DBRS Removes Savanna Energy Services Corp. Ratings from Under Review with Developing Implications, Confirms Ratings at B, Stable, Discontinues All Ratings

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Notes (Notes) ratings of Savanna Energy Services Corp. (Savanna or the Company) at B with Stable trends. The confirmation removes the ratings from Under Review with Developing Implications where they were placed on March 28, 2017, following the announcement by Total Energy Services Inc. (Total) that it had acquired 51.6% of the common shares of Savanna. At the time the ratings were placed Under Review, DBRS highlighted that there was ambiguity with regards to (1) Total’s final ownership of Savanna and its ability to gain full control of Savanna; (2) the status of the Term Loan from Alberta Investment Management Corporation (AIMCo) in the event that AIMCo did not consent to the change of control; and (3) a detailed financing plan to refinance the Notes that also become repayable with a change of control. Concurrently, at the request of the Company, DBRS has withdrawn all of the Company’s ratings, as outlined in the table at the end of this press release.

Total completed the acquisition of Savanna in June 2017 by acquiring the remaining common shares of the Company, at which time Savanna became a wholly owned subsidiary of Total. Total also availed itself of a $225 million revolving credit facility (Credit Facility) that matures in June 2020 and was used to (1) repay the term loan from AIMCo; (2) redeem $39.6 million of Notes that were tendered under the change of control offer; and (3) repay and discontinue Savanna’s existing revolving credit facility. The size of the Credit Facility can be increased by $75.0 million subject to approval of the lenders. As a result, DBRS believes that the uncertainty with regard to the immediate impact of Total’s acquisition of the Company has been resolved.

Although there is no explicit guarantee from Total guaranteeing Savanna’s obligations, DBRS has evaluated Savanna by considering Savanna and Total as a consolidated entity for determining the Issuer Rating and Notes rating. The consolidated approach is based on the ownership interest and management control exerted by Total, Savanna’s significant contribution to Total’s overall business, high degree of operational integration and the financing support provided by Total. However, in the absence of a guarantee, the recovery rating of the Notes continue to be determined on the basis of Savanna as a stand-alone entity.

DBRS views Total’s acquisition of Savanna as moderately positive from a business risk perspective, as it improves the Company’s size and product diversification. Total had stand-alone EBITDA of $18.0 million for the last 12 months (LTM) ended March 31, 2017, a majority of which was generated from compression & process and rentals & transportation services, which are incremental to the contract drilling and well servicing activities offered by Savanna.

DBRS also views the acquisition as moderately positive from a financial risk perspective as the acquisition was primarily funded through an equity issuance. On a stand-alone basis, Total’s key credit metrics for LTM ended March 31, 2017, are stronger than Savanna’s. DBRS also notes that the consolidated entity will have lower interest expenses, as the interest rate payable on the Credit Facility is materially less than the interest rate on the AIMCo term loan and the Notes. However, the consolidated entity’s lease-adjusted debt-to-cash flow and lease-adjusted EBIT interest coverage ratios at June 30, 2017, are outside the current rating range.

The rating confirmation reflects DBRS’s opinion that, although the acquisition is moderately positive from a business and financial risk perspective, on the whole, it is not sufficient to have a positive impact on the Company’s credit ratings at this point in time. Based on the assumption of a modest increase in oil and gas prices, DBRS also expects the consolidated entity’s key credit metrics to improve over the next few quarters as a result of higher activity levels and the full-year impact of the acquisition. However, the pricing environment for the consolidated entity’s services continues to be weak. Additional challenges include a volatile oil and gas pricing environment and the ability to realize cost synergies envisaged from the acquisition. The Company’s liquidity position is deemed to be adequate with flexibility to increase the size of the Credit Facility to repay the remaining Notes when they become payable in May 2018. The recovery rating of the Notes remain unchanged at RR4, as the Notes are junior to the Credit Facility.

The withdrawal of the Company’s ratings is not an expression of the credit quality of the issuer nor the credit quality of the Notes.

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.