Mr. Michael Gray reports

ENSIGN ENERGY SERVICES INC. REPORTS 2023 SECOND QUARTER RESULTS

Ensign Energy Services Inc. has released its results for the second quarter of 2023.

Second quarter highlights:

• Revenue for the second quarter of 2023 was $432.8-million, a 26-per-cent increase from the second quarter of 2022 revenue of $344.1-million.
• Revenue by geographic area was as follows:
  • Canada -- $80.6-million; 19 per cent of total;
  • United States -- $276.8-million; 64 per cent of total;
  • International -- $75.4-million; 17 per cent of total.
• Canadian drilling recorded 2,131 operating days in the second quarter of 2023, a 10-per-cent decrease from 2,369 operating days in the second quarter of 2022. Canadian well servicing recorded 11,804 operating hours in the second quarter of 2023, a 2-per-cent decrease from 12,099 operating hours in the second quarter of 2022. As a result of suspensions of operations related to forest wildfires, Canadian drilling lost approximately 205 operating days.
• U.S. drilling recorded 4,302 operating days in the second quarter of 2023, a 1-per-cent increase from 4,277 operating days in the second quarter of 2022. U.S. well servicing recorded 30,647 operating hours in the second quarter of 2023, which remained consistent with 30,725 operating hours in the second quarter of 2022.
• International drilling recorded 1,247 operating days in the second quarter of 2023, a 21-per-cent increase from 1,030 operating days recorded in the second quarter of 2022.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for the second quarter of 2023 was $116.6-million, a 71-per-cent increase from adjusted EBITDA of $68.3-million for the second quarter of 2022.
• Funds flow from operations for the second quarter of 2023 increased 43 per cent to $116.8-million from $81.5-million in the second quarter of the prior year.
• General and administrative expense increased 20 per cent and totalled $14.7-million (3.4 per cent of revenue) in the second quarter of 2023, compared with $12.2-million (3.5 per cent of revenue) in the second quarter of 2022.
• Net capital purchases for the second quarter of 2023 were $53.1-million, consisting of $3.8-million in upgrade capital and $52.7-million in maintenance capital, offset by sale proceeds of $3.3-million. Capital expenditures for the 2023 year are targeted to be in line with prior guidance of approximately $157-million primarily related to maintenance expenditures. In addition to the maintenance expenditures, there are certain growth projects for the company's customers, of which $18.3-million has been financed by them. The company may continue to consider additional upgrade or growth projects in response to customer demand upon appropriate contract terms.
• Total debt, net of cash, has been reduced by $112.5-million since Dec. 31, 2022. The company's debt reduction for 2023 is targeted to be approximately $200-million. The company's 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.
• The company has completed the publication of its third annual sustainability report for the year ended Dec. 31, 2022. The report, available on Ensign's website, highlights the company's environmental, social and governance (ESG) performance over the past year.

Overview

Revenue for the second quarter of 2023 was $432.8-million, a 26-per-cent increase from $344.1-million in revenue for the second quarter of 2022. Revenue for the six months ended June 30, 2023, was $916.8-million, an increase of 35 per cent from revenue for the six months ended June 30, 2022, of $676.8-million.

Adjusted EBITDA totalled $116.6-million (64 cents per common share) in the second quarter of 2023, 71 per cent higher than adjusted EBITDA of $68.3-million (40 cents per common share) in the second quarter of 2022. For the first six months ended June 30, 2023, adjusted EBITDA totalled $243.9-million ($1.33 per common share), 76 per cent higher than adjusted EBITDA of $138.3-million (83 cents per common share) in the first six months ended June 30, 2022.

Net income attributable to common shareholders for the second quarter of 2023 was $10.3-million (six cents per common share), compared with a net loss attributable to common shareholders of $28.1-million (17 cents per common share) for the second quarter of 2022. Net income attributable to common shareholders for the six months ended June 30, 2023, was $14.5-million (eight cents per common share), compared with a net loss attributable to common shareholders of $21.6-million (13 cents per common share) for the six months ended June 30, 2022.

Funds flow from operations increased 43 per cent to $116.8-million (64 cents per common share) in the second quarter of 2023, compared with $81.5-million (47 cents per common share) in the second quarter of the prior year. Funds flow from operations increased 49 per cent to $235.1-million ($1.28 per common share) for the six months ended June 30, 2023, compared with $158.2-million (94 cents per common share) for the six months ended June 30, 2022.

The outlook for oil field services continues to be constructive despite the recent volatility in global crude oil and natural gas commodity prices and uncertain global economic conditions. Global inflationary concerns continue to prompt central banks to tighten monetary policies. Increasing interest rates, largely resulting from efforts to quell rising inflation, have contributed to uncertainty for global economies related to recession risk and economic growth. These factors continue to impact global energy commodity prices and add uncertainty to the macroeconomic outlook over the short term. Furthermore, the recent decline in the U.S. rig count has contributed to activity uncertainty and rig rate fluctuations over the short term. However, despite these short-term headwinds, demand for crude oil continues to increase year-over-year and OPEC+ (Organization of the Petroleum Exporting Countries Plus) nations continue to moderate supply to respond to market conditions.

Over the near term, there remains uncertainty regarding the impacts of continuing hostilities in Ukraine on the global economy, overall global economic health and recessionary pressures in certain environments. Furthermore, there are many other factors that may impact the future demand for crude oil and natural gas, commodity prices, and the demand for oil field services.

The company's operating days remained consistent in the three months ended June 30, 2023, and higher in the six months ended June 30, 2023, when compared with the same periods in 2022. Operations were positively impacted in the first half of 2023 due to supportive industry conditions, driving activity improvements year over year. In the second quarter of 2023, certain drilling programs were temporarily delayed in the company's Canadian region due to forest fires that impacted operational activity.

The average U.S. dollar exchange rate was $1.35 for the six months ended June 30, 2023 (2022: $1.27), versus the Canadian dollar, an increase of 6 per cent compared with the same period of 2022.

The company's working capital at June 30, 2023, was a deficit of $1,188.1-million, compared with a deficit of $707.8-million at Dec. 31, 2022. The deficit increase was largely due to the company's revolving credit facility and unsecured senior notes being reclassified as current. The company is in discussion with its banking syndicate on extending its existing revolving credit facility and on obtaining a new term loan facility, which facility will be used to retire the company's senior notes due in April, 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.

The company's available liquidity, consisting of cash and available borrowings under its $900-million credit facility, was $171.4-million at June 30, 2023.

Outlook

Industry overview

The outlook for oil field services continues to be constructive despite volatile commodity prices and macroeconomic headwinds. Recessionary pressures, tight fiscal policies, and the potential for slowing economies and other considerations continue to influence commodity prices. These factors continue to add uncertainty to the outlook for crude oil demand and commodity prices.

Constructively, demand for crude oil continues to improve year over year and OPEC+ nations continually monitor the oil markets and may implement cuts to production to moderate supply. Global crude oil prices recently have held steady, with the benchmark price of West Texas Intermediate (WTI) averaging $72 (U.S.) per barrel in May, $70 (U.S.) per barrel in June and increasing to average $76 (U.S.) per barrel in July.

Over the short term, depressed natural gas commodity prices have impacted the industry rig count in North America and have contributed uncertainty to the near-term activity outlook. However, the company continues to expect positive oil prices to support relatively steady oil field services activity in order to maintain or potentially grow production in consideration of well productivity declines and low drilled but uncompleted (DUC) well inventory in certain producing areas. Furthermore, positive revenue rates over the course of 2023 continue to support continuation of year-over-year past and anticipated future improvements in the company's financial results.

Over the short term, there remains uncertainty regarding macroeconomic conditions that may impact supply and demand for and pricing of crude oil and natural gas and related oil field services. These factors include, but are not limited to, recession risk and global economic health, financial sector stress, the impact of continuing hostilities in Ukraine, and the future supply of Russian oil and natural gas.

The company remains committed to disciplined capital allocation and debt repayment. The company has targeted approximately $200-million in debt reduction for the 2023 year. In addition, from the period beginning 2023 to the end of 2025, the company has targeted debt reduction of approximately $600-million. If industry conditions change, this target may be increased or decreased.

Capital expenditures for the 2023 year are targeted to be in line with prior guidance of approximately $157-million primarily related to maintenance expenditures. In addition to the maintenance expenditures, capital is expended on selective rig enhancements or relocation projects for certain of the company's customers, of which $18.3-million has been financed by them during the first half of 2023. The company may continue to consider additional rig relocation, upgrade or growth projects in response to customer demand and appropriate contract terms.

Canadian activity

Canadian activity, representing 24 per cent of total revenue in the first half of 2023, decreased in the second quarter due to seasonal spring breakup and unforeseen weather events, including forest fires and flooding that temporarily delayed certain drilling programs. Operations impacted by the fires or flooding have recommenced. The company expects activity to increase in the third quarter due to supportive industry conditions. The company expects activity in Canada to remain steady or improve in the second half of 2023 as egress solutions of additional pipeline capacity for the Canadian market are expected to come on line.

As of Aug. 4, 2023, of that company's 115 marketed Canadian drilling rigs, approximately 43 per cent are engaged under term contracts of various durations. Approximately 41 per cent of the company's contracted rigs have a remaining term of six months or longer, although they may be subject to early termination.

U.S. activity

U.S. activity, representing 60 per cent of total revenue in the first half of 2023, declined modestly in the second quarter of 2023 compared with the first quarter of 2023 as a result of contract turnover and decreased activity in the company's California region. Operations in California continue to be challenged as producers are currently working through drilling permit challenges that have impacted drilling programs over the short term. The remaining areas of the company's U.S. operations are expected to modestly decline in the third quarter of 2023. In this regard, the company currently has relatively limited exposure to natural-gas-directed drilling programs with no active rigs in the Haynesville or Marcellus basins.

As of Aug. 4, 2023, of the company's 85 marketed U.S. drilling rigs, approximately 61 per cent are engaged under term contracts of various durations. Approximately 12 per cent of the company's contracted rigs have a remaining term of six months or longer, although they may be subject to early termination.

International activity

International activity, representing 16 per cent of total revenue in the first half of 2023, improved in the second quarter of 2023 as a third company rig in Oman commenced drilling. The company currently has three rigs active in Oman, two rigs active in Bahrain and two rigs active in Kuwait. Financial and operational performance of all seven active rigs in the company's Middle East segment is expected to remain steady in the third quarter of 2023.

Over all, the company's international activity is expected to improve in the third quarter of 2023 as operations are expected to increase from seven to eight active rigs in Australia. The company expects operations in Australia to further increase in the fourth quarter of 2023 continuing into 2024. Operations in Argentina, with two company rigs active, are expected to remain steady in the third quarter of 2023.

As of Aug. 4, 2023, of the company's 32 marketed international drilling rigs, approximately 53 per cent were engaged under term contracts of various durations. Approximately 94 per cent of the company's contracted rigs have a remaining term of six months or longer, although they may be subject to early termination.

Risk and uncertainties

The company is subject to numerous risks and uncertainties. A discussion of certain risks faced by the company may be found under the risk factors section of the company's annual information form (AIF) and the risks and uncertainties section of the company's management's discussion and analysis for the year ended Dec. 31, 2022, which are available under the company's SEDAR+ profile.

Other than as described within this document, the company's risk factors and management of those risks have not changed substantially from those as disclosed in the AIF. Additional risks and uncertainties not presently known by the company or that the company does not currently anticipate or deem material may also impair the company's future business operations or financial condition. If any such potential events, whether described in the risk factors in this document or the company's AIF or otherwise actually occur, or described events intensify, overall business, operating results and the financial condition of the company could be materially adversely affected.

Conference call

A conference call will be held to discuss the company's second quarter 2023 results at 10 a.m. MDT (12 p.m. EDT) on Friday, Aug. 4, 2023. The conference call number is 1-416-764-8659 (in Toronto) or 1-888-664-6392 (outside Toronto). The conference call reservation number is 11051240. A taped recording of the conference call will be available until Aug. 11, 2023, by dialling 1-416-764-8677 (in Toronto) or 1-888-390-0541 (outside Toronto) and entering reservation No. 051240 followed by the number sign. A live broadcast may be accessed through the company's website.

Ensign Energy Services is an international oil field services contractor and is listed on the Toronto Stock Exchange under the trading symbol ESI.

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