Ensign Energy Services Inc. (ESI) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Ensign Energy Services Inc. Third Quarter 2026 Results Conference Call. [Operator Instructions] This call is being recorded today, Friday, November 6, 2026. I would now like to turn the conference over to Trevor Russell, Chief Financial Officer. Please go ahead.

Thank you, John. Good morning, and welcome to Ensign Energy Services Third Quarter Conference Call and Webcast. On our call today is Bob Geddes, President and COO; and myself, Trevor Russell, Chief Financial Officer. Today, we will review Ensign's third quarter highlights and financial results. followed by our operational update and outlook. We'll then open the call for questions. Our discussion today may include forward-looking statements based on current expectations that involve several business risks and uncertainties. The factors that could cause results to differ materially include, but are not limited to, political, economic and market conditions, crude oil and natural gas prices foreign currency fluctuations, weather conditions, the company's defense of lawsuits, the ability of oil and gas companies to pay accounts receivable balances or other unforeseen conditions that could impact the demand for services supplied by the company. Additionally, our discussion may refer to non-GAAP financial measures such as adjusted EBITDA. Please see our third quarter earnings release and cedars filings for more information on forward-looking statements and the company's use of non-GAAP financial measures. With that, I'll pass it on to Bob.

Thanks, Trevor. Good morning, everyone. So great quarter with 17% year-over-year increases in operating days revenue, EBITDA and funds go from operations. We also made a strategic acquisition in the quarter, closing the Citadel Drilling and Ola MTV deal in in August, adding 6 super spec triples all over [indiscernible] and is generating strong cash flow. One is actually down today for still to be simplification and then is going back to work. With the Citadel Open acquisition, we are happy to have all the be please and office management on board and integrated into the organization, a very impressive team. In the third quarter, we also expanded our forward book, which now takes us to $1.6 billion of forward revenue contracted, which ties up 70% of our global marketed fleet. Landed our first real-time operating segment project with our advanced performance management team in Houston, where we will be guiding Anton halfway around the world in Australia, with performance improving 24/7 guidance. This is not a guidance service per se and is more focused on maximizing drilling program at least on a 24/7 basis, small plants for the operator. This service is highly expandable to the applied not only for any -- not only depend on it, but any dealer anywhere in the world. We continue to see quarter-over-quarter growth opportunities, and we continue to do this second site results. We deeper dive into our third quarter. A deeper dive into our third quarter, I'll turn the call back over to Trevor?

Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference. We are experiencing some technical difficulties with the line of Mr. Bob Geddes. Thank you for your patience.

Thank you, Bob. The oilfield services sector remains a cautiously constructive outlook as industry compensation of $81.9 million. The strategic business combination was completed to enhance the company's presence in the United States Permian area with 6 high-spec drilling rigs that are fully contracted and expect the company's product offering to increase with Citadel's managed pressure drilling division. Operating days were higher in the third quarter of 2026 in comparison to the third quarter of 2025. The company saw a 16% increase in the United States to 37 21 days, an 8% increase in Canada to 3,7 90 operating days and a 19% increase internationally to 1,013 operating days. For the 9 months ended September 30, 2026, overall operating days increased with the United States recording a 12% increase and international recording an 11% increase in operating days, respectively. Operating -- offsetting the increases was a 1% decrease in our Canadian operating days when compared to the same period in 2025. The company generated revenue of $481.7 million in the third quarter of 2026, a 17% and increase compared to revenue of $4.2 million. [indiscernible] million 5% higher than the adjusted EBITDA of $22.3 million generated in the same period in 2025. The 2026 increase in adjusted EBITDA was primarily the higher operating activity in addition to the increase in operating days due to the Citadel drilling acquisition. Depreciation expense in the first 9 months of 2026 was $265.6 million, an increase of 5% compared to $252 million for the first 9 months of 2025. General and administration expenses in the third quarter of 2026 was 11% higher than in the third quarter of 2025. General and administration expenses increased due to the the annual wage increases and the Citadel Drilling acquisition. Interest expense decreased by 4% to $17.7 million from $18.4 million in 2025. The decrease is the result of reduced debt levels prior to the Citadel drilling acquisition and lower effective interest rates. During the third quarter of 2026, $68.7 million of debt was drawn and a total of $31.7 million was drawn during the first 9 months of 2026 and as a result of the Citadel Drilling acquisition. The company has revised its previously announced 2026 debt reduction target of $60 million to $50 million. The revision is the result of of the Citadel Drilling Limited acquisition and reinvesting into the company through capital expenditure. If industry conditions change, these targets may be increased or decreased. Net purchases of property and equipment for the third quarter of 2026 totaled $85.3 million, consisting of $26.9 million in upgrade capital and $63 million in maintenance capital, offset by dispositions proceeds of $4.6 million. Our 2026 capital budget is set at approximately $190 million and selective upgrade capital of approximately $100 million. As at September 30, 2026, the company had total customer capital commitments of $87 million related to various upgrade projects that will be recognized over their respective contractual terms. Of the $87 million, $32 million has been received and recognized to date in revenue, $32 million has been received and is recognized as deferred revenue and $23 million is yet to be received. On that note, I'll turn it back to Bob. Thanks, Trevor.

So let's start with the global summary here of our third quarter, and then I'll provide some insight into what we are seeing develop under this volatile yet still strong commodity pricing environment. Around the globe, we have 114 high-spec ADR rigs active today along with 50 well service rigs in North America and 25 Okla and PD units on locations generate revenue. Let's dive into each of the business unit areas, starting with U.S. drilling. With the Citadel acquisition, we were up to 51 high-spec ADR drilling rigs active in the U.S., which increases our market share in the Permian, the world's largest and most active market to 9%, with 9% in the Permian market now. We also upgraded, reactivated 2 super spec triples and also reactivated a third rig and moved it from the Rockies to Nevada onto a geothermal project. We have 3 of our U.S. rigs continually engaged in geothermal projects. We continue to see a more active bid book, which is allowing us to move rates up roughly $1,000 a quarter. We're also seeing more private equity and new names flow into the business because of the strong commodity price construct, which provides for more shoulder plays becoming competitive. Starting on the West Coast and moving east, we are seeing our call California drilling asset base up a rig since the second quarter and now at 6 high-spec ADR rigs under contract with expectations of adding a couple of rigs into the New Year. We are up a rig in the Rockies division with 9 active in that division today. In our U.S. Southern unit, we jumped 9 rigs since our last report to 36 in the U.S. Southern business unit, 5 of which the result of the Citadel acquisition and as I mentioned before, 1 of the 6 Citadel rigs is down for research and will be back to work shortly. The Permian continues to be our most active and prolific area with continued strong demand for our high-spec ADR rigs that can drill 5-mile laterals and with an expectation that we should see 4 to 5 more rigs go to work between now and into the first quarter of '27. I'll point out that roughly half are U.S. other rigs in the Permian are on a performance-based contract, which elevates margin opportunities of further 10% to 20%. Turning to Canada. We operate the second largest fig in Canada, which consists of a wide range of fleet of high-spec rigs from singles to the deepest triples. Through the third quarter, we completed 3 high-spec triple rig upgrades and we activated 3 additional rigs, high-spec single high-spec triple and high-spec double all of which have been down for about 2 years. Those have been back and run now. In the third quarter, we also maintained an average activity of roughly 50 drilling rigs active coming out of the summer into the fall with growth focused on the higher-margin high-spec singles and high spec triples. We maintain a 22% market share in the Western Canadian [indiscernible] Basin with opportunity to grow that with our fleet of high spec triple conditions. There was a recent industry-wide field increase of roughly 5%, which were passed on to the operators via the escalation clause in the contracts and the team is raising rates as we price into the busy winter season with roughly 5% to 10% rate increases depending on the rig type in the area. We expect to hit 60-plus rigs active as a peak in the first quarter '27. And with that, any incremental rigs that go to work will require $3 million to $5 million of capital to recertify that and reactivate. This provides a strong backdrop you have operators to fund those costs, either through direct funding over 20% rate increase per term. On the international front, as I mentioned on the prior calls, the geopolitical climate has slipped. A year ago, we talked about the stable Middle East and the unstable Venezuela. Well, that's backwards now. Venezuela is our most active growth opportunity where we currently have 2 rigs active and growing a rig a quarter as we move forward. The goal is to build to a 15-rig operation in the country over the next few years. As you know, Ensign has been active in Venezuela for 25 years and lived through the thick and thin with solid and loyal support from our Venezuelan team. Staying in South America, our Argentina or Argentina business unit has both rigs fully active and contracted into the future. Middle East is defined Strait of Hormuz you're at. In Oman, we have all fiber exact under contract, while Kuwait has the rigs down and bidding into mid-'27 work. 2 rigs in Bahrain or P90 at least with 1 of the rigs going back to work in the area in the new year, and Australia has 4 going to 5 rigs active with strong bid activity likely to see us finding a few more rigs over the next few months. Well servicing. Today, we have 50 well service rigs active with Canada year-over-year and -- I'm sorry, with Canada up year-over-year, we're 20 active today and a growing number on 24-hour projects, which are very profitable. In the Rockies, we're picking up some plug and abandonment work with 30 active today. We have 10 well service rigs working today in our California business unit, working for our usual client base there. Also seeing more demand for a la carte anal items associated with gold servicing, which have very high margins. On our Edge Drilling rig automation group, as mentioned at the beginning of the call, our Drilling Solutions team landed its first real-time operating center APM contract, advance performance management contract where we will be supplying on a 24/7 real-time basis out of our Houston real time operating center, drilling performance advisory services direct to the rig halfway around the world. The APM team of Performance Drilling engineers takes the and applies our experiential knowledge on APM to the team on the rig to help deliver maximize performance. We have our Edge automated drilling system installed now on roughly 60% of the fleet, and we continue to expand our product. we also have our Edge drilling solutions team actively engaged with our newly acquired Okla NPD team in order to help build out more efficient HMI screens or the and introduce more automation woven into the NPD process. Moving to the OPLA NPD. We are excited with the recent acquired OPLA NPD group, which was part of the Citadel acquisition. Ensign has been in the UBD MPD business for over 15 years and had a few units active in Canada before the acquisition. And now we have a platform to seriously grow with. With the addition of 28 MPD units of which 23 are active today. This business line is an exciting opportunity to add margin and drive synergies on the rig. The Open team have deep engineering and operational capacity, and we welcome all of them to the team. With that, I'll turn it back to the operator for questions.

[Operator Instructions] Our first question comes from the line of Aaron MacNeil from TD Cowen.

Bob, on the 15-rig Venezuela target, can you walk us through it's actually committed today versus still perspective? Can you give us a sense of timing? I know you said 1 rig a quarter. But like how many of those rigs are already in country versus requiring import, like where is the contract situation today? And what are the rig specs that your customers are looking for there?

Yes. We've got 2 that have been active in the country for quite some time up and down over the last few years. So they're running, of course. They're basically higher-spec triples, they're not super spec triples super. They're not like a Permian rig. They'd be a slightly smaller version of the Permian rig. We've got another 1 that's landed in the country that will be starting here next week. That will bring us to 3 and then we've got its sister rig, which will be on its way in a month or 2. And then we've got another sister rig that has been on Barrow Island in Australia, for about 5 years. It's hopping on a boat and sailing west to Venezuela. It will be there in the new year. So by next summer, we should be up to 5. We also have a cadence behind that, that we're working on with operators to fill in behind that. So you're going to kind of see us add a rig a quarter as we move forward.

So just not to put too fine a point on it, but maybe 5 contracted. Is that fair? And then in discussion with the remainder.

Correct.

Got you. And then outside of Venezuela, how many additional rigs in the existing fleet could realistically be upgraded and reactivated over the next 12 to 24 months? And how much of that opportunity could be supported by customer funding rather than Ensign capital?

Specific to Venezuela. Is still an are.

Venezuela, is more Nort.

Just generally well, yes, that's a very good question. And we've had a few large clients cannabis industry to ask that very question. Because right now, 85% -- 85% of the rigs are running, that's essentially 100% activity because you've got certifications, you've got moving and rigging and other things happening. So 85% in is like 100%. And we're basically close to 80% utilization in the high-spec triples, if we use Permian as a proxy for this conversation. Anyway, back to the comment that a few operators went in cannabis, and they found that everyone is kind of in the same position that the next rigs coming out of the yard we need $3 million to $5 million to reactivate and recertify and put them to work. So the market is starting to tighten up real quick. That same situation is true north of the border as well. On the high spec singles, which were sold out of in the high-spec triples, which I think we maybe have 1 or 2 that are available today. So and we really don't have anything behind that. So if everyone -- if anyone's going to put rigs out to the market today, they're having to add capital to recertify and reactivate. With that, we're asking the operator to pony up and pay for that or we'll raise the day rate accordingly and make that incremental CapEx investment back in the first year.

Okay. Makes sense. And I'll turn it back.

Our next question comes from the line of Keith MacKey from RBC.

Can you just maybe start out on the liquidity, financial liquidity, looks like it got a little bit tighter quarter-over-quarter. Can you just kind of walk us through the mechanics of the $50 million debt repayment target for Q4? And then maybe an early look at what you're thinking about for 2027 as far as capital and debt repayment.

Sure. Well what we're looking at for Q4 is about the same kind of trend, I guess, on the EBITDA side. With a bit of a reduced plan for capital expenditures in the quarter. As well as we do have some property sales or property sale that has been completed in in Q4. So that, along with some customer-funded projects coming in, we're expecting to have enough cash flow generated from operations as well as from these other sources to bring us back into that free cash generation to continue to repay the debt.

Okay. Bob, can you maybe just walk us through kind of what you're seeing in Canada, certainly, the rig market in Canada has been fairly strong in the last several years. Is there more more upside in the Canadian market? Or have we kind of hit peak margins hit peak rig counts, just maybe walk us through kind of what you're seeing as we head into 2027 winter drilling season.

Well, it's a good question. And strong as activity is, what we found is where people are talking about rig types being sold out. They get a call and they found another rig in the backyard that they can reactivate and upgrade and put to work. Most of that is behind everyone now. And now the situation is we're going to have to spend at least $5 million to do this. And we, again, we need the money to do that or we're going to raise our rates. Raising the rates, of course, brings all the harbor up on everything else around it. So it feels a lot like some markets I've seen before, having some experience in this area where when someone calls -- when you bid something and someone calls and you say, "I'm sorry that rig is no longer available. And then a couple of hours, they call back later and say, okay, what's the second choice here. Let's go with not the rig I'm exactly looking for, but I'll pick another rig. That's when the market starts to move, and it starts to move very quickly when that happens because of the tightness in the market will drive it. So that feels pieces was kind of saying this winter, we may see some of that happening on certain rig types, the high-spec singles, the highest tech triples for sure. It's feeling like that, yes.

Okay. So does that mean that we might see an incremental pricing on some of the doubles market if we do get into that dynamic? Like would you would that be more of an upside scenario right now? Or do you think that we might actually see that.

Well, the high-spec doubles, there's a little more capacity. But what starts to happen is where people have -- they want a super high spec single 1 of our ADRs, and they're all sold out. They go, okay, well, give me a double, double will move slightly slower than ISDC single. It doesn't take up much more acreage on the location, given your double and we'll see demand for the double start to pick up with demand picking up, of course, rates will start to increase slightly as well.

Appreciate the color. Thanks, Steve.

[Operator Instructions] Our next question comes from the line of Parvin Mamedov from Equinox Partners.

Congrats on the new A question on the overall expectations for 2027. So it sounds like for triple utilization is pretty high. So the upside will be coming from the higher rates. And then for doubles or single that's where the utilization can still has gone to increase? Is that the right way to think about it.

Yes. doubles the high spec singles were basically sold out of. So the upside on days will come from the doubles correct.