Ensign Energy Services Inc.

Good afternoon, ladies and gentlemen, and welcome to the Enzyme Energy Services, Inc. conference call. All lines that are placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star one on your telephone keypad. If you'd like to withdraw a question, please press star two. Thank you. I would now like to turn the conference over to Nicole Romano, Investor Relations. You may begin your conference.

Thank you, Julie. Good morning and welcome to Ensign Energy Services' first quarter conference call and webcast. On our call today, Bob Geddes, President and COO, and Mike Gray, Chief Financial Officer, will review Ensign's first 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 services supplied by the company. Additionally, our discussion today may refer to non-GAAP financial measures such as adjusted EBITDA Please see our first quarter earnings release and see our 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, and thanks for joining our call this morning. I'm pleased to report that, once again, the Enzyme team continues to deliver on debt reduction along with increased free cash flow and margin expansion. Since 2019, Enzyme has clipped off close to half a billion dollars of debt off the balance sheet, that while executing on a few opportunistic acquisitions, which are generating strong EBITDA margins and free cash flow today. We saw the usually busy Canadian first quarter winter somewhat muted by the effect of abnormally cold weather, which affected operations. We had a week of 40 below, and we are seeing a paradox develop in the U.S. for record oil production, extremely low levels of ducks combined with decline rates not translating into rig activity. More on this later. This quarter's results emphasize the benefits of being a global player. While the US and Canada were off in the quarter, more so in the US and Canada, our international business segment was up in the quarter year over year. Once again, our global footprint helps to de-risk the company and provide lower beta risk on any geopolitical or specific commodity pricing differentials, which may occur in different places around the world. The impact of the TMX will lead to increased activity in the Western Canadian sedimentary basin due to compressed differentials, but gas pricing remains a challenge worldwide, with Europe emerging from a two-sigma warm winter and storage at 60% full at the end of April. I would be remiss if I didn't mention that the excellent operational performance in the first quarter was achieved with a reduction in incidences over a year and with the team delivering the second-best safety record in Enzyme's history. I'll turn it over to Mike, our CFO, for a deeper dive into the financial results for the Corps. Mike? Thanks, Bob.

Fluctuating commodity prices and customer consolidation have been headwinds impacting Enzyme's operating and financial results over the short term. However, despite these short-term headwinds, the outlook for oilfield services is constructive, and the operating environment for the oil and natural gas industry continues to support steady demand for services. Total operating days were lower in the first quarter of 2024, with United States and Canadian operations recording a 32% and a 1% decrease, respectively, while our international operations saw a 19% increase compared to the first quarter of 2023. The company generated revenue of $431.3 million in the first quarter of 2024, 11% decrease compared to revenue of $484.1 million generated in the first quarter of the prior year. Adjusted EBITDA for the first quarter of 2024 was 117.5 million, an 8% decrease from adjusted EBITDA of 127.3 million in the first quarter of 2023. The decrease in adjusted EBITDA was primarily due to the decrease in activity across our North American operations. Depreciation expense in the first three months of 2024 was 88.3 million, 13% higher than 77.9 million for the first three months of 2023. The depreciation expense increased because of drilling rigs being moved from the market fleet into the reserve fleet in 2024. G&A expense in the first quarter of 2024 was 4% higher than the first quarter of 2023. G&A expense increased due to annual wage increases and higher non-recurring fees. Net capital purchases for the quarter was $51.5 million, with $54.8 million of purchases, offset by $3.3 million in sales proceeds. Our CapEx budget for 2024 is $147 million. Interest expense in the first quarter of 2024 was $26.5 million, a decrease of 23% for the first quarter of 2023. This is a result of lower debt levels and improved interest rates based on improving debt metrics. The company expects its blended interest rates at the Federal Reserve Bank's hold interest rates at current levels to be approximately 8%. Total debt net of cash was reduced by $13.6 million since December 31, 2023. Our debt reduction target for 2024 will be approximately $200 million. Our debt reduction for the period 2023 to the end of 2025 is approximately $600 million. If industry conditions change, this target could be increased or decreased. On that note, I'll turn the call back to Bob.

Thanks, Mike. Just for a macro before we get into the divisional business units, as mentioned before, we saw a first quarter in Canada with activity only off 1%, while industry was off closer to 4% year-over-year, implying market share gained by Ensign, but we experienced a more serious drop in the U.S. with a 32% drop in drilling activity year over year. Once again, our international business unit, on the other hand, was up 19% on operating days. The record M&A activity in the U.S. over the last year is seriously muted activity as competitors have volleyed to hang on to market share. Our thesis is that this will manifest itself into higher activity, but not until very late in 2024, but certainly into 2025. It's currently break up in Canada, so our global rate count is down into the 80 to 85 seasonal range and a 50 to 55 range in our well service business segment focused in North America. Let's start with the United States. The United States market seems to have now stabilized with disciplined pricing and everyone holding their market share, but we will still see some pricing pressure anecdotally. We currently have 38 rigs active today in the U.S., but we feel that is more likely to stabilize with perhaps A few more rigs dropping off next few months, but building back slowly in third and into fourth quarter. While our call was that the back half of 24 would start to see an uptick in activity, we have moved that call to the fourth quarter post-election. California and the Rockies are still plagued with permitting challenges. With that, we expect around between 8 to 10 rigs in those areas. It's ironic that while California's time is permits, the state will be taking Canadian crude, most likely drilled by an enzyme rig in Canada, by the TMX pipeline to California refineries. The Permian seems to have bottomed out at just north of 300 rigs active today, but seems stuck here for at least another few quarters. We're seeing rates struggle to get back to the 30s for the super spec triples, but expect that log jam to release itself in the back half of the year, close to the fourth quarter. Our well-servicing business unit, which is focused primarily in the Rockies and California, is still very active with 42 of our 47 rig fleet active on any given day. Our directional drilling business in the Rockies continues to build market share in the motors supply part of the business. Moving to Canada. In Canada, we're of course in the middle of breakup. We expect Canada to climb up from its current activity of 28 rigs to 30 to 35 post-breakup, and then 50 to 55 mid-late summer, building up to 60 in fourth quarter. I'll point out that we're about We're up about 50% year-over-year in activity through breakup, and we gain market share exiting the winter and into breakup. We have transferred up two of our ADR 300s from our U.S.-California business unit and have placed both these highly versatile rigs onto long-term contracts, and with the operator covering the MOB in retrofit costs required for their specific projects. Operators are finding our ADR 300s the most flexible and efficient of the super spec designs currently available. We still find the super spec triples in the low mid 30s and the high spec double in the low mid 20s, depending on the rig configuration. We're contracting our super spec ADR 300s in the low 20s with strong demand for a flexible super spec ADR 300 design for the Clearwater man-built plays. Our well servicing team continues to see visibility back close to 20 well service units active post breakup and currently have 11 out on jobs today. The rentals business unit continues to run with high rental utilization on its assets and sees a growing opportunity for drill pipe rentals as drilling contractors move to put drill pipe on the outside of dairy contracts due to accelerated wear and other nuances. On the international side, our international business unit has 17 rigs active today, down one in Argentina from our last call. Australia remains steady with eight rigs active with increasing bed activity. Oman, which has three of our ADR 300s, operating on an IPM project, is performing extremely well and has been earning increasing margins due to the PBI contracts. These rigs have tied up well into 2027. Kuwait remains steady with two rigs active, with both rig contracts extended out into mid 2025. Our two rigs in Bahrain continue to operate in the top tier operationally and are contracted into mid 2025. As mentioned, we had one of our super spec triple rigs in Argentina come down for a short period. We fully expect this rig to be back up and running later in the third quarter or beginning of the fourth quarter. We have one rig up and running in Venezuela today and have signed the contract to start up a second rig, which should start up later in the third quarter. On the technology side, our drilling solutions business unit, we continue to grow this technical automation AI component of our business by 15% year over year. Our edge autopilot drilling rig control system continues to be installed at a pace of a rig a month, and we continue to see demand for our automated drill system, what we call our ADS, which charges out at $1,000 a day on top of the Enzyme Basic Core, which is $625 a day. Again, we continue to see demand for that edge autopilot platform. With all the bells and whistles, it charges out at about $2,400 a day. We're currently backlogged out at least four months on our ADS installs. We're also starting to put our energy autopilot platform in some of our Middle East rigs. On the environmental product line, we have four products that are available in Enzyme rigs and which deliver high margins and significantly reduce emissions. We also commissioned a few more new natural gas BEST systems, battery energy storage systems, which charge out in the $5,000 a day range and help to reduce emissions by 60%. BEST systems are battery energy storage systems, as I mentioned, that help store and modulate electrical power delivery on natural gas engine applications. The best systems on an Alucard basis charge out in that $1,700 to $2,000 range. Our investment in a leading best manufacturer has provided Enzyme a secure, reliable, and cost-effective access to best units into the future. Our first NPower substation arrived and is being rigged up on a job as we speak. The Enzyme substation will drive further emission reductions while generating a solid ROI for all electric rigs connected on high-line projects. These units charge out about $2,000 to $2,500 a day. With that, I'll turn it back to the operator for questions.

Thank you. Ladies and gentlemen, should you have a question, please press star 1. If you'd like to withdraw your question, please press star 2. One moment, please, for your first question. Your first question comes from Aaron McNeil from TD Cohen. Please go ahead.

Good morning. I appreciate the time to take questions. First one's for Mike. We're going to start to see the credit facility get reduced in Q2 and then again in Q4. I know you soaked up a lot of cash in Q1 on CapEx and working capital, but how should we think about working capital flows into the second quarter? Can you give us any updates in terms of how you're engaging with the syndicate or if you even need to or if you see any issues there as the year progresses?

Thanks for the question. Yeah, when we look at it, so we entered the quarter with about $878 on our facility, so we did have to be a $28 million reduction. To get to the $850, we have our term loan payment of $28 million, so essentially $56 million of debt reduction needs to take place. In Q2 of this year, if you look in the prior year, we did close to $84 million in debt reduction in Q2. That's a very, let's say, heavy cash flow input. comparison to Q1 where you have a lot of capex and operating expenses. So when we look at it, I think we're in good shape for that to take place. You also look at our interest payments. Q2 of last year, we had about $41 million in cash interest payments. Our bonds were due in April as well as in October for interest. So with the cash savings on the interest expense, once again, we had about $132 million in cash interest or interest expense in 2023. We're expecting that to be a sub-100. When we look over year over year, we're seeing about $32 million in interest savings that can go towards debt reduction. Our CapEx spend last year was about $175 million compared to about $147 million this year, so there's about $28 million in savings there. So all in all, when you put those parts together, we're confident on the $200 million debt reduction and then confident on the reduction in the facility as well as the term payments.

Total cents. Bob, I think you mentioned in your prepared remarks for pricing below $30,000 per day in the Permian. I guess in the absence of a higher rate count, do you see pricing further deteriorating for the balance of the year, or do you generally see your competitors acting disciplined on the few and far between new bids that do occur?

Yeah, I mean, we're seeing some stabilization, but anecdotally we see some of the smaller players taking a crack at – at some of our and others consistent clients, which encourages a little bit of conversation. We turn that conversation over into a performance-based contract saying, okay, if there's some pressure on rates, we'll take you up on that. But we also want to, as a quid pro quo, a performance-based contract, Some cases we've been able to actually increase our net day rate per day with the performance-based incentives, but we're kind of normalizing that with those conversations over the last few months. But I would say that there's still some pressure on pricing as we go into the summer, and we're not seeing anyone saying, hey, I want to tie you up for two years, which always tells us that the operators are still rolling up their sleeves a little bit on pricing. Got it.

Thanks, guys. I'll turn it back. Thanks, Eric.

Your next question comes from Keith Mackey from RBC. Please go ahead.

Yeah, hey, good morning. Just wanted to retouch on the debt. Certainly one of the things we've been getting questions about is covenants and and it looks like you're you know getting fairly close on that senior debt to EBITDA covenant Mike can you just kind of walk us through the pieces for Q2 of how that works I'm assuming EBITDA will be a little bit lower but it looks like debt reduction for Q2 will also come down significantly so can you just kind of talk to that specifically and some of the pieces there you know for sure I mean when we reset the balance sheet back in October I mean we

We did it in a sense that everything is achievable. So when we look at it, there's no concerns on those covenants. All of our debt structure is right now is senior debt, where before we would have had a mix between senior and the unsecured, which would have went to the total debt. So when we look at Q2, like once again, to Erin's question, the free cash flow in Q2 will be quite significant. It will give us the ability to reduce our facility as well as make the term loan payment. The term loan payment, once again, reduces your senior debt. And once again, we'll improve that covenant. So when we look at it, we're quite confident on everything going as planned. So from our perspective, just the way Q2 works with the cash inflow or reduced interest expense. And like I said, Q1 is always heavy capex. We don't foresee any issues. So we'll see that covenant ratio continue to go down. That's the one benefit of the term loan is that it's paid off. There's about $110 million that will be paid off this year, which once again will reduce the covenant ratio as we continue to basically perform as we are.

Yeah, thanks for that. Can you just talk a little bit about Canada? Q1 was down about 1% year-over-year in terms of rig days. Can you just talk about how you're thinking about the second half of the year on a year-over-year basis in Canada?

Yeah, it's... As I mentioned, we've got 50% more rigs running through breakup than we did last year. We had about 17 last year. Keith, we have 28 this year. And we're starting to build up into the 30 to 35 range post-breakup. Should be back to 50 by end of summer. We've got contracts and visibility for that. We've also got the 280 or 300s that we brought up from California. They were retrofitted over the winter to the operator's specific requirements. They're ready to go out the door as soon as we can get them out on the road bands. And then we're, you know, I think we're seeing indications from operators wanting to make sure that they grab their best rigs going into the fall. So for us, it's quite a different year than last year. We started grabbing some more market share as we entered breakup, gaining market share through breakup, and I think we'll continue that through 2024.

Okay. That's it for me. Thanks very much. Thank you.

Your next question comes from Waqar Saeed from ATV Capital Markets. Please go ahead.

Thanks, guys. Good morning. Mike, what would your guidance be for DD&A for Q2 and the following quarters?

We don't really give guidance on that. I mean, historically, we ran between that $75 to $85 million in depreciation, so that would probably be the ballpark.

So this pickup in Q1 for accelerated depreciation, that additional part is just one quarter issue or is that has some lingering impact for the course of the year?

There'll be some lingering impact for the course of the year.

And Bob, could you talk about the geothermal side in California? What's the outlook there? Do you see some incremental drilling?

Yeah, yeah, we're having more and more discussions and bids on geothermal projects. We've got a few underway now. I think we have three, two underway right now. But yeah, it's more of a conversation, you know, drilling more geothermal wells in California and that West Coast area, all the way even up into Oregon, all while the irony is all while Canadian oil comes down through the TMX into California to help the increasing demand for gasoline at the pumps. But yeah, that's where we're on geothermal.

Okay. And then in Venezuela, when did you say your second rig could start up?

We're thinking end of third quarter, so it'll be the end of the summer.

And have you received the go-ahead from the operator to start preparing the rig, or are you still waiting for that?

We have a contract signed, and they've forwarded the monies for the upgrade on the rig.

Great. And then in terms of the Canadian market, I think there were some expectations of price increases. There might be maybe up to about 5%. Is that still a possibility or not really now?

Yeah, for sure. Generally, we're putting out our high-spec doubles with that level of increase and our high-spec triples in that range or higher as the market continues to tighten up in the fourth quarter, third quarter, I'm sorry.

Okay, great. Thank you very much. That's all from me. Thanks, Vikar.

Ladies and gentlemen, as a reminder, should you have a question, press star one. Your next question comes from Josh Jane from Daniel Energy Partners. Please go ahead.

Thanks. First one, could you please speak to the opportunity set for consolidation within the United States wealth service sector? And specifically, do you see much on the market? And if you do, how would you characterize the quality of those businesses?

Good question. The wealth service business in the U.S. is certainly a lot more fragmented and area-specific than what you would find north of the border, for example, where there has been some consolidation. I would suggest that, again, the activity focuses on different areas, consolidation. I'm not seeing... are not hearing of any consolidation efforts. So I can't expand on that other than we're fairly active in the areas we are, which is focused on Rockies and California with our well servicing. But as far as consolidation, I'm not thinking consolidation as necessary in the well servicing area. as it might be perhaps in, in the Permian drilling area, for example.

Okay. And then maybe a follow-up on the U S drilling side. So you, you noted in your release, so 80% of your rigs that are contracted today, um, will sort of roll off in the six months, um, in the next six months in the U S you talked about the, um, You talked about the decrease in day rates. Are customers in the U.S. still wanting to sign up term contracts today, and are you seeing them opportunistically look at term, potentially maybe more so than they were six months or nine months ago?

Not yet, not yet. We're still running six-month type contracts, which is fairly typical, and we haven't seen a discussion for people saying, hey, we want to sign you up for one- to two-year contracts. When that starts to happen, of course, you know that it's starting to turn.

Okay. Thank you. Thank you.

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

Thanks, everyone, for joining us again. Continuing current geopolitical tensions in various places around the globe and the world's confliction with the desire to reduce emissions, all while expressing a desire for a better quality of life with the expanding demand for the hydrocarbon molecule, along with the record M&A activity bump behind us, demand for continuing record U.S. production coupled with record low ducts inventory and continuing decline rates, we believe this will manifest itself into steady drilling activity uptick through late 2024, And in the future, gas is a completely different story. It will take some time to figure itself out. Natural gas co-gen plants will grow as the world moves off coal and gets onto clean-burning natural gas. And along with that, natural gas demand is expected to rise 50% in the next 15 years. In the meantime, gas oversupply will plague the gas side of the business. Enzyme has a fleet of over 200 high-spec drill rigs, ranging from 200,000 pound to 1.5 million pound hook oil capacity. along with a fleet of close to 100 wall service rigs of varying capacity, situated in eight different countries around the world, all ready to perform safely and profitably. Management stays laser-focused on delivering best-in-class performance, which will provide sufficient free cash flow to maintain our fleet in top condition and keep to our debt reduction targets of $200 million a year. Thank you, and look forward to our next call in the summer.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.