Rig Count: Ensign Land Fleet Acquisition Latest In Canadian Expansion Into U.S. Market

Hart Energy's exclusive rig counts measure drilling intensity. Our counts exclude units classified as rigging up or rigging down, and also exclude rigs drilling injection wells, disposal wells or geothermal wells. The result is our most accurate assessment of rigs on location working on oil or gas programs as of the sample date. While our process results in a rig tally that is lower than the published numbers from the non-proprietary rig-tracking agencies, Hart Energy believes our product presents the most accurate picture of what is actually occurring in the field.

The Canadians are coming.

Actually, they are already here, and they are gaining share in the domestic drilling market, particularly in unconventional plays.

Case in point is Ensign Energy Services' $510 million all cash acquisition of Rowan Drilling Company's land fleet July 20. The deal brings Canada's Ensign 30 high-end rigs (28 marketed), complementing Ensign’s existing U.S. fleet of 94 units, including labor contracts, in two divisions covering California and the Rockies.

Through the acquisition, Ensign is now expanding into the Gulf Coast, South Texas, Midcontinent and ArkLaTex markets where it had limited presence previously. When coupled with its Canadian and international fleets, Ensign is now a Top 5 independent contract driller globally with 340 marketed drilling rigs, including 115 units in the United States.

Ensign will fund the cash purchase through working capital, existing credit lines and a new term facility of up to $400 million via HSBC Holdings Plc.

Furthermore Ensign is gaining a mostly new fleet of high end, high spec technology rigs suited for deeper drilling in challenging unconventional plays.

The Rowan acquisition will bring Ensign expanded marketshare in the Eagle Ford, the deep Granite Wash/Cana Woodford play in western Oklahoma, and the Haynesville/Bossier shale plays in the ArkLaTex. All three plays are characterized by deep vertical sections exceeding 11,000 feet along with horizontal laterals that reach out 5,000 to 7,000 feet.

Rowan's 30-unit fleet includes 16 AC-VFD electric rigs that are less than five years old. Seventeen of Rowan's 19 AC-VFD rigs are rated at 2,000 horsepower, and two are rated at 3,000 horsepower. The latter are capable of drilling to 35,000 feet. The company also marketed a mix of 11 traditional DE-SCR electric rigs, including six 2,000 horsepower units with the remainder rated at 1,500 horsepower.

The 1,500 horsepower rig class in the U.S. market is characterized by full utilization with demand currently exceeding supply. A majority of domestic new rig construction is, in fact, focused on the 1,500 horsepower niche as operators seek high spec rigs for the extended reach drilling that has become the driving force in the land drilling market.

The big rig market, or units 2,000 horsepower or greater, has not seen utilization at the same levels as the 1,500 horsepower class. Of the 30 Rowan rigs, two lack contracts and both are 3,000 horsepower units. Elsewhere, seven Rowan rigs are completing contracts in the July/August 2011 time frame. Rowan reported average day rates of $21,000 for its fleet of working U.S. land rigs in June 2011.

Rowan and Ensign have had a long-time business arrangement through Rowan's LeTourneau manufacturing subsidiary, which has been a source of mudpumps and drawworks for Ensign's new rig construction program. Rowan has had a long history of building rigs for both the offshore and onshore markets. Through its LeTourneau manufacturing subsidiary, the company developed technologies such as top drives or AC-VFD systems while using land rigs as a platform to test innovations before they were incorporated in Rowan’s offshore newbuilds. The theory was that the U.S. land sector provided a number of stress tests on equipment because of difficult field conditions and, if components worked onshore, they would work offshore as well.

Rowan has experienced swift action on two long-discussed divestiture initiatives, including its manufacturing subsidiary and its land drilling fleet.

The offshore driller divested the LeTourneau manufacturing subsidiary to Joy Global, Inc. in May 2011 for $1.1 billion in cash. Upon completion of its land fleet sale to Ensign, Rowan will become a pure play offshore driller specializing in high spec harsh condition jackups who subsequently set sail June 1 on a construction program to build two Ultra Deepwater drillships.

Two divestitures for $1.6 billion in cash within 60 days will go a long way towards paying for those drillships, which will cost $605 million, plus another $20 million in specialized equipment, before deployment in 2013-14.

Rowan's transformation to a pure play high spec offshore driller is a developing story in a global offshore market that gives every indication of reviving.

In the meantime, the focus is on the red-hot the U.S. land sector. Through the Rowan acquisition, Ensign gains an impressive customer base, including five rigs working for EnCana, two for Chesapeake, four for EOG Resources as well as a suite of customers including Plains Exploration & Production, EXCO, Devon and several privately held oil and gas firms. Additionally, Ensign currently has 10 rigs at work for EnCana and seven for Occidental. Other customers include Anadarko Petroleum, PDC Energy, Plains Exploration & Production, Chevron, and Hess.

Ensign is a vertically integrated international oil service firm marketing a broad array of well site services including drilling, well servicing and rig manufacturing. Its Latin American drilling fleet includes a 21-rig presence in Mexico, Venezuela, and Argentina with another 15 rigs at work in the Middle East or North Africa. Ensign also has 14 rigs active in Australia and one each in Thailand and New Zealand.

The Rowan acquisition rounds out Ensign's profile with a deeper, higher spec fleet component. Prior to the acquisition, 75% of Ensign’s fleet was rated at 1,000 horsepower or greater, though few were rated above 1,500 horsepower. About 75% of Ensign's land rig fleet is equipped with top drives, which assist the horizontal drilling effort.

Like many of Canada's contract drillers, Ensign has shown a propensity to grow via acquisition. However the company has been a technology innovator over the last 20 years as well. An Ensign rig was the first to incorporate a portable top drive on a land rig in 1994. In 2000, the driller developed a high spec technology rig, branded as an ADR unit, which features automated pipehandling, top drives, and sophisticated drilling controls. Some ADR units are paired with coil tubing drilling packages. Ensign has built 80 ADR units since 2000, including 18 in 2009. The driller is constructing 22 ADR units in 2011-2012, including 11 earmarked for the U.S. market, at its engineering and fabrication centers in Canada, the U.S. and the Middle East.

ADR units are deployed in California, Wyoming's Jonah-Pinedale play, the DJ Basin, and the Haynesville shale with a few working internationally.

In 2010, the U.S. land market accounted for 37% of Ensign's top line revenues. Ensign recognized $502.2 million in revenues during the first quarter 2011, up 42% versus the same period one-year prior, with U.S. revenues accounting for $145 million of the total. Net income for the quarter came in at $79.7 million, or 52 cents per share, on cash flow of $154.5 million.

The Rowan acquisition should add one quarter billion dollars annually to Ensign's U.S. revenue stream.

Canadian-owned contract drilling firms represented 16% of the 834 rigs active in U.S. unconventional oil and gas plays in mid-July. However, Canadian-owned drillers accounted for half of the additional rigs put to work in unconventional plays since the end of 2010 when the group represented a 13% share of unconventional oil and gas drilling. Those contractors include Precision Drilling, Trinidad Drilling, Xtreme Drilling, Saxon Energy, and Savanna Drilling in addition to Ensign.

A majority of Canadian drilling rigs are characterized as technology rigs with AC-VFD power systems, top drives, and highly automated operations. AC-drive technology was initially incorporated in Canadian top drive systems in the 1990s. AC-powered portable top drives began appearing on U.S. land drilling rigs about a decade ago and the power system has since been expanded into AC-VFD packages to replace the traditional DE-SCR system drives on high end technology new builds, though its advantages versus the DE-SCR system remain an occasionally debated item among U.S. land drilling contractors.

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Source: Hart Energy, Smith Bits (A Schlumberger Co.)

Contact the editor, Richard Mason, at rmason@hartenergy.com.