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Ensign Talks Q3, Rig Decline Has 'Leveled Off'; IDs 2020 Capex

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Ensign Energy Services reported its Q3 2019 results. Here are the highlights from its report and call.

Highlights:

Worldwide rig fleet of 302 rigs in 11 different countries, however only 125 rigs are actively running as of 3Q19:

• US = 68
• International = 21
• Canada = 35

The US count is down from 84 rigs in the second quarter and 85 rigs in Q1 2019. Ensign noted that rig reductions have leveled off (currently running 68 and expect to stay there).

The company's 2019 capex target is $102 million and it has planned a 2020 capex of $100 million.

Ensign's US Operating Areas:

• Permian, Eagle ford, Haynesville, Bakken, DJ Basin and California

• Total Rig fleet in the Continental US is 134 rigs

Below are the highlights from the company's conference call:

US

1. In the U.S. we have 68 rigs operating today of which 40% are still tied up on long term contracts 1 to 2 years in duration. International running about 21 rigs today, most of which 76% to be exact are under steady cash flow generating long term contracts of 3 to 5-year duration. Canada has about 35 rigs operating today, with about 50% tied up under long term contracts. I'll go into a little more detail on those later on.

Adjusted EBITDA for the third quarter of 2019 was $97 million, 41% higher than adjusted EBITDA of $68.6 million in the third quarter of 2018. Adjusted EBITDA for the first 9 months of 2019 totaled $312.9 million, 80% higher than adjusted EBITDA of $174 million generated in the first 9 months of 2018. The 3 and 9 months increase in adjusted EBITDA was primarily a result of the Trinidad acquisition and the realization of the synergies from the transaction.

Utilization

"My sense is and I've been in this business a while, it's kind of leveled off. We're running about 70% utilization in this kind of rig category, which tells us that it is still a strong market."

U.S. Operations

We have 4 operational areas in the U.S. the Permian, the Eagle Ford, California and the Rockies. In the Permian, we operate 61 rigs. We have about 40 active today. We run about 9% market share in that market. In the Eagle Ford area where we have 25 rigs, we have 10 running today about 5% of that market. California we own about 60% of the market share there with 9 out of 20 rigs running. And in the Rockies we have 11% market share with about 10 of the 28 active today.

No question the 25% year-over-year drop in U.S. rig count has put pressure on rates. From our last report in the second quarter we have seen pressure on rates on all 4 of our areas but most predominantly in the Permian. Super spec rigs are obviously still the most desirable and are hanging in north of $20,000 a day for day rates all and we continue to maintain our market share and each market albeit with rates of about $1,000 a day quarter-over-quarter. In the California and Rockies markets rates did not appreciate as quickly as it did in the Permian so while we certainly cannot move rates we're not under the same pressure as in the Permian.

Despite the headwinds, we are finding anecdotal evidence that our clients are sensing a bottom. Here is a case in point. in the last few months, we signed up a handful of rigs in the Permian on two-year contracts in the 2021 to 2022 range. Our most calls are for annual contracts. We're starting to see a bit of a shift term.

Well Servicing

The United States well servicing. We operate, one of the newest fleets in the U.S. We have 50 rigs in the fleet with 70% of them active today in the Rockies, California, Permian and Eagle Ford combined. Our long-reach horizontal completion rig which we have 8 of them recently constructed in the last 3 years have been fully utilizing the Permian and Eagle Ford areas still to this day. We see notional pricing pressure, but generally in the plus or minus 5% range quite normal market.

Canada

Moving to Canada, while Canada still remains challenged with take away capacity a minority federal government has pledged that it's fully committed to the new TMX pipeline. Actually talked to someone today that actually saw some movement along the pipeline, so it is actually happening. The Enbridge line through your placement is also expected to be running by year end which will help take away capacity whilst the provincial government of Alberta still has curtailment in place. They just announced the plan to encourage new wells to be drilled here last Friday. Those wells being exempt from curtailment. That will encourage some operators to put a few more Ensign rigs toward this winter. Happy to report that it's not all bad news. Ensign was just awarded a 3-year contract to 2 of our ADR 1500s with edge controls technology. With increased rates from where they were before. We also signed up one of our ADR 1000 pad rigs on a 2-year contract with increased rates.

This is certainly not the norm as most rig categories are witnessing rate pressures with market takers, especially in the oversupply and extremely competitive super single Intelli double market. The 1500 AC market, on the other hand, enjoys a healthy 70% plus utilization rate, and hence can attract reasonable day rates. With Canadian directional drilling, our Canadian directional drilling business continues to slowly expand its client base. When integrated with an Ensign rig it becomes very hard to compete with us. Currently, have 8 jobs running and expect to run 50% more than that this winter getting up to 12 jobs as our integrated model continues to gain traction. On the Canadian well servicing side, we have 55 well-serviced rigs in our Canadian well service fleet mostly focused on the heavy oil market.

Much like the drilling fleet, we have about 25% of the fleet active today. Rates are generally not moving up or down. The success of being defined by how many rigs you can keep steadily active and plan your overhead accordingly. Our well service businesses' right size continue to make reasonable margins with fleet capacity to absorb upticks and demand.