Ensign Energy Services Inc.

Ladies and gentlemen, and welcome to the Ensign Energy Services Inc. fourth quarter 2022 results conference call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, March 3rd, 2023. I would now like to turn the conference over to Nicole Romanol, Investor Relations, please go ahead.

Thank you, Michelle. Good morning and welcome to Enzyme Energy Services' fourth quarter and year-end 2022 conference call and webcast. On our call today, Bob Geddes, President and COO, and Mike Gray, Chief Financial Officer, will review Enzyme's fourth quarter and year-end 2022 highlights and financial results, followed by our operational update and outlook. We'll then open the call for questions. Our discussion today may include forward-looking statements based upon current expectations that involve several business risks and uncertainties. The factors that could cause results to differ materially include but are not limited to political, economic, and market conditions, crude oil and natural gas prices, foreign currency fluctuations, weather conditions, the company's defense of lawsuits, the ability of oil and gas companies to pay accounts receivable balances, and other unforeseen conditions which could impact the demand for the services supplied by the company. Additionally, our discussion today may refer to non-GAAP financial measures such as adjusted EBITDA. Please see our fourth quarter and year-end earnings release and CDAR filings for more information on forward-looking statements and the company's use of non-GAAP financial measures. With that, I'll pass it on to Bob.

Thanks, Nicole. Good morning, everyone. So Enzyme, as you know, operates a fleet of 230 high spec drilling rigs in eight different countries around the world, along with roughly a hundred well service rigs in North America. So we operate about 3 billion assets worldwide employing about 7,000 people. 2022 was a year coming out of COVID where we upgraded and reactivated 31 drill rigs, which were all covered with long-term contracts with a payout of incremental capital in less than 12 months. Also in the fourth quarter, we divested our Canadian directional drilling business in exchange for shares in the publicly traded directional drilling consolidator, which has already doubled in value. We continue to see the drilling contractor's space focus on margin over market share, which helps provide this industry better returns necessary to support new technology development and returns to our shareholders. Of particular interest, you'll see in our press release, I know regarding our policy that payments to employees and management is capped at 5% of EBITDA. Close to 30% of the stock is owned by management directors, reinforcing the fact that we are very aligned with our shareholders. I'll turn it over to Mike for a summary.

Thanks, Bob. The outlook for oilfield services continues to be positive with year-over-year increases in oilfield services demand and activity. Inflation concerns have continued to prompt central banks to tighten monetary policies, leading to uncertainty for global economies. These factors continue to impact global energy commodity prices and add uncertainty to the macroeconomic outlook over the short term. Despite these macro headwinds, Enzyme's fourth quarter and 2022 year-end results reflect meaningful improvements year over year, both operational as well as financially. Total operating days were up in the fourth quarter of 2022, with Canadian operations reporting an increase of 21%, United States operations a 36% increase, and international operations a 14% increase in operating days compared to the fourth quarter of 2021. For the year ended December 31st, 2022 total operating days were up with the Canadian operations reporting a 51% increase, United States operations, a 46% increase and an 11% increase in international operating days compared with the prior year. The company generated revenue of 468 million in the fourth quarter of 2022, a 58% increase compared with revenue of 296.2 million generated in the fourth quarter of the prior year. For the year ended December 31, 2022, the company generated revenue of $1.6 billion, a 58% increase compared with revenue of $996 million generated in the prior year. Adjusted EBITDA for the fourth quarter of 2022 was $130 million, higher by $72.1 million than adjusted EBITDA of $57.9 million in the fourth quarter of 2021. Adjusted EBITDA for the year ended December 31, 2022, with $373.6 million, a 75% increase compared to adjusted EBITDA of $213.2 million generated in the prior year. The 2022 increase in adjusted EBITDA is primarily due to improving industry conditions caused by supportive commodity prices. Adjusted EBITDA margins for the fourth quarter of 2022 was 27.8%, which is a large improvement from the 19.5% margins that we had in the fourth quarter of 2021. We continue to expect margins to increase into 2023. G&A expense for the fourth quarter of 2022 was $12.8 million, compared with $10.2 million in the fourth quarter of 2021. G&A expense totaled $48.6 million for the year ended December 31, 2022, compared with $38.2 million for the same period in 2021. G&A expense increased due to increased operational activity, the reinstatement of salary rollbacks taken during the downturn, and annual wage increases. Further increasing the G&A expense was the negative foreign exchange translation on converting US denominated expenses. Net capital expenditures for the fourth quarter of 2022 totaled $40.6 million compared to net capital expenditures of $20.3 million in the corresponding period of 2021. The net capital expenditures during the year ended 2022 totaled $126.8 million compared to $58 million in the corresponding period of 2021. Our 2023 CAPEX budget is set at $157 million, which primarily relates to maintenance capital. Long-term debt net of cash was reduced by $51 million since December 31, 2021. Our debt reduction target for 2023 is approximately $200 million, and our expectation is to reduce debt by $600 million by the end of 2025, with industry conditions permitting. Also to note, during the fourth quarter, the company sold its Canadian directional business to Cathedral Energy Services for $5 million, and common shares, which translates to approximately 7 million shares. On that note, I'll pass the call back to Bob.

Thanks.

So today we have roughly 125 drilling rigs, roughly 55% of our worldwide drilling fleet active and under contract today. We also have 55 of our well-servicing rigs active in North America, which is about 60% of our marketed fleet of 100 well-serviced rigs. Starting with our largest business unit, the U.S., we operate in various regions, California, the Rockies, and a primary focus in the Permian. We have 43 of our super and high-spec fleet active in the oil-rich Permian today, 10 in the Rockies, and five in California. I'll point out that we are not active in the Hainesville gas play, and with very few of our U.S. rigs working on gas prospects, we're generally not seeing the effects of a challenging gas market on our rig activity today. The Rockies continue to pivot over to more high-line power applications with our high-spec AC rigs. With this growing market, we see the opportunity to differentiate Ensign further by applying high-line power kits a la CART coupled with our edge power management system. This helps to reduce emissions and fuel costs. California continues to be an enigma. Give us more energy, but don't drill in my backyard is how it goes. The confliction continues as drilling permits are restricted. Nonetheless, we see a path forward where we will have a base of five rigs active through the rest of the year, possibly moving to add three or four more depending on permit flow. Leading edge rigs for our super spec triples in the U.S. are close to $40,000 a day when we include all the a la carte items like pipe loaders, edge automated drill rig control systems, et cetera. In Canada, we have been steady with 50 high spec drill rigs operating and approaching breakup now. we have seen strong demand for high-spec rigs or high-spec pad rigs over breakup. We expect to keep 20 to 25 of these high-spec pad rigs running over breakup and then building up after breakup back to 50 rigs into the third quarter and 60 by year end. Happy to point out we just closed a deal with a large Canadian operator to tie up two of our high-spec triples on two-year contracts at rates all in close to $40,000 a day. One of the rigs will be transferred up from our U.S. operation once it completes its contract there. That's in the Rockies. As you know, we have the most diverse fleet in Canada with a fleet of 112 high-spec rigs ranging from 800 horsepower all the way to 3,000 horsepower in variations of high-spec singles, high-spec doubles, and high-spec triples. The Canadian Wealth Service fleet has 16 active today with growing business through the summer and rest of the year. We have a few of those rigs working on 24-day operations. Moving to international, Australia has seven of 14 operating today. Australia has been somewhat of a disappointment through 2022 as costs continue to climb faster than the day rate increases on contract turnovers there. Still a very tough place to make a return. In the fourth quarter, and turning to Oman, we activated two of our high-spec ADRs in Oman with a third one starting up here in about a month. These three rigs are tied up on five-year long-term contracts, and they're also on performance-based contracts, which enhance our margins. We just re-contracted our second high-spec 1,500-horsepower rig in Argentina, which provides full contract coverage out another 12 months. We're careful not to sign long-term contracts over one year in Argentina so as to be able to pass on rate increases and stay ahead of inflation. You'll recall we have eight cold-stacked rigs in Venezuela. It looks like one of our major clients there may be starting up operations in the fourth quarter, which may see one of our drill rigs go back to work. Very preliminary stages at this point. Kuwait and Bahrain, where we have four rigs, high-spec 2,000 and 3,000 horsepower rigs on long-term contracts, they continue to run like tops with operational excellence in the top decile. We also continue to expand our edge drilling solution technology on our rigs around the world and have a backlog today of about 15 systems to be deployed and installed. Our average product revenue for edge is around $1,000 to $1,500 per day, which with high margins, typical of technology products, is rapidly becoming a growing EBITDA generator for Enzyme year over year. So with that, I'll turn the call back to the operator for Q&A.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the hands up before entering any keys. One moment, please, for your first question. Your first question comes from Erin McNeil from the TD Cohen. Please go ahead.

Thanks for taking my questions. Bob, one of your competitors often speaks to being sold out on AC triples in Canada. I assume you're probably in the same boat, but to the extent that we see incremental demand growth for this rig class over the coming years, can you speak to how you might participate in any supply growth in the Montney or other, you know, gas plays just given the Blueberry River? And I guess what I'm getting at is, is this something that you're expecting to invest in over the coming years, or do you have to sort of sit on your hands given your debt reduction targets?

Yeah, no, I think that, you know, to be clear, nothing has been released as far as the consequences of the Blueberry decision. There's a lot of conversation on how that will affect drilling prospects. It'll be positive in any event. As you saw, as I just mentioned, we have a Rockies gas rig, that 1,500-horsepower high-spec rig that we're able to move forward after it finishes its contract, put onto a two-year contract up here, close to $40,000 a day. We also have two other high-spec rigs in Canada that – are ready to go to work and could fill that demand. So I would suggest that what is sold out of rigs, meaning Canada, we've got capacity for two more to put to work. Would we invest in a new one? No, I think we need to see rates well over 50, closer to 55, before one could get their head around putting any investment in it. So we've got a long way to go. And you also, you know, I'm not worried about the fill into the Coastal Link pipeline. You know, we have enough forward view with our clients that they seem to be pretty rational in what they need for a rig fleet moving forward. So I don't think Canada needs more rigs is where I'm going.

Understood. Mike? Sticking with the debt theme, can you walk us through what a debt refinancing might look like in terms of both timing, composition, and if you want to be so bold, any indications of what a blended cost of debt might look like?

Sure. Right now, we're looking at all options and really looking at what's going to be the most beneficial to the company and shareholders going forward, what's going to have the lowest cost of debt. I'd say we have nothing specific we can share, but when we look at it, there's several options out there. Definitely the high-yield market has improved from where it was in the prior year. Our debt metrics have also really improved as well. So our belief was always to get a couple of good quarters under our belt as it's easier to have discussions with potential investors and debt holders on having actual results instead of what things could be. So with Q4 being operationally and financially quite strong, And with Q1 and 2023 in the whole being quite operationally strong as well as financially, we'll really look to probably potentially kick something off probably in that May after the Q1 results, just giving us another quarter of operational performance. And like I said, our debt to EBITDA metrics have gone down substantially from where they were in early 2022 of over five times debt to EBITDA to sub four now into 2022. And then we'll see it getting into the twos in 2023. Like I said, it's a lot easier to get stuff behind you and then to go out and mark it off of the story instead of having to say, well, this is what the future looks like. So nothing specific we can get into, but definitely there's options out there that we're looking at.

Maybe I'll sneak one more in. Bob, could you give us a sense of what the potential list could be in Australia in terms of the number of rigs you could put to work and what the timing might look like?

Yeah, I think, you know, Australia is mostly gas. No, it's mostly gas used for utility consumption and export. So they've got a nice arbitrage and, you know, the government put a $12 cap on, which sounds like a nice number to put a cap on gas for internal consumption. So it's... The interesting thing is, as you know, gas is a very geographic-specific situation. But, yeah, we just see it very normal there. There's very few clients in Australia. It's a tough place to do business. Inflation has been pretty rapid. It was the last one to come out of COVID, so there was a lot of costs there. a lot of business frustration over the last three years there. And Australia sometimes to me feels bureaucratically a little bit like California, not to the same extent. They do like resources because they exploit them and they consume them. Not to read too much into that, but Australia, because of its gas, is not seeing the same uptick like you see in other areas that are oily.

Understood. Thanks, everyone. I'll turn it over. Thanks, Aaron.

Thank you. The next question comes from Cole Priera of Stifel. Please go ahead.

Hi. Good morning, everyone. So it's been about a month since a lot of your U.S. driller peers reported. I'm just curious. I mean, you mentioned you don't really have a ton of gas exposure, but have you seen any weakening at all of leading-edge day rates in the U.S.?

No, not any weakening. As you know, we were pushing up rates quarter over quarter, and we've kind of landed on the low 30s, mid 30s as a base rate before any a la carte items. Our contracts have been turning over into those numbers consistently. Even as of yesterday, we signed another one up. We're tending to, through the build-up in rates, we tend to term out on six-month intervals. As we move into where we see some stability in rates, we tend to term out in one- to two-year contracts to move term. we've probably added $100 million of contract, that's $100 million EBITDA contract term forward over the last six months with that strategy. So no, they're certainly not seeing any tension on bidding down, no.

Got it. And on the two Canadian rigs contract, did any additional details you can give on that? Was that related to LNG work? And you said one It's from the U.S. Was the other just idle in Canada? And then what would any upgrade costs for those rigs be, if need be?

Yeah, good question, Cole. The other rig was currently contracted with this particular operator, and so they wanted to extend its contract out two years and add an additional sister rig. The sister rig to that rig, which was shipped out of the U.S. three or four years ago, was... a Canadian rig. So it's kind of coming back to Canada, tying it up with the same client on a two-year term with rates, as I mentioned to you there, all in, you know, closer to $40,000 a day. As far as what it's drilling, it's, you know, it's that DuVernay stuff. So, you know, liquids and it's not dry gas by any means, no.

Okay, got it. And then, so I guess my takeaway from that would be that The high day rate is more to support the customer, you know, wanting to make sure these rigs are available as opposed to supporting some kind of upgrade CapEx. Is that fair?

Correct. There's no CapEx involved in any of these two rigs, zero. The operator is paying the full load.

Okay, perfect. And, you know, obviously a lot of talk about the high spec market in Canada, which means pretty healthy. I mean, what do you – Seeing in the double market right now, I mean, obviously, it's not quite as tight, but I assume still somewhat positive?

Yeah, absolutely. There's just a lot more conventional doubles, and then the bridge into a high-spec double is defined by a 7500 PSI operating system, high-torque top drive, the ability to move as a pad rig, that type of thing. We're seeing good demand in our high-spec doubles. We're signing those close to $25,000 a day now. So they're kind of filling in the gap behind the high-spec triples. High-spec doubles start to lap over into the bottom end of the high-spec triples. So you can see the arbitrage on the rates that's pulling our high-spec double rates up. And also, as you see, the Clearwater move more into pad-type drilling. Pad-type drilling, of course, suggests that you want a high-spec double because you can rack back more capacity than, let's say, a high-spec single. We only have four high-spec singles, but we've got a lot of high-spec doubles. So we're in a pretty good position to run that market a little bit.

Okay, perfect. Mike, can you give any details on the split of the CapEx and how many rigs you might plan to upgrade this year?

Yeah, so our CapEx budget is primarily maintenance capital. We'll kind of look at growth capital opportunities as they come up, but definitely conversations with customers is that it has to be funded by them. So yeah, the $157 million is predominantly maintenance capital, and then we'll, like I said, assess as we go throughout 2023.

Okay, got it. That's all for me. Thanks. I'll turn it back.

Thank you. Once again, ladies and gentlemen, if you do have a question, please press star 1 at this time. The next question comes from Weigert Saad of ATB Capital Markets. Please go ahead.

Thank you. Good morning. Bob, since the beginning of the year, how has your rig count in the U.S. changed?

It's been very stable. You know, the buildup was 2022. Right now, we're stable, running about 60 rigs, give or take, on any given day in the U.S.

And what's your outlook for the next, let's say, three to six months?

So, as I mentioned, we've been looking for a term in recontracting and understanding that there may be some gas rigs moving out of Haynesville, knocking on our clients' doors. We've been ahead of that. We saw that coming. So we've been tying up our clients on longer-term contracts at current rates in the 30s, as we mentioned there. You know, I see the, you know, we go from California east. California, of course, is all dependent on licensing, and that seems to be a little bit of a teaser there. We think there will be a clear path to see another three or four rigs there. We have one of our rigs out of California. It's an electric super single that'll be deployed into the Rockies, tied into high-line power to do surface holes. Very efficient doing that. And the Rockies looks to be quite stable for us. It'll be down one rig that we're deploying back to Canada, a 1,500 horsepower super spec rig. And then the Permian. We're very steady with our client base in the Permian. And we're seeing some of the clients actively putting out one to two year contracts at these rates because they've seen quite an aggressive 2022 quarter over quarter rate increase. And I think they're a little fearful that that might continue through 2023. Plus, they also want to secure their best rigs. That's the other thing they're doing.

And in the Canadian market, Bob, how many super triple rigs do you have?

Well, in the Canadian market, a little different, like in Permian, a super spec triple, of course, is four gens, three pumps, and a high torque top drive because you're drilling with five and a half inch pipe going out four miles. you need the three pumps, the high torque top drive. In Canada, we're not drilling out with those horizons, with those hole diameters. So the concept of super spec triple in Canada just isn't there. The high spec triples are getting the same rates without having to add the third pump and the fourth generator. All of our high spec rigs or triples in Canada you know, have the capacity to run both pumps full power and the high torque top drive. And we're seeing more demand now in Canada for the automated drilling rig controls. So the ADS, which is our auto back, is kind of an auto connection, a little bit of automation on the rig, which drives consistent connection times and back to bottom, which operators are saying, we don't need to go faster, we need to be consistent Much like, so it's becoming, it's taking a page out of manufacturing. Operators are more concerned about consistent slips to slips than they are going faster slips to slips. It's already going fast enough.

So how many of these high-spec triple rigs do you have?

In Canada, we've got, in the triple side, we've got about 25.

And what's the utilization right now for those?

Well, it'd be – one of them, of course, is a 3,000-horsepower rig. So it'd be 22 divided by 25. Mike, what's that?

And then you have – so you have now one incremental picking up, so you'll get to 23 with that, and then you have one coming from the U.S. Okay. Correct. So you'll be going to – just I want to make sure I get the math right. You'll be going to 24 out of 26.

No, we'd be going to 23. I think one of your math is that one additional one coming out of the U.S. The other one that I mentioned in that two-rig deal with a major is already working, so we'll probably end up at 23 or 26. Okay. That's good.

You know, as you look forward, let's say, over the next 12 months, and I'll go a little bit longer than you described before, you know, between your international markets, where do you see the most growth?

The most growth. I would say, you know, we're back up and running in Oman. And we had Oman shut down for about two or three years. And we're starting to see some more activity for our ADR type, our shallower ADR rigs there. So that may improve through the year. Of course, early discussions are any capital would have to be funded by the operator or we're not interested in the deal. Other than that, I kind of look at 23 as a year of running steadily 130 rigs and harvesting.

And Mike, some of your peers report daily drilling margins. And is there something that you can let us know, either maybe directionally, like how much incremental change there's been, or maybe even absolute numbers of what the daily drilling margin is in dollars per rig day in the US and Canada?

We could look at potentially adding some additional disclosure in the future, but for this call, no, we wouldn't be able to get into that detail. But definitely, I mean, in my statements, EBITDA margins have increased from 19.5% in 2022 of Q4 to 27.8% of Q4 of this year. So definitely we're seeing an increase, and we'll see that probably get into, I'd say, the low 30s into 2023.

With a target, I mean, this business, full cycle, has to see peaks close to 50%. At the rig margin? Yeah.

Great. Well, thank you very much. Thanks, Scott.

Thank you. The next question comes from Keith McKee of RBC. Please go ahead.

Hi, good morning, and thanks for taking my questions. The first one here is, So if we assume that some of the Hainesville rigs or gas rigs make their way to the Permian, Bob, Mike, what do you think the break-even point is for rates where it's worth it for you or another operator to let a rig go down versus accepting a lower rate to remain utilized? Historically, the rates would go down to a certain level and it's worth it to keep the rigs working. Then you end up repricing the fleet at that lower level. But how are you and your competitors, you think, thinking about that now? Has that break-even rate changed? Will you lay down a rig if you can't get $35,000 versus $36,000 per day? Or how does that math work today?

Yeah, no, it's – we're just not – getting into those conversations, we find that, because we've been, you know, my experience has taught me years over year that it costs a lot of money for an operator to change horses. You're on a pad. You've got to complete the pad. You've got a team of the rig, the directional crew, the operators, the drilling staff, and it becomes a finely tuned team. So I've always, we've had clients talk to us and say, you know what, they'd have to see a $5,000 a day drop before they would even consider making a change. So it's really a non-issue in our mind. As far as a break-even point, if we're making close to 30% margins, if there's some suggestion that someone would drop their rate, by 30% to break even to get work, I don't see that happening at all. I mean, the high spec and super spec triples, usually anything over 60% utilization, you can continue to hold price and get it. So it would be very awkward for a contractor to drop his rates. He'd probably be more likely to drop the rig and be just down one rig. and with the sales staff and to go and find work for it.

Got it. Understood. Now, just on the debt pay down, I think it was $200 million for the year. Are you contemplating that repaying debt with 100% of your free cash flow? I guess the question is, is that $200 million your free cash flow forecast or for 2023, or is there some cushion in there for holding cash on the balance sheet?

There definitely will be some cushion. So like I said, if there's some selective upgrade capital that makes economic sense, we'd have the ability to look at that as well. So that's a target based on what we're seeing with our forecast to be able to start to de-lever, but also give us some flexibility to look at opportunities as they arise.

Just to add to Mike's comment, we don't look at upgrade capital if it doesn't pay out in less than one year, and we target six months.

Okay. Thanks very much. Thank you.

Thank you. There are no further questions. I will turn the call back to Bob Geddes for closing remarks.

Thank you, Operator. We saw 2022 as being the year where Enzyme deployed capital to upgrade and reactivate 31 rigs, which along with the rest of our active fleet will provide us a fleet of 130 rigs active every day, generating strong cash flow, which will provide, as Mike pointed out, the necessary free cash flow to pay down roughly $600 million of debt over the next three years, depending on the market, of course. I'd like to thank all of our employees around the world whom, without this focus and hard work, none of these strong results would have materialized. I'd also like to thank you, the shareholders, for your support and look forward to sharing our first quarter 23 results on our next call. Thank you.

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.