RE:CIBC TodayPrice Target (12-18 mos.):
C$2.50
ENSIGN ENERGY SERVICES INC.
Nabors Acquisition Adds High-spec Exposure To Canadian Operations
Our Conclusion
Ensign acquired 35 rigs from Nabors’ Canadian drilling fleet. Although the deal size was not disclosed, we see this transaction adding more than meets the eye, offering strategic importance in gaining market share in the Montney and Deep Basin. With this update we have increased our 2021E and 2022E EBITDA expectations for ESI to $232MM and $308MM from $209MM and $260MM, respectively, and have assumed a $105MM purchase price. Our 2022E D/CF estimate decreases to 3.8x from 4.4x previously. On the back of this acquisition, we are raising our price target to $2.50 from $1.40 prior but are maintaining our Neutral rating due to continued risk of carrying such high debt levels in the event of a decline in activity levels.
Key Points
Acquisition to be funded with cash on hand and available credit facilities, which we estimate could be ~$105MM. Ensign reported total liquidity of ~$118MM at the end of Q1/21, which consisted of ~$33MM in cash and the balance being capacity under its $900MM credit facility. We have assumed a purchase price of $105MM, which is likely to carry an accretive EBITDA multiple on the Nabors assets. Nabors’ Canadian drilling segment reported adjusted EBITDA of US$9.7MM in Q1/21, US$13MM in 2020, and US$15MM in 2019. On 2020 EBITDA of ~C$15.9MM, our transaction multiple computes to 6.6x EV/EBITDA, which is slightly accretive to ESI’s current trading value at 7.3x 2021E EV/EBITDA.
The NBR portfolio adds a material client book in the Montney and Deep Basin. The proforma fleet will include 127 rigs in Canada, which computes to ~26% of the total Canadian rig fleet and includes 12 A/C rigs. The high-spec rig market in Canada is dominated by PD, ESI, and NBR. With this acquisition, we estimate ESI could add about 10%-20% to its market share in terms of rig days in plays that require more advanced rigs that command higher day rates such as the Montney, Spirit River, and “other” Deep Basin.
We expect the client book to be sticky as E&Ps prefer consistent and experienced crews. We see it as likely the existing client book is maintained, given many E&Ps prefer to maintain the same crew through their drilling programs. In addition, as the labor market tightens, both ESI and PD have one less company to compete with in staffing rigs, so we view this as an acquisition of assets on a number of fronts.
Acquisition to close in Q3/21 and increases Ensign’s Canadian activity levels by 61% in 2021E and 100% in 2022E. We are modeling an average of 29 rigs in 2021E, up from 18 prior, and 42 rigs in 2022E, up from 21. With the higher proportion of drilling in higher day-rate plays our day-rate expectation increases to ~$20,150 (up from $19,300) in 2021E and $21,500 (up from $20,000) in 2022E.