Mr. Michael Gray reports

ENSIGN ENERGY SERVICES INC. REPORTS 2024 FIRST QUARTER RESULTS

Ensign Energy Services Inc. has released its results for Q1 2024.

First quarter highlights:

• Revenue for the first quarter of 2024 was $431.3-million, an 11-per-cent decrease from the first quarter of 2023 revenue of $484.1-million.
• Revenue by geographic area:
  • Canada -- $138.5-million, 32 per cent of total;
  • United States -- $208.4-million, 48 per cent of total;
  • International -- $84.4-million, 20 per cent of total.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for the first quarter of 2024 was $117.5-million, an 8-per-cent decrease from adjusted EBITDA of $127.3-million for the first quarter of 2023.
• Funds flow from operations for the first quarter of 2024 decreased 8 per cent to $108.4-million from $118.3-million in first quarter of the prior year.
• Net loss attributed to common shareholders for the first quarter of 2024 was $1.2-million, down from net income attributed to common shareholders of $4.2-million for the first quarter of 2023.

• Canadian drilling recorded 3,752 operating days in the first quarter of 2024, compared with 3,800 operating days in the first quarter of 2023, a decrease of 1 per cent. Canadian well servicing recorded 11,926 operating hours in the first quarter of 2024, a 13-per-cent decrease from 13,776 operating hours in the first quarter of 2023.
• United States drilling recorded 3,134 operating days in the first quarter of 2024, a 32-per-cent decrease from 4,617 operating days in the first quarter of 2023. United States well servicing recorded 26,251 operating hours in the first quarter of 2024, a 6-per-cent decrease from 27,917 operating hours in the first quarter of 2023.
• International drilling recorded 1,319 operating days in the first quarter of 2024, a 19-per-cent increase from 1,104 operating days recorded in first quarter of 2023.

• Interest expense in the first quarter of 2024 was $26.5-million, a decrease of 23 per cent from the first quarter of 2023 as a result of lower debt levels and improved interest rates based on improving debt metrics.
• Total debt, net of cash, was reduced by $13.6-million since Dec. 31, 2023.
• Ensign's debt reduction for 2024 is targeted to be approximately $200-million. Its target debt reduction for the period beginning 2023 to the end of 2025 is approximately $600-million. If industry conditions change, this target could be increased or decreased.
• Net capital purchases for the quarter were $51.5-million, consisting of $1.8-million in upgrade capital and $53-million in maintenance capital, offset by sale proceeds of $3.3-million. Capital expenditures for 2024 are targeted to be approximately $147-million, primarily related to maintenance expenditures and selective growth projects. In addition, the company may consider other upgrade or growth projects in response to customer demand and appropriate contract terms.
• General and administrative expense increased 4 per cent and totalled $15.1-million in the first quarter of 2024, compared with $14.5-million in the first quarter of 2023.

Overview

Revenue for the three months ended March 31, 2024, was $431.3-million, a decrease of 11 per cent from revenue for the three months ended March 31, 2023, of $484.1-million. Adjusted EBITDA totalled $117.5-million (64 cents per common share) in the first quarter of 2024, 8 per cent lower than adjusted EBITDA of $127.3-million (69 cents per common share) in the first quarter of 2023.

Net loss attributable to common shareholders for the three months ended March 31, 2024, was $1.2-million (one cent per common share), compared with net income attributable to common shareholders of $4.2-million (two cents per common share) for the three months ended March 31, 2023.

Funds flow from operations decreased 8 per cent to $108.4-million (59 cents per common share) in the first quarter of 2024 compared with $118.3-million (64 cents per common share) in the first quarter of the prior year.

The outlook for oil field services continues to be constructive despite the year-over-year decline in oil field services activity in certain operating regions. Depressed natural gas commodity prices have impacted the industry rig count in North America and reinforced customer discipline with capital programs. Furthermore, there have been several recent oil and natural gas customer mergers and acquisitions (M&A) in both the Canadian and the United States operating regions that have impacted drilling programs over the short term. However, despite these short-term headwinds, demand for crude oil continues to improve year-over-year. Moreover, OPEC+ (Organization of the Petroleum Exporting Countries plus other oil-producing countries) nations continue to exercise production and supply discipline in response to market conditions.

Over the near term, geopolitical tensions, hostilities in areas of the Middle East and the continuing Russia-Ukraine conflict continue to impact global commodity prices and add uncertainty to the outlook for crude oil supply and commodity prices over the short term.

The company's operating days were lower in the first quarter of 2024 when compared with the first quarter of 2023 as operations were negatively impacted by the above-mentioned customer M&A activity and customer discipline with regard to their capital programs.

The average United States dollar exchange rate was $1.35 for the first three months of 2024 (2023 -- $1.35), consistent with the first quarter of 2023.

Working capital at March 31, 2024, was $39.4-million compared with $15.8-million at Dec. 31, 2023. The increase to working capital is the result of higher operating activity compared with the fourth quarter of 2023. At the end of the first quarter 2024, the company's available liquidity, consisting of cash and available borrowings under its $900-million revolving credit facility, totalled $60.9-million compared with $74.6-million at Dec. 31, 2023.

Revenue and oil field services expense

Revenue for the three months ended March 31, 2024, totalled $431.3-million, a decrease of 11 per cent from the first quarter of 2023 of $484.1-million.

The decrease in total revenue during the first quarter of 2024 was primarily due to volatile commodity prices impacting drilling activity and reducing the industry rig count in North America, resulting in reinforced customer discipline with regard to capital programs. Furthermore, recent M&A activity in the oil and natural gas sector in both the Canadian and the U.S. operating regions has impacted drilling programs over the short term.

Canadian oil field services

The company recorded revenue of $138.5-million in Canada for the three months ended March 31, 2024, a decrease of 1 per cent from $140.1-million recorded for the three months ended March 31, 2023. Canadian revenues accounted for 32 per cent of the company's total revenue in the first quarter of 2024 (2023 -- 29 per cent).

The financial results for the company's Canadian operations for the first quarter 2024 were generally flat, along with operating activity, and likely reflect both recent customer M&A activity and customer capital discipline.

For the three months ended March 31, 2024, the company recorded 3,752 drilling days compared with 3,800 drilling days for the three months ended March 31, 2023, a decrease of 1 per cent. Well servicing hours decreased by 13 per cent to 11,926 operating hours in the first quarter of 2024 compared with 13,776 operating hours in the corresponding period of 2023.

During the first quarter of 2024, the company transferred 23 underutilized Canadian drilling rigs into its operations reserve fleet.

United States oil field services

During the three months ended March 31, 2024, revenue of $208.4-million was recorded by the company's United States operations, a decrease of 24 per cent from the $274.6-million recorded in the corresponding period of the prior year. The United States operations accounted for 48 per cent of the company's revenue in the first quarter of 2024 (2023 -- 57 per cent).

Drilling days decreased by 32 per cent to 3,134 drilling days in the first quarter of 2024 from 4,617 drilling days in the first quarter of 2023. Well servicing hours decreased by 6 per cent in the first quarter of 2024 to 26,251 operating hours from 27,917 operating hours in the first quarter of 2023.

Operating and financial results for the company's United States operations were impacted by the recent customer M&A activity and customer capital discipline.

During the first quarter of 2024, the company transferred six underutilized United States drilling rigs into its reserve fleet.

International oil field services

The company's international operations recorded revenue of $84.4-million in the first quarter of 2024, a 22-per-cent increase from the $69.4-million recorded in the corresponding period of the prior year. The company's international operations contributed 20 per cent of the company's total revenue in the first quarter of 2024 (2023 -- 14 per cent).

For the three months ended March 31, 2024, international operating days totalled 1,319 operating days compared with 1,104 days for the three months ended March 31, 2023, an increase of 19 per cent.

Operating and financial results from international operations reflect positive industry conditions, supporting increased drilling activity and rig revenue rates. In addition, operational activity increased year-over-year as a result of a third company drilling rig in Oman commencing operations in the second quarter of 2023, and one company drilling rig in Venezuela commencing a drilling program in the first quarter of 2024.

During the first quarter of 2024, the company transferred one underutilized international drilling rig into its operations reserve fleet.

Depreciation

Depreciation totalled $88.3-million for the first quarter of 2024 compared with $77.9-million for the first quarter of 2023. The increase in depreciation primarily is the result of drilling rigs moving into the reserve fleet at the beginning of the year, which are depreciated on an accelerated basis.

General and administrative

General and administrative expenses increased 4 per cent to $15.1-million (3.5 per cent of revenue) for the first quarter of 2024 compared with $14.5-million (3 per cent of revenue) for the first quarter of 2023. General and administrative expenses increased due to annual wage increases and higher non-recurring fees.

Foreign exchange loss and other

Included in this amount is the impact of foreign currency fluctuations in the company's subsidiaries that have functional currencies other than the Canadian dollar.

Interest expense

Interest expense was incurred on the company's credit and term facilities, capital leases, and other obligations.

Interest expense decreased by $7.9-million in the first quarter of 2024 compared with the same period in 2023 as a result of lower debt levels and interest rates based on improving debt metrics.

Income tax (recovery)

The effective income tax rate for the three months ended March 31, 2024, was 77.7 per cent compared with 28.3 per cent for the three months ended March 31, 2023. The effective income tax rate in the first quarter of the current year was higher than the effective income tax rate in the first quarter of 2023 due to the impact of operating earnings in foreign jurisdictions and unrealized foreign exchange gains on foreign investments.

Funds flow from operations and working capital

For the three months ended March 31, 2024, the company generated funds flow from operations of $108.4-million (59 cents per common share), a decrease of 8 per cent from $118.3-million (64 cents per common share) for the three months ended March 31, 2023. The decrease in funds flow from operations in 2024 compared with 2023 is largely due to the decrease in activity compared with the prior period.

As at March 31, 2024, the company's working capital was $39.4-million, compared with $15.8-million at Dec. 31, 2023. The increase to working capital is the result of higher operating activity compared with the fourth quarter of 2023.

The company's existing bank facility provides for total borrowings of $900-million, of which $21.8-million was undrawn and available at March 31, 2024 (Dec. 31, 2023 -- $54.1-million).

Investing activities

Net purchases of property and equipment for the first quarter of 2024 totalled $51.5-million (2023 -- net proceeds of $49.7-million). The purchase of property and equipment for the first three months of 2024 consists of $53-million in maintenance capital and $1.8-million in upgrade capital.

Financing activities

As at March 31, 2024, the amount of available borrowings under the credit facility was $21.8-million. Concurrent with the closing of the amended and restated existing credit agreement on Oct. 13, 2023, the letter of credit facility was reduced from $50-million (U.S.) to the outstanding balance, which was $44.6-million (U.S.), at that time. In addition, the outstanding letter of credits will be reduced by the amounts of the letter of credits that expire. The company does have the ability to issue letters of credit through the credit facility.

On Oct. 13, 2023, the company amended and restated its existing credit agreement with its syndicate of lenders, which provides a revolving credit facility and a three-year $369-million term facility. The amendments include an extension to the maturity date of the $900-million credit facility to the earlier of: (i) the date that is six months prior to the earliest maturity of any future senior notes; and (ii) Oct. 13, 2026. The credit facility includes a reduction of the facility by $50-million at the end of the second quarter of 2024, a $75-million reduction at the end of the fourth quarter of 2024 and a further reduction of $75-million by the end of the second quarter of 2025. The final size of the credit facility will then be $700-million.

The term facility requires repayments of at least $27.7-million each quarter beginning in the first quarter of 2024 to the fourth quarter 2025, and then repayments of at least $36.9-million each quarter from the first quarter 2026 to the third quarter 2026.

The amended and restated credit facility provides the company with continued access to revolver capacity in a dynamic industry environment.

The current capital structure of the company consisting of the credit facility and the term facility, allows the company to utilize funds flow generated to reduce debt in the near term with greater flexibility than a more non-callable weighted capital structure.

Covenants

As at March 31, 2024, the company was in compliance with all covenants related to the credit facility.

The credit facility

The amended and restated credit agreement, a copy of which is available on SEDAR+, provides the company with its credit facility and includes requirements that the company comply with certain covenants, including a consolidated net debt to consolidated EBITDA ratio, a consolidated EBITDA to consolidated interest expense ratio and a consolidated net senior debt to consolidated EBITDA ratio.

Outlook

Industry overview

The outlook for oil field services continues to be constructive and supports steady demand for services. Global demand for crude oil continues to grow year-over-year. Furthermore, OPEC+ nations continue to monitor the oil markets and are expected to maintain moderated supply over the near term. Geopolitical tensions, hostilities in areas of the Middle East and the continuing Russia-Ukraine conflict continue to impact global commodity prices and add uncertainty to the outlook for crude oil supply and commodity prices over the short term. Global crude prices improved in first quarter and into the second quarter of 2024, due in part to geopolitical tensions and resilient global oil demand. The benchmark price of West Texas Intermediate (WTI) averaged $77 (U.S.)/barrel (bbl) in February, $81/bbl in March and $84/bbl in April.

Over the short term, depressed natural gas prices have negatively impacted the industry rig count in North America and reinforced customer discipline with capital programs. Furthermore, recent oil and natural gas customer M&A activity in both the company's Canadian and the U.S. operating regions has adversely impacted drilling programs over the short term. Over the long term, the company expects customer consolidation will generally be positive for oil field services activity and may also facilitate relatively consistent drilling programs.

In 2024, the company expects positive oil prices to support relatively steady oil field services activity in order to maintain or potentially grow production, especially so in consideration of well productivity declines and low drilled but uncompleted (DUC) well inventory in certain producing areas in the United States. In addition, the company remains optimistic regarding Canadian drilling activity with the completion of the Trans Mountain oil pipeline expansion project and the completion of the Coastal GasLink pipeline expected in 2024. In addition, several liquefied natural gas (LNG) projects, including LNG Canada, are expected to support increased activity over the medium-to-long term.

The company remains committed to disciplined capital allocation and debt repayment. The company has targeted approximately $200-million in debt reduction for the 2024 year. In addition, from the period beginning 2023 to the end of 2025, the company reaffirms its targeted debt reduction of approximately $600-million. If industry conditions change, these targets may be increased or decreased.

The company has budgeted base capital expenditures for 2024 of approximately $147-million, primarily related to maintenance expenditures. In addition to the maintenance expenditures, the company may continue to consider rig relocation, upgrade or growth projects in response to customer demand and under appropriate contract terms.

Canadian activity

Canadian activity, representing 32 per cent of total revenue in the first quarter of 2024, increased in the first quarter of 2024 compared with the fourth quarter of 2023 as operations entered the winter drilling season. Activity in Canada is expected to decrease in the second quarter of 2024 due to seasonal spring breakup. In the Canadian market, scheduled additional pipeline and transportation capacity and positive market conditions are expected to support improved activity in 2024.

As of May 3, 2024, of the company's 94 marketed Canadian drilling rigs, approximately 45 per cent are engaged under term contracts of various durations. Approximately 55 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.

United States activity

United States activity, representing 48 per cent of total revenue in the first quarter of 2024, remained steady in the first quarter of 2024 compared with the fourth quarter of 2023. U.S. activity is expected to remain relatively consistent in the second quarter of 2024, largely as a result of recent customer M&A activity and continued depressed 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 near term.

As of May 3, 2024, of Ensign's 77 marketed United States drilling rigs, approximately 48 per cent are engaged under term contracts of various durations. Approximately 19 per cent of its contracted rigs have a remaining term of six months or longer, although they may be subject to early termination.

International activity

International activity, representing 20 per cent of total revenue in the first quarter of 2024, was stable in the first quarter of 2024 and is expected to remain steady in the second quarter of 2024.

Currently, the company has three rigs active in Oman, two rigs active in Bahrain and two rigs active in Kuwait. The financial and operational performances of all seven active rigs in the company's Middle East segment are expected to remain steady in the second quarter of 2024.

Activity in Australia remained steady at seven rigs in the first quarter of 2024 and is expected to improve modestly to eight active rigs in the second quarter of 2024.

Operations in Argentina remained steady with two rigs active in the first quarter of 2024 and are expected to decline, by one rig, in the second quarter. Operations in Venezuela, which were dormant for several years, were resumed in the first quarter, with one rig reactivated, and are expected to remain steady, at one active rig, in the second quarter of 2024.

As of May 3, 2024, of Ensign's 31 marketed international drilling rigs, approximately 58 per cent, were engaged under term contracts of various durations. Approximately 61 per cent of its contracted rigs have a remaining term of six months or longer, although they may be subject to early termination.

Conference call

A conference call will be held to discuss the company's first quarter 2024 results at 10 a.m. Mountain Time (12 p.m. Eastern Time) on Monday, May 6, 2024. The conference call number is 1-416-764-8659 (in Toronto) or 1-888-664-6392 (outside Toronto). The conference call reservation number is: 94456031. A recording will be available until May 13, 2024, by dialling 1-416-764-8677 (in Toronto) or 1-888-390-0541 (outside Toronto), and entering the reservation number 456031 followed by the pound key. A live webcast may be accessed through the company's website.

Ensign Energy Services Inc.

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

We seek Safe Harbor.