Ensign Energy Services Inc.

Good day ladies and gentlemen and welcome to the Enzyme Energy Services, Inc. second quarter 2023 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, August 4th, 2023. I would now like to turn the conference over to Nicole Romano. Please go ahead.

Thank you, Michelle. Good morning and welcome to Enzyme Energy Services' second quarter conference call and webcast. On our call today, Bob Geddes, President and COO, and Mike Gray, Chief Financial Officer, will review Enzyme's second quarter 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, or 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 second quarter earnings release and CDR Plus 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. Enzyme team delivered a strong quarter with increasing margins year over year and quarter over quarter as tightness in certain rig type classes continues to support the rate increases that industry realized through the back half of 2022, first quarter 23, and into second quarter 23. But with some cost headwinds building up primarily from higher R&M costs, the result of high spec rigs continue to drill longer and longer reach laterals. While operating days were fairly static year over year for the quarter, Our Canadian business unit was frustrated with 25% of its active fleet impacted by the wildfires and floods that affected operations in Western Canada in the quarter. The quarter also had a few timing drags on projects that were scheduled to start in the second quarter that have been delayed until the third quarter. EBITDA margins improved quarter over quarter, and gross margins improved. Enzyme continues to manage its balance sheet, only spending $53 million in planned maintenance capital to maintain the high-spec fleet in the second quarter. As we have mentioned, the focus continues with the goal to reducing debt by $600 million over the next three years. I'll turn it over to Mike Gray for a detailed summary of the quarter. Mike.

Thanks, Bob. Enzyme's results for the first six months of 2023 reflect positive improvements to oilfield services activity. They rate some financial results year over year. Despite the recent volatility in commodity prices, the outlook is constructive, and the operating environment for oil and natural gas industry continues to support demand for oilfield services. Overall operating days remain consistent in the second quarter of 2023. Canadian operations recorded 2,131 operating days, a decrease of 10%. U.S. operations recorded 4,302 operating days, a 1% increase, and international operations recorded 1,247 days, a 21% increase compared to the second quarter of 2022. For the first six months ended June 30th, 2023, overall operating days were higher, with the United States recording a 12% increase and international operations recording a 24% increase, which were offset by a 3% decrease by the Canadian operations when compared to the same period in 2022. The company generated revenue of $432.8 million in the second quarter of 2023, a 26% increase compared to revenue of $344.1 million generated in the second quarter of the prior year. for the first six months ended June 30th, 2023. The company generated revenue of 916.8 million, a 35% increase compared to revenue of 676.8 million generated in the same period in 2022. Adjusted EBITDA for the second quarter of 2023 was 116.6 million, 71% higher than adjusted EBITDA of 68.3 million in the second quarter of 2022. Adjusted EBITDA for the six months ended June 30th, 2023 total 243.9 million, 76% higher than adjusted EBITDA of 138.3 million generated in the same period in 2022. The 2023 increase in adjusted EBITDA can be attributed to improved industry conditions, increasing drilling activity. Depreciation expense in the first six months of 2023 was 152.7 million, an increase of 10% compared to 138.7 million in the first six months of 2022. G&A expense in the second quarter of 2023 was 20% higher than in the second quarter of 2022, but lower on a total basis compared to revenue. General G&A expenses increased in support of increased operational activity, and as a result of annual wage increases, higher foreign exchange on the U.S. dollar translation. Net capital purchases for the second quarter of 2023 was 53.1 million, consisting of 3.8 million in upgrade capital and 52.7 million in maintenance capital. Maintenance capital expenditures for 2023 is targeted to be approximately $157 million. In addition to the maintenance capital, there are certain growth projects for our customers, of which $18.3 million has been funded by our customers. Total debt net of cash has been reduced by $112.5 million since December 31, 2022. Our debt reduction target for 2023 is approximately $200 million. Our targeted debt reduction for the period beginning 2023 to the end of 2025 is approximately $600 million. If industry conditions change, these targets could be increased or decreased. We exited the quarter with total net debt to EBITDA of 2.69, which is a 28% reduction from year-end 2022 of 3.76, and a 55% reduction from year-end 2021, which was 5.98. This is our lowest total net debt to EBITDA since Q1 of 2016. The company is in discussions currently with our banking syndicate on extending their credit facility and obtaining a term loan facility which will be used to retire the senior notes due in 2024. The company has not yet finalized such refinancing or the terms thereof, and if it is successfully completed, it contemplates completion of such refinancing before the end of the third quarter of 2023. On that note, I'll turn it back to Bob.

Thanks, Mike. Most of you on the call are well aware that Enzyme operates a high-spec fleet of 230 high-spec drill rigs, 90 well-servicing rigs, and a growing drilling rig control technology business unit, which employ over 4,000 highly trained crews and technicians in eight countries around the world. Let's start with the U.S., which provides over half of our consolidated EBITDA. With the commodity drag through the second quarter and the general slip in U.S. rig count, Enzyme is down about 10 rigs in the second quarter as compared to the first quarter and going into the third quarter. We have 47 rigs active today in the U.S. and with a strong position in the Permian region, We have 36 of those rigs active today in that basin. With the Hainesville place softening due to gas prices, the sales team has been very active churning rigs over onto new contracts. In most cases where rigs have come off 2022 contracts, we are now seeing some bid tension in the market as a result of the rig count decline. So the margin run rate for the third quarter will probably be neutral quarter over quarter. In most cases and on more current negotiations, we are more likely to hold rates for a six-month term. When operators start asking us for more term, we will know it's time to raise pricing again. I think we're probably a few quarters away from that. Our California business unit, where we have just three of our 16 regs active today, continues to get frustrated with ongoing challenges with drawing permits in that state. It's California. We maintain a solid 7% market share in the lower 48 and see this stabilizing over the rest of 2023. We are also starting to see operators drill more into their Tier 2 acreage, which means that to maintain production, not grow, just maintain, they will need to drill more wells. With that, we predict that rig counts will start to move up in the fourth quarter, but probably not before that. We have close to 25% of our active U.S. fleet on an enzyme emissions reduction strategy, which is a combination of highline-powered rigs and also natural gas engine rigs with battery energy storage systems, otherwise known as BEST systems, to regulate peak power draws. With the arbitrage between diesel fuel and gas, natural gas that is, the argument becomes more compelling. As a result, we'll continue to see expansion in this area, which not only reduces emissions, it provides ends on a high margin incremental revenue stream. Our U.S. oil servicing business had one of the slowest starts out of the gate in 2023, purely due to operator project timing, but we are back up to 85% utilization today. and look to stay strong through the rest of the year with no rate degradation. Our directional drilling business, mostly Rocky-centric, continues to deliver with steady work on numerous projects. Turning to Canada, Canada had a strong operational core but fell short of expected days as the wildfires directly affected 25% of our active fleet. Because of the wildfires and floods, we trotted only 16 rigs operating over break-up. Today, we are back up to 40 rigs active and expect to get to 50 later in the third quarter. Our high-spec triple fleet are running well over 70% utilization, which provides continued strong pricing with solid rate bumps expected in the fourth quarter and into 2024. We continue to see our high-spec doubles be considered for work later in the third quarter with rates relatively static still in the mid-20s. The conventional fleet is staying active, but rates have fallen to fine bids over the summer. They should stabilize later in the year. Our Canadian Wealth Servicing Business Unit has 14 active rigs today, and with more OWA work ahead, we expect to get back to 18 rigs later in the third quarter, with a few of those rigs operating on 24-hour operations. We still have for sale roughly $40 million of redundant real estate in NISQ, which, when sold, will go, obviously, towards debt reduction. International is steady as she goes, generating steady free cash flow in long-term projects. We commissioned our third rig in Amman in the second quarter onto a five-year contract. The other two started up later in 2022. All three rigs performing well out of the gate. These rigs are all on performance-based contracts and delivering well above expectations, generating approximately $3,000 a day in incremental margin. Kuwait and Bahrain, where we have four of our largest rigs, continue to execute in the top decile of our contracting peer group in these countries. Australia's second quarter results were frustrated with the further delay of two large projects that were delayed now until the third quarter. This affected the second quarter results, but will, of course, benefit the third quarter results. In Argentina, we have two super spec triples on long-term contracts with strong day rates, terming out one to three years. The situation in Venezuela changes daily, but we're expecting that we may have one of our drilling rigs working by the end of the year. We'll see how that develops. On the technology front, our Edge Drilling Solutions product line continues to expand. With a lot of the supply chain issues behind us with respect to computer hardware access, we continue to deploy and commission roughly one a month of our Edge drilling rig control systems on our high-spec rigs worldwide. This attracts roughly $1,000 to $1,500 a day of incremental high-margin technology to the rig. We will have Edge actively engaged in most of our super-spec and high-spec triples by the end of the third quarter. With the obvious arbitrage between diesel and natural gas, notwithstanding the obvious emission reductions when using Highline or natural gas power, we are seeing growing demand for our edge emissions reduction strategy, which includes BESS systems, Highline power substations. The product offering ranges from the Highline power substation, which rents for about $2,000 a day, to the standalone BESS for about the same rate, to the full-blown natural gas power system with BESS, and the Enzyme Engine Management System, sort of a mouthful, for around $6,000 a day. These are all high-margin opportunities, and they help reduce fuel costs and emissions by as much as 50%. We have about 10% of the North American fleet on one of these strategies, and when we include dual fuel applications, we have roughly a quarter of the fleet on an emissions reduction strategy. Our ADS, automated drill system, which delivers consistent slips-to-slips, and automates the routine for the driller has been now fully tested and is now commissioned on 10 rigs in the U.S. charging out $1,000 a day. We just can't get these on the rigs fast enough. So I'll turn back to the operator for questions.

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 remove yourself from the queue, please press star two. If you're using a speakerphone, please lift the hands up before pressing any keys. One moment, please, for your first question. First question comes from Cole Piera of Seifel. Please go ahead.

Hi. Good morning, all. Just wanted to start on the refinancing. Can you talk about where you are in the process? I mean, I'm just wondering with Q2 results out now, could we see something relatively near term?

Canada had much color than what was in the press release, so we're, like I said, looking to complete this before the end of the quarter of Q3.

Gotcha. Fair enough. And on the wildfires in Canada... I mean, a bit more of an impact than some of your peers. Can you just add some color on that, maybe the specific areas, et cetera?

Yeah, yeah. It was a lot of the Drayton Valley, north and west of that. And we had no impact to our equipment, which is the good news, nor personnel. Everyone were evacuated safely. So it had an impact on about seven of the rigs that we had, and it impacted also because of some facility issues impacted by the fires. Some planned projects were delayed a couple of months. So that's the impact it had, but no equipment or personnel impact, which was a good thing.

Got it. And thinking about the U.S. drilling business, can you just talk about how customer conversations have been going over the past few, call it weeks or months, with regards to pricing, more rig additions, et cetera, and are you seeing a big difference in terms of what privates might want versus the demand from publics?

Yeah, we're seeing a lot more privates evolving. That would suggest maybe the capital markets are opening up a tiny bit for them. The bigger companies, of course, are staying to their plans, staying to their project, and continuing to work on operational efficiency. But we are working for a lot of smaller companies that have raised capital and are taking on different projects. So that tells me the capital markets have opened up to some extent for them.

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

Thank you. The next question comes from Keith McKay of RBC Capital Markets. Please go ahead.

Hi, good morning. Just curious, first off, on the U.S. versus Canada rig markets, do you see a material difference in the trajectory of where the two markets go, and does that lead you to potentially think about having to transfer more rigs I would assume from the US to Canada, but do you think there'll be more rig transfers in the next six to 12 months, given your outlook for both of those markets?

Yeah, good question, Keith. I'm not thinking so. There may be the odd rig that we might move from a basin like California where there's underutilization on the smaller high-spec single area to Canada. You might see one of those, but generally there won't be a large migration. We think the gas market picks back up in the back half of 2024 for the U.S. Canada, we're seeing a good bid level, but we're also seeing a bunch of contractors that haven't worked rigs in two or three months you know, going after the bid.

Yeah, got it. And there's been some talk about larger Canadian E&Ps potentially dropping activity, and the rig count did tick down this week. Can you just talk about what you're seeing in terms of rig count expectations for the second half of the year? Do you think we'll get to, you know, match or beat last year's levels given all these factors?

Yeah, well, I think, you know, we continue to drill wells a little bit faster. So the operators are sticking to budget number of wells planned. And I think they're waiting to see a quarter of cash flow build up with a commodity price with a thought that perhaps they change their their fourth quarter budget notion to some extent. We haven't seen any real notion of that. We're perhaps contemplating that. That's how they've reacted in the past. But we have had some clients on the high-spec triples and the high-spec singles, which are tighter rig type scenarios, look a little different. further forward with, you've got the tightness and filling the Coastal Link gas line, that type of stuff in those rate categories only though.

All right, thanks very much. Thank you.

Thank you. As a reminder, ladies and gentlemen, if you do have a question, please press star one at this time. Next question comes from Waqar Saeed of ATB Capital Markets. Please go ahead.

Thank you for taking my question. Bob, it's always very difficult to guess what's going to come next in California, but still, you know, what would be your best guess in terms of any permitting issues, resolution, activity pickup? And number two, Without rigs returning to work in California, can enzymes rig count, you know, pick up, you know, late in the year or next year?

Yeah, I think we're thinking of the U.S., regardless of California, you know, maybe a couple of rigs picking up in California. What we're finding is... There is some obvious tension in the permitting process that's being somewhat subrogated to some extent by operators suggesting that they will normalize emissions another way. And, you know, we've heard a couple of projects that they may be getting engaged on geothermal, which you've got to drill a hole in the ground, involves a drilling rig. So one way or another we may be going to work. and or emission reduction strategies in other areas of their business. So it is getting approached because there is oil in the ground and they can make money with it. And it's, you know, some of this stuff is in an appellate court. But it is grinding through. It seems to – the clouds seem to be – they're still cloudy, but they seem to be breaking up a little bit in California.

And then you mentioned that you are – Current rig count, if I remember correctly, is 47 in the U.S., currently active. Do you have visibility or do you have any rig release notices that you have in hand? And where do you think your rig count kind of bottoms and likely when?

Yeah, I think that – I think we're kind of close to a bottom. The rig count has been dropping a little bit, as you well know, in the U.S. I think that what we're finding is our U.S. team is where a rig is coming off contract. They've been very quickly able to recontract it. So we may slip another couple of rigs, Wakar, but I think we're pretty close to a trough.

And in terms of the day rates for these super triple or what they call super spec rigs in the U.S., where do you see the leading edge day rates these days?

So I would suggest that they've been hanging in the low 30s, but we're seeing some people throw a few more a la carte items that used to be outside inside. but there's not as much tension on the super spec triples. It hasn't moved at all, and maybe one may look at the margins of maybe come off $1,000 to $2,000 a day.

Okay. And then, just last question, there are some structural improvements happening in the Canadian market with the LNG coming up, some egress issues being resolved here. How do you see the demand kind of changing or rig activity changing on a year-over-year basis for the next couple of years?

Well, I think there's, as you point out, if you're going to feed those lines, In a basin where you have decline rates, you're going to have to drill to feed into it. It's pretty basic. The pace is the question. You know, the delays in boat pipelines, which everyone's well aware of, continue. But they are getting close to getting a final pipe to end.

Yeah. Okay, so thank you very much.

Thanks, Mark.

Thank you. If there are no further questions, I will turn the call back over to Bob Geddes for closing remarks.

Thank you, Michelle. While the commodity deck was weak for the industry in the second quarter, the macro construct for the oil business looks stronger for the back half of 23 and into 24. While this is true, the contradiction is that the rig count in the U.S. is still falling, albeit we feel almost at the bottom. For gas, it will be well into 2024 before we see demand for gas wells increasing again. The recent uptick in commodity prices has generally established a floor, we believe, on rates, and it is expected that contractors will start to bid up for fourth quarter work. Enzyme expects to be running around 110 drilling rigs and 50 to 60 well service rigs into the third quarter and remaining part of the year. Enzyme continues to build up term to help de-risk the future and reinforce our debt reduction targets while being strategic about term and pricing at the same time. Again, when we see operators start asking for more term, we'll know we've turned the corner. We're not there yet, but we feel we're not that far away from that turn. The challenge, as I mentioned in my opening remarks, is that R&M costs are coming to roost and that rate increases need to be applied to start recovering that. The rigs are delivering well, Boris, at an increasing pace. and with consistency, and the costs have to be covered in the rates somehow. Enzyme has roughly a billion of contracted revenue forward, with about half of the fleet tied up under contract and over 30% of the active fleet on long-term contract of six months or greater. The weighted average contract tenure is about one year, and the average age of the fleet is roughly 11 years old, with another 20 years of economic life ahead of it. Enzyme is fully committed to the target of quickly delivering and reducing $600 million of debt over the next three years. I look forward to our next call in three months. Thank you for attending the call.

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.