 1,088 926
Other 1,307 (3,509) 2,656 (5,243)
-------------------------------------------------------
242,080 204,096 534,553 501,868
-------------------------------------------------------
Income before
income taxes 15,498 21,914 75,864 124,562
Income taxes
Current 1,673 (7,425) 8,637 38,253
Future 4,520 16,127 17,892 411
-------------------------------------------------------
6,193 8,702 26,529 38,664
-------------------------------------------------------
Net income
for the period 9,305 13,212 49,335 85,898
Retained earnings
- beginning
of period 1,482,852 1,442,919 1,456,229 1,383,249
Dividends (note 3) (13,408) (13,018) (26,815) (26,034)
-------------------------------------------------------
Retained earnings
- end of period $ 1,478,749 $ 1,443,113 $ 1,478,749 $ 1,443,113
-------------------------------------------------------
-------------------------------------------------------
Net income per
share (note 3)
Basic $ 0.06 $ 0.09 $ 0.32 $ 0.56
Diluted $ 0.06 $ 0.09 $ 0.32 $ 0.56
-------------------------------------------------------
-------------------------------------------------------
See accompanying notes to the interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three and six months ended June 30, 2010 and 2009
(Unaudited - in thousands of Canadian dollars)
Three months ended Six months ended
June 30 June 30
2010 2009 2010 2009
-------------------------------------------------------
Cash provided by
(used in)
Operating
activities
Net income for
the period $ 9,305 $ 13,212 $ 49,335 $ 85,898
Items not
affecting cash:
Depreciation 31,180 22,854 65,430 51,794
Stock-based
compensation,
net of cash
paid (1,413) 9,731 (1,769) 5,826
Future income
taxes 4,520 16,127 17,892 411
-------------------------------------------------------
43,592 61,924 130,888 143,929
Net change in
non-cash working
capital (note 5) 76,016 104,008 8,013 101,942
-------------------------------------------------------
119,608 165,932 138,901 245,871
-------------------------------------------------------
Investing
activities
Net purchase of
property and
equipment (62,193) (26,688) (87,745) (72,782)
Net change in
non-cash working
capital (note 5) (393) (38,695) 3,090 (18,865)
-------------------------------------------------------
(62,586) (65,383) (84,655) (91,647)
-------------------------------------------------------
Financing
activities
Net decrease
in operating
lines of credit (2,234) (2,761) (12,402) (39,263)
Net decrease
in promissory
note payable - (20,000) - (20,000)
Issue of capital
stock - 152 - 152
Dividends (note 3) (13,408) (13,018) (26,815) (26,034)
Net change in
non-cash working
capital (note 5) 198 2 296 2
-------------------------------------------------------
(15,444) (35,625) (38,921) (85,143)
-------------------------------------------------------
Increase in
cash and cash
equivalents
during the period 41,578 64,924 15,325 69,081
Cash and cash
equivalents -
beginning of
period 108,900 100,062 135,153 95,905
-------------------------------------------------------
Cash and cash
equivalents -
end of period $ 150,478 $ 164,986 $ 150,478 $ 164,986
-------------------------------------------------------
-------------------------------------------------------
Supplemental
information
Interest paid $ 710 $ 988 $ 1,330 $ 1,449
Income taxes
paid $ 2,613 $ 15,517 $ 3,742 $ 23,623
-------------------------------------------------------
-------------------------------------------------------
See accompanying notes to the interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three and six months ended June 30, 2010 and 2009
(Unaudited - in thousands of Canadian dollars)
Three months ended Six months ended
June 30 June 30
2010 2009 2010 2009
-------------------------------------------------------
Net income for
the period $ 9,305 $ 13,212 $ 49,335 $ 85,898
Other
comprehensive
income (loss)
Foreign currency
translation
adjustment 34,673 (62,471) 9,511 (36,933)
-------------------------------------------------------
Comprehensive
income (loss)
for the period $ 43,978 $ (49,259) $ 58,846 $ 48,965
-------------------------------------------------------
-------------------------------------------------------
See accompanying notes to the interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
For the three and six months ended June 30, 2010 and 2009
(Unaudited - in thousands of Canadian dollars)
Three months ended Six months ended
June 30 June 30
2010 2009 2010 2009
-------------------------------------------------------
Accumulated other
comprehensive
(loss) income -
beginning of
period $ (121,526) $ 23,955 $ (96,364) $ (1,583)
Foreign
currency
translation
adjustment 34,673 (62,471) 9,511 (36,933)
-------------------------------------------------------
Accumulated other
comprehensive
loss - end of
period $ (86,853) $ (38,516) $ (86,853) $ (38,516)
-------------------------------------------------------
-------------------------------------------------------
See accompanying notes to the interim consolidated financial statements.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended June 30, 2010 and 2009
(Unaudited - in thousands of Canadian dollars, except share
and per share data)
The interim consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles
("Canadian GAAP"), and include the accounts of Ensign Energy Services
Inc. and its subsidiaries and partnerships (the "Company"), substantially
all of which are wholly-owned. The interim consolidated financial
statements have been prepared following the same accounting policies and
methods of computation as the consolidated financial statements for the
year ended December 31, 2009. The disclosures provided below are
incremental to those included with the annual consolidated financial
statements. These interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and the
notes thereto in the Company's annual report for the year ended
December 31, 2009.
1. Recent accounting pronouncements
The Canadian Institute of Chartered Accountants ("CICA") Accounting
Standards Board ("AcSB") confirmed in February 2008 that International
Financial Reporting Standards ("IFRS") will replace Canadian GAAP in 2011
for profit-oriented Canadian publicly accountable enterprises. The
Company has assessed which accounting policies will be affected by the
change to IFRS and continues to assess the potential impact of these
changes on its financial position and results of operations.
As of January 1, 2011, the Company will be required to adopt the
following CICA Handbook sections:
a) CICA Handbook Section 1582 "Business Combinations" will replace
the existing business combinations standard. The new standard
requires assets and liabilities acquired in a business combination
and contingent consideration to be measured at fair value as at
the date of the acquisition. Acquisition costs that are currently
capitalized as part of the purchase price will be recognized in
the consolidated statement of income. The adoption of this
standard will impact the accounting treatment of future business
combinations.
b) CICA Handbook Section 1601 "Consolidated Financial Statements" and
Section 1602 "Non-controlling Interests" will replace the former
consolidated financial statements standard. These standards
establish the requirements for the preparation of consolidated
financial statements and the accounting for a non-controlling
interest (previously referred to as minority interest) in a
subsidiary. The new standard requires non-controlling interest to
be presented as a separate component of equity and requires net
income and other comprehensive income to be attributed to both the
parent and non-controlling interest. The adoption of this standard
is not expected to have a material impact on the Company's
consolidated financial statements.
2. Seasonality of operations
The Company's Canadian oilfield services operations are seasonal in
nature and are impacted by weather conditions that may hinder the
Company's ability to access locations or move heavy equipment. The lowest
activity levels are experienced during the second quarter of the year
when road weight restrictions are in place and access to wellsites in
Canada is reduced.
3. Capital Stock
(a) Authorized
Unlimited common shares
Unlimited preferred shares, issuable in series
(b) Outstanding
------------------------------
Number of
Common Shares Amount
-----------------------------------------------------------------
Balance at January 1, 2010 153,228,106 $ 170,932
Balance at June 30, 2010 153,228,106 $ 170,932
-----------------------------------------------------------------
(c) Options
A summary of the Company's stock option plan as of June 30, 2010,
and the changes during the six month period then ended, is
presented below:
-----------------------------------------------------------------
Weighted
Average
Exercise
Number of Options Price
-----------------------------------------------------------------
Outstanding at January 1, 2010 10,719,300 $ 18.67
-----------------------------------------------------------------
Granted 124,500 14.56
Exercised for cash (18,000) (13.50)
Forfeited (43,500) (19.75)
-----------------------------------------------------------------
Outstanding at June 30, 2010 10,782,300 $ 18.62
-----------------------------------------------------------------
Exercisable at June 30, 2010 4,304,200 $ 19.09
-----------------------------------------------------------------
---------------------------------------------------------------------
Average
Vesting Weighted Weighted
Options Remain- Average Options Average
Out- ing (in Exercise Exerci- Exercise
Exercise Price standing years) Price sable Price
---------------------------------------------------------------------
$11.33 to $13.79 1,416,200 0.08 $ 13.52 1,378,400 $ 13.52
$14.56 to $19.95 5,313,100 2.22 17.09 942,000 19.61
$21.95 to $23.33 4,053,000 1.23 22.42 1,983,800 22.72
---------------------------------------------------------------------
10,782,300 1.57 $ 18.62 4,304,200 $ 19.09
---------------------------------------------------------------------
(d) Common share dividends
During the six months ended June 30, 2010, the Company declared
dividends of $26,815 (2009 - $26,034), being $0.175 per common
share (2009 - $0.170 per common share).
(e) Net income per share
Net income per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the
period. Diluted net income per share is calculated using the
treasury stock method, which assumes that all outstanding stock
options are exercised, if dilutive, and the assumed proceeds are
used to purchase the Company's common shares at the average
market price during the period.
The weighted average number of common shares outstanding for the
three and six month periods ended June 30, 2010 and 2009 are as
follows:
Three months ended Six months ended
June 30 June 30
2010 2009 2010 2009
-------------------------------------------------------
Basic 153,228,106 153,144,299 153,228,106 153,139,715
Diluted 153,229,173 153,706,696 153,297,466 153,383,401
Stock options of 9,366,100 (2009 - 8,259,500) were excluded from
the calculation of diluted weighted average number of common
shares outstanding as the options' exercise price was greater
than the average market price of the common shares for the
period.
(f) Normal Course Issuer Bid
On May 10, 2010, the Company announced its intent to file with
the Toronto Stock Exchange a Normal Course Issuer Bid (the "Bid")
to acquire for cancellation up to five percent of the Company's
issued and outstanding common shares. On May 28, 2010, the
Company received approval from the Toronto Stock Exchange to
purchase up to 7,661,411 common shares for cancellation. The Bid
commenced on June 1, 2010 and will terminate on May 31, 2011 or
such earlier time as the Bid is completed or terminated at the
option of the Company. As at June 30, 2010, no common shares have
been purchased pursuant to the Bid.
4. Segmented information
The Company operates in three geographic areas within one industry
segment. Oilfield services are provided in Canada, the United States
and internationally. The amounts related to each geographic area are
as follows:
Three months ended June 30, 2010
---------------------------------------------------------------------
United
Canada States International Total
---------------------------------------------------------------------
Revenue $66,799 $115,635 $75,144 $257,578
Property and
equipment, net $776,336 $535,656 $391,366 $1,703,358
Capital
expenditures,
net $7,003 $37,778 $17,412 $62,193
Depreciation $10,661 $11,601 $8,918 $31,180
---------------------------------------------------------------------
Three months ended June 30, 2009
---------------------------------------------------------------------
United
Canada States International Total
---------------------------------------------------------------------
Revenue $52,108 $94,617 $79,285 $226,010
Property and
equipment, net $811,296 $518,001 $362,470 $1,691,767
Capital
expenditures,
net $164 $24,126 $2,398 $26,688
Depreciation $9,426 $7,607 $5,821 $22,854
---------------------------------------------------------------------
Six months ended June 30, 2010
---------------------------------------------------------------------
United
Canada States International Total
---------------------------------------------------------------------
Revenue $245,677 $219,590 $145,150 $610,417
Property and
equipment, net $776,336 $535,656 $391,366 $1,703,358
Capital
expenditures,
net $14,938 $50,471 $22,336 $87,745
Depreciation $26,592 $22,334 $16,504 $65,430
---------------------------------------------------------------------
Six months ended June 30, 2009
---------------------------------------------------------------------
United
Canada States International Total
---------------------------------------------------------------------
Revenue $233,222 $222,321 $170,887 $626,430
Property and
equipment, net $811,296 $518,001 $362,470 $1,691,767
Capital
expenditures,
net $1,211 $46,029 $25,542 $72,782
Depreciation $23,836 $16,607 $11,351 $51,794
---------------------------------------------------------------------
5. Supplemental disclosure of cash flow information
The net change in non-cash working capital for the three and six
months ended June 30, 2010 and 2009 is determined as follows:
Three months ended Six months ended
June 30 June 30
-------------------------------------------------------
2010 2009 2010 2009
-------------------------------------------------------
Net change in
non-cash
working
capital
Accounts
receivable $ 61,481 $ 145,533 $ 10,467 $ 169,504
Inventory
and other 2,119 176 6,726 838
Accounts
payable and
accrued
liabilities 12,963 (57,454) (10,985) (101,895)
Long-term
note
receivable 198 - 292 -
Income taxes
recoverable
(payable) (940) (22,942) 4,895 14,630
Dividends
payable - 2 4 2
-------------------------------------------------------
$ 75,821 $ 65,315 $ 11,399 $ 83,079
-------------------------------------------------------
Relating to
Operating
activities $ 76,016 $ 104,008 $ 8,013 $ 101,942
Investing
activities (393) (38,695) 3,090 (18,865)
Financing
activities 198 2 296 2
-------------------------------------------------------
$ 75,821 $ 65,315 $ 11,399 $ 83,079
-------------------------------------------------------
6. Prior year amounts
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
%SEDAR: 00001999E
For further information: Glenn Dagenais, Executive Vice President Finance and Chief Financial Officer, (403) 262-1361
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