Ensign Energy Services Inc. (TSX: ESI) is a Canada-based oil services company.  The groups offerings include, drilling and well servicing, directional drilling, underbalanced and managed pressure drilling, oil sands coring, equipment rentals, transportation etc. The Company has proprietary automated drilling rigs, which improves its drilling operations.

Q1FY20 Financial Highlights: ESI declared its quarterly results, wherein the company reported revenue of CAD 383.89 million, significantly lower than CAD 445.26 million in pcp. The decline was primarily attributed to a drastic decline in income from the United States and Canada, while the international segment reported better than expected top line. The quarter was impacted by lower crude oil prices due to the price-war scenario between Saudi Arabia and Russia, coupled with lower crude- oil demand from the major markets. The quarter witnessed a lower oilfield service costs and a major fall in general & administrative expense followed by a significantly lower restructuring expense. However, despite a decline in expenses, the company failed to report profitability. Loss before financing charges and other losses and income taxes stood at CAD 7.14 million, as compared to a profit of CAD 4.89 million in pcp. Net loss widens to CAD 29.18 million, as compared to CAD 22.21 million in the previous corresponding quarter, supported by a gain on repurchase of unsecured Senior Notes. The Group exited the quarter with a cash balance of CAD 48.56 million and total assets of CAD 3,640.76 million.

Stock Recommendation: The stock of ESI Corrected ~67% so far this year, due to turmoil in international prices on account of lower demand scenario. Oil-producing companies across the North American markets witnessed tremendous jolt due to lower demand from industrial and manufacturing activities. Oil and natural gas energy producers curtailed their capital expenditures, leading to downward pressure on demand for the Company's equipment. The group reduced its capital expenditure by CAD 50 million from the original budget of CAD 100.0 million to preserve the liquidity. We believe that demand for oil to witness a gradual recovery in the near term as easing lockdown restrictions are likely to result in higher industrial and manufacturing activities. Also, easing in travel restrictions would further provide support to the oil demand. A stable demand scenario is likely to result in higher demand for drilling, servicing and other related equipment. The Company's high variable cost, low fixed cost business model, enables it to be resilient and flexible, and the group is well-positioned to survive the current downturn and take advantage of the new operating environment when the market rebounds. The stock witnessed a sharp pullback rally in last five trading session and soared ~28%. At the last traded price, the stock was trading above its 20-days and 50-days simple moving average of CAD 0.68 and CAD 0.59, respectively, indicating a bullish trend. The stock is currently trading at a forward EV/Sales multiple of 1.7x against the 'Oil & Gas Related Equipment and Services' industry average of 3.1x. Hence, we recommend a 'Speculative Buy' rating on the stock at the closing price of CAD 0.92 on June 5, 2020.

ESI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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