Ensign Energy Services Inc. Reports 2010 Third Quarter Earnings
CALGARY, Nov. 8 /CNW/ -
Overview
Ensign Energy Services Inc. (the "Company") recorded revenue for the three months ended September 30, 2010 of $341.3 million, a 47 percent increase from the $232.5 million recorded in the third quarter of the prior year. The Company recorded revenue of $951.7 million for the nine months ended September 30, 2010, an 11 percent increase from revenue of $858.9 million for the nine months ended September 30, 2009. The Company's net income for the third quarter of 2010 was $30.7 million ($0.20 per share), an increase of 82 percent compared with net income of $16.9 million ($0.11 per share) for the third quarter of 2009. Net income for the nine months ended September 30, 2010 totalled $80.1 million ($0.52 per share), a decrease of 22 percent from net income of $102.8 million ($0.67 per share) recorded in the first nine months of 2009.
Overall, the increased revenue for the three and nine months ended September 30, 2010 was a result of an increase in operating activity when compared to the corresponding periods of the prior year, increasing 65 percent and 43 percent respectively. The increased operating activity was offset by slightly lower day rates in most regions and by the negative effect of a strengthening Canadian dollar on the translation of the Company's United States and international segments into Canadian dollars for reporting purposes. In the nine months ended September 30, 2010, the Canadian dollar strengthened by approximately 11 percent compared to the United States dollar when compared to the same period in 2009.
Gross margin decreased in the third quarter of 2010 to 25.0 percent from 28.2 percent recorded in the third quarter of 2009. For the nine months ended September 30, 2010, gross margin was 26.5 percent compared to 32.2 percent for the same period in 2009. Gross margin deterioration was attributable to generally lower revenue rates across all geographic segments, marginally higher operating costs in Canada, and ongoing challenges in Latin America.
Working capital at September 30, 2010 was $124.1 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 Nine months ended
September 30 September 30
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% %
2010 2009 change 2010 2009 change
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Revenue 341,274 232,463 47 951,691 858,893 11
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EBITDA(1) 82,553 53,238 55 223,206 241,804 (8)
EBITDA per share(1)
Basic $0.54 $0.35 54 $1.46 $1.58 (8)
Diluted $0.54 $0.35 54 $1.46 $1.58 (8)
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Adjusted net
income(2) 30,746 16,444 87 78,957 109,677 (28)
Adjusted net income
per share(2)
Basic $0.20 $0.11 82 $0.52 $0.72 (28)
Diluted $0.20 $0.11 82 $0.52 $0.71 (27)
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Net income 30,746 16,900 82 80,081 102,798 (22)
Net income per
share
Basic $0.20 $0.11 82 $0.52 $0.67 (22)
Diluted $0.20 $0.11 82 $0.52 $0.67 (22)
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Funds from
operations(3) 77,399 55,667 39 208,287 199,596 4
Funds from
operations per
share(3)
Basic $0.51 $0.36 42 $1.36 $1.30 5
Diluted $0.51 $0.36 42 $1.36 $1.30 5
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Weighted average
shares
Basic (000s) 153,181 153,156 - 153,212 153,145 -
Diluted (000s) 153,181 153,692 - 153,224 153,427 -
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Drilling
Number of
marketed rigs
Canada
Conventional 146 157 (7) 146 157 (7)
Oil sands
coring/coal
bed methane 28 28 - 28 28 -
United States 80 80 - 80 80 -
International(4) 59 49 20 59 49 20
Operating days
Canada 4,941 2,994 65 13,546 9,394 44
United States 4,003 2,251 78 11,025 7,247 52
International 2,590 1,567 65 7,298 5,391 35
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Well Servicing
Number of marketed
rigs/units
Canada 112 112 - 112 112 -
United States 23 18 28 23 18 28
Operating hours
Canada 29,698 24,260 22 93,482 76,007 23
United States 14,028 8,275 70 37,573 24,654 52
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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 Nine months ended
September 30 September 30
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% %
($ thousands) 2010 2009 change 2010 2009 change
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Revenue
Canada 126,757 80,217 58 372,434 313,439 19
United States 130,941 93,964 39 350,531 316,285 11
International 83,576 58,282 43 228,726 229,169 -
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341,274 232,463 47 951,691 858,893 11
Oilfield services
expense 255,986 166,884 53 699,081 582,674 20
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85,288 65,579 30 252,610 276,219 (9)
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Gross margin 25.0% 28.2% 26.5% 32.2%
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The Company recorded revenue of $341.3 million in the third quarter of 2010, an increase of 47 percent over $232.5 million recorded in the third quarter of 2009. Revenue was $951.7 million for the nine months ended September 30, 2010, an 11 percent increase from $858.9 million recorded in the nine months ended September 30, 2009. As a percentage of revenue, gross margin fell to 25.0 percent for the third quarter of 2010 (2009 - 28.2 percent), and 26.5 percent for the nine months ended September 30, 2010 (2009 - 32.2 percent).
The increased revenue in North America was a reflection of a recovery in demand for oilfield services equipment as evidenced by an increase in the operating days for the three months ended September 30, 2010. While operating activity levels have also increased in the nine months ended September 30, 2010 relative to the comparable period of 2009, pricing pressures persist, resulting in lower increases over the comparable prior period. Spot prices for uncontracted oilfield services equipment appear to have bottomed in the second quarter of 2010 with the third quarter increased activity levels in most regions.
Further, the financial results of the United States and international operations in the three and nine month periods ended September 30, 2010 were negatively impacted by translation to Canadian dollars due to the weakening of the United States dollar, compared to the corresponding periods in 2009. For the nine month period ended September 30, 2010 the United States dollar declined by 11 percent over the comparable period in 2009.
Canadian Oilfield Services
Revenue generated in Canada increased 58 percent to $126.8 million for the three months ended September 30, 2010, from $80.2 million for the three months ended September 30, 2009. In the third quarter of 2010, Canadian revenues accounted for 37 percent of total revenue (2009 - 35 percent). Drilling days recorded by the Canadian division in the third quarter of 2010 increased 65 percent from the comparable period of the prior year.
For the nine months ended September 30, 2010, revenue increased 19 percent to $372.4 million compared to $313.4 million for the same period in 2009. During the nine months ended September 30, 2010, Canadian revenues were 39 percent of total revenue (2009 - 36 percent). Canadian drilling days increased 44 percent during the first three quarters of 2010 over the same period of the prior year. The increase in demand for Canadian oilfield services is primarily a result of crude oil prices stabilizing and operators focusing drilling efforts on oil plays and liquids rich natural gas projects.
While utilization has increased, the Canadian financial results in the three and nine month periods ended September 30, 2010 were negatively impacted by a decrease in pricing compared to the same periods of the prior year. The supply of oilfield equipment continues to exceed the demand in the Western Canada Sedimentary Basin. This oversupply, along with depressed pricing for natural gas, is holding back demand for service equipment and consequently spot pricing remains at low levels. Further, during the first nine months of 2010, slightly 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.
Canadian well servicing hours increased by 22 percent in the third quarter of 2010 and by 23 percent in the nine months ended September 30, 2010 compared to the corresponding periods in the prior year.
United States Oilfield Services
The Company's United States operations recorded revenue of $130.9 million in the third quarter of 2010, a 39 percent increase from the $94.0 million recorded in the third quarter of 2009. The United States segment accounted for 38 percent of the Company's revenue in the third quarter of 2010 (2009 - 40 percent). The number of drilling days recorded by the United States segment in the third quarter of 2010 increased 78 percent from the same period of the prior year.
The increase in revenue recorded by the Company in the United States in the third quarter of 2010 compared to the third 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.
During the nine months ended September 30, 2010, revenue of $350.5 million was recorded, compared to revenue of $316.3 million recorded in same period of 2009. The United States segment accounted for 37 percent of the Company's revenue for the nine months ended September 30, 2010 (2009 - 37 percent). United States drilling days for the first nine months of 2010 increased 52 percent from the prior year. 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 nine months of 2010.
The impact of increased 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 1.036 for the first nine months of 2010 compared to 1.170 for the first nine months of 2009, an 11 percent decline.
United States well servicing hours in the third quarter of 2010 were up 70 percent compared to the prior year and well servicing hours for the first nine months of 2010 were up 52 percent compared to the first nine months of 2009.
International Oilfield Services
The Company's international operations recorded revenue of $83.6 million in the third quarter of 2010, a 43 percent increase from the $58.3 million recorded in the third quarter of 2009. The increased revenue generated in the third quarter of 2010 is mainly due to increased operating activity when compared to the third quarter of 2009. The international segment contributed 25 percent of the Company's revenue in the third quarter of 2010, consistent with the same period of 2009. Drilling days recorded by the Company's international operations in the quarter ended September 30, 2010 increased 65 percent from the third quarter of 2009.
International revenues totalled $228.7 million for the nine months ended September 30, 2010 which is consistent with revenue of $229.2 million for the first nine months of 2009. During the nine months ended September 30, 2010, international revenue accounted for 24 percent of the Company's revenue, a decrease from 27 percent in the same period of 2009. Drilling days recorded in the nine months ended September 30, 2009 increased 35 percent over the same period in 2009.
Consistent with the past few quarters, certain regions of the Company's international segment are continuing to meet expectations and such positive financial results are being offset by continued challenges in Latin America. The Company has made some progress in certain of these underperforming markets and will continue to focus on improving returns from international operations.
Depreciation
Three months ended Nine months ended
September 30 September 30
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% %
($ thousands) 2010 2009 change 2010 2009 change
-------------------------------------------------------------------------
Depreciation 34,157 24,364 40 99,587 76,158 31
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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 $34.2 million for the third quarter of 2010 compared with $24.4 million for the third quarter of 2009. Depreciation expense increased to $99.6 million for the nine months ended September 30, 2010 compared with $76.2 million for the nine months ended September 30, 2009.
The increase in depreciation expense is consistent with the increase in operating activity during the three months and nine months ended September 30, 2010 compared to the operating activity in the same periods of 2009. Further, depreciation increased due to the utilization of higher-valued equipment added to the Company's fleet over the course of 2009 and 2010.
General and Administrative Expense
Three months ended Nine months ended
September 30 September 30
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% %
($ thousands) 2010 2009 change 2010 2009 change
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General and
administrative 12,526 12,504 - 36,539 39,821 (8)
% of revenue 3.7% 5.4% 3.8% 4.6%
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General and administrative expense for the third quarter of 2010 was $12.5 million (3.7 percent of revenue), consistent with the third quarter of 2009 expense of $12.5 million (5.4 percent of revenue). For the nine months ended September 30, 2010, general and administrative expense totalled $36.5 million (3.8 percent of revenue) compared with $39.8 million (4.6 percent of revenue), a decline of eight percent. The reduction in general and administrative expense reflects the ongoing efforts of the Company to control fixed costs and the translational impact of a weaker United States dollar on United States and international administrative expenses.
Stock-Based Compensation (Recovery) Expense
Three months ended Nine months ended
September 30 September 30
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% %
($ thousands) 2010 2009 change 2010 2009 change
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Stock-based
compensation - (701) (100) (1,729) 10,583 (116)
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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 September 30, 2010 stock-based compensation recovery/expense was nil compared with a recovery of $0.7 million recorded in the third quarter of 2009. For the nine months ended September 30, 2010, stock-based compensation recovery was $1.7 million compared with an expense of $10.6 million in the same period of 2009. The recovery over the nine month period ended September 30, 2010 results from a decline in the price of the Company's common shares over this period. The closing price of the Company's common shares was $12.63 at September 30, 2010 compared with $12.52 at June 30, 2010, $14.70 at March 31, 2010 and $15.00 at December 31, 2009.
Interest
Three months ended Nine months ended
September 30 September 30
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% %
($ thousands) 2010 2009 change 2010 2009 change
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Interest expense 241 138 75 1,329 1,064 25
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Interest is incurred on the Company's $200 million global revolving credit facility at prime interest rates or bankers' acceptance rates/LIBOR plus 0.75 percent and is shown net of interest income earned on the Company's cash balances.
Other
Three months ended Nine months ended
September 30 September 30
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% %
($ thousands) 2010 2009 change 2010 2009 change
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Other income (9,791) (163) 5,907 (7,135) (5,406) 32
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This amount consists primarily of exchange gains on the conversion of the Australian operations from Australian dollars to United States dollars. The Australian dollar strengthened in the three and nine months ended September 30, 2010. This trend was consistent during the same periods in 2009.
Income Taxes
Three months ended Nine months ended
September 30 September 30
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% %
($ thousands) 2010 2009 change 2010 2009 change
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Current income tax 4,913 (5,334) (192) 13,550 32,919 (59)
Future income tax 12,496 17,871 (30) 30,388 18,282 66
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17,409 12,537 39 43,938 51,201 (14)
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Effective income
tax rate (%) 36.2% 42.6% 35.4% 33.2%
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The effective income tax rate for the third quarter of 2010 was 36.2 percent, down considerably from the 42.6 percent rate in the third quarter of 2009. For the nine months ended September 30, 2010, the effective income tax rate was 35.4 percent compared with 33.2 percent for the nine months ended September 30, 2009.
The Company's effective tax rate for the current quarter decreased in comparison to the corresponding quarter in 2009 due to a higher proportion of income from Canada in the current quarter versus a larger proportion of taxable income accruing from higher rate jurisdictions in the third quarter of 2009. The increase in the overall effective income tax rate for the nine months ended September 30, 2010 compared with the nine months ended September 30, 2009 is due to a moderately higher proportion of taxable income being generated in jurisdictions with higher income tax rates.
Financial Position
The following chart outlines significant changes in the consolidated balance sheet from December 31, 2009 to September 30, 2010:
($ thousands) Change Explanation
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Cash and cash equivalents (53,220) See consolidated statement of cash
flows.
Accounts receivable 47,017 Increase is consistent with an
increase in operating activity
levels in the third quarter of 2010
compared with the fourth quarter of
2009.
Income taxes recoverable (3,081) Decrease due to the current income
tax provision for the period, net
of tax instalments.
Inventory and other 4,954 Increase due to additional
inventory and prepaid expenses, net
of amortization, offset by normal
course use of consumables.
Property and equipment 35,367 Increase due to the new build
construction program offset by the
impact of foreign exchange
fluctuations on the consolidation
of the Company's foreign
self-sustaining subsidiaries and
depreciation.
Long-term note receivable (292) Decrease due to the partial
collection of the long-term note
receivable.
Accounts payable and 11,892 Increase due to the increase in
accrued liabilities operating activity levels in the
third quarter of 2010 compared with
the fourth quarter of 2009.
Operating lines of credit (31,424) 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 September 30, 2010
compared with December 31, 2009.
Dividends payable (13) Decrease due to a reduction in the
number of outstanding common shares
compared with December 31, 2009.
Future income taxes 21,825 Increase due to higher tax
depreciation in certain foreign
jurisdictions.
Shareholders' equity 30,234 Increase due to the net income for
the period offset by the impact of
foreign exchange rate fluctuations
on net assets of foreign
self-sustaining subsidiaries, the
amount of dividends declared in the
period and the purchase of common
shares.
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Funds from Operations and Working Capital
Three months ended Nine months ended
September 30 September 30
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% %
($ thousands) 2010 2009 change 2010 2009 change
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Funds from
operations 77,399 55,667 39 208,287 199,596 4
Funds from
operations
per Share $0.51 $0.36 42 $1.36 $1.30 5
Working
capital(1) 124,110 107,894 15 124,110 107,894 15
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(1) Comparative figure as of December 31, 2009.
During the three months ended September 30, 2010, the Company generated funds from operations of $77.4 million ($0.51 per common share) compared with funds from operations of $55.7 million ($0.36 per common share) for the three months ended September 30, 2009, an increase of 39 percent. Funds from operations totalled $208.3 million ($1.36 per common share) in the first nine months of 2010, an increase of four percent compared to $199.6 million of funds from operations ($1.30 per common share) generated in the nine months ended September 30, 2009. The increase in funds from operations in the three and nine months ended September 30, 2010 reflects the increased operating levels compared to the comparable periods in 2009.
At September 30, 2010, the Company's working capital totalled $124.1 million, compared to $107.9 million at December 31, 2009. The Company's strong working capital 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 $56.6 million was available as at September 30, 2010. The Company continues to operate with no long-term debt and exited the third quarter with a strong balance sheet.
Investing Activities
Three months ended Nine months ended
September 30 September 30
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% %
($ thousands) 2010 2009 change 2010 2009 change
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Net purchase of
property and
equipment (63,084) (44,870) 41 (150,829) (117,652) 28
Net change in
non-cash working
capital (1,609) 16,306 (110) 1,481 (2,558) (158)
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Cash used in
investing
activities (64,693) (28,564) 126 (149,348) (120,210) 24
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Net purchases of property and equipment during the third quarter of 2010 totalled $63.1 million compared to $44.9 million during the third quarter of the prior year. Net purchases of property and equipment for the nine months ended September 30, 2010 totalled $150.8 million compared with $117.7 million for the nine months ended September 30, 2009. The net purchase of property and equipment relates predominantly to the Company's most recent new build program. Additional details regarding the new build program are provided in the "New Builds" section below.
Financing Activities
Three months ended Nine months ended
September 30 September 30
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% %
($ thousands) 2010 2009 change 2010 2009 change
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Net (decrease)
increase in
operating lines
of credit (19,022) 4,368 (535) (31,424) (34,895) (10)
Net decrease in
promissory note
payable - - - - (20,000) (100)
Issue of capital
stock - 116 (100) - 268 (100)
Purchase of
common shares (2,330) - 100 (2,330) - 100
Dividends (13,390) (13,019) 3 (40,205) (39,053) 3
Net change in
non-cash working
capital (17) 1 (1,800) 279 3 9,200
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Cash used in
financing
activities (34,759) (8,534) 307 (73,680) (93,677) (21)
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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 September 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 fourth quarter dividend of $0.0950 per common share, an 8.6 percent increase over the previous quarterly dividend rate of $0.0875 per common share. The Company has increased its dividend every year since it first started to pay a dividend in 1995. The fourth quarter dividend is payable January 5, 2011 to all Common Shareholders of record as of December 21, 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.
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 November 8, 2010, 200,000 common shares have been purchased pursuant to the Bid and cancelled.
New Builds
In response to customer demand for new oilfield services equipment to meet the growing technical demands of non-conventional resource plays, currently the Company's 2010/2011 new build program will result in 12 new ADR(TM) style drilling rigs and 19 new well servicing rigs being constructed for delivery starting late in 2010 and continuing through 2011. Nine drilling rigs and 14 well servicing rigs have been allocated to the United States while the remaining three drilling rigs and five well servicing rigs will be operated in Canada. The Company plans to fund the construction program using internally generated cash flows and available operating lines of credit.
The new build delivery schedule, by geographic area, is as follows:
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Actual Forecast Total
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Q2-2010 Q3-2010 Q4-2010 Q1-2011 Q2-2011 Q3-2011
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ADR's
Canada - - - - 1 2 3
United
States - - 1 5 2 1 9
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Total - - 1 5 3 3 12
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Well
Servicing
Canada - - 1 - 4 - 5
United
States 2 3 3 2 4 - 14
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Total 2 3 4 2 8 - 19
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Outlook
The demand for energy and related services depends on general economic conditions. Expectations earlier this year for a moderate to robust economic recovery have been tempered by recent events to a relatively subdued outlook as the global economy continues to recover more slowly than earlier projections. In spite of lower levels of demand owing to muted economic conditions, particularly in North America, future supply concerns have maintained crude oil prices at relatively stable and robust levels. Accordingly, there continues to be increased focus on crude oil-directed drilling to capture the favorable economics associated with this resource. Natural gas futures prices have continued to decline due to high storage levels, waning concerns about the hurricane season and fall weather patterns, as well as prospects for slow economic growth. Excess supply of natural gas continues to build in the United States, particularly from lease-retention drilling associated with some of the more prolific unconventional natural gas plays, further building the excess supply of natural gas within the United States and eroding demand for pipeline imports from Canada.
Drilling operating days in our Canadian operations for the third quarter of 2010 were up 65 percent over the third quarter of 2009, despite wet weather conditions in September that hampered industry activity. Higher industry utilization rates are expected to continue through the winter drilling season, with favorable economics from crude oil, liquids-rich natural gas, and unconventional resource plays driving the demand for oilfield services. While crude oil fundamentals are expected to remain favorable throughout 2011, the demand for oilfield services after the end of the 2010/11 winter drilling season will be heavily dependent on the state of the underlying fundamentals involving natural gas. Accordingly, the outlook for utilization in our Canadian operations in 2011 is generally expected to be no better than the 2010 fiscal year. A full recovery of the Canadian oilfield services industry cannot occur until the fundamentals regarding natural gas development improve dramatically from current levels of over-supply.
Drilling operating days in the Company's United States operations for the first nine months of 2010 were up 52 percent over the same period in 2009, with the highest growth rates occurring in the Company's California operations. During the quarter, active land-based rig activity levels for the industry increased to the highest level since late 2008, primarily attributable to increased levels of drilling directed at crude oil and liquids rich natural gas. As previously mentioned, weakening natural gas fundamentals continue to be a cause for concern, particularly as slower economic recovery in the United States will delay restoring the supply/demand imbalance. The Company expects that the United States oilfield services industry will likely see reduced levels of demand in 2011 if natural gas supply and demand fundamentals do not meaningfully improve in the short term. Although crude oil fundamentals should remain favorable, natural gas directed activity that resulted from short-term stimuli, such as favorable hedge positions and the drilling of resource plays to hold leases, will begin to fall off until underlying natural gas fundamentals improve.
The Company's international operations experienced a 40 percent increase in drilling days in the first nine months of 2010 versus the same period in 2009, reflecting activity growth similar to that of the overall industry. Wet weather conditions had a negative impact in Australia during the quarter, however Eastern hemisphere operations were otherwise relatively steady. The Company experienced improved utilization in Venezuela, but challenges continued elsewhere in Latin America. Overall, activity levels in the Company's international operations are expected to show slow growth through the next year as regional geopolitical conditions are expected to improve in many of the areas of operation.
Uncertainty in the ultimate timing and extent of the economic recovery, as well as the impacts of shifts in natural gas fundamentals continue to make 2010 a year of interesting challenges. The Company has responded by adjusting our current new build program in response to changing customer requirements and contractual commitments. The continued strength of our financial position will enable the Company to pursue other opportunities as these are identified and developed.
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 third quarter 2010 results at 2:00 p.m. MST (4:00 p.m. EST) on Monday, November 8, 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 November 15, 2010 by dialing 1-800-642-1687 (local calls 1-416-849-0833) and entering reservation number 18294682. 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 September 30, 2010 and December 31, 2009
(Unaudited - in thousands of Canadian dollars)
September 30 December 31
2010 2009
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Assets
Current assets
Cash and cash equivalents $ 81,933 $ 135,153
Accounts receivable 289,369 242,352
Income taxes recoverable 3,345 6,426
Inventory and other 65,985 61,031
Future income taxes - 377
---------------------------
440,632 445,339
Property and equipment 1,710,511 1,675,144
Long-term note receivable 7,315 7,607
---------------------------
$ 2,158,458 $ 2,128,090
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Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 165,552 $ 153,660
Operating lines of credit 137,580 169,004
Current portion of stock-based compensation - 1,378
Dividends payable 13,390 13,403
---------------------------
316,522 337,445
Stock-based compensation - 391
Future income taxes 280,905 259,457
---------------------------
597,427 597,293
---------------------------
Shareholders' Equity
Capital stock (note 3) 170,710 170,932
Accumulated other comprehensive loss (103,676) (96,364)
Retained earnings 1,493,997 1,456,229
---------------------------
1,561,031 1,530,797
---------------------------
$ 2,158,458 $ 2,128,090
---------------------------
---------------------------
See accompanying notes to the interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For the three and nine months ended September 30, 2010 and 2009
(Unaudited - in thousands of Canadian dollars - except per share data)
Three months ended Nine months ended
September 30 September 30
2010 2009 2010 2009
-------------------------------------------------------
Revenue
Oilfield services $ 341,274 $ 232,463 $ 951,691 $ 858,893
Expenses
Oilfield services 255,986 166,884 699,081 582,674
Depreciation 34,157 24,364 99,587 76,158
General and
administrative 12,526 12,504 36,539 39,821
Stock-based
compensation - (701) (1,729) 10,583
Interest 241 138 1,329 1,064
Other (9,791) (163) (7,135) (5,406)
-------------------------------------------------------
293,119 203,026 827,672 704,894
-------------------------------------------------------
Income before
income taxes 48,155 29,437 124,019 153,999
Income taxes
Current 4,913 (5,334) 13,550 32,919
Future 12,496 17,871 30,388 18,282
-------------------------------------------------------
17,409 12,537 43,938 51,201
-------------------------------------------------------
Net income
for the period 30,746 16,900 80,081 102,798
Retained earnings
- beginning
of period 1,478,749 1,443,113 1,456,229 1,383,249
Purchase of common
shares under
Normal Course
Issuer Bid
(note 3) (2,108) - (2,108) -
Dividends (note 3) (13,390) (13,019) (40,205) (39,053)
-------------------------------------------------------
Retained earnings
- end of period $ 1,493,997 $ 1,446,994 $ 1,493,997 $ 1,446,994
-------------------------------------------------------
-------------------------------------------------------
Net income per
share (note 3)
Basic $ 0.20 $ 0.11 $ 0.52 $ 0.67
Diluted $ 0.20 $ 0.11 $ 0.52 $ 0.67
-------------------------------------------------------
-------------------------------------------------------
See accompanying notes to the interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three and nine months ended September 30, 2010 and 2009
(Unaudited - in thousands of Canadian dollars)
Three months ended Nine months ended
September 30 September 30
2010 2009 2010 2009
-------------------------------------------------------
Cash provided by
(used in)
Operating
activities
Net income for
the period $ 30,746 $ 16,900 $ 80,081 $ 102,798
Items not
affecting cash:
Depreciation 34,157 24,364 99,587 76,158
Stock-based
compensation,
net of cash
paid - (3,468) (1,769) 2,358
Future income
taxes 12,496 17,871 30,388 18,282
-------------------------------------------------------
77,399 55,667 208,287 199,596
Net change in
non-cash working
capital (note 5) (46,492) (40,562) (38,479) 61,379
-------------------------------------------------------
30,907 15,105 169,808 260,975
-------------------------------------------------------
Investing
activities
Net purchase of
property and
equipment (63,084) (44,870) (150,829) (117,652)
Net change in
non-cash working
capital (note 5) (1,609) 16,306 1,481 (2,558)
-------------------------------------------------------
(64,693) (28,564) (149,348) (120,210)
-------------------------------------------------------
Financing
activities
Net (decrease)
increase in
operating lines
of credit (19,022) 4,368 (31,424) (34,895)
Net decrease
in promissory
note payable - - - (20,000)
Issue of capital
stock - 116 - 268
Purchase of
common shares
under Normal
Course Issuer
Bid (note 3) (2,330) - (2,330) -
Dividends (note 3) (13,390) (13,019) (40,205) (39,053)
Net change in
non-cash working
capital (note 5) (17) 1 279 3
-------------------------------------------------------
(34,759) (8,534) (73,680) (93,677)
-------------------------------------------------------
(Decrease)
increase in
cash and cash
equivalents
during the period (68,545) (21,993) (53,220) 47,088
Cash and cash
equivalents -
beginning of
period 150,478 164,986 135,153 95,905
-------------------------------------------------------
Cash and cash
equivalents -
end of period $ 81,933 $ 142,993 $ 81,933 $ 142,993
-------------------------------------------------------
-------------------------------------------------------
Supplemental
information
Interest paid $ 386 $ 372 $ 1,716 $ 1,789
Income taxes
paid $ 6,727 $ 6,831 $ 10,469 $ 30,454
-------------------------------------------------------
-------------------------------------------------------
See accompanying notes to the interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three and nine months ended September 30, 2010 and 2009
(Unaudited - in thousands of Canadian dollars)
Three months ended Nine months ended
September 30 September 30
2010 2009 2010 2009
-------------------------------------------------------
Net income for
the period $ 30,746 $ 16,900 $ 80,081 $ 102,798
Other
comprehensive
loss
Foreign currency
translation
adjustment (16,823) (61,719) (7,312) (98,652)
-------------------------------------------------------
Comprehensive
income (loss)
for the period $ 13,923 $ (44,819) $ 72,769 $ 4,146
-------------------------------------------------------
-------------------------------------------------------
See accompanying notes to the interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS
For the three and nine months ended September 30, 2010 and 2009
(Unaudited - in thousands Canadian of dollars)
Three months ended Nine months ended
September 30 September 30
2010 2009 2010 2009
-------------------------------------------------------
Accumulated other
comprehensive
loss - beginning
of period $ (86,853) $ (38,516) $ (96,364) $ (1,583)
Foreign
currency
translation
adjustment (16,823) (61,719) (7,312) (98,652)
-------------------------------------------------------
Accumulated other
comprehensive
loss - end of
period $ (103,676) $ (100,235) $ (103,676) $ (100,235)
-------------------------------------------------------
-------------------------------------------------------
See accompanying notes to the interim consolidated financial statements.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine months ended September 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 audited 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 existing
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
Purchase of common shares under
Normal Course Issuer Bid (200,000) (222)
-----------------------------------------------------------------
Balance at September 30, 2010 153,028,106 $ 170,710
-----------------------------------------------------------------
(c) Options
A summary of the Company's stock option plan as of September 30,
2010, and the changes during the nine month period then ended, is
presented below:
Weighted
Average
Number Exercise
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 September 30, 2010 10,782,300 $ 18.62
-----------------------------------------------------------------
Exercisable at September 30, 2010 5,170,400 $ 19.38
-----------------------------------------------------------------
Weighted
Average Weighted Weighted
Options Remaining Average Options Average
Out- Life (in Exercise Exerci- Exercise
Exercise Price standing months) Price sable Price
---------------------------------------------------------------------
$11.33 to $13.79 1,416,200 4.6 $ 13.52 1,378,400 $ 13.52
$14.56 to $19.95 5,313,100 40.6 17.09 1,389,000 19.65
$21.95 to $23.33 4,053,000 27.5 22.42 2,403,000 22.58
---------------------------------------------------------------------
10,782,300 30.9 $ 18.62 5,170,400 $ 19.38
---------------------------------------------------------------------
(d) Common share dividends
During the third quarter, the Company declared dividends of
$13,390 (2009 - $13,019), being $0.0875 per common share (2009 -
$0.0850 per common share). For the nine months ended
September 30, 2010, the Company declared dividends of $40,205
(2009 - $39,053), being $0.2625 per common share (2009 - $0.2550
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 nine month periods ended September 30, 2010 and 2009
are as follows:
Three months ended Nine months ended
September 30 September 30
2010 2009 2010 2009
-------------------------------------------------------
Basic 153,180,728 153,155,632 153,212,140 153,145,021
Diluted 153,181,147 153,692,481 153,223,624 153,426,523
During the three months ended September 30, 2010, 10,776,300
(2009 - 6,682,600) options 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. For the nine months
ended September 30, 2010, 9,419,100 options (2009 - 6,735,100)
were excluded from the calculation of diluted weighted average
number of common shares outstanding.
(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 September 30, 2010, 200,000 common
shares have been purchased pursuant to the Bid and cancelled.
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 September 30, 2010
---------------------------------------------------------------------
United
Canada States International Total
---------------------------------------------------------------------
Revenue $ 126,757 $ 130,941 $ 83,576 $ 341,274
Property and
equipment,
net $ 727,342 $ 533,241 $ 449,928 $ 1,710,511
Capital
expenditures,
net $ 4,001 $ 37,552 $ 21,531 $ 63,084
Depreciation $ 13,786 $ 12,533 $ 7,838 $ 34,157
---------------------------------------------------------------------
Three months ended September 30, 2009
---------------------------------------------------------------------
United
Canada States International Total
---------------------------------------------------------------------
Revenue $ 80,217 $ 93,964 $ 58,282 $ 232,463
Property and
equipment,
net $ 806,058 $ 500,551 $ 340,632 $ 1,647,241
Capital
expenditures,
net $ 6,563 $ 28,081 $ 10,226 $ 44,870
Depreciation $ 11,801 $ 7,563 $ 5,000 $ 24,364
---------------------------------------------------------------------
Nine months ended September 30, 2010
---------------------------------------------------------------------
United
Canada States International Total
---------------------------------------------------------------------
Revenue $ 372,434 $ 350,531 $ 228,726 $ 951,691
Property and
equipment,
net $ 727,342 $ 533,241 $ 449,928 $ 1,710,511
Capital
expenditures,
net $ 18,939 $ 88,023 $ 43,867 $ 150,829
Depreciation $ 40,378 $ 34,867 $ 24,342 $ 99,587
---------------------------------------------------------------------
Nine months ended September 30, 2009
---------------------------------------------------------------------
United
Canada States International Total
---------------------------------------------------------------------
Revenue $ 313,439 $ 316,285 $ 229,169 $ 858,893
Property and
equipment,
net $ 806,058 $ 500,551 $ 340,632 $ 1,647,241
Capital
expenditures,
net $ 7,774 $ 74,110 $ 35,768 $ 117,652
Depreciation $ 35,637 $ 24,170 $ 16,351 $ 76,158
---------------------------------------------------------------------
5. Supplemental disclosure of cash flow information
The net change in non-cash working capital for the three and nine
months ended September 30, 2010 and 2009 is determined as follows:
Three months ended Nine months ended
September 30 September 30
-------------------------------------------------------
2010 2009 2010 2009
-------------------------------------------------------
Net change in
non-cash
working
capital
Accounts
receivable $ (57,484) $ (8,440) $ (47,017) $ 161,064
Inventory
and other (11,680) 2,827 (4,954) 3,665
Accounts
payable and
accrued
liabilities 22,877 (6,478) 11,892 (108,373)
Long-term
note
receivable - - 292 -
Income taxes
recoverable (1,814) (12,165) 3,081 2,465
Dividends
payable (17) 1 (13) 3
-------------------------------------------------------
$ (48,118) $ (24,255) $ (36,719) $ 58,824
-------------------------------------------------------
Relating to
Operating
activities $ (46,492) $ (40,562) $ (38,479) $ 61,379
Investing
activities (1,609) 16,306 1,481 (2,558)
Financing
activities (17) 1 279 3
-------------------------------------------------------
$ (48,118) $ (24,255) $ (36,719) $ 58,824
-------------------------------------------------------
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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