(ESI-T) C$0.51
Q1/20 Results Event
Ensign reported Q1/20 EBITDAS of $89.2 million, in-line with our estimate of $91.1 million and consensus of $90.8 million.
Impact: NEGATIVE. We are reducing our 2021 EBITDAS estimate by 20% to reflect a prolonged recovery from COVID-19.
Q1/20 Results: Ensign reported Q1/20 Revenue, EBITDAS, and EPS of $383.9 million, $89.2 million, and a loss of $0.18 per share, compared with our estimates of $390.2 million, $94.7 million, and a loss of $0.17 per share, respectively. The only notable difference between our estimates and actual results was lower-than- expected international segment revenues (-17%). Details on page 2.
Capital Allocation Priorities Shift to Debt Reduction: Management disclosed three notable shifts in capital allocation strategy, including: the suspension of its dividend (in-line with TDSI expectations), a 50% reduction to its 2020 capital program (now $50 million, including $40 million for maintenance), and opportunistic senior note buy-backs of US$17.8 million during the quarter and an additional US$41.0 million subsequent to quarter end.
Addressable Covenant Issue: While Ensign was in compliance with all covenants at quarter end, we continue to calculate that it will require covenant relief for its credit facility in the near-term. With the elimination of the dividend, the secured nature of its credit facility and our expectation that it will generate positive free-cash-flow in 2020/21, we continue to expect that covenant relief is achievable.
TD Investment Conclusion
Given the limited number of material competitors across the North American contract drilling landscape, we believe that this sub-sector holds several desirable characteristics, the most important of which, in our view, is an expectation of relatively disciplined pricing strategies among competitors. Additionally, the business features an almost entirely variable operating cost structure and should feature a harvest of working capital in the near-term. That said, we are reducing our 2021 EBITDAS estimate by 20% to reflect a prolonged recovery timeline from COVID-19-related crude oil demand destruction, while leaving our 2020 EBITDAS estimate effectively unchanged. As a result of our reduced 2021 estimates, we are also decreasing our target price to $0.70 ($0.75 previously), while maintaining our HOLD rating. Management will host a conference call at 12:00 pm ET, dial 1-888-231-8191.