DBRS Updates Its Report on Savanna Energy Services Corp.

DBRS has today updated its report on Savanna Energy Services Corp. (Savanna or the Company). The credit quality of Savanna Energy Services Corp. is supported by its strong financial profile and adequate liquidity, a modern fleet of drilling rigs, flexible operating cost structure and a relatively diverse customer base. However, these strengths are offset by the following main challenges: (1) the cyclical nature of the drilling industry; (2) excess rig capacity in shallow drilling; (3) the Company’s limited geographic diversification; and (4) high capital spending (mostly related to drilling rig conversions supported by two-to-five-year term contracts) to achieve critical mass, which could pressure its balance sheet.

Savanna’s financial profile remained strong for the rating category in the first half of the year, ending June 30, 2012 (H1 2012). Debt-to-cash flow improved to 1.27 times (x) from 1.46x in 2011, as did adjusted debt-to-capital, decreasing to 20.5% from 21.1%. This improvement was mainly due to a strong first quarter, attributable to increased drilling and oil-field service demand, driven by strong crude oil pricing.

In Q2 2012, the Company announced an increase to its capital spending (capex) budget for 2012, from $126.9 million to $152.8 million. This increase will be used towards continued rig recertification, as well as general operational equipment needs. Despite this upward revision, DBRS anticipates a free cash flow deficit for 2012 to be manageable at $15 million to $20 million, and is not expected to have a material impact on key financial metrics. This funding deficit is expected to be bridged by the Company’s available liquidity through cash on hand ($5 million at H1 2012) and credit facilities ($133 million available). DBRS expects the Company to continue to maintain its conservative financial profile.

Savanna continues to shift its operations towards deeper drilling depth focused on liquid rich natural gas and crude oil drilling locations. In order to accomplish this, the Company has completed four TDS-3000 drilling rig conversions, with three more expected by the end of Q3 2012, and have purchased four portable top drives in H1 2012. This should benefit the Company, as it will use its modern fleet to take advantage of higher margins from deeper cut, liquid-rich plays and contribute to increased drilling rig utilization.

Notes:
All figures are in Canadian dollars unless otherwise noted.