DBRS Assigns Issuer and Senior Unsecured Notes Ratings of B (low) to Western Energy Services Corp.

DBRS Limited (DBRS) has today assigned an Issuer Rating and a Senior Unsecured Notes rating of B (low) to Western Energy Services Corp. (Western or the Company). The Senior Unsecured Notes have also been assigned a recovery rating of RR4. All trends are Stable.

Western’s ratings are supported by its (1) modern and capable drilling fleet, (2) realigned lower operating cost structure and (3) adequate liquidity position. The ratings remain constrained by the Company’s (1) exposure to oil and gas (O&G) prices, (2) limited geographic diversification and (3) weak financial metrics. The Stable trends reflect the improving financial performance of the Company over the last three quarters and the Company’s satisfactory liquidity position with a cash balance of $52.6 million and $60.0 million available under its credit facilities as at June 30, 2017.

Western is the fifth-largest drilling contractor in Canada with 51 rigs in Canada and five rigs in the United States. The Company also provides well-servicing rigs and rental-equipment services exclusively in Canada. Western’s contract drilling fleet consists of newer and capable rigs that have enabled the Company to consistently achieve higher utilization rates relative to the industry and gain market share through the downturn. However, the Company’s operations are concentrated in Western Canada and it is exposed to seasonality at its Canadian operations.

The reduced activity levels in the O&G industry in 2015 and 2016 have led to less demand and lower pricing for Western’s services. In response, the Company has reduced operating costs, cancelled dividends, limited capital expenditures to maintenance levels and used its cash balances ($62.4 million as at December 31, 2014) to fund its free cash flow deficits. As a result, the Company has been able to operate without adding additional debt through the downturn. However, the steep decline in profitability and cash flow from operations has resulted in a significant deterioration in the Company’s lease-adjusted debt-to-cash flow and lease-adjusted EBIT interest coverage ratios in 2016. Western’s financial performance improved significantly in H1 2017, with the Company benefiting from higher activity levels and a lower operating cost structure. The Company’s key credit metrics have also improved for the last 12 months ended June 30, 2017; however, they continue to remain below the threshold for the current rating category.

Based on an assumption of a modest increase in O&G prices, DBRS expects that by the end of 2018, the Company’s lease-adjusted debt-to-cash flow and lease-adjusted EBIT interest coverage ratios will be consistent with the B range because of (1) higher utilization rates as O&G producers, having reduced their break-even costs by focusing on capital and operating efficiencies, are expected to spend more capital; (2) the benefits of a lower cost structure; and (3) no material increase in debt, as the Company primarily operates within cash flow. DBRS also expects the Company to maintain satisfactory levels of liquidity through the period with adequate cash balances to meet its debt-servicing obligations. DBRS may consider a negative rating action if the expected improvement in the ratios does not materialize or if the Company’s liquidity position deteriorates significantly.

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 principal methodologies are Rating Companies in the Oilfield Services Industry (September 2016) and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (February 2017), which can be found on dbrs.com 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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.