DBRS Confirms Savanna Energy Services Corp. at B, Changes Trend to Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the Senior Unsecured Notes (the Notes) rating of Savanna Energy Services Corp. (Savanna or the Company) at B. DBRS has also changed the trend on the ratings to Stable from Negative. 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 Q4 2016; (2) cost-reduction measures undertaken by the Company; (3) reduction in debt subsequent to the recently completed equity issuances; and (4) adequate liquidity factoring in low-maintenance capital expenditure (capex) requirements and the absence of near-term debt maturities. The change in trends to Stable reflects DBRS’s view that, with closing of the $200 million second-lien Senior Secured Term Loan facility (the Term Loan) from Alberta Investment Management Corporation (AIMCo) in December 2016, the refinancing risk associated with the Notes has been alleviated.

DBRS also notes that Total Energy Services Inc. (Total) has launched an unsolicited takeover bid for Savanna. Total has announced that it has support agreements in place with shareholders controlling 44% of Savanna’s common shares and the bid will remain open until March 24, 2017. The Company has appointed a special committee of independent directors to evaluate the bid and a formal recommendation from the board of directors to the shareholders is pending. Savanna has also announced that it has received interest from third parties in evaluating the opportunity to make a competing bid and that it intends to commence a strategic review process in Q1 2017 to evaluate its options. Currently, it is uncertain (1) whether the takeover bid will be accepted or a competing bid may arise, which could result in a bidding war; (2) how Total plans to restructure Savanna’s debt as both the Notes and the Term Loan become repayable in the event of a change of control and (3) if the strategic review process results in a transaction. In the event Total’s takeover bid is successful or the strategic review results in a transaction, DBRS will likely place the ratings Under Review with the intent to resolve the Under Review status as more details become available.

Concurrently with the closing of the Term Loan, Savanna has also closed a private placement with AIMCo and bought deal offering of common shares for gross proceeds of $40.5 million. The financing transactions resolve the refinancing risk associated with Notes, provide the Company with additional liquidity to cover future capital expenditures and offer Savanna a strong strategic investor in AIMCo with a possibility of additional equity injections in the medium term. They also improve the repayment profile of the Company as the Term Loan matures in December 2021 and Savanna’s secured revolving credit facility which, in the absence of refinancing of the Notes would have been due on January 25, 2018, can now be expected to mature in May 2019.

Savanna has seen improved activity levels in Q4 2016 across its operations. Based on the assumption of a modest recovery in crude oil prices, DBRS expects activity levels to improve further in 2017; however, day rates are likely to remain pressured as overcapacity continues to weigh down the North American industry. DBRS expects Savanna’s key credit metrics to strengthen in the medium term based on a higher utilization of its equipment and lower debt levels as the Company has used private-placement proceeds and the bought deal financing to reduce its debt. If there is a prolonged decline in oil and natural gas prices, however, Savanna’s key credit metrics could deteriorate further, resulting in 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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