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 for the Senior Unsecured Notes (the Notes) is RR4. The confirmation reflect DBRS’s expectation that Savanna will continue to improve its cash flow diversification by geographic and product segment, while maintaining its key credit metrics in line with the current rating category. The confirmation also reflects the expectation that Savanna will have sufficient liquidity to finance its planned capital expenditures (capex) and operations for the foreseeable future.

Savanna’s business risk profile is well within the B range. Savanna’s key challenge is its significant exposure to contract drilling demand, which is ultimately a function of volatile commodity pricing. Any material decline in oil and gas drilling activity would have a significant negative impact on Savanna. In addition, Savanna’s dependence on the Western Canada market (59% of revenue in 2013) remains relatively high, albeit lower than 2012 (63% of revenue). Demand for drilling in Western Canada has been under pressure due to volatile crude oil (heavy/light) pricing differentials and the low natural gas prices. Going forward, the Company is expected to continue to grow its operations in the United States and Australia (targeting 50% of revenue in 2015, versus 37% in 2012) to further improve its cash flow diversification. The additions of three flush-by units and five workover rigs to its contracted fleet in Australia in 2014 are expected to partially mitigate against economic and pricing uncertainty in North America. Furthermore, the Company’s improved drilling rig mix following the completion of its rig conversion program in 2012 should continue to support its overall reasonable utilization rate as shallow drilling continues to have a lower utilization rate.

Savanna’s key credit metrics are currently in the BB range, providing the Company with flexibility to increase its leverage to fund its planned growth capex. The completion of the Company’s rig conversion program in 2012 resulted in significantly lower capex in 2013, reducing the funding pressure on its balance sheet. Capex in 2014 is expected to increase significantly, primarily due to the addition of five workover rigs in Australia, the initiation of the triple drilling rig build program and a new operating facility in Canada. As a result, key credit metrics are expected to be negatively pressured over the near term but still remain reasonable for the current rating category. DBRS expects the Company to use a prudent financing strategy should demand for drilling drop sharply and/or large external funds be required. Savanna is also expected to have adequate liquidity, supported by a $200 million facility ($126.8 million available as of December 31, 2013), to finance capex and operations 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 (October 2013), which can be found on our website under Methodologies.