DBRS Confirms Canadian Energy Services at B (high), Trends Stable

DBRS has today confirmed the Issuer Rating and Senior Unsecured Notes rating of Canadian Energy Services & Technology Corp. (CES or the Company) at B (high), with Stable trends. The recovery rating for the Senior Unsecured Notes is RR4. The confirmation reflects DBRS’s expectation that CES will continue to grow its Drilling Fluids and Production and Specialty Chemicals business organically and through acquisitions, while maintaining its key credit metrics in line with the current rating category. The confirmation also reflects the expectation that CES will have sufficient liquidity to fund planned capital expenditures (capex) and operations over the near-term.

CES’s business risk profile is considered B (high). CES’s key challenge is its significant exposure to volatile oil and gas drilling activities, given its small size compared to its peers. Any material decline in oil and gas drilling activities or change in drilling technology would have a significant, negative impact on CES. In 2013, the Company continued to strengthen its position in the drilling fluids (approximately 66% of EBITDA) market in Canada (31% market share) and the United States (8% market share) through organic growth and the acquisition of Venture Mud One L.P. (Venture Mud). In addition, the acquisition of JACAM Chemical Company, Inc. (JACAM) provided CES with greater geographic diversification and increased cash flows from a relatively more stable Production and Specialty Chemicals business. Going forward, CES’s growth is expected to be largely from the Production and Specialty Chemicals segment and from the United States.

CES’s key credit metrics are currently in the B (high) range. The acquisitions of JACAM and Venture Mud in 2013 were primarily funded with debt, which weakened CES’s key credit metrics significantly. Although the key credit metrics are currently in line with CES’s rating category, this reduces its financial flexibility to withstand any material cash flow declines. Over the medium-term, the Company is expected to generate positive free cash flow as cash flows grow. Should CES reduce its debt-to-cash flow ratio to below 2.0 times 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 a negative rating action. CES is expected to have sufficient liquidity from its senior credit facility (the Senior Facility; $66 million available as of December 31, 2013) and operating cash flows to fund planned capex and ongoing operations (including working capital needs) over the near-term.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Oilfield Services Industry, which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.