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Press release from CNW Group

Ensign Energy Services Inc. Reports 2010 Third Quarter Earnings

Monday, November 08, 2010

Ensign Energy Services Inc. Reports 2010 Third Quarter Earnings06:00 EST Monday, November 08, 2010CALGARY, Nov. 8 /CNW/ -OverviewEnsign Energy Services Inc. (the "Company") recorded revenue for the three months ended September 30, 2010 of $341.3 million, a 47 percent increase from the $232.5 million recorded in the third quarter of the prior year. The Company recorded revenue of $951.7 million for the nine months ended September 30, 2010, an 11 percent increase from revenue of $858.9 million for the nine months ended September 30, 2009. The Company's net income for the third quarter of 2010 was $30.7 million ($0.20 per share), an increase of 82 percent compared with net income of $16.9 million ($0.11 per share) for the third quarter of 2009. Net income for the nine months ended September 30, 2010 totalled $80.1 million ($0.52 per share), a decrease of 22 percent from net income of $102.8 million ($0.67 per share) recorded in the first nine months of 2009.Overall, the increased revenue for the three and nine months ended September 30, 2010 was a result of an increase in operating activity when compared to the corresponding periods of the prior year, increasing 65 percent and 43 percent respectively. The increased operating activity was offset by slightly lower day rates in most regions and by the negative effect of a strengthening Canadian dollar on the translation of the Company's United States and international segments into Canadian dollars for reporting purposes. In the nine months ended September 30, 2010, the Canadian dollar strengthened by approximately 11 percent compared to the United States dollar when compared to the same period in 2009.Gross margin decreased in the third quarter of 2010 to 25.0 percent from 28.2 percent recorded in the third quarter of 2009. For the nine months ended September 30, 2010, gross margin was 26.5 percent compared to 32.2 percent for the same period in 2009. Gross margin deterioration was attributable to generally lower revenue rates across all geographic segments, marginally higher operating costs in Canada, and ongoing challenges in Latin America.Working capital at September 30, 2010 was $124.1 million, compared with $107.9 million at December 31, 2009. Positive working capital and no long-term debt means that the balance sheet remains a source of strength for the Company. << ------------------------------------------------------------------------- FINANCIAL AND OPERATING HIGHLIGHTS ($ thousands, except per share data and operating information) ------------------------------------------------------------------------- Three months ended Nine months ended September 30 September 30 ------------------------------------------------------------------------- % % 2010 2009 change 2010 2009 change ------------------------------------------------------------------------- Revenue 341,274 232,463 47 951,691 858,893 11 ------------------------------------------------------------------------- EBITDA(1) 82,553 53,238 55 223,206 241,804 (8) EBITDA per share(1) Basic $0.54 $0.35 54 $1.46 $1.58 (8) Diluted $0.54 $0.35 54 $1.46 $1.58 (8) ------------------------------------------------------------------------- Adjusted net income(2) 30,746 16,444 87 78,957 109,677 (28) Adjusted net income per share(2) Basic $0.20 $0.11 82 $0.52 $0.72 (28) Diluted $0.20 $0.11 82 $0.52 $0.71 (27) ------------------------------------------------------------------------- Net income 30,746 16,900 82 80,081 102,798 (22) Net income per share Basic $0.20 $0.11 82 $0.52 $0.67 (22) Diluted $0.20 $0.11 82 $0.52 $0.67 (22) ------------------------------------------------------------------------- Funds from operations(3) 77,399 55,667 39 208,287 199,596 4 Funds from operations per share(3) Basic $0.51 $0.36 42 $1.36 $1.30 5 Diluted $0.51 $0.36 42 $1.36 $1.30 5 ------------------------------------------------------------------------- Weighted average shares Basic (000s) 153,181 153,156 - 153,212 153,145 - Diluted (000s) 153,181 153,692 - 153,224 153,427 - ------------------------------------------------------------------------- Drilling Number of marketed rigs Canada Conventional 146 157 (7) 146 157 (7) Oil sands coring/coal bed methane 28 28 - 28 28 - United States 80 80 - 80 80 - International(4) 59 49 20 59 49 20 Operating days Canada 4,941 2,994 65 13,546 9,394 44 United States 4,003 2,251 78 11,025 7,247 52 International 2,590 1,567 65 7,298 5,391 35 ------------------------------------------------------------------------- Well Servicing Number of marketed rigs/units Canada 112 112 - 112 112 - United States 23 18 28 23 18 28 Operating hours Canada 29,698 24,260 22 93,482 76,007 23 United States 14,028 8,275 70 37,573 24,654 52 ------------------------------------------------------------------------- (1) EBITDA is defined as "income before interest expense, income taxes, depreciation and stock-based compensation (recovery)/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 (recovery)/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 Nine months ended September 30 September 30 ------------------------------------------------------- % % ($ thousands) 2010 2009 change 2010 2009 change ------------------------------------------------------------------------- Revenue Canada 126,757 80,217 58 372,434 313,439 19 United States 130,941 93,964 39 350,531 316,285 11 International 83,576 58,282 43 228,726 229,169 - ------------------------------------------------------- 341,274 232,463 47 951,691 858,893 11 Oilfield services expense 255,986 166,884 53 699,081 582,674 20 ------------------------------------------------------- 85,288 65,579 30 252,610 276,219 (9) ------------------------------------------------------- Gross margin 25.0% 28.2% 26.5% 32.2% ------------------------------------------------------------------------- >>The Company recorded revenue of $341.3 million in the third quarter of 2010, an increase of 47 percent over $232.5 million recorded in the third quarter of 2009. Revenue was $951.7 million for the nine months ended September 30, 2010, an 11 percent increase from $858.9 million recorded in the nine months ended September 30, 2009. As a percentage of revenue, gross margin fell to 25.0 percent for the third quarter of 2010 (2009 - 28.2 percent), and 26.5 percent for the nine months ended September 30, 2010 (2009 - 32.2 percent).The increased revenue in North America was a reflection of a recovery in demand for oilfield services equipment as evidenced by an increase in the operating days for the three months ended September 30, 2010. While operating activity levels have also increased in the nine months ended September 30, 2010 relative to the comparable period of 2009, pricing pressures persist, resulting in lower increases over the comparable prior period. Spot prices for uncontracted oilfield services equipment appear to have bottomed in the second quarter of 2010 with the third quarter increased activity levels in most regions.Further, the financial results of the United States and international operations in the three and nine month periods ended September 30, 2010 were negatively impacted by translation to Canadian dollars due to the weakening of the United States dollar, compared to the corresponding periods in 2009. For the nine month period ended September 30, 2010 the United States dollar declined by 11 percent over the comparable period in 2009.Canadian Oilfield ServicesRevenue generated in Canada increased 58 percent to $126.8 million for the three months ended September 30, 2010, from $80.2 million for the three months ended September 30, 2009. In the third quarter of 2010, Canadian revenues accounted for 37 percent of total revenue (2009 - 35 percent). Drilling days recorded by the Canadian division in the third quarter of 2010 increased 65 percent from the comparable period of the prior year.For the nine months ended September 30, 2010, revenue increased 19 percent to $372.4 million compared to $313.4 million for the same period in 2009. During the nine months ended September 30, 2010, Canadian revenues were 39 percent of total revenue (2009 - 36 percent). Canadian drilling days increased 44 percent during the first three quarters of 2010 over the same period of the prior year. The increase in demand for Canadian oilfield services is primarily a result of crude oil prices stabilizing and operators focusing drilling efforts on oil plays and liquids rich natural gas projects.While utilization has increased, the Canadian financial results in the three and nine month periods ended September 30, 2010 were negatively impacted by a decrease in pricing compared to the same periods of the prior year. The supply of oilfield equipment continues to exceed the demand in the Western Canada Sedimentary Basin. This oversupply, along with depressed pricing for natural gas, is holding back demand for service equipment and consequently spot pricing remains at low levels. Further, during the first nine months of 2010, slightly higher operating and maintenance costs were incurred as the Company prepared additional equipment to return to work in anticipation of growing levels of customer demand for oilfield services through the remainder of the year.Canadian well servicing hours increased by 22 percent in the third quarter of 2010 and by 23 percent in the nine months ended September 30, 2010 compared to the corresponding periods in the prior year.United States Oilfield ServicesThe Company's United States operations recorded revenue of $130.9 million in the third quarter of 2010, a 39 percent increase from the $94.0 million recorded in the third quarter of 2009. The United States segment accounted for 38 percent of the Company's revenue in the third quarter of 2010 (2009 - 40 percent). The number of drilling days recorded by the United States segment in the third quarter of 2010 increased 78 percent from the same period of the prior year.The increase in revenue recorded by the Company in the United States in the third quarter of 2010 compared to the third quarter of 2009 is mainly attributable to improved levels of operating activity in the unconventional natural gas plays and in crude oil-focused areas, such as North Dakota and California.During the nine months ended September 30, 2010, revenue of $350.5 million was recorded, compared to revenue of $316.3 million recorded in same period of 2009. The United States segment accounted for 37 percent of the Company's revenue for the nine months ended September 30, 2010 (2009 - 37 percent). United States drilling days for the first nine months of 2010 increased 52 percent from the prior year. The increase in United States operating activity experienced by the Company is consistent with the overall increase seen in the United States industry's land drilling rig count through the first nine months of 2010.The impact of increased activity levels was partially offset by lower revenue rates and the translational impact of a weakening United States dollar relative to the Canadian dollar. The average Canadian/United States dollar exchange rate at which the Company's United States results were translated to Canadian dollars for presentation purposes was 1.036 for the first nine months of 2010 compared to 1.170 for the first nine months of 2009, an 11 percent decline.United States well servicing hours in the third quarter of 2010 were up 70 percent compared to the prior year and well servicing hours for the first nine months of 2010 were up 52 percent compared to the first nine months of 2009.International Oilfield ServicesThe Company's international operations recorded revenue of $83.6 million in the third quarter of 2010, a 43 percent increase from the $58.3 million recorded in the third quarter of 2009. The increased revenue generated in the third quarter of 2010 is mainly due to increased operating activity when compared to the third quarter of 2009. The international segment contributed 25 percent of the Company's revenue in the third quarter of 2010, consistent with the same period of 2009. Drilling days recorded by the Company's international operations in the quarter ended September 30, 2010 increased 65 percent from the third quarter of 2009.International revenues totalled $228.7 million for the nine months ended September 30, 2010 which is consistent with revenue of $229.2 million for the first nine months of 2009. During the nine months ended September 30, 2010, international revenue accounted for 24 percent of the Company's revenue, a decrease from 27 percent in the same period of 2009. Drilling days recorded in the nine months ended September 30, 2009 increased 35 percent over the same period in 2009.Consistent with the past few quarters, certain regions of the Company's international segment are continuing to meet expectations and such positive financial results are being offset by continued challenges in Latin America. The Company has made some progress in certain of these underperforming markets and will continue to focus on improving returns from international operations.Depreciation << Three months ended Nine months ended September 30 September 30 ------------------------------------------------------- % % ($ thousands) 2010 2009 change 2010 2009 change ------------------------------------------------------------------------- Depreciation 34,157 24,364 40 99,587 76,158 31 ------------------------------------------------------------------------- >>The Company uses the unit-of-production method for calculating depreciation for the majority of its property and equipment. Depreciation expense totalled $34.2 million for the third quarter of 2010 compared with $24.4 million for the third quarter of 2009. Depreciation expense increased to $99.6 million for the nine months ended September 30, 2010 compared with $76.2 million for the nine months ended September 30, 2009.The increase in depreciation expense is consistent with the increase in operating activity during the three months and nine months ended September 30, 2010 compared to the operating activity in the same periods of 2009. Further, depreciation increased due to the utilization of higher-valued equipment added to the Company's fleet over the course of 2009 and 2010.General and Administrative Expense << Three months ended Nine months ended September 30 September 30 ------------------------------------------------------- % % ($ thousands) 2010 2009 change 2010 2009 change ------------------------------------------------------------------------- General and administrative 12,526 12,504 - 36,539 39,821 (8) % of revenue 3.7% 5.4% 3.8% 4.6% ------------------------------------------------------------------------- >>General and administrative expense for the third quarter of 2010 was $12.5 million (3.7 percent of revenue), consistent with the third quarter of 2009 expense of $12.5 million (5.4 percent of revenue). For the nine months ended September 30, 2010, general and administrative expense totalled $36.5 million (3.8 percent of revenue) compared with $39.8 million (4.6 percent of revenue), a decline of eight percent. The reduction in general and administrative expense reflects the ongoing efforts of the Company to control fixed costs and the translational impact of a weaker United States dollar on United States and international administrative expenses.Stock-Based Compensation (Recovery) Expense << Three months ended Nine months ended September 30 September 30 ------------------------------------------------------- % % ($ thousands) 2010 2009 change 2010 2009 change ------------------------------------------------------------------------- Stock-based compensation - (701) (100) (1,729) 10,583 (116) ------------------------------------------------------------------------- >>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 September 30, 2010 stock-based compensation recovery/expense was nil compared with a recovery of $0.7 million recorded in the third quarter of 2009. For the nine months ended September 30, 2010, stock-based compensation recovery was $1.7 million compared with an expense of $10.6 million in the same period of 2009. The recovery over the nine month period ended September 30, 2010 results from a decline in the price of the Company's common shares over this period. The closing price of the Company's common shares was $12.63 at September 30, 2010 compared with $12.52 at June 30, 2010, $14.70 at March 31, 2010 and $15.00 at December 31, 2009.Interest << Three months ended Nine months ended September 30 September 30 ------------------------------------------------------- % % ($ thousands) 2010 2009 change 2010 2009 change ------------------------------------------------------------------------- Interest expense 241 138 75 1,329 1,064 25 ------------------------------------------------------------------------- >>Interest is incurred on the Company's $200 million global revolving credit facility at prime interest rates or bankers' acceptance rates/LIBOR plus 0.75 percent and is shown net of interest income earned on the Company's cash balances.Other << Three months ended Nine months ended September 30 September 30 ------------------------------------------------------- % % ($ thousands) 2010 2009 change 2010 2009 change ------------------------------------------------------------------------- Other income (9,791) (163) 5,907 (7,135) (5,406) 32 ------------------------------------------------------------------------- >>This amount consists primarily of exchange gains on the conversion of the Australian operations from Australian dollars to United States dollars. The Australian dollar strengthened in the three and nine months ended September 30, 2010. This trend was consistent during the same periods in 2009.Income Taxes << Three months ended Nine months ended September 30 September 30 ------------------------------------------------------- % % ($ thousands) 2010 2009 change 2010 2009 change ------------------------------------------------------------------------- Current income tax 4,913 (5,334) (192) 13,550 32,919 (59) Future income tax 12,496 17,871 (30) 30,388 18,282 66 ------------------------------------------------------- 17,409 12,537 39 43,938 51,201 (14) ------------------------------------------------------- Effective income tax rate (%) 36.2% 42.6% 35.4% 33.2% ------------------------------------------------------------------------- >>The effective income tax rate for the third quarter of 2010 was 36.2 percent, down considerably from the 42.6 percent rate in the third quarter of 2009. For the nine months ended September 30, 2010, the effective income tax rate was 35.4 percent compared with 33.2 percent for the nine months ended September 30, 2009.The Company's effective tax rate for the current quarter decreased in comparison to the corresponding quarter in 2009 due to a higher proportion of income from Canada in the current quarter versus a larger proportion of taxable income accruing from higher rate jurisdictions in the third quarter of 2009. The increase in the overall effective income tax rate for the nine months ended September 30, 2010 compared with the nine months ended September 30, 2009 is due to a moderately higher proportion of taxable income being generated in jurisdictions with higher income tax rates.Financial PositionThe following chart outlines significant changes in the consolidated balance sheet from December 31, 2009 to September 30, 2010: << ($ thousands) Change Explanation ------------------------------------------------------------------------- Cash and cash equivalents (53,220) See consolidated statement of cash flows. Accounts receivable 47,017 Increase is consistent with an increase in operating activity levels in the third quarter of 2010 compared with the fourth quarter of 2009. Income taxes recoverable (3,081) Decrease due to the current income tax provision for the period, net of tax instalments. Inventory and other 4,954 Increase due to additional inventory and prepaid expenses, net of amortization, offset by normal course use of consumables. Property and equipment 35,367 Increase due to the new build construction program offset by the impact of foreign exchange fluctuations on the consolidation of the Company's foreign self-sustaining subsidiaries and depreciation. Long-term note receivable (292) Decrease due to the partial collection of the long-term note receivable. Accounts payable and 11,892 Increase due to the increase in accrued liabilities operating activity levels in the third quarter of 2010 compared with the fourth quarter of 2009. Operating lines of credit (31,424) Decrease due to net repayments of the operating lines of credit. Stock-based compensation (1,769) Decrease due to a reduction in the price of the Company's common shares as at September 30, 2010 compared with December 31, 2009. Dividends payable (13) Decrease due to a reduction in the number of outstanding common shares compared with December 31, 2009. Future income taxes 21,825 Increase due to higher tax depreciation in certain foreign jurisdictions. Shareholders' equity 30,234 Increase due to the net income for the period offset by the impact of foreign exchange rate fluctuations on net assets of foreign self-sustaining subsidiaries, the amount of dividends declared in the period and the purchase of common shares. ------------------------------------------------------------------------- >>Funds from Operations and Working Capital << Three months ended Nine months ended September 30 September 30 ------------------------------------------------------- % % ($ thousands) 2010 2009 change 2010 2009 change ------------------------------------------------------------------------- Funds from operations 77,399 55,667 39 208,287 199,596 4 Funds from operations per Share $0.51 $0.36 42 $1.36 $1.30 5 Working capital(1) 124,110 107,894 15 124,110 107,894 15 ------------------------------------------------------------------------- (1) Comparative figure as of December 31, 2009. >>During the three months ended September 30, 2010, the Company generated funds from operations of $77.4 million ($0.51 per common share) compared with funds from operations of $55.7 million ($0.36 per common share) for the three months ended September 30, 2009, an increase of 39 percent. Funds from operations totalled $208.3 million ($1.36 per common share) in the first nine months of 2010, an increase of four percent compared to $199.6 million of funds from operations ($1.30 per common share) generated in the nine months ended September 30, 2009. The increase in funds from operations in the three and nine months ended September 30, 2010 reflects the increased operating levels compared to the comparable periods in 2009.At September 30, 2010, the Company's working capital totalled $124.1 million, compared to $107.9 million at December 31, 2009. The Company's strong working capital and existing credit facilities are expected to adequately support its future operations and capital expansion initiatives. Existing credit facilities provide for total borrowings of $210.0 million, of which approximately $56.6 million was available as at September 30, 2010. The Company continues to operate with no long-term debt and exited the third quarter with a strong balance sheet.Investing Activities << Three months ended Nine months ended September 30 September 30 ------------------------------------------------------- % % ($ thousands) 2010 2009 change 2010 2009 change ------------------------------------------------------------------------- Net purchase of property and equipment (63,084) (44,870) 41 (150,829) (117,652) 28 Net change in non-cash working capital (1,609) 16,306 (110) 1,481 (2,558) (158) ------------------------------------------------------- Cash used in investing activities (64,693) (28,564) 126 (149,348) (120,210) 24 ------------------------------------------------------------------------- >>Net purchases of property and equipment during the third quarter of 2010 totalled $63.1 million compared to $44.9 million during the third quarter of the prior year. Net purchases of property and equipment for the nine months ended September 30, 2010 totalled $150.8 million compared with $117.7 million for the nine months ended September 30, 2009. The net purchase of property and equipment relates predominantly to the Company's most recent new build program. Additional details regarding the new build program are provided in the "New Builds" section below.Financing Activities << Three months ended Nine months ended September 30 September 30 ------------------------------------------------------- % % ($ thousands) 2010 2009 change 2010 2009 change ------------------------------------------------------------------------- Net (decrease) increase in operating lines of credit (19,022) 4,368 (535) (31,424) (34,895) (10) Net decrease in promissory note payable - - - - (20,000) (100) Issue of capital stock - 116 (100) - 268 (100) Purchase of common shares (2,330) - 100 (2,330) - 100 Dividends (13,390) (13,019) 3 (40,205) (39,053) 3 Net change in non-cash working capital (17) 1 (1,800) 279 3 9,200 ------------------------------------------------------- Cash used in financing activities (34,759) (8,534) 307 (73,680) (93,677) (21) ------------------------------------------------------------------------- >>The Company's available operating lines of credit consist of a $200 million global revolving credit facility (the "Global Facility") and a $10 million Canadian-based revolving credit facility (the "Canadian Facility"). The Global Facility is available to the Company and any of its wholly-owned subsidiaries, and may be drawn in Canadian, United States or Australian dollars, up to the equivalent value of $200 million Canadian dollars. The amount available under the Canadian Facility is $10 million or the equivalent United States dollars.Net repayments of the operating lines of credit were the result of operating cash flows generated by the Company's United States and international divisions in excess of capital expenditure requirements. As of September 30, 2010, the operating lines of credit are primarily being used to fund the completion of the most recent new build program and to support international operations.The Board of Directors of the Company has declared a fourth quarter dividend of $0.0950 per common share, an 8.6 percent increase over the previous quarterly dividend rate of $0.0875 per common share. The Company has increased its dividend every year since it first started to pay a dividend in 1995. The fourth quarter dividend is payable January 5, 2011 to all Common Shareholders of record as of December 21, 2010. The dividend is pursuant to the quarterly dividend policy adopted by the Company. Pursuant to subsection 89(1) of the Canadian Income Tax Act ("ITA"), the dividend being paid is designated as an eligible dividend, as defined in subsection 89(1) of the ITA.On May 10, 2010, the Company announced its intent to file with the Toronto Stock Exchange a Normal Course Issuer Bid (the "Bid") to acquire for cancellation up to five percent of the Company's issued and outstanding common shares. On May 28, 2010, the Company received approval from the Toronto Stock Exchange to purchase up to 7,661,411 common shares for cancellation. The Bid commenced on June 1, 2010 and will terminate on May 31, 2011 or such earlier time as the Bid is completed or terminated at the option of the Company. As at November 8, 2010, 200,000 common shares have been purchased pursuant to the Bid and cancelled.New BuildsIn response to customer demand for new oilfield services equipment to meet the growing technical demands of non-conventional resource plays, currently the Company's 2010/2011 new build program will result in 12 new ADR(TM) style drilling rigs and 19 new well servicing rigs being constructed for delivery starting late in 2010 and continuing through 2011. Nine drilling rigs and 14 well servicing rigs have been allocated to the United States while the remaining three drilling rigs and five well servicing rigs will be operated in Canada. The Company plans to fund the construction program using internally generated cash flows and available operating lines of credit.The new build delivery schedule, by geographic area, is as follows: << ------------------------------------------------------------------------- Actual Forecast Total ------------------------------------------------------ Q2-2010 Q3-2010 Q4-2010 Q1-2011 Q2-2011 Q3-2011 ------------------------------------------------------------------------- ADR's Canada - - - - 1 2 3 United States - - 1 5 2 1 9 ------------------------------------------------------------------------- Total - - 1 5 3 3 12 ------------------------------------------------------------------------- Well Servicing Canada - - 1 - 4 - 5 United States 2 3 3 2 4 - 14 ------------------------------------------------------------------------- Total 2 3 4 2 8 - 19 ------------------------------------------------------------------------- >>OutlookThe demand for energy and related services depends on general economic conditions. Expectations earlier this year for a moderate to robust economic recovery have been tempered by recent events to a relatively subdued outlook as the global economy continues to recover more slowly than earlier projections. In spite of lower levels of demand owing to muted economic conditions, particularly in North America, future supply concerns have maintained crude oil prices at relatively stable and robust levels. Accordingly, there continues to be increased focus on crude oil-directed drilling to capture the favorable economics associated with this resource. Natural gas futures prices have continued to decline due to high storage levels, waning concerns about the hurricane season and fall weather patterns, as well as prospects for slow economic growth. Excess supply of natural gas continues to build in the United States, particularly from lease-retention drilling associated with some of the more prolific unconventional natural gas plays, further building the excess supply of natural gas within the United States and eroding demand for pipeline imports from Canada.Drilling operating days in our Canadian operations for the third quarter of 2010 were up 65 percent over the third quarter of 2009, despite wet weather conditions in September that hampered industry activity. Higher industry utilization rates are expected to continue through the winter drilling season, with favorable economics from crude oil, liquids-rich natural gas, and unconventional resource plays driving the demand for oilfield services. While crude oil fundamentals are expected to remain favorable throughout 2011, the demand for oilfield services after the end of the 2010/11 winter drilling season will be heavily dependent on the state of the underlying fundamentals involving natural gas. Accordingly, the outlook for utilization in our Canadian operations in 2011 is generally expected to be no better than the 2010 fiscal year. A full recovery of the Canadian oilfield services industry cannot occur until the fundamentals regarding natural gas development improve dramatically from current levels of over-supply.Drilling operating days in the Company's United States operations for the first nine months of 2010 were up 52 percent over the same period in 2009, with the highest growth rates occurring in the Company's California operations. During the quarter, active land-based rig activity levels for the industry increased to the highest level since late 2008, primarily attributable to increased levels of drilling directed at crude oil and liquids rich natural gas. As previously mentioned, weakening natural gas fundamentals continue to be a cause for concern, particularly as slower economic recovery in the United States will delay restoring the supply/demand imbalance. The Company expects that the United States oilfield services industry will likely see reduced levels of demand in 2011 if natural gas supply and demand fundamentals do not meaningfully improve in the short term. Although crude oil fundamentals should remain favorable, natural gas directed activity that resulted from short-term stimuli, such as favorable hedge positions and the drilling of resource plays to hold leases, will begin to fall off until underlying natural gas fundamentals improve.The Company's international operations experienced a 40 percent increase in drilling days in the first nine months of 2010 versus the same period in 2009, reflecting activity growth similar to that of the overall industry. Wet weather conditions had a negative impact in Australia during the quarter, however Eastern hemisphere operations were otherwise relatively steady. The Company experienced improved utilization in Venezuela, but challenges continued elsewhere in Latin America. Overall, activity levels in the Company's international operations are expected to show slow growth through the next year as regional geopolitical conditions are expected to improve in many of the areas of operation.Uncertainty in the ultimate timing and extent of the economic recovery, as well as the impacts of shifts in natural gas fundamentals continue to make 2010 a year of interesting challenges. The Company has responded by adjusting our current new build program in response to changing customer requirements and contractual commitments. The continued strength of our financial position will enable the Company to pursue other opportunities as these are identified and developed.Risks and UncertaintiesThis 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 CallA conference call will be held to discuss the Company's third quarter 2010 results at 2:00 p.m. MST (4:00 p.m. EST) on Monday, November 8, 2010. The conference call number is (647) 427-7450 in Toronto and internationally or 1-888-231-8191 for Canada and the United States. A taped recording will be available until November 15, 2010 by dialing 1-800-642-1687 (local calls 1-416-849-0833) and entering reservation number 18294682. A live webcast of the conference call can be accessed via the Company's website at www.ensignenergy.com. An archived version of the call will be available shortly after the call ends.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 September 30, 2010 and December 31, 2009 (Unaudited - in thousands of Canadian dollars) September 30 December 31 2010 2009 ------------- ------------- Assets Current assets Cash and cash equivalents $ 81,933 $ 135,153 Accounts receivable 289,369 242,352 Income taxes recoverable 3,345 6,426 Inventory and other 65,985 61,031 Future income taxes - 377 --------------------------- 440,632 445,339 Property and equipment 1,710,511 1,675,144 Long-term note receivable 7,315 7,607 --------------------------- $ 2,158,458 $ 2,128,090 --------------------------- --------------------------- Liabilities Current liabilities Accounts payable and accrued liabilities $ 165,552 $ 153,660 Operating lines of credit 137,580 169,004 Current portion of stock-based compensation - 1,378 Dividends payable 13,390 13,403 --------------------------- 316,522 337,445 Stock-based compensation - 391 Future income taxes 280,905 259,457 --------------------------- 597,427 597,293 --------------------------- Shareholders' Equity Capital stock (note 3) 170,710 170,932 Accumulated other comprehensive loss (103,676) (96,364) Retained earnings 1,493,997 1,456,229 --------------------------- 1,561,031 1,530,797 --------------------------- $ 2,158,458 $ 2,128,090 --------------------------- --------------------------- See accompanying notes to the interim consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS For the three and nine months ended September 30, 2010 and 2009 (Unaudited - in thousands of Canadian dollars - except per share data) Three months ended Nine months ended September 30 September 30 2010 2009 2010 2009 ------------------------------------------------------- Revenue Oilfield services $ 341,274 $ 232,463 $ 951,691 $ 858,893 Expenses Oilfield services 255,986 166,884 699,081 582,674 Depreciation 34,157 24,364 99,587 76,158 General and administrative 12,526 12,504 36,539 39,821 Stock-based compensation - (701) (1,729) 10,583 Interest 241 138 1,329 1,064 Other (9,791) (163) (7,135) (5,406) ------------------------------------------------------- 293,119 203,026 827,672 704,894 ------------------------------------------------------- Income before income taxes 48,155 29,437 124,019 153,999 Income taxes Current 4,913 (5,334) 13,550 32,919 Future 12,496 17,871 30,388 18,282 ------------------------------------------------------- 17,409 12,537 43,938 51,201 ------------------------------------------------------- Net income for the period 30,746 16,900 80,081 102,798 Retained earnings - beginning of period 1,478,749 1,443,113 1,456,229 1,383,249 Purchase of common shares under Normal Course Issuer Bid (note 3) (2,108) - (2,108) - Dividends (note 3) (13,390) (13,019) (40,205) (39,053) ------------------------------------------------------- Retained earnings - end of period $ 1,493,997 $ 1,446,994 $ 1,493,997 $ 1,446,994 ------------------------------------------------------- ------------------------------------------------------- Net income per share (note 3) Basic $ 0.20 $ 0.11 $ 0.52 $ 0.67 Diluted $ 0.20 $ 0.11 $ 0.52 $ 0.67 ------------------------------------------------------- ------------------------------------------------------- See accompanying notes to the interim consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS For the three and nine months ended September 30, 2010 and 2009 (Unaudited - in thousands of Canadian dollars) Three months ended Nine months ended September 30 September 30 2010 2009 2010 2009 ------------------------------------------------------- Cash provided by (used in) Operating activities Net income for the period $ 30,746 $ 16,900 $ 80,081 $ 102,798 Items not affecting cash: Depreciation 34,157 24,364 99,587 76,158 Stock-based compensation, net of cash paid - (3,468) (1,769) 2,358 Future income taxes 12,496 17,871 30,388 18,282 ------------------------------------------------------- 77,399 55,667 208,287 199,596 Net change in non-cash working capital (note 5) (46,492) (40,562) (38,479) 61,379 ------------------------------------------------------- 30,907 15,105 169,808 260,975 ------------------------------------------------------- Investing activities Net purchase of property and equipment (63,084) (44,870) (150,829) (117,652) Net change in non-cash working capital (note 5) (1,609) 16,306 1,481 (2,558) ------------------------------------------------------- (64,693) (28,564) (149,348) (120,210) ------------------------------------------------------- Financing activities Net (decrease) increase in operating lines of credit (19,022) 4,368 (31,424) (34,895) Net decrease in promissory note payable - - - (20,000) Issue of capital stock - 116 - 268 Purchase of common shares under Normal Course Issuer Bid (note 3) (2,330) - (2,330) - Dividends (note 3) (13,390) (13,019) (40,205) (39,053) Net change in non-cash working capital (note 5) (17) 1 279 3 ------------------------------------------------------- (34,759) (8,534) (73,680) (93,677) ------------------------------------------------------- (Decrease) increase in cash and cash equivalents during the period (68,545) (21,993) (53,220) 47,088 Cash and cash equivalents - beginning of period 150,478 164,986 135,153 95,905 ------------------------------------------------------- Cash and cash equivalents - end of period $ 81,933 $ 142,993 $ 81,933 $ 142,993 ------------------------------------------------------- ------------------------------------------------------- Supplemental information Interest paid $ 386 $ 372 $ 1,716 $ 1,789 Income taxes paid $ 6,727 $ 6,831 $ 10,469 $ 30,454 ------------------------------------------------------- ------------------------------------------------------- See accompanying notes to the interim consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) For the three and nine months ended September 30, 2010 and 2009 (Unaudited - in thousands of Canadian dollars) Three months ended Nine months ended September 30 September 30 2010 2009 2010 2009 ------------------------------------------------------- Net income for the period $ 30,746 $ 16,900 $ 80,081 $ 102,798 Other comprehensive loss Foreign currency translation adjustment (16,823) (61,719) (7,312) (98,652) ------------------------------------------------------- Comprehensive income (loss) for the period $ 13,923 $ (44,819) $ 72,769 $ 4,146 ------------------------------------------------------- ------------------------------------------------------- See accompanying notes to the interim consolidated financial statements. CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS For the three and nine months ended September 30, 2010 and 2009 (Unaudited - in thousands Canadian of dollars) Three months ended Nine months ended September 30 September 30 2010 2009 2010 2009 ------------------------------------------------------- Accumulated other comprehensive loss - beginning of period $ (86,853) $ (38,516) $ (96,364) $ (1,583) Foreign currency translation adjustment (16,823) (61,719) (7,312) (98,652) ------------------------------------------------------- Accumulated other comprehensive loss - end of period $ (103,676) $ (100,235) $ (103,676) $ (100,235) ------------------------------------------------------- ------------------------------------------------------- See accompanying notes to the interim consolidated financial statements. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS For the three and nine months ended September 30, 2010 and 2009 (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 audited consolidated financial statements for the year ended December 31, 2009. 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, 2009. 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. The Company has assessed which accounting policies will be affected by the change to IFRS and continues to assess the potential impact of these changes on its financial position and results of operations. 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 existing 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 (a) Authorized Unlimited common shares Unlimited preferred shares, issuable in series (b) Outstanding Number of Common Shares Amount ----------------------------------------------------------------- Balance at January 1, 2010 153,228,106 $ 170,932 Purchase of common shares under Normal Course Issuer Bid (200,000) (222) ----------------------------------------------------------------- Balance at September 30, 2010 153,028,106 $ 170,710 ----------------------------------------------------------------- (c) Options A summary of the Company's stock option plan as of September 30, 2010, and the changes during the nine month period then ended, is presented below: Weighted Average Number Exercise of Options Price ----------------------------------------------------------------- Outstanding at January 1, 2010 10,719,300 $ 18.67 Granted 124,500 14.56 Exercised for cash (18,000) 13.50 Forfeited (43,500) 19.75 ----------------------------------------------------------------- Outstanding at September 30, 2010 10,782,300 $ 18.62 ----------------------------------------------------------------- Exercisable at September 30, 2010 5,170,400 $ 19.38 ----------------------------------------------------------------- Weighted Average Weighted Weighted Options Remaining Average Options Average Out- Life (in Exercise Exerci- Exercise Exercise Price standing months) Price sable Price --------------------------------------------------------------------- $11.33 to $13.79 1,416,200 4.6 $ 13.52 1,378,400 $ 13.52 $14.56 to $19.95 5,313,100 40.6 17.09 1,389,000 19.65 $21.95 to $23.33 4,053,000 27.5 22.42 2,403,000 22.58 --------------------------------------------------------------------- 10,782,300 30.9 $ 18.62 5,170,400 $ 19.38 --------------------------------------------------------------------- (d) Common share dividends During the third quarter, the Company declared dividends of $13,390 (2009 - $13,019), being $0.0875 per common share (2009 - $0.0850 per common share). For the nine months ended September 30, 2010, the Company declared dividends of $40,205 (2009 - $39,053), being $0.2625 per common share (2009 - $0.2550 per common share). (e) 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 three and nine month periods ended September 30, 2010 and 2009 are as follows: Three months ended Nine months ended September 30 September 30 2010 2009 2010 2009 ------------------------------------------------------- Basic 153,180,728 153,155,632 153,212,140 153,145,021 Diluted 153,181,147 153,692,481 153,223,624 153,426,523 During the three months ended September 30, 2010, 10,776,300 (2009 - 6,682,600) options 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. For the nine months ended September 30, 2010, 9,419,100 options (2009 - 6,735,100) were excluded from the calculation of diluted weighted average number of common shares outstanding. (f) Normal Course Issuer Bid On May 10, 2010, the Company announced its intent to file with the Toronto Stock Exchange a Normal Course Issuer Bid (the "Bid") to acquire for cancellation up to five percent of the Company's issued and outstanding common shares. On May 28, 2010, the Company received approval from the Toronto Stock Exchange to purchase up to 7,661,411 common shares for cancellation. The Bid commenced on June 1, 2010 and will terminate on May 31, 2011 or such earlier time as the Bid is completed or terminated at the option of the Company. As at September 30, 2010, 200,000 common shares have been purchased pursuant to the Bid and cancelled. 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 September 30, 2010 --------------------------------------------------------------------- United Canada States International Total --------------------------------------------------------------------- Revenue $ 126,757 $ 130,941 $ 83,576 $ 341,274 Property and equipment, net $ 727,342 $ 533,241 $ 449,928 $ 1,710,511 Capital expenditures, net $ 4,001 $ 37,552 $ 21,531 $ 63,084 Depreciation $ 13,786 $ 12,533 $ 7,838 $ 34,157 --------------------------------------------------------------------- Three months ended September 30, 2009 --------------------------------------------------------------------- United Canada States International Total --------------------------------------------------------------------- Revenue $ 80,217 $ 93,964 $ 58,282 $ 232,463 Property and equipment, net $ 806,058 $ 500,551 $ 340,632 $ 1,647,241 Capital expenditures, net $ 6,563 $ 28,081 $ 10,226 $ 44,870 Depreciation $ 11,801 $ 7,563 $ 5,000 $ 24,364 --------------------------------------------------------------------- Nine months ended September 30, 2010 --------------------------------------------------------------------- United Canada States International Total --------------------------------------------------------------------- Revenue $ 372,434 $ 350,531 $ 228,726 $ 951,691 Property and equipment, net $ 727,342 $ 533,241 $ 449,928 $ 1,710,511 Capital expenditures, net $ 18,939 $ 88,023 $ 43,867 $ 150,829 Depreciation $ 40,378 $ 34,867 $ 24,342 $ 99,587 --------------------------------------------------------------------- Nine months ended September 30, 2009 --------------------------------------------------------------------- United Canada States International Total --------------------------------------------------------------------- Revenue $ 313,439 $ 316,285 $ 229,169 $ 858,893 Property and equipment, net $ 806,058 $ 500,551 $ 340,632 $ 1,647,241 Capital expenditures, net $ 7,774 $ 74,110 $ 35,768 $ 117,652 Depreciation $ 35,637 $ 24,170 $ 16,351 $ 76,158 --------------------------------------------------------------------- 5. Supplemental disclosure of cash flow information The net change in non-cash working capital for the three and nine months ended September 30, 2010 and 2009 is determined as follows: Three months ended Nine months ended September 30 September 30 ------------------------------------------------------- 2010 2009 2010 2009 ------------------------------------------------------- Net change in non-cash working capital Accounts receivable $ (57,484) $ (8,440) $ (47,017) $ 161,064 Inventory and other (11,680) 2,827 (4,954) 3,665 Accounts payable and accrued liabilities 22,877 (6,478) 11,892 (108,373) Long-term note receivable - - 292 - Income taxes recoverable (1,814) (12,165) 3,081 2,465 Dividends payable (17) 1 (13) 3 ------------------------------------------------------- $ (48,118) $ (24,255) $ (36,719) $ 58,824 ------------------------------------------------------- Relating to Operating activities $ (46,492) $ (40,562) $ (38,479) $ 61,379 Investing activities (1,609) 16,306 1,481 (2,558) Financing activities (17) 1 279 3 ------------------------------------------------------- $ (48,118) $ (24,255) $ (36,719) $ 58,824 ------------------------------------------------------- 6. Prior year amounts Certain prior period amounts have been reclassified to conform to the current period's presentation. >>%SEDAR: 00001999EFor further information: Glenn Dagenais, Executive Vice President Finance and Chief Financial Officer, (403) 262-1361