DBRS Assigns Provisional Ratings to Canadian Energy Services & Technology Corp.

DBRS has today assigned a provisional Issuer Rating of B (high) to Canadian Energy Services & Technology Corp. (CES or the Company) and a provisional rating of B (high) to the Company’s proposed Senior Unsecured Notes (the Notes), both with Stable trends. DBRS has also assigned a recovery rating of RR4 to the Notes. The proposed $200 million Notes are effectively subordinated to the Company’s $150 million secured bank facility (the Senior Facility). Proceeds from the Notes will be used to terminate the Company’s $160 million acquisition facility (Bridge Facility) and to partially pay down the Senior Facility.

The ratings reflect CES's leading position (30%) in the niche drilling fluids market in the Western Canadian Sedimentary Basin (WCSB) and its diverse customer base (over 500 customers) in most major resource plays throughout North America. Although CES is exposed to volatile oil and gas drilling activities, the recent JACAM Chemical Company, Inc. (JACAM) acquisition significantly increases cash flow from a more stable Production and Specialty Chemicals business (approximately 26% of pro forma EBITDA post acquisition), which is expected to grow at a faster rate than that of the Drilling Fluids business (approximately 67% of pro forma EBITDA) in the near-to-medium term. In addition, the Company's patented technologies and oilfield expertise should provide the Company with a competitive position in its respective markets, which are not capital intensive but require technological expertise and customer relationships to remain competitive.

The assigned ratings also reflect the Company's ability to generate consistent positive free cash flow. Cash flow surpluses provided CES with good financial flexibility and supported strong credit metrics prior to 2013. However, leverage has weakened materially, largely due to the debt-financed JACAM acquisition in March 2013, with a pro forma debt-to-EBITDA ratio at 2.69 times (x) and a debt-to-capital ratio at 49%.

The ratings factor in management's commitment to reduce leverage over the medium term with the Company’s expected increasing free cash flow. Should CES reduce its debt-to-EBITDA ratio to below 2.00x and its debt-to-capital ratio to below 40% on a sustained basis, it could result in a positive rating action. However, should leverage increase further due to either weaker cash flow or higher debt borrowings for future acquisitions, it could trigger negative rating action.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Onshore Oil and Gas Drilling Industry, which can be found on our website under Methodologies.