DBRS Confirms Savanna Energy Services Corp. at B (high), Stable

DBRS has today confirmed the Issuer Rating and the Senior Unsecured Notes rating of Savanna Energy Services Corp. (Savanna or the Company) at B (high) with Stable trends. The recovery rating on the Senior Unsecured Notes remains at RR4. The rating confirmation reflects DBRS’s view of Savanna’s slightly weaker but still solid credit metrics, the improvement of cash flow diversification both by geographic and product segments and the successful completion of the rig conversion process in 2012 (converting from shallow drilling rigs to deeper horizontal drilling rigs (the TDS-3000 retrofit)).

The TDS-3000 retrofit program has improved Savanna’s drilling rig mix, with almost 80% (69% in 2011 and 62% in 2010) of its fleet capable of long-reach horizontal drilling to meet the market demand for efficient modern drilling rigs. This should provide incremental cash flow and support the Company’s overall reasonable utilization rate going forward, as shallow drilling currently has a lower utilization rate due to excess supply in the market, especially in western Canada. Currently, the Company has over 50% of its drilling fleet under contracts, with a minimum of six months out at all times (all four rigs in Australia are under long-term contracts and 90% of rigs in the United States are under term contracts), reducing cash flow volatility. In addition, the growth in operations in the United States and Australia reduced Savanna’s dependence on the western Canada market (38% of 2012 revenue from outside of Canada) where the demand for drilling is under pressure due not only to low natural gas prices but also crude oil (heavy/light) pricing differentials.

The Company’s financial profile remained solid in 2012 despite lower cash flow in the year and higher debt levels as a result of additional borrowings to partially finance free cash flow deficits and the acquisition of a private Canadian oilfield service company, which included over 200 pieces of rental equipment. All credit metrics remained well within the current rating category.

Over the medium term, Savanna’s expansion strategy is to market another four deep drilling rig designs and to further expand its well services and rental services, particularly in the United States and Australia. The goal to achieve 50% of revenue from outside Canada remains a challenge for Savanna, especially with expanding its operations in Australia where the market is dominated by a few multinational exploration and production (E&P) companies. DBRS estimates Savanna’s capex in 2013-2015 to be $120 million to $130 million per year (on average). As a result, a modest cash flow deficit and stable credit metrics are expected in 2013. However, should the demand for drilling drop sharply and should large external funds be required, DBRS expects the Company to use a prudent financing strategy or manage a flexible capex program to maintain its credit ratios within the current rating category.

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.