CALGARY — Ensign Energy Services Inc. is predicting oil and gas drilling will steadily improve during the rest of 2010, but warned Monday that weak pricing may linger for several quarters.
“There’s no question the worst appears to be behind us in the oilfield services sector generally, but we still see a few areas of concern,” president and chief operating officer Bob Geddes told a conference call with analysts after the company reported weaker quarterly profits.
“There’s still an oversupply of equipment in most of the business lines across Canada. This makes it very difficult to move rates to more profitable levels until more consolidation occurs in certain areas.”
In an earlier statement, Ensign said it could be “several quarters” before competitive pricing pressures ease up.
BMO Capital Markets analyst Michael Mazar called Ensign’s (TSX:ESI) outlook “tepid” compared to what he has been hearing from others in the drilling and well servicing industry.
“Most of the other guys have said Canadian and U.S. drilling activity is ramping up, pricing is getting better, margins are expanding,” he said. “Maybe it’s just Ensign being conservative.”
Ensign does not have as many high-tech rigs in its fleet as its competitors. These rigs allow companies to drill long, complex horizontal wells into promising North American shale formations. The advanced equipment can fetch much more attractive pricing from customers than simpler rigs that target shallower reservoirs.
In a move Mazar said may help on the pricing front, Ensign is doubling the number of drilling rigs it plans to build this year to 12. Those will be delivered later this year and into the early part of 2011. Ensign is also building six new well servicing rigs.
The company said earlier its second-quarter profits fell 30 per cent as higher operating costs offset revenue growth.
Net income was $9.3 million, or six cents per share, for the three months ended June 30 — missing consensus analyst estimates of 13 cents per share.
A year earlier Ensign booked profits of $13.2 million, or nine cents a share.
“Rig/service pricing across most regions appears to be the main cause of the miss as gross margins of 23.1 per cent were shy of our 26.8 per cent estimate and well down from 31 per cent in Q2 ’09,” UBS Investment Research analyst Chad Friess wrote in a note to clients Monday.
The company said the slip was caused partly by the stronger Canadian dollar, lower revenues in some areas and temporarily higher operating costs from new equipment.
Overall, quarterly revenues increased 14 per cent to $257.6 million from $226 million.
The second quarter is normally a weak time for oil and gas drillers in Canada, since the ground is too mushy to support equipment during much of the spring.
But even with “spring breakup” taken into account, Ensign still performed worse than its peers, BMO’s Mazar said.
“The utilization in Canada was much worse than we thought.”
Ensign shares fell nearly two per cent to $12.45 on the Toronto Stock Exchange on Monday.