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CALGARY, Aug. 10 /CNW/ -
Overview
Ensign Energy Services Inc. (the "Company") recorded net income of $13.2 million ($0.09 per share) for the second quarter of 2009, a decline of 59 percent compared with net income of $32.3 million ($0.21 per share) recorded for the second quarter of 2008. Net income for the six months ended June 30, 2009 totaled $85.9 million ($0.56 per share), a decrease of 25 percent from net income of $114.1 million ($0.75 per share) recorded in the first six months of 2008. The decline in the Company's operating and financial results for the second quarter and first half of 2009 compared to the prior year reflect reduced industry activity levels and recessionary global economic conditions that have persisted through the first half of this year.
Revenue for the second quarter of 2009 was $226.0 million, a 33 percent decrease from the $337.8 million for the second quarter of the prior year. The Company recorded revenue of $626.4 million for the six months ended June 30, 2009, a 23 percent decrease from revenue of $810.0 million for the six months ended June 30, 2008. Results from the Company's Canadian and United States oilfield services segments continued to deteriorate due to poor fundamentals for natural gas. While the price for crude oil did recover somewhat in the second quarter of 2009, it did not have a meaningful impact on operations in these natural gas driven segments of the Company.
Gross margin decreased slightly in the second quarter of 2009 to 31.0 percent compared to 31.1 percent recorded in the second quarter of 2008. While utilization and revenue decreased during the six months ended June 30, 2009 relative to the same period in the prior year, the Company has preserved its gross margin of 33.6 percent (2008 - 35.8 percent). This is attributable to established contractual revenue rates realized on newer equipment working in North America combined with a continued focus on carefully controlling costs. Spot prices for un-contracted oilfield services equipment continued to deteriorate in the quarter due to low demand and an oversupply of equipment in Canada and the United States. The six new drilling rigs delivered by the Company into the international market during the first half of 2009 also contributed favorable margins thereby maintaining the average gross margin for 2009 at a rate higher than would otherwise be expected given current market conditions.
Adjusted net income for the second quarter of 2009 was $23.1 million ($0.15 per share), a decrease of 41 percent from adjusted net income of $39.2 million ($0.26 per share) for the second quarter of 2008. During the six months ended June 30, 2009, adjusted net income decreased by 29 percent to $93.2 million ($0.61 per share) from $131.9 million ($0.86 per share) recorded for the corresponding period in 2008. Adjusted net income is defined as net income before the tax-effected stock-based compensation expense. Stock-based compensation expense for the second quarter of 2009 was $15.2 million (2008 - $10.7 million); and for the first six months of 2009 was $11.3 million (2008 - $27.5 million). The impact of the increase in the closing price for the Company's common shares at June 30, 2009 compared to the closing price at March 31, 2009, was significant in the context of the reduction in the net income recorded by the Company for the second quarter of 2009.
FINANCIAL AND OPERATING HIGHLIGHTS
($ thousands, except per share data and operating information)
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Three months ended Six months ended
June 30 June 30
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2009 2008 % change 2009 2008 % change
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Revenue 226,010 337,774 (33) 626,430 809,958 (23)
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EBITDA(1) 60,151 90,935 (34) 188,566 261,990 (28)
EBITDA per
share(1)
Basic $ 0.39 $ 0.59 (34) $ 1.23 $ 1.71 (28)
Diluted $ 0.39 $ 0.59 (34) $ 1.23 $ 1.69 (27)
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Adjusted net
income(2) 23,083 39,238 (41) 93,233 131,901 (29)
Adjusted net
income per
share(2)
Basic $ 0.15 $ 0.26 (42) $ 0.61 $ 0.86 (29)
Diluted $ 0.15 $ 0.25 (40) $ 0.61 $ 0.85 (28)
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Net income 13,212 32,262 (59) 85,898 114,058 (25)
Net income
per share
Basic $ 0.09 $ 0.21 (57) $ 0.56 $ 0.75 (25)
Diluted $ 0.09 $ 0.21 (57) $ 0.56 $ 0.74 (24)
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Funds from
operations(3) 61,924 82,526 (25) 143,929 206,767 (30)
Funds from
operations
per share (3)
Basic $ 0.40 $ 0.54 (26) $ 0.94 $ 1.35 (30)
Diluted $ 0.40 $ 0.53 (25) $ 0.94 $ 1.34 (30)
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Weighted average
shares -
basic (000s) 153,144 153,074 - 153,140 153,064 -
Weighted average
shares
- diluted
(000s) 153,707 155,161 (1) 153,383 154,669 (1)
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Drilling
Number of
marketed
rigs
Canada
Conven-
tional 158 157 1 158 157 1
Oil sands
coring/
coal-bed
methane 28 28 - 28 28 -
United
States 77 76 1 77 76 1
Inter-
national(4) 48 48 - 48 48 -
Operating days
Canada 1,264 3,399 (63) 6,400 11,931 (46)
United
States 2,121 5,110 (59) 4,996 10,027 (50)
Inter-
national 1,856 2,596 (29) 3,824 4,963 (23)
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Well Servicing
Number of
marketed
rigs/units
Canada 108 118 (8) 108 118 (8)
United
States 18 15 20 18 15 20
Operating
hours
Canada 20,098 28,478 (29) 51,747 73,449 (30)
United
States 6,843 8,629 (21) 16,379 17,431 (6)
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(1) EBITDA is defined as "income before interest expense, income taxes,
depreciation and stock-based compensation expense". Management
believes that in addition to net income, EBITDA and 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 or how the results are
impacted by the accounting standards associated with the Company's
stock-based compensation plan. EBITDA and EBITDA per share as defined
above are not recognized measures under Canadian generally accepted
accounting principles and accordingly may not be comparable to
measures used by other companies.
(2) Adjusted net income is defined as "net income before stock-based
compensation expense, tax-effected using an income tax rate of 35%".
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 the accounting
standards associated with the Company's stock-based compensation
plan, net of income taxes. Adjusted net income and adjusted net
income per share as defined above are not recognized measures under
Canadian generally accepted accounting principles 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 shareholders and potential investors with 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 Canadian generally accepted accounting
principles and accordingly may not be comparable to similar measures
used by other companies.
(4) Includes workover rigs.
Revenue and Oilfield Services Expense
Three months ended June 30 Six months ended June 30
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($ thousands) 2009 2008 % change 2009 2008 % change
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Revenue
Canada 52,108 108,378 (52) 233,222 368,828 (37)
United
States 94,617 152,825 (38) 222,321 292,140 (24)
Inter-
national 79,285 76,571 4 170,887 148,990 15
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226,010 337,774 (33) 626,430 809,958 (23)
Oilfield
services
expense 155,993 232,715 (33) 415,790 520,179 (20)
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70,017 105,059 (33) 210,640 289,779 (27)
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Gross margin 31.0% 31.1% 33.6% 35.8%
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Canada
------
The Company recorded revenue of $52.1 million in Canada in the second quarter of 2009, a 52 percent decrease from $108.4 million recorded in the second quarter of 2008. Canadian revenue was $233.2 million for the six months ended June 30, 2009, a 37 percent decrease from $368.8 million recorded in the six months ended June 30, 2008. Canada accounted for just 23 percent of the Company's revenue in the second quarter of 2009 (2008 - 32 percent); and for 37 percent of the Company's revenue in the first six months of 2009 (2008 - 46 percent). Notwithstanding the seasonality of the second quarter, when spring break-up and wet weather conditions hinder the Company's ability to move heavy equipment and access Canadian drilling locations, the overall results for Canada reflect a weak quarter. The Company experienced a decline in oilfield services activity compared with the same period of the prior year when the prospects for the oilfield services industry appeared much brighter. Customers have significantly reduced demand for oilfield services as crude oil and natural gas commodity prices dropped and credit markets tightened. Without a meaningful increase in natural gas commodity prices leading to increased demand for oilfield services, it will take some time to rebalance the oilfield services market in Canada due to the over-supply of equipment.
Drilling days recorded by the Canadian division in the second quarter of 2009 decreased by 63 percent from the comparable period of the prior year. During the six months ended June 30, 2009, Canadian drilling days decreased 46 percent from the same period of the prior year. Similarly, Canadian well servicing hours decreased by 29 percent in the second quarter of 2009 and by 30 percent in the six months ended June 30, 2009 with respect to the corresponding periods in the prior year. In light of the current operating environment and the reduced short term prospects for the Canadian industry, the Company has pared back its Canadian operations to more effectively manage the reduction in activity in Canada.
United States -------------
The Company's United States operations recorded revenue of $94.6 million in the second quarter of 2009, a 38 percent decrease from the $152.8 million recorded in the corresponding period of the prior year. United States revenue was $222.3 million for the six months ended June 30, 2009, down 24 percent from revenue of $292.1 million for the first six months of 2008. The United States accounted for 42 percent of the Company's revenue in the second quarter of 2009 (2008 - 45 percent); and for 36 percent of the Company's revenue in the first six months of 2009, unchanged from the prior year. In relative terms, the Company's United States results have fared better than Canada, largely due to a greater contractual coverage of the United States oilfield services equipment fleet compared to the Canadian fleet. Much of the Company's construction program over the last couple of years has been directed at adding new equipment to the United States market, and these high performing ADRTM drilling rigs built for the United States market have been subject to multi-year take-or-pay contracts. At June 30, 2009, a total of five contracted ADRs were still under construction for delivery before year-end.
The decline in activity levels in the Company's United States operations compared to the prior year mirror the overall reduction in the United States active rig count in 2009. The number of drilling days recorded by the United States division in the second quarter of 2009 decreased 59 percent from the same period of the prior year. United States drilling days for the first six months of 2009 decreased 50 percent from the prior year. United States well servicing hours in the second quarter of 2009 were down 21 percent compared to the prior year and well servicing hours for the first half of 2009 were down 6 percent compared to the first half of 2008. Further reducing the 2009 contributions from the Company's United States operations is the translation impact of the weakening in the United States dollar relative to the Canadian dollar, the Company's reporting currency. The average Canadian/United States dollar exchange rate at which the Company's United States dollar results were translated to Canadian dollars for presentation purposes was 1.1671 for the second quarter of 2009 compared to 1.2453 for the first quarter of 2009.
International -------------
The Company's international operations recorded revenue of $79.3 million in the second quarter of 2009, a 4 percent increase from the $76.6 million recorded in the second quarter of 2008. International revenue totaled $170.9 million for the six months ended June 30, 2009, an increase of 15 percent from revenue of $149.0 million for the first six months of 2008. The international division contributed 35 percent of the Company's revenue in the second quarter of 2009 (2008 - 23 percent); and 27 percent of the Company's revenue in the first six months of 2009 (2008 - 18 percent). The Company's established geographical diversification strategy has offset some of the weakness from the Company's North American operations.
The international oilfield services market is not immune to the negative pressures of the global economic recession. Drilling days recorded by the Company's international operations in the quarter ended June 30, 2009 decreased 29 percent from the second quarter of 2008, while drilling days recorded in the six months ended June 30, 2009 decreased 23 percent from the same period in 2008. The Company's operations in Latin America and Africa have experienced reductions in demand for oilfield services in the first half of 2009. Mitigating this regional weakness has been the successful deployment of six new ADRTM drilling rigs in the first six months of the year. The contributions from these new rigs should offset the expected weakness in certain international regions serviced by the Company.
Depreciation
Three months ended June 30 Six months ended June 30
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($ thousands) 2009 2008 % change 2009 2008 % change
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Depreciation 22,854 27,465 (17) 51,794 55,718 (7)
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Depreciation expense totaled $22.9 million for the second quarter of 2009 compared with $27.5 million for the second quarter of 2008. Depreciation expense decreased to $51.8 million for the six months ended June 30, 2009 compared with $55.7 million for the six months ended June 30, 2008. The change in depreciation reflects decreased consolidated operating activity levels, partially offset by increased depreciation on higher valued equipment added to the Company's drilling rig fleet over the course of 2009. In addition, effective July 1, 2008, the Company began applying a depreciation charge for drilling and well servicing rigs that have not operated within the last 12 months based on the estimated useful life of such equipment, resulting in additional depreciation expense in the three and six months ended June 30, 2009.
General and Administrative Expense
Three months ended June 30 Six months ended June 30
-----------------------------------------------------------
($ thousands) 2009 2008 % change 2009 2008 % change
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General and
administrative 13,375 13,936 (4) 27,317 29,143 (6)
% of revenue 5.9% 4.1% 4.4% 3.6%
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General and administrative expense totaled $13.4 million (5.9 percent of revenue) for the second quarter of 2009 compared with $13.9 million (4.1 percent of revenue) for the second quarter of 2008, a decline of 4 percent. General and administrative expense totaled $27.3 million (4.4 percent of revenue) for the six months ended June 30, 2009 compared with $29.1 million (3.6 percent of revenue) for the six months ended June 30, 2008, a decline of 6 percent. As a percentage of revenue, general and administrative expense was comparable to the corresponding periods of 2008. The decline in general and administrative expense reflects the Company's efforts to control costs during periods of declining activity levels.
Stock-Based Compensation Expense
Three months ended June 30 Six months ended June 30
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($ thousands) 2009 2008 % change 2009 2008 % change
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Stock-based
compensation 15,186 10,734 41 11,284 27,450 (59)
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Stock-based compensation expense arises from the intrinsic value accounting associated with the Company's stock option plan, whereby the liability associated with stock-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 quarter-ended June 30, 2009, the majority of the stock-based compensation expense consists of $14.5 million due to an increase in the Company's common share price during the quarter. For the six months ended June 30, 2009, stock-based compensation expense consists of $0.7 million for the vesting of additional stock options and $10.6 million associated with an increase in the price of the Company's common shares. The price of the Company's common shares was $17.00 at June 30, 2009 compared with $10.92 at March 31, 2009 and $13.22 at December 31, 2008.
Interest Expense
Three months ended June 30 Six months ended June 30
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($ thousands) 2009 2008 % change 2009 2008 % change
-------------------------------------------------------------------------
Interest 197 2,007 (90) 926 3,944 (77)
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Interest expense is incurred on the Company's operating lines of credit and promissory note payable, and is shown net of interest income earned on the Company's cash balances. The decrease in interest expense for the three and six months ended June 30, 2009 compared to the prior year is due to the decline in interest rates in the first 6 months of 2009 compared to the same period in 2008. Further, the 2008 second quarter interest expense includes upfront fees related to the new operating lines of credit that were negotiated during that quarter. The Company's effective interest rate for the 6 months ended June 30, 2009 was approximately 1.2% compared to approximately 8.2% for the corresponding period of the prior year.
Income Taxes
Three months ended June 30 Six months ended June 30
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($ thousands) 2009 2008 % change 2009 2008 % change
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Current income
tax (7,425) 2,175 (441) 38,253 45,521 (16)
Future income
tax 16,127 16,292 (1) 411 15,299 (97)
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8,702 18,467 (53) 38,664 60,820 (36)
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Effective
income tax
rate (%) 39.7% 36.4% 31.0% 34.8%
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The effective income tax rate for the second quarter of 2009 was 39.7 percent compared with 36.4 percent in the second quarter of 2008. For the six months ended June 30, 2009, the effective income tax rate was 31.0 percent compared with 34.8 percent for the six months ended June 30, 2008.
The Company's effective income tax rate on a quarter-over-quarter basis increased due to an increase in the proportion of taxable income being earned in the United States, a higher tax rate jurisdiction. Current income tax decreased due to a reduction in taxable income for the Canadian operations in the second quarter of 2009. The decrease in the effective income tax rate for the six months ended June 30, 2009 compared with the six months ended June 30, 2008 is due to future income tax recoveries in the Canadian partnerships and increased levels of income being generated in international jurisdictions that have lower income tax rates.
Financial Position
The following chart outlines significant changes in the consolidated balance sheet from December 31, 2008 to June 30, 2009:
($ thousands) Change Explanation
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Cash and cash equivalents 69,081 See consolidated statement of
cash flows.
Accounts receivable (169,504) Decrease due to a decrease in
operating activity levels in the
second quarter of 2009 compared
with the fourth quarter of 2008.
Inventory and other (838) Decrease due to normal course
consumption of operating supplies
and spare parts.
Property and equipment (18,814) Decrease due to increased
depreciation on higher-value
equipment.
Accounts payable and accrued (101,895) Decrease due to a decrease in
liabilities operating activity levels in the
second quarter of 2009 compared
with the fourth quarter of 2008.
Operating lines of credit (39,263) Decrease due to net repayments of
the operating lines of credit.
Promissory note payable (20,000) Decrease due to payment of the
promissory note in June 2009.
Stock-based compensation 5,746 Increase due to an increase in
the price of the Company's common
shares as at June 30, 2009
compared with December 31, 2008.
Income taxes payable 14,630 Increase due to the current
income tax provision for the
period, net of tax instalments.
Dividends payable 2 Increase due to a slight increase
in the number of outstanding
common shares compared with the
fourth quarter of 2008.
Future income taxes (2,458) Decrease due to the current
period future income tax recovery
arising from a decrease in
partnership timing differences.
Shareholders' equity 23,163 Increase due to the impact of net
income for the period and the
impact of foreign exchange rate
fluctuations on net assets of
foreign self-sustaining
subsidiaries, net of dividends
declared in the period.
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Working Capital and Funds from Operations
Three months ended June 30 Six months ended June 30
-----------------------------------------------------------
($ thousands) 2009 2008 % change 2009 2008 % change
-------------------------------------------------------------------------
Funds from
operations 61,924 82,526 (25) 143,929 206,767 (30)
Funds from
operations
per share $0.40 $0.54 (26) $0.94 $1.35 (30)
Working
capital(1) 128,041 107,024 20 128,041 107,024 20
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(1) Comparative figure as at December 31, 2008.
During the three months ended June 30, 2009, the Company generated funds from operations of $61.9 million ($0.40 per common share) compared with funds from operations of $82.5 million ($0.54 per common share) for the three months ended June 30, 2008, a decrease of 25 percent. Funds from operations totaled $143.9 million ($0.94 per common share) in the first six months of 2009, a decrease of 30 percent compared to $206.8 million of funds from operations ($1.35 per common share) generated in the six months ended June 30, 2008.
The decrease in funds from operations in both the second quarter of 2009 and the six months ended June 30, 2009 compared to the same periods in 2008 is due to the deterioration of oilfield services market conditions, primarily in the Company's Canadian and United States divisions, resulting in lower activity levels. The decline in operating activity is slightly offset by contributions from the newly constructed ADRs placed in operation in the United States and international markets under term contracts during the first six months of 2009. The significant factors that may impact the Company's ability to generate funds from operations in future periods are outlined in the "Risks and Uncertainties" section of the Management's Discussion and Analysis contained in the Company's 2008 Annual Report.
During the second quarter of 2009, the Company increased its working capital to $128.0 million, up $21.0 million from December 31, 2008, an enviable achievement given the difficult economic environment and market conditions present in the second quarter of 2009. As of June 30, 2009, the Company continues to operate with no long-term debt and operates with sufficient liquidity to meet its obligations as they come due.
Investing Activities
Three months ended June 30 Six months ended June 30
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($ thousands) 2009 2008 % change 2009 2008 % change
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Net purchase
of property
and equipment (26,688) (44,979) (41) (72,782) (78,523) (7)
Net change in
non-cash
working
capital (38,695) (2,006) 1,829 (18,865) (5,255) 259
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Cash used in
investing
activities (65,383) (46,985) 39 (91,647) (83,778) 9
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Net purchases of property and equipment during the second quarter of 2009 totaled $26.7 million compared with $45.0 million for the second quarter of 2008. Net purchases of property and equipment for the six months ended June 30, 2009 totaled $72.8 million compared with $78.5 million for the six months ended June 30, 2008. The net purchase of property and equipment relates predominantly to the Company's new-build program as all other non-critical capital expenditures were tightly controlled or suspended during the second quarter of 2009. Additional details regarding the new-build program are provided in the "New Builds" section below.
Financing Activities
Three months ended June 30 Six months ended June 30
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($ thousands) 2009 2008 % change 2009 2008 % change
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Net decrease
in operating
lines of
credit (2,761) (50,449) (95) (39,263) (42,773) (8)
Net decrease
in promissory
note payable (20,000) - (100) (20,000) - (100)
Issue of
capital stock 152 111 37 152 411 (63)
Dividends (13,018) (12,629) 3 (26,034) (25,257) 3
Net change in
non-cash
working
capital 2 1 100 2 6 (67)
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Cash used in
financing
activities (35,625) (62,966) (43) (85,143) (67,613) 26
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Net repayments of the operating lines of credit were the result of operating cash flows generated by the Company's Canadian and United States oilfield services divisions in excess of capital expenditure requirements. As of June 30, 2009, the operating lines of credit are primarily being used to fund the new-build program and to support international operations. The $20 million promissory note due July 2011 was paid in full during the second quarter of 2009. Currently, the Company has no long-term debt.
Other financing activities during the second quarter of 2009 include the receipt of $0.2 million on the exercise of employee stock options and the payment of dividends in the amount of $13.0 million ($0.085 per share). For the six months ended June 30, 2009, cash received on employee stock option exercises totaled $0.2 million and dividends paid totaled $26.0 million. During the first six months of 2009, the Company declared year-to-date dividends totaling $0.170 per common share compared with $0.165 per common share during the first six months of 2008. All dividends paid by the Company subsequent to January 1, 2006 qualify as an eligible dividend, as defined by subsection 89(1) of the Canadian Income Tax Act ("ITA").
The Board of Directors of the Company has declared a third quarter dividend of $0.085 per common share to be payable October 1, 2009 to all Common Shareholders of record as of September 21, 2009. The dividend is pursuant to the quarterly dividend policy adopted by the Company. Pursuant to subsection 89(1) of the ITA, the dividend being paid is designated as an eligible dividend, as defined in subsection 89(1) of the ITA.
New Builds
During the quarter ended June 30, 2009, two additional ADR(TM)-1500 models were added to the Company's world-wide rig construction program. As of August 10, 2009, nine ADRs have been completed and five remain under construction. Of the 14 ADRs included in the construction program, two are ADR(TM)-250 models, two are ADR(TM)-300 models, four are ADR(TM)-350 models, four are ADR(TM)-1000 models, and two are ADR(TM)-1500 models. Upon completion of this new-build program, the Company will have a total of 62 ADRs in its fleet. The well servicing rig new-build program consists of seven well servicing rigs: four for the Canadian market, of which three have been delivered during the first half of 2009, and three well servicing rigs for the United States market, all of which have been completed.
The new-build delivery schedule, by geographic area, is as follows:
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Actual Forecast
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Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Total
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ADRs
United States 1 1 1 2 3 8
International - 2 4 - - 6
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Total 1 3 5 2 3 14
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Well Servicing
Rigs
Canada - 1 2 1 - 4
United States 1 2 - - - 3
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Total 1 3 2 1 - 7
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Outlook
The outlook for the Company, and the oilfield services industry in general, continues to be very weak as the global economy struggles to overcome the recent recessionary trends. Weak economic conditions have led to reduced levels of demand for energy commodities, thereby resulting in weak equipment utilization levels and deteriorating margins for the Company. Additionally, many of the Company's customers continue to struggle to address balance sheet issues in this environment, adding further downward pressure on the Company's operations. These are indeed difficult times that have placed the oilfield services industry at a crossroads. Survival is dependent on financial strength and the decisions made to adapt to a new operating environment.
Our Canadian operations have now exited the "spring break-up" quarter, but third quarter activity levels remain down in historical terms as operators have reduced the demand for oilfield services, particularly in response to natural gas price levels that have challenged the economics associated with many projects. A recent improvement in crude oil commodity prices to the USD$60 to $70 per barrel range has helped activity levels in certain oil-producing regions somewhat, but not enough to overcome the overall weakness owing to unfavorable natural gas commodity prices. Activity levels in Canada are primarily driven by supply and demand fundamentals for natural gas. Until there is a significant improvement in the commodity price for natural gas, we do not expect demand for oilfield services in Canada to improve. Additionally, there remains an oversupply of oilfield services equipment that must be addressed before margins can improve. Clearly, the Canadian industry has many challenges ahead of it. While there have been some encouraging signs in the second quarter, such as the ability of exploration and production companies to raise equity in the capital markets (much of which was utilized to fix balance sheet issues) and interim measures from the Alberta government to provide short-term royalty incentives, there has not been a meaningful increase in demand for oilfield services.
The United States oilfield services market has started to show signs that it may have found a bottom. Recent rig count data has stabilized and even shown a modest increase from the floor in 2009 due to additional activity associated with the increase in crude oil prices. However, it is still too early to turn optimistic with respect to the prospects for the United States market. Fundamentals driving oilfield services activity will not improve until economic conditions strengthen to levels that improve the demand for energy commodities. It remains anybody's guess as to when this might occur. In the meantime, the Company continues to enjoy good contract coverage in this market segment and has the advantage of having a newer high tech drilling rig fleet that meets the efficiency demands of today's resource plays.
As expected, the international oilfield services market had begun to show signs of weakness amid energy demand reductions resulting from recessionary global economic conditions. Although mild by North American standards, the Company's international operations have been negatively impacted by deteriorating commodity prices. The recent improvement in crude oil prices should help stabilize activities in key areas of the international market. That said, there remain regional issues that must be managed to ensure the continued profitability of certain areas for the Company. On a positive note, the Company has completed the international portion of its new build program. All six drilling rigs for the international market have been successfully completed and mobilized in the first half of 2009. These new drilling rigs are operating at or above design performance levels and will have a meaningful impact on the Company's international results in succeeding quarters through the completion of the multi-year contracts associated with such rigs. The Company continues to search for new contracts and new opportunities to expand its global footprint through the delivery of our industry-leading drilling technology.
While much of what is going on in the world falls outside of our control, we continue to adapt the Company to the new realities challenging the oilfield services industry. As we have said before, the strength of the Company's balance sheet has never been more important than it is now. We believe that our diversified operations, well-trained personnel, financial strength, focus on cost control and opportunistic approach towards growth will help us to emerge from this down cycle in a stronger position.
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 and the ability of oil and natural gas companies to 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 second quarter results at 2:00 p.m. MDT (4:00 p.m. EDT) on Monday, August 10, 2009. The conference call number is 1-800-732-9303. A taped recording will be available until August 17, 2009 by dialing 1-877-289-8525 and entering reservation number 21310936 followed by the number sign. 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.
CONSOLIDATED BALANCE SHEETS
As at June 30, 2009 and December 31, 2008
(Unaudited, in thousands of Canadian dollars)
June 30 December 31
2009 2008
------------ -------------
Assets
Current assets
Cash and cash equivalents $ 164,986 $ 95,905
Accounts receivable 190,982 360,486
Inventory and other 59,986 60,824
Future income taxes 2,546 1,040
--------------------------
418,500 518,255
Property and equipment 1,691,767 1,710,581
--------------------------
$ 2,110,267 $ 2,228,836
--------------------------
--------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 134,189 $ 236,084
Operating lines of credit 130,180 169,443
Current portion of stock-based compensation 9,292 3,538
Income taxes payable 3,780 (10,850)
Dividends payable 13,018 13,016
--------------------------
290,459 411,231
Promissory note payable - 20,000
Stock-based compensation 1,095 1,103
Future income taxes 244,399 245,351
--------------------------
535,953 677,685
--------------------------
Shareholders' Equity
Capital stock (note 3) 169,717 169,485
Accumulated other comprehensive loss (38,516) (1,583)
Retained earnings 1,443,113 1,383,249
--------------------------
1,574,314 1,551,151
--------------------------
$ 2,110,267 $ 2,228,836
--------------------------
--------------------------
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For the three and six months ended June 30, 2009 and 2008
(Unaudited, in thousands of Canadian dollars, except per share data)
Three months ended Six months ended
June 30 June 30
2009 2008 2009 2008
---------------------------------------------------
Revenue
Oilfield services $ 226,010 $ 337,774 $ 626,430 $ 809,958
Expenses
Oilfield services 155,993 232,715 415,790 520,179
Depreciation 22,854 27,465 51,794 55,718
General and
administrative 13,375 13,936 27,317 29,143
Stock-based
compensation 15,186 10,734 11,284 27,450
Interest 197 2,007 926 3,944
Other (3,509) 188 (5,243) (1,354)
---------------------------------------------------
204,096 287,045 501,868 635,080
---------------------------------------------------
Income before income
taxes 21,914 50,729 124,562 174,878
Income taxes
Current (7,425) 2,175 38,253 45,521
Future 16,127 16,292 411 15,299
---------------------------------------------------
8,702 18,467 38,664 60,820
---------------------------------------------------
Net income for the
period 13,212 32,262 85,898 114,058
Retained earnings -
beginning of period 1,442,919 1,243,363 1,383,249 1,174,195
Dividends (note 3) (13,018) (12,629) (26,034) (25,257)
---------------------------------------------------
Retained earnings -
end of period $ 1,443,113 $ 1,262,996 $ 1,443,113 $ 1,262,996
---------------------------------------------------
---------------------------------------------------
Net income per share
(note 3)
Basic $ 0.09 $ 0.21 $ 0.56 $ 0.75
Diluted $ 0.09 $ 0.21 $ 0.56 $ 0.74
---------------------------------------------------
---------------------------------------------------
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three and six months ended June 30, 2009 and 2008
(Unaudited, in thousands of Canadian dollars)
Three months ended Six months ended
June 30 June 30
2009 2008 2009 2008
---------------------------------------------------
Cash provided by
(used in)
Operating activities
Net income for the
period $ 13,212 $ 32,262 $ 85,898 $ 114,058
Items not affecting
cash:
Depreciation 22,854 27,465 51,794 55,718
Stock-based
compensation, net
of cash paid 9,731 6,507 5,826 21,692
Future income taxes 16,127 16,292 411 15,299
---------------------------------------------------
Cash provided by
operating activities
before the change
in non-cash working
capital 61,924 82,526 143,929 206,767
Net change in
non-cash working
capital (note 5) 104,008 47,295 101,942 (23,586)
---------------------------------------------------
165,932 129,821 245,871 183,181
---------------------------------------------------
Investing activities
Net purchase of
property and equipment (26,688) (44,979) (72,782) (78,523)
Net change in
non-cash working
capital (note 5) (38,695) (2,006) (18,865) (5,255)
---------------------------------------------------
(65,383) (46,985) (91,647) (83,778)
---------------------------------------------------
Financing activities
Net decrease in
operating lines
of credit (2,761) (50,449) (39,263) (42,773)
Net decrease in
promissory note
payable (20,000) - (20,000) -
Issue of capital stock 152 111 152 411
Dividends (note 3) (13,018) (12,629) (26,034) (25,257)
Net change in
non-cash working
capital (note 5) 2 1 2 6
---------------------------------------------------
(35,625) (62,966) (85,143) (67,613)
---------------------------------------------------
Increase in cash and
cash equivalents
during the period 64,924 19,870 69,081 31,790
Cash and cash
equivalents -
beginning of period 100,062 13,860 95,905 1,940
---------------------------------------------------
Cash and cash
equivalents -
end of period $ 164,986 $ 33,730 $ 164,986 $ 33,730
---------------------------------------------------
---------------------------------------------------
Supplemental
information
Interest paid $ 988 $ 2,081 $ 1,449 $ 4,064
Income taxes paid $ 15,517 $ 37,364 $ 23,623 $ 75,233
---------------------------------------------------
---------------------------------------------------
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three and six months ended June 30, 2009 and 2008
(Unaudited, in thousands of Canadian dollars)
Three months ended Six months ended
June 30 June 30
2009 2008 2009 2008
---------------------------------------------------
Net income for the
period $ 13,212 $ 32,262 $ 85,898 $ 114,058
Other comprehensive
income (loss)
Foreign currency
translation adjustment (62,471) 6,380 (36,933) 41,092
---------------------------------------------------
Comprehensive income
(loss) for the
period $ (49,259) $ 38,642 $ 48,965 $ 155,150
---------------------------------------------------
---------------------------------------------------
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS
For the three and six months ended June 30, 2009 and 2008
(Unaudited, in thousands of Canadian dollars)
Three months ended Six months ended
June 30 June 30
2009 2008 2009 2008
---------------------------------------------------
Accumulated other
comprehensive loss -
beginning of period $ 23,955 $ (62,876) $ (1,583) $ (97,588)
Foreign currency
translation adjustment (62,471) 6,380 (36,933) 41,092
---------------------------------------------------
Accumulated other
comprehensive loss -
end of period $ (38,516) $ (56,496) $ (38,516) $ (56,496)
---------------------------------------------------
---------------------------------------------------
See accompanying notes to the consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended June 30, 2009 and 2008
(Unaudited, in thousands of Canadian dollars, except share and per share
data)
The interim consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles
("Canadian GAAP"), and include the accounts of Ensign Energy Services
Inc. and its subsidiaries and partnerships (the "Company"), substantially
all of which are wholly-owned. The interim consolidated financial
statements have been prepared following the same accounting policies and
methods of computation as the consolidated financial statements for the
year ended December 31, 2008. The disclosures provided below are
incremental to those included with the annual consolidated financial
statements. These interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and the
notes thereto in the Company's annual report for the year ended
December 31, 2008.
1. Recent accounting pronouncements
The Canadian Institute of Chartered Accountants ("CICA") Accounting
Standards Board ("AcSB") confirmed in February 2008 that
International Financial Reporting Standards ("IFRS") will replace
Canadian GAAP in 2011 for profit-oriented Canadian publicly
accountable enterprises. As the Company will be required to report
its results in accordance with IFRS starting in 2011, the Company is
assessing the potential impacts of this changeover and developing its
plan accordingly. When finalized, it will include project structure
and governance, resourcing and training, and an analysis of key
differences between IFRS and Canadian GAAP.
As of January 1, 2011, the Company will be required to adopt the
following CICA Handbook sections:
(a) CICA Handbook Section 1582 "Business Combinations" will replace
the existing business combinations standard. The new standard
requires assets and liabilities acquired in a business
combination and contingent consideration to be measured at fair
value as at the date of the acquisition. Acquisition costs that
are currently capitalized as part of the purchase price will be
recognized in the consolidated statement of income. The adoption
of this standard will impact the accounting treatment of future
business combinations.
(b) CICA Handbook Section 1601 "Consolidated Financial Statements"
and Section 1602 "Non-controlling Interests" will replace the
former consolidated financial statements standard. These
standards establish the requirements for the preparation of
consolidated financial statements and the accounting for a
non-controlling interest (previously referred to as minority
interest) in a subsidiary. The new standard requires
non-controlling interest to be presented as a separate component
of equity and requires net income and other comprehensive income
to be attributed to both the parent and non-controlling interest.
The adoption of this standard is not expected to have a material
impact on the Company's consolidated financial statements.
2. Seasonality of operations
The Company's Canadian oilfield services operations are seasonal in
nature and are impacted by weather conditions that may hinder the
Company's ability to access locations or move heavy equipment. The
lowest activity levels are experienced during the second quarter of
the year when road weight restrictions are in place and access to
wellsites in Canada is reduced.
3. Capital Stock
Authorized
Unlimited common shares
Unlimited preferred shares, issuable in series
Outstanding
Number of
Common Shares Amount
---------------------------------------------------------------------
Balance at January 1, 2009 153,135,006 $ 169,485
Issued under employee stock option plan 14,500 232
---------------------------------------------------------------------
Balance at June 30, 2009 153,149,506 $ 169,717
---------------------------------------------------------------------
Options
A summary of the status of the Company's stock option plan as of
June 30, 2009, and the changes during the six-month period then
ended, is presented below:
Weighted
Average
Number of Exercise
Options Price
---------------------------------------------------------------------
Outstanding at January 1, 2009 10,445,962 $ 18.09
Granted 11,000 11.33
Exercised for shares (14,500) (10.50)
Exercised for cash (939,600) (10.68)
Forfeited (117,600) (21.45)
---------------------------------------------------------------------
Outstanding at June 30, 2009 9,385,262 $ 18.79
---------------------------------------------------------------------
Exercisable at June 30, 2009 3,884,162 $ 16.46
---------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------------------------
Average Weighted Weighted
Vesting Average Options Average
Options Remaining Exercise Exercis- Exercise
Exercise Price Outstanding (in years) Price able Price
---------------------------------------------------------------------
$9.45 to $11.33 1,125,762 0.09 $ 10.51 1,052,362 $ 10.50
$13.50 to $18.85 1,822,900 0.86 14.16 1,179,000 13.81
$19.88 to $23.33 6,436,600 2.04 21.56 1,652,800 22.15
---------------------------------------------------------------------
9,385,262 1.58 $ 18.79 3,884,162 $ 16.46
---------------------------------------------------------------------
Common share dividends
During the six months ended June 30, 2009, the Company declared
dividends of $26,034 (2008 - $25,257), being $0.170 per common share
(2008 - $0.165 per common share).
Net income per share
Net income per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the
period. Diluted net income per share is calculated using the treasury
stock method, which assumes that all outstanding stock options are
exercised, if dilutive, and the assumed proceeds are used to purchase
the Company's common shares at the average market price during the
period.
The weighted average number of common shares outstanding for the six
months ended June 30, 2009 and 2008 are as follows:
2009 2008
------------- -------------
Weighted average number of common shares
outstanding - basic 153,139,715 153,063,904
Weighted average number of common shares
outstanding - diluted 153,383,401 154,669,014
------------- -------------
Stock options of 8,259,500 (2008 - 6,876,500) were excluded from the
calculation of diluted weighted average number of common shares
outstanding, as the options' exercise price was greater than the
average market price of the common shares for the period.
4. Segmented information
The Company operates in three geographic areas within one industry
segment. Oilfield services are provided in Canada, the United States
and internationally. The amounts related to each geographic area are
as follows:
Three months ended June 30, 2009
---------------------------------------------------------------------
United Inter-
Canada States national Total
---------------------------------------------------------------------
Revenue $ 52,108 $ 94,617 $ 79,285 $ 226,010
Property and
equipment, net $ 811,296 $ 518,001 $ 362,470 $ 1,691,767
Capital
expenditures,
net $ 164 $ 24,126 $ 2,398 $ 26,688
Depreciation $ 9,426 $ 7,607 $ 5,821 $ 22,854
---------------------------------------------------------------------
Three months ended June 30, 2008
---------------------------------------------------------------------
United Inter-
Canada States national Total
---------------------------------------------------------------------
Revenue $ 108,378 $ 152,825 $ 76,571 $ 337,774
Property and
equipment, net $ 780,034 $ 365,890 $ 351,201 $ 1,497,125
Capital
expenditures,
net $ 3,752 $ 18,202 $ 23,025 $ 44,979
Depreciation $ 12,854 $ 7,270 $ 7,341 $ 27,465
---------------------------------------------------------------------
Six months ended June 30, 2009
---------------------------------------------------------------------
United Inter-
Canada States national Total
---------------------------------------------------------------------
Revenue $ 233,222 $ 222,321 $ 170,887 $ 626,430
Property and
equipment, net $ 811,296 $ 518,001 $ 362,470 $ 1,691,767
Capital
expenditures,
net $ 1,211 $ 46,029 $ 25,542 $ 72,782
Depreciation $ 23,836 $ 16,607 $ 11,351 $ 51,794
---------------------------------------------------------------------
Six months ended June 30, 2008
---------------------------------------------------------------------
United Inter-
Canada States national Total
---------------------------------------------------------------------
Revenue $ 368,828 $ 292,140 $ 148,990 $ 809,958
Property and
equipment, net $ 780,034 $ 365,890 $ 351,201 $ 1,497,125
Capital
expenditures,
net $ 5,509 $ 29,180 $ 43,834 $ 78,523
Depreciation $ 27,828 $ 13,926 $ 13,964 $ 55,718
---------------------------------------------------------------------
5. Supplemental disclosure of cash flow information
The net change in non-cash working capital for the three and six
months ended June 30, 2009 and 2008 is determined as follows:
Three months ended Six months ended
June 30 June 30
---------------------------------------------------
2009 2008 2009 2008
---------------------------------------------------
Net change in
non-cash working
capital
Accounts
receivable $ 145,533 $ 98,435 $ 169,504 $ 18,224
Inventory and
other 176 (1,451) 838 (2,225)
Accounts payable
and accrued
liabilities (57,454) (16,505) (101,895) (15,127)
Income taxes
payable (22,942) (35,190) 14,630 (29,713)
Dividends
payable 2 1 2 6
---------------------------------------------------
$ 65,315 $ 45,290 $ 83,079 $ (28,835)
---------------------------------------------------
Relating to
Operating
activities $ 104,008 $ 47,295 $ 101,942 $ (23,586)
Investing
activities (38,695) (2,006) (18,865) (5,255)
Financing
activities 2 1 2 6
---------------------------------------------------
$ 65,315 $ 45,290 $ 83,079 $ (28,835)
---------------------------------------------------
6. Prior period amounts
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
%SEDAR: 00001999E