DBRS Comments on Downgrade of Canadian Energy Services & Technology Corp.’s Ratings

DBRS Limited (DBRS) has today commented on the downgrade of Canadian Energy Services & Technology Corp.’s (CES or the Company) Issuer Rating as well as its Senior Unsecured Notes (the Notes) rating to B from B (high) (see DBRS press release entitled, “DBRS Reviews Ratings of High-Yield Oil & Gas Portfolio”). DBRS has also changed the trends to Stable from Negative. The recovery rating for the Notes remains unchanged at RR4.

The downgrade reflects the Company’s weakened financial profile caused by lower oilfield services activity in North America, coupled with intense pricing pressure for CES’s services and products. In H1 2016, the Company has seen a decline of 41% in revenue and 89% in EBITDA compared with the corresponding previous period. The EBITDA margin also declined to 3% from 15%. Consequently, for the last 12 months ended June 30, 2016, CES’s lease-adjusted debt-to-cash flow ratio was 11.5 times (x) and lease-adjusted EBIT interest coverage was negative, both well below the range for the B (high) rating category.

The Company has gained market share in the Production and Specialty Chemical segment (Production and Specialty Chemical) in both Canada and the United States through organic growth and acquisitions. In August 2016, CES completed the acquisition of all Production and Specialty Chemical assets of Catalyst Oilfield Services, LLC. (Catalyst), which expands its presence in West Texas and the Permian basin. The acquisition, funded with an equity offering of $92 million, is expected to be accretive to CES’s cash flow from operations. Although DBRS expects the Company’s financial performance to improve over the next two years based on expectations for a modest increase in oil and natural gas prices, the key credit metrics are unlikely to return to the range commensurate with a B (high) rating.

The Stable trends underscores the measures undertaken by the Company to improve profitability, including the reduction of operating costs and dividends, low maintenance capital expenditure requirements and the absence of near-term debt maturities. DBRS also expects Production and Specialty Chemicals, which has relatively more stable demand and stronger margins compared with CES’s Drilling Fluids segment, will account for an increasing proportion of the Company’s consolidated earnings and operating cash flow as a result of the Catalyst acquisition.

CES’s liquidity position has strengthened with the equity offering completed in June 2016 and the Company has an estimated cash balance of $42 million at August 11, 2016, after completion of the Catalyst acquisition. CES’s committed senior credit facility of $150 million maturing in September 2018 was undrawn at June 30, 2016, and the Company has received a relaxation on the financial covenants applicable to the senior credit facility. The Notes mature in April 2020.

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

The applicable methodologies are Rating Companies in the Oilfield Services Industry (September 2016) and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (March 2016), which can be found on our website under Methodologies.

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