Ensign Energy Services Inc. (OTCPK:ESVIF) Q3 2022 Earnings Conference Call November 4, 2022 12:00 PM ET
Company Participants
Nicole Romanow – Investor Relations
Bob Geddes – President and Chief Operating Officer
Mike Gray – Chief Financial Officer
Conference Call Participants
Aaron MacNeil – TD Securities
Cole Pereira – Stifel
Waqar Syed – ATB Capital Markets
John Gibson – BMO
Operator
Good afternoon, ladies and gentlemen, and welcome to the Ensign Energy Services Inc. Third Quarter 2022 Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we’ll conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Friday, November 4, 2022.
I would now like to turn the conference over to Nicole Romanow. Please go ahead.
Nicole Romanow
Thank you, Andrew. Good morning, and welcome to Ensign Energy Services third quarter 2022 conference call and webcast.
On our call today, Bob Geddes, President and COO; and Mike Gray, Chief Financial Officer will review Ensign’s third quarter highlights and financial results, followed by our operational update and outlook. We’ll then open the call for questions.
Our discussion today may include forward-looking statements based upon current expectations that involve several business risks and uncertainties. The factors that could cause results to differ materially include, but are not limited to, political economic and market conditions, crude oil and natural gas prices, foreign currency fluctuations, weather conditions, the company’s defense of lawsuits, the ability of oil and gas companies to pay accounts receivable balances or other unforeseen conditions, which could impact the demand for the services supplied by the company.
Additionally, our discussion today may refer to non-GAAP financial measures such as adjusted EBITDA. Please see our third quarter earnings release and SEDAR filings for more information on forward-looking statements and the company’s use of non-GAAP financial measures.
With that, I’ll pass it on to Bob.
Bob Geddes
Thanks, Nicole. Hello, everyone. I’m happy to report that Ensign’s third quarter results came in ahead of expectations. And most importantly, a solid indication that the office space is finally starting to deliver sustainable profits with positive net income. A few key highlights. In the U.S., we are definitely seeing another push on rates in the 10% ranges. Operators quietly contract their most desired fleets moving forward with our application of our EDGE AutoPilot drilling rig control system and our performance advisors, which help the operator reduce net well delivery costs. We actually deliver real value with our rate increases, which makes rate increases very sustainable. And our U.S. Southern business unit, the team successfully completed and commissioned nine high-spec triples on long-term contracts for the Permian rates well into the mid upper 30s. This brings us now to 31 rigs worldwide that we have received or that have received upgrades largely funded by operators through covered costs and/or incremental rate increases.
Adding to the recent recontracting of our two high-spec 2,000 horsepower AC rigs in Bahrain, our international team at Oman secured long-term five-year contracts for three of our high-spec ADRs. All five of these rigs will utilize our EDGE AutoPilot drilling control system engaged on performance based incentive contracts, which will enhance the rig operating margins. We currently have 124 rigs on the payroll today and have visibility to 140 by year end. Most of that uptake in rig count will come from Canada and all with rate increases as we wait into the winter with winter rates being established. These will all have incremental oil [ph] revenue as usual.
At the end of October, we rationalized our Canadian directional drilling business unit for approximately 7 million shares and Cathedral Energy Services making us about a 4% owner in that business. The DD space in Canada is extremely competitive and crowded, necessitating a trade into a consolidation strategy to unlock the value in that business unit.
The deal keeps Ensign invested into the upside that is anticipated as a result of the consolidation strategy, and it also allows Cathedral to have access to Ensign’s EDGE AutoPilot drilling rig control system platform, which is arguably the most easily and cost effectively drilling rig control system solution out there.
As we have expressed on prior calls, incremental CapEx or upgrade reactivations must be funded by the operator at least 50% and that the day rate adjustments must be significant enough to generate sufficient cash flow to cover the remaining CapEx within six months. For upgrade requests less than $1 million, we insist the operator cover the upgrade 100%. I think we’ve seen the wave of upgrades and associated capital requirements through 2022 slow down as the most desirable and easily upgradeable rigs have been completed and reengaged into the market. As we wade through 2023, Ensign still has lots of upgradeable rigs, especially in the double category in Canada where we have 40 underutilized tele-doubles they can be upgraded to high-spec self-moving tele-doubles, along with our new EDGE AutoPilot light drilling rig control system for anywhere from $2 million to $4 million.
Again, we would be working with our clients to cover the upgrade costs for those transactions. While finding new skilled labor with rig experience is challenging. We continue to find ways to attract, recruit and train new employees to the Ensign team. Ensign’s global skills standard GSS trains field personnel on a managed competency career path, much like you see in most other trades and is arguably the most desirable training protocol in the space.
We continue to drive efficiency through systems around the world. With that, we reduced our G&A operating day by 12% in the quarter with record penetration rates and reduced well delivery times, industry is finding accelerated wear and drill strings. In some cases, we’re finding drill strings in the Permian lasting only three years versus eight years, only a decade ago.
To address this accelerated wear issue, we’re now modifying the current contract with our clients, where by a 100% of downgrades will be fully cost recovered with new replacement joints at the operator’s expense, where operators have requested non-inventory drill strings, the operator will be requested to provide the pipe at their cost or accept the market rental charge. We’ve also introduced, I’m sorry, we’ve also started to see operators wanting to contract for longer terms. Always a sign that they feel another rate push coming. With that, we will take term in the upper 30s and we generally like to respond with defined bumps every six months or annually.
I’ll come back to an operational update. Before that, I will turn over to Mike Gray for a run on the numbers.
Mike Gray
Thanks, Bob. Ensign’s results for the first nine months of 2022 reflect positive improvements to oilfield services activity, day rates and financial results year-over-year. Despite the recent pullback in commodity prices, the operating environment for oil and natural gas industry continues to improve. Overall, operating days increased in the third quarter of 2022. Canadian operations recorded 4,009 operating days, an increased of 41%. U.S. operations recorded 4,937 operating days, a 61% increase. And international operations recorded 996 days, a 7% increase compared to the third quarter of 2021.
For the first nine months, September 30, 2022 operating days were higher with a Canadian operating – operations achieving a 76% increase. The United States a 51% increase and a 10% increase in the international operations when compared to the same period in 2021. The company generated revenue of $432.6 million in the third quarter of 2022, a 61% increase compared to revenue of $268.6 million generated in the third quarter of the prior year.
For the first nine months ended September 30, 2022, the company generated revenue of $1.1 billion, a 59% increase compared to revenue of $699.4 million generated in the same period of 2021.
Adjusted EBITDA for the third quarter of 2022 was $105.4 million, 76% higher than adjusted EBITDA of $59.8 million in the third quarter of 2021. Adjusted EBITDA for the nine months ended September 30, 2022, total $243.7 million, 57% higher than adjusted EBITDA of $155.3 million generated in the same period in 2021. The 2022 increases in adjusted EBITDA is due to improved industry conditions, increasing both drilling and well servicing activity.
In addition, operating activity increased as a result of the acquisition of 35 land-based drilling rigs during the third quarter of 2021. Depreciation expense in the first nine months of 2022 was $208.1 million, a decrease of 3% compared to $214 million for the first nine months of 2021.
General and administrative expense in the third quarter of 2022 was $12.8 million or 2.9% of revenue compared to $10 million or 3.2% revenue in the prior year. Capital purchases for the third quarter of 2022 were $46.9 million, consisting of $18.4 million in upgrade in growth capital and $28.5 million in maintenance capital. Capital expenditures for 2022 is still targeted to be approximately $165 million.
On that note, I’ll turn the call back to Bob.
Bob Geddes
Thanks, Mike. So let’s start with the U.S. In the U.S., we operate a fleet of 89 high-spec ADR rigs and 48 well servicing rigs along with a Rockies directional drilling business. The team has grown its market share in the U.S. up to 7%, most of which is concentrated in the highly active Permian region. Ensign also has a strong foothold in the Rockies and California, both challenging areas to operate in from a regulatory standpoint. With the nine recent upgrade reactivations in the Southern business unit now commissioned and out operating, we now have a total of 62 rigs in the payroll in the U.S.
With the bid book recently picking up again, we are seeing visibility to 65 rigs to 70 rigs operating by the end of the year. The Permian now has 41 of our high-spec ADR, 1500 ADR rigs operating with a high probability that we will exit closer to 45 by year end in that area. California state steady at eight rigs out of our 17 in the state. State licensing issues are still a challenge in California, depending on whether licensing opens back up. We could see our U.S. California business unit moving back up to 10 rigs in short order.
Rockies currently at 13 drilling rigs could possibly see another two rigs being picked up by the year end. Our U.S. well servicing business, which operates a fleet of 47 relatively new well service rigs continues to run at high utilization rates and keeps finding ways to grow its business year-over-year in both the Rockies and the California Area. Our directional drilling team in the Rockies continues to deliver high performance service and has a steady book moving forward with a very local client base. As mentioned before, we are seeing a strong wave coming at us again for our high-spec triples and we are solidly bidding into the upper 30s with six man crew tubulars and our EDGE AutoPilot platform.
We still have lots of runway as rates need to be closer to $15,000 [ph] per day all in before one could rationalize building a new super high-spec triple and receiving a reasonable rate of return above one’s cost to capital. In Canada, we operate a fleet of 123 rigs that are focused in the Western Canadian sedimentary basin. Today, we have 46 rigs in the payroll with bookings that will get us to 55 in short order targeting 60 by year end. While we were able to elevate pricing right across all rig categories coming out of breakup, we have seen some price resistance in certain conventional rig type categories. This is a bit of what we call the back draft effect as some of the mid-tier contractors look to get some rig and crews started up before the winter. That’s not the case in the high-spec rig types where we enjoy very strong utilization and leading edge price traction.
We continue to see growing demand occurring in the high-spec doubles and high-spec triple rig categories. As the Clearwater moves over to deeper well plans and Duvernay, Montney stay strong. We’re bidding the high-spec doubles in the low 20s and the high-spec triples in the low 30s as we enter into winter pricing scenarios. I’ll point out again that Ensign still has lots of upgradable rigs, especially in the double category in Canada where we have 40 underutilized tele doubles that can be upgraded to high-spec self-moving pad tele doubles, along with our EDGE AutoPilot light drilling rig control system for anywhere from $2 million to $4 million.
Again, we would be working with our clients to cover the upgrade costs for those transactions. We do see contractors moving rates slowly into winter, but expect rates to elevate another 10% through the first quarter of 2023 on spot pricing, setting the stage for the rest of 2023 for continuing rate increases of 10% to 15%.
Our well servicing business operates a fleet of 52 well service rigs in the Western Canadian basin and have 15 operating today with visibility to 20 by year end. Again, rates are moving with every program negotiation. On the international front, we have a fleet of 34 drilling rigs, of which 14 are situated in Australia, eight in the Middle East and 12 in Latin America, South America.
As mentioned in my opening summary, our Middle East team were successfully recontracting our Bahrain rigs onto five-year contracts with performance based kickers as well as successfully negotiating to put three of our high-spec ADRs in Oman to work on five-year contracts also with performance based kickers. We are finding that there is a growing mark for high performance applications of our EDGE AutoPilot drilling rig control system engaged on performance based contracts. We’re both the operator and Ensign win.
Our rigs in Kuwait are performing in the upper decile and have three more years on their primary term. In Australia where we operate one of the largest fleets in the country, we are finally merging out of COVID challenges, which stunted the business levels severely in the first three quarters. Projects are coming back strong and we expect a very strong year ahead. Rates on our deeper high-spec rigs have been moving up about 15% to 20% with a tighter market developing in the mid-size high-spec rigs. We have also planned two to three EDGE AutoPilot installations in the near future in Australia, which are generating incremental income of $1,600 a day. Argentina has two rigs operating now with a third opportunity being negotiated. The need to generate electricity in Argentina is driving a strong push for a deeper high-spec ADR rigs to deliver gas in country cost effectively.
In Venezuela, the prospect to get some of our fleet operating looks encouraging. But we won’t hold our breath in any case. Our eight rigs are cold stacked in a secure site and ready to go back to work with very little capital once the U.S. lifts and modifies its current OFAC [ph] policy. On the technology front, we now have our EDGE AutoPilot platform installed on 56 rigs worldwide. And the other thing slowing us down or the only thing slowing us down is a global chip problem.
So with that, I’ll turn it back to the operator for Q&A. Thank you.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, we’ll now begin the question-and-answer session. [Operator Instructions] Your first question comes from Aaron MacNeil from TD Securities. Please go ahead, sir.
Aaron MacNeil
Well, thanks for taking my questions. Mike, obviously, a big working capital build this quarter. I don’t think we really need to get into the nuances of why. But more importantly, looking ahead, what do you think working capital requirements will be as well as maybe your first or initial blush at 2023 maintenance and growth capital. And I guess, what I’m ultimately trying to drive that is what do you think cash flows available for debt reduction, might look like in 2023. So I know you’re not going to give guidance, but any help on the other moving pieces might be helpful.
Mike Gray
Yes, so for the working capital, we saw about a 76 million increase in accounts receivable. A lot of that was from the activity pickup we saw going from Q2 into Q3. From a capital perspective, I mean, we’re still fairly firm on the 165, we’re about 133 million into it. So from the accounts receivables coming into the door with the – with sort of the CapEx requirements in Q4 and going into 2023, it’ll be, I think, sort of less than what we have seen. So if anything, we’ll see our liquidity build up and the free cash flow definitely go towards the balance sheet and reducing the credit facility.
Aaron MacNeil
Okay. Bob, you mentioned a slowdown in upgrades. Was that specific to a certain class and what would your inventory of rigs that can be upgraded to a 1500 horsepower super spec rig be and maybe you could put it into buckets of 1 million to 2 million, 3 million to 5 million or whatever other buckets you feel are relevant. I’ve got to follow up on the doubles that separately. So…
Bob Geddes
Right, right. So when – what we mean is through 2022, of course, there was a strong push from 2021. People started to get after the upgrades. So there was a strong push through 2022. The pace of upgrades has slowed down with the clients. Their kind of gotten through their 2022 budget. We’re already starting to see some uptick in some conversation with clients where they go, hey, we like this rig. Have you got another one just like it? And if we’re talking the high-spec triple for a moment we go, well, we can upgrade a rig. Here are the – here’s the scenarios, here’s the day rate and you’re going to have to fund the upgrade. We’ve got in the U.S., we’ve probably got at least another five to 10 triples that can be upgraded.
I’d say they’re probably in that three to five range that would follow into that question. In the high-spec doubles, of course, those would be focused in Canada where we’ve got the greatest concentration of doubles. As I mentioned, we have 40 upgradeable doubles. Some of them are already high-spec doubles that would be upgraded further, because they’re not fully utilized. We’ve still probably got about 10 of those that we can put to work. So we’ve got capacity for not a lot of money to put those to work. And those would be in the $2 million to $4 million range CAD for the Canadian stuff, the U.S. for the U.S. stuff.
Aaron MacNeil
Okay, that’s great. I’ll turn it over. Thanks for your time.
Bob Geddes
Thank you Aaron.
Operator
Your next question comes from Cole Pereira from Stifel. Please go ahead.
Cole Pereira
Good morning, all. So many of your peers in the U.S. guided to sequential increases in drilling margins of the – call it U.S. $1,000 to U.S. $2,000 a day range in Q4. Obviously don’t disclose this, but should we expect sort of a similar range from Ensign?
Bob Geddes
Oh yes, yes, yes. It’s – the harbor moves similarly, absolutely, yes.
Cole Pereira
Got it. And you mentioned 60 rigs in Canada by year end. Should we be thinking about that number as your Q1 peak or could that figure go higher?
Bob Geddes
Oh, no. Q1 peak will go higher. I think we might get to 70 in Q1, peak 70.
Cole Pereira
Got it. And as well, I know we kind of just briefly referenced it, but maybe on a percentage or absolute basis, how many of your Tier 1 rigs in Canada do you expect to be active in Q1?
Bob Geddes
I would say probably close to a 100%. We’re probably on the Tier 1 high-spec triples. We’re already at 90%. So it’s kind of the last two or three going to work type of thing on the high-spec triples. On the high-spec doubles, we’ve probably got capacity and high-spec doubles can range. We’re finding high-spec doubles are starting to push into the smaller what we call now super high-spec doubles are starting to push into the high-spec triple market. As you can imagine, we’ve got clients that currently have a high-spec double doing great work, great crews, and they want to put bigger pumps on it. They want to put a little bigger top drive, that type of thing. So it’s an evolution. There’s some convergence there between our high-spec doubles and the high-spec triples that are out in the market currently. So the margins are very equivalent. I mean, our super high-spec doubles are making the same margin as a high-spec triples in Canada.
Cole Pereira
And is it, so is that on a dollar basis or a percentage basis?
Bob Geddes
Dollar basis.
Cole Pereira
Got it. And as well, you have a bond due in April 2024 that you’d need to refi in the next five months to avoid it going current. Obviously, the bond market’s very challenging in the current environment. Can you just talk about how you’re thinking about the strategy for that?
Bob Geddes
Yes, we’re looking at it. I mean, the story is definitely improving quarter-over-quarter. When you look at where a consensus is to where we’ve been the last couple years, the story is definitely strengthening. So definitely the high yield market is in a bit turmoil right now, as you said. But from our perspective, we’re continuing to improve the story and we’ll look to hit the markets when we think we’re ready from it going current. I mean, if it goes current, that’s not the end of the world by any means. So we’ll look to do what’s right with the company going forward.
Cole Pereira
Got it. So I mean, you would prefer to wait it out and maybe do a similar call it unsecured issue as opposed to increasing the security or some sort of other dilutive event or something of that nature?
Bob Geddes
We don’t have any specifics. I mean, we’ll look at all the different options that are in front of us and select what’s best for the company going forward.
Cole Pereira
Got it. That makes sense. That’s all for me. Thanks. I’ll turn it back.
Bob Geddes
Thanks, Cole.
Operator
Your next question comes from Waqar Syed, ATB Capital Markets. Please go ahead.
Waqar Syed
Thank you for taking my question. Mike, in Q3, were there any rig reactivation costs that were embedded in the OpEx number?
Mike Gray
There’d be some, we had some rigs in the U.S. that were reactivated. So yes, there’d be a little bit, it wouldn’t be material by any means.
Waqar Syed
A couple of million dollars to $3 million, is that a reasonable number?
Mike Gray
Probably within the ballpark.
Waqar Syed
Okay. And then for Q4, do you have any guidance for rig reactivation costs?
Mike Gray
We have the Oman rig starting up which actually spudded this week and last week. So we’d have some start costs with that as they get on the payroll. And then throughout the United States, there might be one or two here and there. But for the most part the international is where we’ll see some reactivations.
Waqar Syed
And how big a number that would that be for the international?
Mike Gray
Once again, it’s two rigs, so fairly immaterial.
Waqar Syed
Okay. Okay. Sounds good. And then Bob, in terms, as you’ve re-contracted number of rigs in the Middle East, what is the – how does the new rate compare to the previous one and then the margin compare to where they were contracted before?
Bob Geddes
Yes, the turnover rate, I mean, negotiations in the Middle East happen over a year or two type of timeframe not over a month. The re-contracted rates are with our performance based contract slightly higher than where we were before. So there should be you could at least model the same. But with the application of our autopilot and our performance, we think in a P50, we can increase rates by about $5,000 a day, P90 by about $3,000 a day, contract over contract.
Waqar Syed
Right. Okay. That makes sense. And then Mike, the net debt number went up by about $58 million. Some of that was – there was some cash out output in the quarter but there was beyond that, is it all translation effect of currency or is there something else going on?
Bob Geddes
Though it’d be all FX, so it’d be taking a high yield issuance, which is about USD417 million outstanding and translating at the quarter on rate. I mean, when you look at foreign exchange this quarter, the income statement translation was almost $0.10 lower than the quarter end translation just given the FX movement the last couple of weeks of the U.S. dollar have. Yes, it was quite significant.
Waqar Syed
Okay. Great. Any early indication of where the CapEx could be for next year?
Bob Geddes
No particular guidance as of yet. I mean, we’re going through budget seasons right now. But I mean, predominantly we’re looking at maintenance capital going forward and having customers pay for upgrades. Yes, it’ll be less, I think we’re seeing some.
Waqar Syed
I’m sorry, Bob, you said year-over-year it’ll be less?
Bob Geddes
Yes, I think right now we’re seeing that on a net basis. Again, we’re pushing operators to cover any upgrade costs and our strength in that positioning gets stronger as the market gets tighter. So I’d be very surprised if it wasn’t last year-over-year.
Waqar Syed
For sure. But I was just thinking from cash flow statement perspective, the gross number that you report in there for CapEx, that number would still be higher year-over-year or could be flat to lower?
Mike Gray
The gross amount should be lower from what we’re seeing. Like it would predominantly be maintenance capital. We’ve done 30 plus rig upgrades and activation. So there’s less rigs to be activated, but those would’ve to be at probably higher cost of, which would be hopefully funded by the customer. So from our point of view, as it sounds right now, it would be less unless we get into an upgrade cycle.
Waqar Syed
Okay. Great. Thank you very much.
Bob Geddes
Thanks, Waqar.
Operator
Your next question is from John Gibson from BMO. Please go ahead.
John Gibson
Good morning, all. Bob, your commentary on this call seems to be more bullish in terms of rig adds and pricing relative to forward guidance in the release this morning, particularly in the U.S. Just wondering how we should reconcile these statements just given, the market dynamics for pricing and margins combined with the expected rig adds you touched on this morning.
Bob Geddes
Yes, I think I mean, generally the comments are pointed in the same direction. We’re – the commentary that I provide is the reality we see down on the sales desk and the operations side. So that’s what’s happening. So yes.
John Gibson
Okay. Fair enough. And then lesson from you spoke to contract terms, maybe extending on the high-spec rig classes. Can you put some goal post on the lengths of contracts you’re signing now versus say a few months ago?
Bob Geddes
Yes, yes. Well, it’s always a balance. We always find that when operators start asking us for term, when they go from six months to one year and one year to two year, we’re getting some clients saying they want to tie the rig up for two years. Those are leading indicators of course, that they also believe that rates are going to move up. So they’re trying to tie that in. We’ve structured any type of conversation along the lines like that where we say, well, we’ll tie in a two-year contract. But we’re going to already establish what the second year of that contract term would look like, and it’d be a 10% to 15% bump. We’ve also got some clients where we’re purposely saying, we will – you can have the rig. The rig isn’t going away, but we’re going to renegotiate every six months. And every client is a little bit different in that regard.
So, we want to make sure we keep our cadence proper and our rig turnover such a contract turnover such that we don’t have them all coming off at the same time, because that’s never good in the market as well. We like to cadence about a quarter every quarter of the fleet is the ideal situation, and we’re getting pretty close to that. So we’ve got a pretty good contract book on cadence that I think will allow us to react quick on any end the upcoming continued upside that we continue to see quarter-over-quarter. These things go in pushes, at the beginning of 2022, we had a push of on the high-spec triples $5,000 to $8,000 a day. And then of course, the back draft effect, which I call when the mid companies, midcap companies come in and they take up some market share back and they do that with a little bit of rates. So you see a rate steadying through that process. Now we’re seeing them utilize to the market share that they seem to feel comfortable with, and now there’s another push. So we’re able to push another $2,000 to $3,000 a day increases in current bid process.
John Gibson
Got it. And maybe I’ll just sneak one more, and you talked about day rates of upwards of $50,000 needed to contemplate new builds. And this is seems to be moving up constantly, just is that just based on your expectations for a new build price and just given the inflationary environment over the past few months or…
Bob Geddes
Yes. Yes.
John Gibson
What’s going on there?
Bob Geddes
Yes, no, you nailed it. I think the cost to build a high-spec, super high-spec triple is 30 to 35. Base operating costs are a little bit higher. I mean, everyone is seeing and I mentioned drill pipe. One example, drill pipe costs are up significantly from where they used to be because we’re drilling wells faster. The other thing is and I pointed out a reasonable rate of return above one’s cost of capital. Everyone’s cost of capital is moving up as well, right? So now we’re into close to $50,000 a day before, I think anyone would sensibly contemplate a new build.
John Gibson
Great. Appreciate the color. I will turn back.
Bob Geddes
Thank you.
Operator
There are no further questions. I’m sorry, there is a question now in the queue. This question is from Keith [indiscernible] from RBC Capital Markets. Please go ahead.
Bob Geddes
Hey, Keith.
Operator
Keith [indiscernible], please go ahead.
Bob Geddes
We’re still here in this end.
Operator
Keith is live. Keith’s microphone is live at the moment.
Unidentified Analyst
Hi, can you hear me?
Operator
Oh, here we go.
Bob Geddes
Hello, Keith.
Unidentified Analyst
Hi. Sorry about that. I apologize if there’s some background noise. I just had one question to start off with. You monetized, you talked about your Canadian directional drilling business. And talk about the competitive dynamics of why, just curious how you’re thinking about your U.S. directional business in the Rockies, and do you see the same sort of dynamic down there or is that a more favorable business in Rockies and USS?
Bob Geddes
Yes, it’s quite a completely different business down in the Rockies. The Rockies is a much smaller business area. Canada, Calgary, the center of the Canadian oil field service space. So there’s about 20 some directional companies in Calgary in the Rockies. There’s barely a handful. And we focused on, we have a directional drilling mud motor shop where we take motors and we basically manage the motors for the operators.
So we’ve – we basically don’t do a lot of directional drilling in the U.S. We’re – we’ve kind of focused in on a key area that we can make a 30% margin. And we’ve got a good client base that we service well. And they’re quite loyal and we do a heck of a job there. So it’s not to be confused with the Canadian directional drilling space, which we did not build out our mud motors in shop. We would build that out. We would assemble them and reburying them, but we were more of a what you would consider a competitive directional drilling business with directional drillers well plans, things like that in Canada. So it’s just a different business down there.
Unidentified Analyst
Okay. Thanks for that. And maybe a follow up would be – how are you thinking about the portfolio, the balance sheet and financial liquidity over the next three to six to 12 months? Are there other assets you’d consider monetizing for the right price, or are you pretty happy with what you’ve got, where you’ve got it?
Bob Geddes
Yes, when we look at liquidity, we’ll definitely see the expense going into year end and then going forward as well. I mean, the large chunks of CapEx were spent looking for the customer to pay for the upgrades next year. So from our perspective, liquidity will continue to grow. The balance sheet will be in better shape quarter-over-quarter with improved results as well. So from our perspective, it just being laser focused on the balance sheet, laser focused on cost and laser focused on performance.
Unidentified Analyst
Thanks. That’s it for me.
Bob Geddes
I see.
There are no further questions at this time. Please proceed.
Bob Geddes
All right. Let me wrap up here. It’s clear that the $12 trillion under investment in the oil and gas business over the last decade has created the opportunity for drilling companies like Ensign to see more opportunities to expand our active operating rig count. And with that, the ability to move our rates more into a range that provides a reasonable rate of return on the capital invested.
In addition, the capital investments industry has made in high torque top drives, self-moving pad systems, additional high pressure pumping capacity, and the application of drilling rig control systems that use algorithms and AI to replicate record wells over and over again, provide real value to our clients with reduced well cycle times and reduced well costs. As most of you on the call understand the drilling contracting business has lots of margin torque in upcycle markets. And let me suggest, we’re definitely at the front end of that upcycle market. Look forward to reviewing our Q4 results in the New Year with you. Have a safe and merry Thanksgiving and a Merry Christmas. Thank you.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you now please disconnect your lines.
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