ESVIF - Ensign Energy Services 9.25% 2024: Another Of My Favorite Short-Dated Bonds

Summary

• Ensign Drilling has a 9.25% April 2024 bond outstanding (CUSIP: 29359NAA3).
• Despite the volatility, the energy market and the land drilling economics are overall significantly better compared to recent history.
• There are a couple of deep-pocket investors in the equity holders base.
• I expect the bonds to be taken out at par before the end of 2023.

Situation Overview

Ensign Energy Services (ESVIF) is confronting a maturity wall in the near future, as its bond is set to mature on April 15, 2024. Furthermore, its revolving credit facility has a springing maturity clause that mandates the $882 million credit facility to become due immediately if the bond is not refinanced six months ahead of the bond's maturity date. As a result, Ensign's nearest maturity date is on October 15, 2023.

Although a static review of Ensign's financials might unnerve some investors, Ensign's creditworthiness is rapidly improving. The supply and demand dynamics of North American drill rigs have significantly improved over the past two years, benefiting drillers, including Ensign, which has not yet adjusted its fleet prices to reflect current day rates. Recent weakness in natural gas is also expected to constrain rig reactivation, further strengthening the favorable industry environment. Ensign's anticipated FY2022 EBITDA is approximately $350 million and is projected to increase significantly to at least $500 million in FY2023, thereby lowering its net leverage ratio below 3.0x. Moreover, major shareholders, such as Murray Edwards and Fairfax, are expected to provide support to safeguard their equity interests via an equity offering, among other possibilities.

Company Description

Ensign Energy Services is a global provider of oilfield services, offering drilling, well servicing, and oilfield equipment rentals to the energy industry. The company was founded in 1987 and has grown to become one of the largest drilling and well services companies in North America, with operations in Canada, the United States, and Mexico, as well as limited international operations in South America, the Middle East, and Australia. Ensign's drilling services include vertical, horizontal, and directional drilling, as well as drilling-related services such as casing running, cementing, and drilling fluids. Its well servicing offerings include well completion, workover, and re-entry services. The company also offers a broad range of oilfield equipment for rent, including drilling rigs, well servicing rigs, and ancillary equipment.

Capital Structure

Ensign Energy Services has a straightforward capital structure, consisting of a revolving credit facility of around C$882 million and a senior unsecured bond with a 9.25% interest rate, which currently has an outstanding amount of US$417.5 million. Although the bond was initially issued for US$700 million, Ensign actively repurchased many of these bonds during the COVID pandemic years.

Ensign Energy Services' leverage ratio has been subject to fluctuations, as is common in the oil field service industry. As of the latest 12-month period, Ensign's leverage ratio stands at approximately 5.0x, but it is expected to decrease to below 3.0x by the end of FY2023. This is because the anticipated EBITDA is expected to exceed $500 million, generating a substantial amount of free cash flow that will allow for further reduction of net debt. With a record-high EBITDA, Ensign is poised to make significant progress in reducing its leverage ratio in the coming years.

Major Shareholders

Murray Edwards, a Canadian billionaire, holds approximately 23% of Ensign Energy Services, making him the largest shareholder. Fairfax is the second-largest shareholder, with ownership of nearly 13% of Ensign shares after converting a small debenture to stocks. With these two major shareholders controlling a significant stake in the company, they have the ability to contribute the necessary capital to roll the bond, which could require up to US$400 million. Based on the current interest rate, it's possible that Murray Edwards and Fairfax will provide between US$100 to 150 million, which should be sufficient to entice existing bondholders to roll their holdings and even attract new investors.

If a straightforward refinancing arrangement proves difficult, I can envision the two shareholders spearheading an equity raise to help lower Ensign's leverage. Regardless, given the favorable outlook for the energy market, they are unlikely to relinquish control of the second-largest land driller in Canada.

Ensign 9.25% 2024

According to TRACE, Ensign's bonds are currently trading at approximately $98. Below is a yield table reflecting this price at various redemption dates. Based on my cautious outlook, I believe that investors have an opportunity to earn an appealing yield of 12.5-32.6%, depending on how long they hold the bond.

Conclusion

Given the current uncertain market conditions, the return of capital is now more crucial than the return on capital. However, with Ensign's 9.25% bond, investors can benefit from both an appealing yield and a high degree of certainty that their capital will be returned. I anticipate that Ensign will refinance the bond by the end of 2023, and I am eager to hear the company's management discuss its plans to address the maturity runway on their upcoming Q4-2022 earnings conference call, scheduled for early March.

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