DBRS Confirms Canadian Energy Services & Technology Corp. at B, Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the Senior Unsecured Notes (the Notes) rating of Canadian Energy Services & Technology Corp. (CES or the Company) at B and maintained the trends at Stable. The recovery rating for the Notes remains unchanged at RR4. The rating confirmation reflects (1) a modestly improving business environment with increased activity levels in Q3 2016; (2) cost reduction measures undertaken by the Company, especially in its drilling fluids segment; (3) increasing market share in the production and specialty chemical segment in both the United States and Canada; and (4) adequate liquidity factoring low-maintenance capital expenditure (capex) requirements and the absence of near-term debt maturities.

DBRS believes that the financial profile of the Company, which had deteriorated significantly over the last year leading to a rating downgrade in October 2016 (see DBRS press release from October 26, 2016, “DBRS Comments on Downgrade of Canadian Energy Services & Technology Corp.’s Ratings”), has now stabilized. CES is expected to benefit from the acquisition of the Production and Specialty chemical assets of Catalyst Oilfield Services, LLC. (Catalyst), which it concluded in August 2016. DBRS expects the Production and Specialty Chemical segment (Production and Specialty Chemicals), which has relatively more stable demand and stronger margins compared with CES’s Drilling Fluids segment (Drilling Fluids), will account for an increasing proportion of the Company’s consolidated earnings and operating cash flow because of the Catalyst acquisition. The Company’s drilling fluids business, which was underperforming in the first half of 2016, has also experienced higher activity levels in Q3 2016 and, with the implementation of cost reduction measures, is operating above its fixed cost base. The drilling fluid business also has a strong presence in the Permian Basin, one of the most active basins in the United States. CES’s liquidity position is deemed adequate with a cash balance of $23 million and no draws under its committed senior credit facility (the Credit Facility) of $150 million as at September 30, 2016. The Credit Facility matures in September 2018 and the Company has received a relaxation of the financial covenants applicable on the Credit Facility. CES also benefits from an absence of near-term debt maturities with the Notes maturing in April 2020.

CES’s lease adjusted debt-to-cash flow and lease adjusted EBIT interest coverage ratios for the last twelve months (LTM) ended September 30, 2016, remain below the current rating category. However, based on DBRS’s expectation for a gradual increase in oil prices (see DBRS commentary from September 21, 2016, “DBRS Updates its Outlook for the Oil & Gas Industry: Financial Stresses Ease with a Modest Improvement in Market Conditions”), CES’s key credit metrics are expected to improve in the medium term but are likely to remain within the current rating range. However, if there is a prolonged decline in the price of oil (less than USD 40/barrel, WTI), the Company’s key credit metrics could deteriorate further or remain below the threshold for the current rating. In the event of such a scenario, DBRS may take a 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 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.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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