Ensign Energy Services Inc. Reports 2013 Third Quarter Results
CALGARY, Nov. 11, 2013 /CNW/ -
Overview
Ensign Energy Services Inc. ("Ensign" or the "Company") recorded revenue of $543.0 million for the third quarter of 2013, an increase of three percent over revenue of $525.7 million recorded in the third quarter of 2012. Revenue for the nine months ended September 30, 2013 was $1,562.0 million, six percent lower than revenue of $1,667.2 million for the nine months ended September 30, 2012. Net income for the third quarter of 2013 decreased 25 percent to $33.7 million ($0.22 per common share) compared to net income of $44.8 million ($0.29 per common share) for the third quarter of 2012. Net income for the nine months ended September 30, 2013 decreased 40 percent to $102.0 million ($0.67 per common share) compared to net income of $169.0 million ($1.11 per common share) for the first nine months of 2012. Included in the year-to-date third quarter earnings is the negative impact of $15.4 million foreign exchange and other loss, primarily due to the effect of a weakening AUS dollar on US dollar debt in the Company's Australian operations. Excluding the tax-effected impact of share-based compensation expense (recovery) and foreign exchange and other, adjusted net income for the third quarter of 2013 totaled $34.9 million ($0.23 per common share), 23 percent lower than adjusted net income of $45.2 million ($0.30 per common share) in the third quarter of 2012. For the nine months ended September 30, 2013 adjusted net income was $116.0 million ($0.76 per common share), 32 percent lower than adjusted net income of $171.1 million ($1.12 per common share) for the nine months ended September 30, 2012. Adjusted EBITDA, defined as "income before interest, income taxes, depreciation, share-based compensation expense (recovery) and foreign exchange and other", totaled $123.1 million ($0.81 per common share) in the third quarter of 2013, seven percent lower than adjusted EBITDA of $132.6 million ($0.87 per common share) in the third quarter of 2012. For the first nine months of 2013 adjusted EBITDA was $373.3 million ($2.45 per common share), 15 percent lower than adjusted EBITDA of $437.1 million ($2.86 per common share) for the first nine months of 2012. Funds from operations decreased 13 percent to $105.9 million ($0.69 per common share) in the third quarter of 2013 from $121.2 million ($0.80 per common share) in the third quarter of the prior year. For the nine months ended September 30, 2013, funds from operations decreased 14 percent to $334.4 million ($2.19 per common share) compared to $389.8 million ($2.55 per common share) for the nine months ended September 30, 2012.
Operating activity for the current quarter in North America continued to be at lower levels when compared to the third quarter of the prior year, consistent with the first half of 2013. Although activity levels began to show signs of recovery late in the third quarter of the current year, operating and financial results reflect the weakened demand for North American oilfield services when compared to the same periods of the prior year. As mentioned above, financial results for the nine months ended September 30, 2013 include the negative impact from a strengthening United States dollar on USD denominated debt in the Company's Australian operations. Increased activity in the Company's international operations, along with the positive translational impact from an increase in the average United States dollar foreign exchange rate, helped to partially offset these reductions. During the nine months ended September 30, 2013 the average United States dollar foreign exchange rate increased by approximately two percent against the Canadian dollar compared to the nine months ended September 30, 2012, positively impacting United States and international financial results on translation to Canadian dollars.
Gross margin decreased five percent in the third quarter of 2013 to $144.4 million (26.6 percent of revenue) compared with gross margin of $151.7 million (28.9 percent of revenue) for the third quarter of 2012. For the nine months ended September 30, 2013 gross margin decreased to $437.7 million (28.0 percent of revenue) compared to $496.3 million (29.8 percent of revenue) for the nine months ended September 30, 2012. Reduced operating activity in North America and a greater proportion of operating activity being generated by lower margin international operations in the three and nine months ended September 30, 2013 compared to the same periods of 2012 resulted in lower consolidated gross margin percentages in the current year compared to the prior year.
During the second quarter of 2013, the Company expanded its existing oilfield rental business when it acquired rental equipment assets through the acquisition of substantially all of the assets of EGOC Enviro Group of Companies ("EGOC"). Additionally, in the second quarter of the current year the Company expanded its directional drilling business in Canada through the acquisition of substantially all of the assets of Departure Energy Services Inc. ("Departure"). Both of these acquisitions were completed utilizing the Company's existing cash balances. The funding of these acquisitions, combined with funding the Company's active new build program, resulted in a working capital deficit at September 30, 2013, of $34.4 million compared to positive working capital of $13.9 million at December 31, 2012. The Company's ongoing new build program has delivered five new ADR® drilling rigs and six new well servicing rigs in the first nine months of the year and is expected to deliver an additional five new ADR® drilling rigs and two new well servicing rigs throughout the remainder of 2013 and into 2014. In addition to the above new builds, the Company is refurbishing and upgrading four drilling rigs into ADR®-style drilling rigs.
| FINANCIAL AND OPERATING HIGHLIGHTS | ||||||||||||||
| ($ thousands, except per share data and operating information) | ||||||||||||||
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||
| 2013 | 2012 | % Change | 2013 | 2012 | % Change | |||||||||
| Revenue | 542,951 | 525,666 | 3 | 1,561,967 | 1,667,215 | (6) | ||||||||
| Adjusted EBITDA 1 | 123,123 | 132,577 | (7) | 373,251 | 437,060 | (15) | ||||||||
| Adjusted EBITDA per share 1 | ||||||||||||||
| Basic | $0.81 | $0.87 | (7) | $2.45 | $2.86 | (14) | ||||||||
| Diluted | $0.80 | $0.87 | (8) | $2.43 | $2.86 | (15) | ||||||||
| Adjusted net income 2 | 34,861 | 45,248 | (23) | 115,961 | 171,136 | (32) | ||||||||
| Adjusted net income per share 2 | ||||||||||||||
| Basic | $0.23 | $0.30 | (23) | $0.76 | $1.12 | (32) | ||||||||
| Diluted | $0.23 | $0.30 | (23) | $0.76 | $1.12 | (32) | ||||||||
| Net income | 33,699 | 44,832 | (25) | 101,970 | 169,033 | (40) | ||||||||
| Net income per share | ||||||||||||||
| Basic | $0.22 | $0.29 | (24) | $0.67 | $1.11 | (40) | ||||||||
| Diluted | $0.22 | $0.29 | (24) | $0.66 | $1.11 | (41) | ||||||||
| Funds from operations 3 | 105,923 | 121,229 | (13) | 334,402 | 389,799 | (14) | ||||||||
| Funds from operations per share 3 | ||||||||||||||
| Basic | $0.69 | $0.80 | (14) | $2.19 | $2.55 | (14) | ||||||||
| Diluted | $0.69 | $0.79 | (13) | $2.18 | $2.55 | (15) | ||||||||
| Weighted average shares - basic (000s) | 152,605 | 152,480 | - | 152,654 | 152,680 | - | ||||||||
| Weighted average shares - diluted (000s) | 153,641 | 152,838 | 1 | 153,468 | 152,923 | - | ||||||||
| Drilling | ||||||||||||||
| Number of marketed rigs | ||||||||||||||
| Canada 4 | 121 | 133 | (9) | 121 | 133 | (9) | ||||||||
| United States | 117 | 116 | 1 | 117 | 116 | 1 | ||||||||
| International 5 | 54 | 58 | (7) | 54 | 58 | (7) | ||||||||
| Operating days | ||||||||||||||
| Canada 4 | 3,799 | 4,551 | (17) | 10,726 | 14,263 | (25) | ||||||||
| United States | 5,961 | 6,170 | (3) | 17,177 | 18,671 | (8) | ||||||||
| International 5 | 2,979 | 2,960 | 1 | 8,496 | 8,602 | (1) | ||||||||
| Well Servicing | ||||||||||||||
| Number of marketed rigs | ||||||||||||||
| Canada | 94 | 99 | (5) | 94 | 99 | (5) | ||||||||
| United States | 45 | 46 | (2) | 45 | 46 | (2) | ||||||||
| Operating hours | ||||||||||||||
| Canada | 30,355 | 35,098 | (14) | 90,835 | 105,924 | (14) | ||||||||
| United States | 27,529 | 33,029 | (17) | 75,203 | 93,669 | (20) | ||||||||
| 1 Adjusted EBITDA is defined as "income before interest expense, income taxes, depreciation, share-based compensation (recovery) expense and foreign exchange and other". Management believes that in addition to net income, Adjusted EBITDA and Adjusted EBITDA per share are useful supplemental measures as they provide an indication of the results generated by the Company's principal business activities prior to consideration of how these activities are financed, how the results are taxed in various jurisdictions, how the results are impacted by foreign exchange or how the results are impacted by the accounting standards associated with the Company's share-based compensation plans. Adjusted EBITDA and Adjusted EBITDA per share as defined above are not recognized measures under International Financial Reporting Standards and accordingly may not be comparable to measures used by other companies. |
| 2 Adjusted net income is defined as "net income before share-based compensation expense (recovery) and foreign exchange and other, tax-effected using an income tax rate of 35 percent". Adjusted net income and Adjusted net income per share are useful supplemental measures as they provide an indication of the results generated by the Company's principal business activities prior to consideration of how the results are impacted by foreign exchange and how the results are impacted by the accounting standards associated with the Company's share-based compensation plans, net of income taxes. Adjusted net income and Adjusted net income per share as defined above are not recognized measures under International Financial Reporting Standards and accordingly may not be comparable to measures used by other companies. |
| 3 Funds from operations is defined as "cash provided by operating activities before the change in non-cash working capital". Funds from operations and Funds from operations per share are measures that provide additional information regarding the Company's liquidity and its ability to generate funds to finance its operations. Management utilizes these measures to assess the Company's ability to finance operating activities and capital expenditures. Funds from operations and Funds from operations per share are not measures that have any standardized meaning prescribed by International Financial Reporting Standards and accordingly may not be comparable to similar measures used by other companies. |
| 4 Excludes coring rigs. |
| 5 Includes workover rigs. |
Third Quarter Highlights
- Revenue for the three months ended September 30, 2013 was $543.0 million, up three percent from revenue for the three months ended September 30, 2012. The increase in revenue in the current year's third quarter over the third quarter of the prior year was mainly due to increased activity and revenue rates in the Company's international operations.
- Two new ADR® drilling rigs were added to the Company's fleet in the third quarter of 2013; one to the Canadian drilling fleet and one to the United States drilling fleet. The new build program also added three new well servicing rigs in the third quarter; two in Canada and one in the United States.
- Third quarter revenue by geographic area:
- Canada - 30 percent;
- United States - 43 percent; and
- International - 27 percent.
- Adjusted EBITDA for the third quarter of 2013 was $123.1 million, a seven percent decrease from adjusted EBITDA of $132.6 million for the third quarter of 2012. Funds from operations for the third quarter of 2013 decreased 13 percent to $105.9 million from $121.2 million in the third quarter of the prior year.
- Canadian drilling recorded 3,799 operating days in the third quarter of 2013, a 17 percent decrease from 4,551 operating days in the third quarter of 2012. Canadian well servicing hours decreased by 14 percent in the third quarter of 2013 compared to the third quarter of 2012.
- United States drilling recorded 5,961 operating days in the third quarter of 2013, a three percent decrease from 6,170 operating days in the third quarter of 2012. United States well servicing hours decreased by 17 percent in the third quarter of 2013 compared to the third quarter of 2012.
- International drilling recorded 2,979 operating days in the third quarter of 2013, a one percent increase from 2,960 operating days recorded in the third quarter of 2012.
- The Board of Directors of the Company has declared a fourth quarter dividend of $0.1175 per common share representing a 6.8 percent increase over the previous quarterly dividend rate of $0.1100 per common share. The dividend has increased by a compound annual growth rate of 17 percent since the Company first started to pay a dividend in 1995.
Revenue and Oilfield Services Expense
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||
| ($ thousands) | 2013 | 2012 | % Change | 2013 | 2012 | % Change | |||||||
| Revenue | |||||||||||||
| Canada | 161,079 | 164,081 | (2) | 502,520 | 597,751 | (16) | |||||||
| United States | 234,625 | 237,114 | (1) | 654,938 | 730,913 | (10) | |||||||
| International | 147,247 | 124,471 | 18 | 404,509 | 338,551 | 19 | |||||||
| 542,951 | 525,666 | 3 | 1,561,967 | 1,667,215 | (6) | ||||||||
| Oilfield services expense | 398,546 | 373,982 | 7 | 1,124,317 | 1,170,956 | (4) | |||||||
| 144,405 | 151,684 | (5) | 437,650 | 496,259 | (12) | ||||||||
| Gross margin (%) | 26.6 | 28.9 | 28.0 | 29.8 | |||||||||
Revenue for the three months ended September 30, 2013 increased three percent to $543.0 million compared to $525.7 million for the comparable period in 2012. Revenue for the nine months ended September 30, 2013 decreased six percent to $1,562.0 million from revenue of $1,667.2 million recorded for the nine months ended September 30, 2012. As a percentage of revenue, gross margin for the third quarter of 2013 decreased to 26.6 percent (2012 - 28.9 percent) and decreased to 28.0 percent for the nine months ended September 30, 2013 (2012 - 29.8 percent).
Reduced levels of demand for oilfield services in North America, which began late in 2012, resulted in reduced revenue in Canada and the United States in 2013 compared to 2012 and reflects operators having delayed or reduced their capital programs in 2013 in reaction to current global economic conditions and concerns regarding the economics of oil and natural gas projects within North America. Growth of the Company's international operations has helped to somewhat offset the reductions in the North American operations throughout 2013.
Canadian Oilfield Services
Revenue decreased two percent to $161.1 million for the three months ended September 30, 2013, from $164.1 million for the three months ended September 30, 2012. For the nine months ended September 30, 2013, revenue decreased 16 percent to $502.5 million compared to $597.8 million for the same period in 2012. Canadian revenues accounted for 30 percent of the Company's total revenue in the third quarter of 2013 (2012 - 31 percent) and during the nine months ended September 30, 2013, Canadian revenues were 32 percent of total revenue (2012 - 36 percent).
The Company's Canadian operations recorded 3,799 drilling days in the third quarter of 2013, compared to 4,551 drilling days in the third quarter of 2012, a decrease of 17 percent. For the nine months ended September 30, 2013, the Company recorded 10,726 drilling days compared to 14,263 drilling days for the nine months ended September 30, 2012, a decrease of 25 percent. Canadian well servicing hours decreased by 14 percent to 30,355 operating hours in the third quarter of 2013 compared with 35,098 operating hours in the corresponding period of 2012. For the nine months ended September 30, 2013, well servicing hours decreased by 14 percent to 90,835 operating hours compared with 105,924 operating hours for the nine months ended September 30, 2012.
Activity levels in Canada continued to be weakened by reduced demand for oilfield services in 2013 compared to 2012. Year-to-date Canadian results also reflect a particularly wet spring break-up in the second quarter of 2013, when weather conditions hindered mobility of the Company's equipment. The reduced field activity was partially offset by the positive impact from the expansion of the Company's oilfield rentals and directional drilling capabilities in the second quarter of 2013.
During the nine months ended September 30, 2013, the Company added two newly constructed ADR's to its Canadian drilling rig fleet and five new well servicing rigs. Five inactive drilling rigs and 10 inactive well servicing rigs were decommissioned, all in the first quarter. The Company also disposed of its non-rig manufacturing facility located in Calgary, Alberta in January, 2013.
United States Oilfield Services
The Company's United States operations recorded revenue of $234.6 million in the third quarter of 2013, a one percent decrease from the $237.1 million recorded in the corresponding period of the prior year. During the nine months ended September 30, 2013, revenue of $654.9 million was recorded, a decrease of 10 percent from the $730.9 million recorded for the nine months ended September 30, 2012. The Company's United States operations accounted for 43 percent of the Company's revenue in the third quarter of 2013 (2012 - 45 percent) and 42 percent of total revenue in the nine months ended September 30, 2013 (2012 - 44 percent). Drilling rig operating days decreased by three percent to 5,961 drilling days in the third quarter of 2013 from 6,170 drilling days in the third quarter of 2012. For the nine months ended September 30, 2013, drilling days decreased by eight percent to 17,177 drilling days from 18,671 drilling days for the nine months ended September 30, 2012. Well servicing activity decreased by 17 percent in the third quarter of 2013 to 27,529 operating hours from 33,029 operating hours in the third quarter of 2012. For the nine months ended September 30, 2013 well servicing activity decreased 20 percent to 75,203 operating hours from 93,669 operating hours for the first nine months of 2012.
Similar to Canada and consistent with the second quarter of 2013, United States operating and financial results were weakened by reduced demand for United States oilfield services and the resultant decrease in revenue rates and margins in the three and nine months ended September 30, 2013, when compared to the same periods of 2012.
During the nine months ended September 30, 2013 the Company added three new ADR® drilling rigs and one new well servicing rig to its United States fleet. In addition one drilling rig was transferred to the Company's international fleet, six inactive drilling rigs were decommissioned and two well servicing rigs were disposed.
A strengthening United States dollar against the Canadian dollar in the first nine months of 2013 had a positive impact on the translation of the Company's United States financial results to Canadian dollars. In the first nine months of 2013 the average United States dollar exchange rate increased by approximately two percent to 1.02 when compared to the same period of the prior year.
International Oilfield Services
The Company's international operations recorded revenue of $147.2 million in the third quarter of 2013, an 18 percent increase over the $124.5 million recorded in the corresponding period of the prior year. Similarly, international revenues for the nine months ended September 30, 2013, increased by 19 percent to $404.5 million from $338.6 million recorded for the nine months ended September 30, 2012. International operations contributed 27 percent of the Company's revenue in the third quarter of 2013 (2012 - 24 percent) and 26 percent of the Company's revenue in the first nine months of 2013 (2012 - 20 percent). International operating days for the three months ended September 30, 2013 totaled 2,979 drilling days compared with 2,960 drilling days for the three months ended September 30, 2012, an increase of one percent. For the nine months ended September 30, 2013, international operating days totaled 8,496 drilling days compared with 8,602 drilling days for the nine months ended September 30, 2012, a decrease of one percent.
The increase in the Company's international revenue during the three and nine months ended September 30, 2013 was mainly due to additions to the international fleet in 2012 and 2013 and stronger demand for oilfield services in certain international markets. Late in 2012 two new ADR's were added to the international fleet through the continuing new build program and one existing drilling rig was relocated to the international market from the United States. Similarly, during the current quarter an additional drilling rig was relocated to the international market from the Company's United States fleet. These additions to the international fleet resulted in increased average revenue rates per day for international operations for the three and nine months ended September 30, 2013 compared to the same periods of 2012. The increase to international drilling days for the three and nine months ended September 30, 2013 as a result of these additions was partially offset by the expected reduction due to the completion of the Company's drilling contracts in Mexico in 2012.
The Company's international operations also benefited from the strengthening of the United States dollar relative to the Canadian dollar when translating financial results into Canadian dollars for reporting purposes in the first nine months of 2013 compared to the first nine months of the prior year.
During the nine months ended September 30, 2013 the Company decommissioned one inactive drilling rig from its international fleet and added one drilling rig from its existing United States fleet as mentioned above.
Depreciation
| Three months ended September 30 | Nine months ended September 30 | |||||||||||
| ($ thousands) | 2013 | 2012 | % Change | 2013 | 2012 | % Change | ||||||
| Depreciation | 66,264 | 57,599 | 15 | 178,873 | 166,198 | 8 | ||||||
The Company uses the unit of production method of calculating depreciation for the majority of its property and equipment. Depreciation expense totaled $66.3 million for the third quarter of 2013 compared with $57.6 million for the third quarter of 2012, an increase of 15 percent. Depreciation expense for the first nine months of 2013 was $178.9 million, an increase of eight percent over the $166.2 million recorded for the first nine months of 2012. Increased depreciation reflects higher-valued equipment being added to the Company's global fleet throughout the latter half of 2012 and into the first nine months of 2013 in addition to the impacts of the second quarter acquisitions of assets from EGOC and Departure.
General and Administrative Expense
| Three months ended September 30 | Nine months ended September 30 | |||||||||||
| ($ thousands) | 2013 | 2012 | % Change | 2013 | 2012 | % Change | ||||||
| General and administrative | 21,282 | 19,107 | 11 | 64,399 | 59,199 | 9 | ||||||
| % of revenue | 3.9 | 3.6 | 4.1 | 3.6 | ||||||||
General and administrative expense increased 11 percent to $21.3 million (3.9 percent of revenue) for the third quarter of 2013 compared with $19.1 million (3.6 percent of revenue) for the third quarter of 2012. For the nine months ended September 30, 2013, general and administrative expense totaled $64.4 million (4.1 percent of revenue) compared with $59.2 million (3.6 percent of revenue) recorded for the nine months ended September 30, 2012, an increase of nine percent. The overall increase in general and administrative expense in the current periods reflects the negative translational impact of a stronger United States dollar on United States and international administrative expenses and increased costs to support growing international operations.
Share-Based Compensation Expense (Recovery)
| Three months ended September 30 | Nine months ended September 30 | |||||||||||
| ($ thousands) | 2013 | 2012 | % Change | 2013 | 2012 | % Change | ||||||
| Share-based compensation | 4,268 | 3,659 | 17 | 6,094 | (2,557) | (338) | ||||||
Share-based compensation expense (recovery) arises from the Black-Scholes valuation accounting associated with the Company's share-based compensation plans, whereby the liability associated with share-based compensation is adjusted for the effect of granting and vesting of employee stock options and changes in the underlying price of the Company's common shares.
For the three months ended September 30, 2013, share-based compensation expense (recovery) was an expense of $4.3 million compared with an expense of $3.7 million recorded in the third quarter of 2012. For the nine months ended September 30, 2013, share-based compensation was an expense of $6.1 million compared with a recovery of $2.6 million for the nine months ended September 30, 2012. The increase in share-based compensation expense in the three and nine months ended September 30, 2013, compared to the same periods of 2012 was a result of the change in the fair value of share-based compensation liability primarily resulting from movements in the price of the Company's common shares. The closing price of the Company's common shares was $17.64 at September 30, 2013 ($15.10 at September 30, 2012), compared with $16.28 at June 30, 2013 ($14.00 at June 30, 2012), $17.32 at March 31, 2013 ($14.91 at March 31, 2012) and $15.37 at December 31, 2012 ($16.25 at December 31, 2011).
Interest Expense
| Three months ended September 30 | Nine months ended September 30 | |||||||||||
| ($ thousands) | 2013 | 2012 | % Change | 2013 | 2012 | % Change | ||||||
| Interest expense | 4,741 | 4,926 | (4) | 13,400 | 14,804 | (9) | ||||||
| Interest income | (302) | (145) | 108 | (1,013) | (365) | 178 | ||||||
| 4,439 | 4,781 | (7) | 12,387 | 14,439 | (14) | |||||||
Interest is incurred on the Company's $10.0 million Canadian-based revolving credit facility, the $400.0 million global revolving credit facility and the USD $300.0 million senior unsecured notes issued in February 2012. The amortization of deferred financing costs associated with the issuance of the Company's long-term debt was included in interest expense in both the three and nine months ended September 30, 2013 and 2012.
The decrease in interest expense in the nine months ended September 30, 2013, compared to the same period of the prior year was mainly due to interest incurred in the prior year on the USD $100.0 million remaining balance of the short-term acquisition loan which was repaid in full during the second quarter of 2012.
Foreign Exchange and Other ((Gain)/Loss)
| Three months ended September 30 | Nine months ended September 30 | |||||||||||
| ($ thousands) | 2013 | 2012 | % Change | 2013 | 2012 | % Change | ||||||
| Foreign exchange and other | (2,481) | (3,018) | (18) | 15,431 | 5,793 | 166 | ||||||
Included in this amount is the impact of the conversion of the Australian operations from Australian dollars to United States dollars. The change in foreign exchange (gain) loss in the three and nine months ended September 30, 2013, compared to same periods of 2012 was mainly due to movements in the Australian currency. During the nine months ended September 30, 2013 the Australian dollar weakened by approximately 10 percent against the United States dollar causing a foreign currency loss on translation of the Company's USD denominated debt into Australian dollars. The Australian dollar strengthened somewhat against the United States dollar during the three months ended September 30, 2013 resulting in a foreign currency gain in the current quarter.
Income Taxes
| Three months ended September 30 | Nine months September 30 | |||||||||||
| ($ thousands) | 2013 | 2012 | % Change | 2013 | 2012 | % Change | ||||||
| Current income tax | 13,044 | 9,795 | 33 | 36,570 | 41,017 | (11) | ||||||
| Deferred income tax | 3,890 | 14,929 | (74) | 21,926 | 43,137 | (49) | ||||||
| 16,934 | 24,724 | (32) | 58,496 | 84,154 | (30) | |||||||
| 33.4% | 35.5% | 36.5% | 33.2% | |||||||||
The effective income tax rate for the three months ended September 30, 2013 was 33.4 percent compared with 35.5 percent for the three months ended September 30, 2012. The effective income tax rate for the nine months ended September 30, 2013 was 36.5 percent compared with 33.2 percent for the nine months ended September 30, 2012. The increase in the effective income tax rate for the nine months ended September 30, 2013 was due to a higher proportion of taxable income earned in higher tax rate jurisdictions outside of Canada, with the additional impact of foreign exchange translation losses affecting the effective rate in the first half of 2013.
Financial Position
The following chart outlines significant changes in the consolidated statement of financial position from December 31, 2012 to September 30, 2013:
| ($ thousands) | Change | Explanation | ||
| Cash and cash equivalents | 47,718 | See consolidated statements of cash flows. | ||
| Accounts receivable | 5,216 | Increase was due to increased operating activity in the third quarter of 2013 compared to the fourth quarter of 2012. | ||
| Inventories and other | (22,133) | Decrease was due to normal course use of consumables offset by additional inventory. | ||
| Property and equipment | 163,766 | Increase was due to additions to fixed assets from the current new build construction program; the acquisitions of the EGOC and Departure assets during the second quarter; and a strengthening of the USD quarter-end foreign exchange rate on the consolidation of the Company's foreign subsidiaries, offset by depreciation. | ||
| Accounts payable and accruals | 6,235 | Increase was due to increased operating activity in the third quarter of 2013 compared to the fourth quarter of 2012. | ||
| Operating lines of credit | 86,074 | Increase was due to additional draws during the period on the global revolving credit facility and the impact of foreign exchange fluctuations on the consolidation of USD denominated debt held by the Company's foreign subsidiaries, offset by repayments during the period. | ||
| Income taxes payable | (16,752) | Decrease was due to tax instalments and refunds, net of the current income tax provision for the period. | ||
| Share-based compensation | 3,682 | Increase was due to the increase in the price of the Company's common shares as at September 30, 2013 compared with December 31, 2012. | ||
| Long-term debt | 10,262 | Increase was due to foreign exchange fluctuations on the USD denominated long-term debt. | ||
| Deferred income taxes | 22,422 | Increase was primarily due to tax depreciation of assets added during the first nine months of 2013. | ||
| Shareholders' equity | 82,823 | Increase was due to net income for the period and the impact of foreign exchange rate fluctuations on net assets of foreign subsidiaries, offset by the amount of dividends declared in the period. |
Funds from Operations and Working Capital
| Three months ended September 30 | Nine months ended September 30 | |||||||||||
| ($ thousands) | 2013 | 2012 | % Change | 2013 | 2012 | % Change | ||||||
| Funds from operations | 105,923 | 121,229 | (13) | 334,402 | 389,799 | (14) | ||||||
| Funds from operations per share | $0.69 | $0.80 | (14) | $2.19 | $2.55 | (14) | ||||||
| Working capital (deficit) 1 | (34,355) | 13,861 | (348) | (34,355) | 13,861 | (348) | ||||||
| 1 Comparative figure as of December 31, 2012. |
During the three months ended September 30, 2013, the Company generated funds from operations of $105.9 million ($0.69 per common share) compared with funds from operations of $121.2 million ($0.80 per common share) for the three months ended September 30, 2012, a decrease of 13 percent. For the nine months ended September 30, 2013, the Company generated funds from operations of $334.4 million ($2.19 per common share), a decrease of 14 percent from funds from operations of $389.8 million ($2.55 per common share) generated in the first nine months ending of 2012. Reduced operating activity in North America was the main reason for the decrease in funds from operations for the three and nine months ended September 30, 2013 compared to the same periods in 2012.
At September 30, 2013, the Company had a working capital deficit of $34.4 million, compared to positive working capital of $13.9 million at December 31, 2012. The second quarter acquisitions of the assets of EGOC and Departure utilized the Company's working capital resources and this, in addition to funding of the Company's current new build program, resulted in a working capital deficit at September 30, 2013. The Company expects funds generated by operations, combined with current and future credit facilities, to fully support current operating and capital requirements. Existing revolving credit facilities provide for total borrowing of $410.0 million, of which $77.3 million was available at September 30, 2013.
Investing Activities
| Three months ended September 30 | Nine months ended September 30 | |||||||||||
| ($ thousands) | 2013 | 2012 | % Change | 2013 | 2012 | % Change | ||||||
| Acquisitions | - | - | - | (76,408) | - | - | ||||||
| Purchase of property and equipment | (88,951) | (69,751) | 28 | (235,313) | (226,360) | 4 | ||||||
| Net change in non-cash working capital | 1,647 | 21,801 | (92) | (2,842) | 8,352 | (134) | ||||||
| Cash used in investing activities | (87,304) | (47,950) | 82 | (314,563) | (218,008) | 44 | ||||||
Purchases of property and equipment during the third quarter of 2013 totaled $89.0 million (2012 - $69.8 million). Purchases of property and equipment during the first nine months of 2013 totaled $235.3 million (2012 - $226.4 million). The purchase of property and equipment for the three and nine months ended September 30, 2013 relate predominantly to expenditures made pursuant to the Company's ongoing new build program.
During the second quarter of 2013 the Company acquired the rental assets of EGOC and the directional drilling assets of Departure. These acquisitions increased the Company's presence in the rental and directional drilling markets in Western Canada.
Financing Activities
| Three months ended September 30 | Nine months ended September 30 | |||||||||||
| ($ thousands) | 2013 | 2012 | % Change | 2013 | 2012 | % Change | ||||||
| Net (decrease) increase in operating lines of credit | (142) | (40,493) | (100) | 78,057 | 29,188 | 167 | ||||||
| Issue of senior unsecured notes | - | - | - | - | 300,000 | (100) | ||||||
| Repayment of term loan | - | - | - | - | (403,279) | (100) | ||||||
| Issue of capital stock | 508 | - | - | 2,002 | 43 | n/m | ||||||
| Purchase of shares held in trust | (559) | (524) | 7 | (5,917) | (8,044) | (26) | ||||||
| Deferred financing costs | - | - | - | - | (2,156) | (100) | ||||||
| Dividends | (16,868) | (16,087) | 5 | (50,595) | (48,262) | 5 | ||||||
| Net change in non-cash working capital | 2,995 | (65) | n/m | 2,876 | 930 | 209 | ||||||
| Cash (used in) provided by financing activities | (14,066) | (57,169) | (75) | 26,423 | (131,580) | (120) | ||||||
| n/m - Calculation not meaningful. |
The Company's available operating lines of credit consist of a $400.0 million global revolving credit facility (the "Global Facility") and a $10.0 million Canadian based revolving credit facility (the "Canadian Facility"). The Global Facility is available to the Company and certain of its wholly-owned subsidiaries, and may be drawn in Canadian, United States or Australian dollars, up to the equivalent value of $400.0 million Canadian dollars. The amount available under the Canadian Facility is $10.0 million or the equivalent United States dollars.
Net draws of the operating lines of credit for the nine months ended September 30, 2013 were mainly used to fund the ongoing new build program, which added five new ADR® drilling rigs to the Company's fleet in the first nine months of 2013 (two in Canada and three in the United States) as well as six new well servicing rigs (five in Canada and one in the United States). As of September 30, 2013, 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.
In February 2012, the Company completed the private placement of USD $300.0 million of senior unsecured notes, with the proceeds from the issuance being used to repay a portion of the USD $400.0 million unsecured term loan with the remaining balance repaid in full in the second quarter of 2012.
On June 21, 2013 the Company received approval from the Toronto Stock Exchange to acquire for cancellation up to three percent of the Company's issued and outstanding common shares under a Normal Course Issuer Bid (the "Bid"). The Company may purchase up to 4,599,367 common shares for cancellation. The Bid commenced on June 25, 2013, and will terminate on June 24, 2014, or such earlier time as the Bid is completed or terminated at the option of the Company. As at September 30, 2013, no common shares have been purchased and cancelled pursuant to the Bid.
The Company previously had a Bid that commenced on June 18, 2012, and terminated on June 17, 2013, under which no common shares were purchased and cancelled.
During the nine months ended September 30, 2013 the Company received $2.0 million from the issuance of common shares in connection with the employee stock option program compared to a nominal amount received during the nine months ended September 30, 2012.
The Board of Directors of the Company has declared a fourth quarter dividend of $0.1175 per common share, a 6.8 percent increase over the previous quarterly dividend rate of $0.1100 per common share. The Company has increased its dividend rate every year since it first started to pay a dividend in 1995. Dividends have been increased at a compound annual growth rate of 17 percent. The fourth quarter dividend is payable January 6, 2014, to all Common Shareholders of record as of December 20, 2013. The dividend is pursuant to the quarterly dividend policy adopted by the Company. Pursuant to subsection 89(1) of the Canadian Income Tax Act ("ITA"), the dividend being paid is designated as an eligible dividend, as defined in subsection 89(1) of the ITA.
New Builds
During the nine months ended September 30, 2013, the Company commissioned three new ADR® drilling rigs and one new well servicing rig in the United States; and two new ADR® drilling rigs and five new well servicing rigs in Canada.
The remaining new build estimated delivery schedule, by geographic area, is as follows:
| Estimated Delivery Date | |||||||||||||
| Q4-2013 | Q1-2014 | Q2-2014 | Q3-2014 | Q4-2014 | Total | ||||||||
| ADRs | |||||||||||||
| Canada | - | - | 1 | 1 | - | 2 | |||||||
| United States | - | 1 | - | - | - | 1 | |||||||
| International | - | 2 | - | - | - | 2 | |||||||
| Total | - | 3 | 1 | 1 | - | 5 | |||||||
| Well Servicing | |||||||||||||
| Canada | 1 | - | - | 1 | - | 2 | |||||||
| United States | - | - | - | - | - | - | |||||||
| Total | 1 | - | - | 1 | - | 2 | |||||||
In addition to the above new builds, the Company is refurbishing and upgrading four drilling rigs into ADR®-style drilling rigs. One drilling rig is being refurbished for the Canadian market, with an estimated delivery date in the first quarter of 2014. The three remaining drilling rigs are being refurbished for the international market, one of the drilling rigs is scheduled for delivery in the fourth quarter of 2013, one drilling rig is scheduled for delivery in the first quarter of 2014 and the other drilling rig is scheduled for delivery in the second quarter of 2014. All of the major refurbishments are supported by contracts.
Outlook
Global economic indicators generally continue to improve, albeit at rates less than previously forecast. Muted economic growth, particularly in the United States, has resulted in reduced levels of demand for oilfield services in spite of general improvements in crude oil and natural gas commodity prices. The WTI crude oil price of USD$102.33 per barrel on September 30, 2013 was up 11 percent compared to USD$92.19 per barrel on September 30, 2012. Similarly, the Henry Hub natural gas price improved 14 percent to USD$3.49 per mmbtu at the end of the third quarter of 2013 compared to USD$3.06 per mmbtu at the end of the third quarter of 2012. Canadian natural gas prices did not fare as well, with the AECO natural gas price closing at $1.92 per mcf at September 30, 2013 down 11 percent compared to $2.16 per mcf at September 30, 2012. The overall improved levels of commodity prices, particularly in the United States, have not resulted in increased capital expenditures on oilfield services as measured by the active drilling and well servicing rig levels in 2013 compared to 2012.
Canadian oilfield services industry activity levels as measured by total drilling operating days for the third quarter of 2013 were essentially flat with the number of drilling operating days recorded by the industry in the third quarter of the prior year. Earlier expectations were that third quarter oilfield services activity levels would rebound significantly from the second quarter seasonal lows due to strong crude oil prices throughout much of the third quarter. While crude oil drilling resumed later in the quarter as field conditions improved, natural gas prices in Canada continued to languish, providing little incentive for the exploration and production companies to increase natural gas related oilfield services expenditures. However, there are a number of potential Canadian natural gas liquids projects that continue to generate interest in the northwest part of the Western Canadian Sedimentary Basin. Additionally, the Montney, Horn River and Duvernay areas are expected to benefit from any potential LNG export projects touted for Canada's future. The Company currently has 11 drilling rigs operating in these key areas and all of the drilling rigs currently under construction or being refurbished for Canada are contracted for these areas. With respect to the next two quarters, the current expectations are that the upcoming winter drilling season will mirror that of last year.
The Company's United States operations continue to improve after a slow start to 2013. Some areas have fared better than others owing to strong prices and demand for crude oil and natural gas liquids. As mentioned above, current activity levels as reflected in the industry drilling rig count continue to underwhelm as exploration and production companies have not generally increased oilfield services demand in an environment of improving commodity prices. The hope is that there will be increased levels of demand in the near term as operators become more comfortable with general economic conditions and increase their 2014 budgets after realizing stronger levels of cash flow in 2013. The Company is currently constructing one new drilling rig for the United States and expects activity and financial results to improve slightly over the next couple of quarters.
The third quarter activity levels for the Company's international operations continued with the gains of the first half of 2013. International crude oil and natural gas prices remain attractive in many of the areas serviced by the Company and, accordingly, the demand for oilfield services has remained steady. The active international drilling rig count was 1,284 drilling rigs at September 30, 2013, up two percent compared to 1,254 active drilling rigs at September 30, 2012. The Company's established geographic diversification is important in international operations as there is still significant geopolitical risk in many of the international areas. The Company is currently building two drilling rigs and refurbishing three drilling rigs for the international market under term contracts. Accordingly, subject to any unexpected negative events in any of the international areas serviced by the Company, international operations are expected to continue to show modest growth in the next two quarters.
Risks and Uncertainties
This document contains forward-looking statements based upon current expectations that involve a number of business risks and uncertainties. The factors that could cause results to differ materially include, but are not limited to, political and economic conditions, crude oil and natural gas prices, foreign currency fluctuations, weather conditions, the Company's defense of lawsuits and the ability of oil and natural gas companies to pay accounts receivable balances and raise capital or other unforeseen conditions which could impact on the use of the services supplied by the Company.
Conference Call
A conference call will be held to discuss the Company's third quarter 2013 results at 2:00 p.m. MST (4:00 p.m. EST) on Monday, November 11, 2013. The conference call number is (647) 427-7450 (in Toronto) or 1-888-231-8191 (outside Toronto). A taped recording will be available until November 18, 2013 by dialing 1-416-849-0833 (in Toronto) or 1-855-859-2056 (outside Toronto) and entering the reservation number 20605551. A live broadcast may be accessed through the Company's web site at www.ensignenergy.com.
Ensign Energy Services Inc. is an international oilfield services contractor and is listed on the Toronto Stock Exchange under the trading symbol ESI.
| Ensign Energy Services Inc. | |||||||
| Consolidated Statements of Financial Position | |||||||
| As at | September 30 2013 |
December 31 2012 |
|||||
| (Unaudited, in thousands of Canadian dollars) | |||||||
| Assets | |||||||
| Current Assets | |||||||
| Cash and cash equivalents | $ | 80,926 | $ | 33,208 | |||
| Accounts receivable | 428,376 | 423,160 | |||||
| Income taxes receivable | 5,555 | - | |||||
| Inventories and other | 54,212 | 76,345 | |||||
| 569,069 | 532,713 | ||||||
| Property and equipment | 2,697,009 | 2,533,243 | |||||
| Note receivable | 5,215 | 5,021 | |||||
| $ | 3,271,293 | $ | 3,070,977 | ||||
| Liabilities | |||||||
| Current Liabilities | |||||||
| Accounts payable and accruals | $ | 250,847 | $ | 244,612 | |||
| Operating lines of credit | 318,064 | 231,990 | |||||
| Income taxes payable | - | 11,197 | |||||
| Dividends payable | 16,868 | 16,853 | |||||
| Share-based compensation | 17,645 | 14,200 | |||||
| 603,424 | 518,852 | ||||||
| Long-term debt | 306,851 | 296,589 | |||||
| Share-based compensation | 4,356 | 4,119 | |||||
| Deferred income taxes | 415,881 | 393,459 | |||||
| 1,330,512 | 1,213,019 | ||||||
| Shareholders' Equity | |||||||
| Share capital | 168,735 | 164,670 | |||||
| Contributed surplus | 3,199 | 4,811 | |||||
| Foreign currency translation reserve | 12,988 | (16,007) | |||||
| Retained earnings | 1,755,859 | 1,704,484 | |||||
| 1,940,781 | 1,857,958 | ||||||
| $ | 3,271,293 | $ | 3,070,977 | ||||
| Ensign Energy Services Inc. | ||||||||||||
| Consolidated Statements of Income | ||||||||||||
| For the three and nine months ended | ||||||||||||
| (Unaudited, in thousands of Canadian dollars, except per share data) | ||||||||||||
| Three months ended | Nine months ended | |||||||||||
| September 30 | September 30 | September 30 | September 30 | |||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||
| Revenue | $ | 542,951 | $ | 525,666 | $ | 1,561,967 | $ | 1,667,215 | ||||
| Expenses | ||||||||||||
| Oilfield services | 398,546 | 373,982 | 1,124,317 | 1,170,956 | ||||||||
| Depreciation | 66,264 | 57,599 | 178,873 | 166,198 | ||||||||
| General and administrative | 21,282 | 19,107 | 64,399 | 59,199 | ||||||||
| Share-based compensation | 4,268 | 3,659 | 6,094 | (2,557) | ||||||||
| Foreign exchange and other | (2,481) | (3,018) | 15,431 | 5,793 | ||||||||
| 487,879 | 451,329 | 1,389,114 | 1,399,589 | |||||||||
| Income before interest and income taxes | 55,072 | 74,337 | 172,853 | 267,626 | ||||||||
| Interest income | 302 | 145 | 1,013 | 365 | ||||||||
| Interest expense | (4,741) | (4,926) | (13,400) | (14,804) | ||||||||
| Income before income taxes | 50,633 | 69,556 | 160,466 | 253,187 | ||||||||
| Income taxes | ||||||||||||
| Current tax | 13,044 | 9,795 | 36,570 | 41,017 | ||||||||
| Deferred tax | 3,890 | 14,929 | 21,926 | 43,137 | ||||||||
| 16,934 | 24,724 | 58,496 | 84,154 | |||||||||
| Net income | $ | 33,699 | $ | 44,832 | $ | 101,970 | $ | 169,033 | ||||
| Net income per share | ||||||||||||
| Basic | $ | 0.22 | $ | 0.29 | $ | 0.67 | $ | 1.11 | ||||
| Diluted | $ | 0.22 | $ | 0.29 | $ | 0.66 | $ | 1.11 | ||||
| Ensign Energy Services Inc. | ||||||||||||
| Consolidated Statements of Cash Flows | ||||||||||||
| For the three and nine months ended | ||||||||||||
| (Unaudited, in thousands of Canadian dollars) | ||||||||||||
| Three months ended | Nine months ended | |||||||||||
| September 30 | September 30 | September 30 | September 30 | |||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||
| Cash provided by (used in) | ||||||||||||
| Operating activities | ||||||||||||
| Net income | $ | 33,699 | $ | 44,832 | $ | 101,970 | $ | 169,033 | ||||
| Items not affecting cash | ||||||||||||
| Depreciation | 66,264 | 57,599 | 178,873 | 166,198 | ||||||||
| Share-based compensation, net of cash paid | 6,020 | 6,499 | 10,080 | 3,558 | ||||||||
| Unrealized foreign exchange and other | (4,032) | (2,705) | 21,309 | 6,370 | ||||||||
| Accretion on long-term debt | 82 | 75 | 244 | 1,503 | ||||||||
| Deferred income tax | 3,890 | 14,929 | 21,926 | 43,137 | ||||||||
| Net change in non-cash working capital | (40,485) | (22,641) | 3,808 | 2,602 | ||||||||
| 65,438 | 98,588 | 338,210 | 392,401 | |||||||||
| Investing activities | ||||||||||||
| Purchase of property and equipment | (88,951) | (69,751) | (235,313) | (226,360) | ||||||||
| Acquisitions | - | - | (76,408) | - | ||||||||
| Net change in non-cash working capital | 1,647 | 21,801 | (2,842) | 8,352 | ||||||||
| (87,304) | (47,950) | (314,563) | (218,008) | |||||||||
| Financing activities | ||||||||||||
| Net (decrease) increase in operating lines of credit | (142) | (40,493) | 78,057 | 29,188 | ||||||||
| Issue of senior unsecured notes | - | - | - | 300,000 | ||||||||
| Repayment of term loan | - | - | - | (403,279) | ||||||||
| Issue of capital stock | 508 | - | 2,002 | 43 | ||||||||
| Purchase of shares held in trust | (559) | (524) | (5,917) | (8,044) | ||||||||
| Deferred financing costs | - | - | - | (2,156) | ||||||||
| Dividends | (16,868) | (16,087) | (50,595) | (48,262) | ||||||||
| Net change in non-cash working capital | 2,995 | (65) | 2,876 | 930 | ||||||||
| (14,066) | (57,169) | 26,423 | (131,580) | |||||||||
| Net (decrease) increase in cash and cash equivalents | (35,932) | (6,531) | 50,070 | 42,813 | ||||||||
| Effects of foreign exchange on cash and cash equivalents | 4,119 | 2,093 | (2,352) | 3,713 | ||||||||
| Cash and cash equivalents | ||||||||||||
| Beginning of period | 112,739 | 53,577 | 33,208 | 2,613 | ||||||||
| End of period | $ | 80,926 | $ | 49,139 | $ | 80,926 | $ | 49,139 | ||||
| Supplemental information | ||||||||||||
| Interest paid | $ | 1,669 | $ | 1,827 | $ | 9,088 | $ | 9,322 | ||||
| Income taxes paid | $ | 18,599 | $ | 9,949 | $ | 53,322 | $ | 36,914 | ||||
SOURCE: Ensign Energy Services Inc.
Glenn Dagenais, Executive Vice President Finance and Chief Financial Officer, (403) 262-1361.
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