Ensign Energy Services’ shares fell in a recent selloff of oil services stocks. But the company is building its fleet of rigs in Canada, the U.S. and overseas. This will improve its earnings. Ensign remains a buy for rising dividends and long-term share price gains.
Ensign’s shares fell by over 12 per cent during the late spring and summer. Most oil services stocks are down. Also, the company earned less in the first half of 2014. Ensign expects its results to improve in the second half and through 2015 as it adds new rigs. It remains a buy for rising dividends and long-term share price gains.
In the first half of 2014, Ensign earned $75.7 million, or 49 cents a share. This was up by 8.9 per cent from net income of $68.3 million, or 45 cents a share, a year earlier. But the lower loonie raised Ensign’s first-half profits by $28.9 million, or 19 cents a share. The company’s adjusted net income was $68.3 million, or 45 cents a share. This was down by 15.1 per cent from $81.1 million, or 53 cents a share, a year earlier. Adjusted net income excludes changes in foreign exchange rates and some accounting standards.
Ensign’s business is improving. In the second quarter, it profited from stronger demand in Canada, the U.S. and other foreign markets. The company’s second-quarter adjusted net income was $14.4 million, or nine cents a share. That was the same as $14.5 million, or nine cents a share, a year earlier.
Investment reduced its profit margins
Ensign earned lower gross profit margins. But this partly reflected “higher costs related to ongoing maintenance and start-up costs of additional equipment preparing for work later in 2014”. Indeed, in the first six months, Ensign commissioned one new advanced drilling rig in the U.S. and two in Australia. It also retrofitted one rig transferred from the U.S. to Canada and two rigs transferred from Canada to Australia. The company expects to do well in North America in the second half. Better results in markets such as Australia should offset “challenges” in the Middle East and parts of Africa.
Ensign is investing heavily for future growth. It’s building 34 new advanced drilling rigs. In Canada, it’s shifting from shallow drilling to deeper drilling. In the U.S. the company’s “deeper, longer reach, self-moving high-tech [advanced] drilling rigs meet stringent customer demands for horizontal and lateral drilling”. It also continues to upgrade and retrofit existing rigs. All this investment will more than offset noncommissioned drilling rigs.
In the third quarter of 2014, Ensign will deliver two new rigs and do major retrofits of seven. In the fourth quarter, it will deliver seven new rigs. In 2015, Ensign will deliver seven new rigs in the first quarter, eight in the second quarter and six in each of the third and fourth quarter. It’ll also do major retrofits of two rigs.
Such investment is costly. In the first half, Ensign’s cash flow dipped by 0.5 per cent, to $227 million. This fell far short of $258 million in purchases of property and equipment and $36 million in dividend payments. In the second quarter, the company’s cash flow rose by two per cent, to $90.4 million. This, too, fell short of its investment and dividends. As a result, Ensign raised its revolving credit to $600 million, up by a half from the former $400 million.
Ensign has a safely-low level of debt
Ensign’s net debt-to-cash-flow ratio is only 1.4 times. This is within our usual comfort zone of two times or less. It also gives the company the means to keep raising its dividend. It has raised its dividend each year since 2002, when it paid 10 cents a share.
In 2014, Ensign is expected to earn 98 cents a share, as new capacity comes on stream. This would be up by 16.7 per cent from 84 cents a share last year. In 2015, the company’s earnings are expected to climb by nearly 30 per cent, to $1.27 a share.
Ensign Energy Services (TSX—ESI) is a buy for rising dividends to add to long-term share price gains.
The Investment Reporter, MPL Communications Inc.
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The Investment Reporter •10/14/14 •