OUTLOOK
Industry Overview
The outlook for the oil service industry is uncertain. The macroeconomic environment for its oil and natural gas producer customers has shifted rapidly as a result of the global COVID-19 pandemic and geopolitical events. Global COVID-19 mitigation strategies have dramatically and adversely impacted demand for oil and natural gas in the short term, exacerbating a supply surplus that has driven crude oil commodity prices to historic lows. While supply has recently been curtailed somewhat by select global oil producing nations, the outlook for crude oil prices remains challenged as a result of this current supply and demand imbalance. Oil and natural gas energy producers have adjusted to the current commodity price environment by curtailing capital expenditures and selectively curtailing production, leading to downward pressure on demand for the Company's equipment, resulting in lower utilization and revenue rates across the Company's North American fleet.
The Company has responded by further reducing its 2020 budgeted net capital expenditures to $50.0 million now down 50 percent from an original budget of $100.0 million, which was initially reduced to $60.0 million on March 23, 2020. Furthermore, the Company has and will continue to reduce general and administrative expenses, largely as a result of compensation reductions, effective April 1, 2020, across the organization and plans to implement ongoing cost control efforts in response to ongoing developments.
In the short term, we expect continued uncertainty with macroeconomic conditions including crude oil commodity prices and demand for oil and natural gas and the services we provide. In the long term, while acknowledging the timing of an oil market recovery remains uncertain, the Company believes the oil price environment is likely to gradually stabilize and improve. The Company's high variable cost, low fixed cost business model enables it to be resilient and flexible during this time of uncertainty. Although future uncertainties may impact the current outlook, the Company believes it is relatively well positioned to survive the current downturn and take advantage of the new operating environment when the market rebounds.
The Company remains committed to debt retirement, balance sheet and liquidity preservation and capital efficiency. In addition, the Company continues to monitor the current macroeconomic environment and will continue to take additional steps to mitigate the negative impacts of these events and to be positioned to take advantage of positive events that may occur.
Canadian Activity
While Canadian activity has predictably slowed as operations entered the seasonal spring break-up, Canadian operations delivered a strong first quarter in 2020. Notably, the Company increased Canadian market share nearing the end of the quarter. We expect Canadian activity to remain muted through break-up, into the year's third quarter and down year-over-year. As a result, we remain focused on opportunities in diversified projects such as natural gas and gas liquids.
As of May 8, 2020, of our 101 marketed Canadian drilling rigs, approximately 20 percent are engaged under contracts of various terms. Approximately 60 percent of those contracted rigs have a remaining term of six months or longer, notwithstanding they may be subject to early terminations.
United States Activity
United States activity remained steady early in the quarter. Exiting the quarter activity decreased as a result of the current depressed industry conditions. We expect activity to remain muted under current conditions and down year-over-year. As a result, the Company is focused on working with our customers to deliver on select and important projects.
As of May 8, 2020, of our 122 marketed United States drilling rigs, approximately 30 percent are engaged under contracts of various terms. Approximately 50 percent of those contracted rigs have a remaining term of six months or longer, notwithstanding they may be subject to early terminations.
International Activity
International activity delivered a stable first quarter. In light of the current environment, we expect international activity to be flat to slightly down year-over-year. Although we believe market conditions in many of our international operating jurisdictions are superior to North America, they are and will be affected by the current unfavourable global macroeconomic and industry environment.
As of May 8, 2020, of our 48 marketed international drilling rigs including the five joint venture drilling rigs, approximately 30 percent are engaged under contracts of various terms. Approximately 70 percent of those contracted rigs have a remaining term of six months or longer, notwithstanding they may be subject to early terminations.
RISKS AND UNCERTAINTIES
This document contains forward-looking statements based upon current expectations that involve a number of business risks and uncertainties. The factors that could cause results to differ materially include, but are not limited to, the impact of the COVID-19 virus, political, economic and market conditions, crude oil and natural gas prices, foreign currency fluctuations, weather conditions, the Company's defense of lawsuits and the ability of oil and gas companies to pay accounts receivable balances and raise capital or other unforeseen conditions which could impact on the use of the services supplied by the Company. For a more detailed description of the risk factors and uncertainties that face the Company and the industry in which it operates, refer to the "Risks and Uncertainties" section of our current Management's Discussion & Analysis and the section titled "Risk Factors" in our current Annual Information Form.
Source: Ensign Energy Services
