DBRS Confirms the Issuer Rating of Western Energy Services Corp. at B (low) with a Stable Trend

DBRS Limited (DBRS) confirmed the Issuer Rating of Western Energy Services Corp. (Western or the Company) at B (low) with a Stable trend. The rating confirmation is underpinned by Western’s (1) modern and capable drilling fleet, (2) variable operating and flexible capital costs and (3) adequate liquidity position with full availability under its credit facilities of $80 million that mature in December 2020. The rating remains constrained by the Company’s weak financial metrics and limited geographic diversification with the majority of its business concentrated in Western Canada. The Stable trend reflects the improving operating environment with higher crude oil prices relative to 2017, steady improvement in pricing and DBRS’s expectation that under the base case price assumptions, the Company’s financial performance will continue to improve over the next two years.

Western’s equipment utilization levels and pricing have both improved over the last 18 months as higher crude oil prices have led to an increase in activity levels. 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 improvement in pricing has lagged the improvement in equipment utilization and Western will likely require further price increases to improve its financial performance. The Company has continued to reduce operating costs and it retains the flexibility to adapt its capital expenditure program in line with the prevailing commodity price environment.

Western also took significant steps in 2018 to strengthen its balance sheet by redeeming its Senior Unsecured Notes (Senior Notes) by using its existing cash balance and proceeds from a second lien senior secured term loan facility (the Term Loan) availed from Alberta Investment Management Corporation (AIMCo) (please refer to DBRS’s Press Release, “DBRS Comments on Western Energy Services Corp. Announcement of Debt Financing, Private Placement and Bought Deal Financing” dated September 27, 2017). The Company’s total debt as at June 30, 2018, has reduced by $53 million compared to year-end 2017. The actions taken have (1) improved the Company’s debt maturity profile as the Term Loan matures in January 2023; (2) reduced its interest expense as the interest rate on the Term Loan is lower than the interest rate on the Senior Notes; and (3) provided Western with a strong strategic investor in AIMCo with a possibility of additional equity injections in the medium term.

While improving, Western’s lease-adjusted debt-to-cash flow and lease-adjusted earnings before interest and taxes (EBIT) interest coverage ratios continue to remain below the threshold for the current rating category. Although crude oil prices and pricing have both increased in the first half of 2018 (H1 2018) compared to H1 2017, activity levels in Western Canada have declined marginally due to low natural gas prices and market access issues. As a result, the Company’s earnings and cash flow have not seen a material improvement over the same period and the Company will require further strengthening in pricing for the key credit metrics to improve.

Based on an assumption of a modest increase in oil and gas prices, DBRS expects that by the end of 2019, the Company’s lease-adjusted debt-to-cash flow and lease-adjusted EBIT interest coverage ratios will be consistent with the current range because of (1) continued trend of a steady increase in pricing; (2) the benefits of a lower operating and financing costs; 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. However, DBRS notes that the need for a favourable commodity price environment for the key credit metrics to improve lowers the threshold for the Company’s rating to withstand a sustained reduction in crude oil prices. While a positive rating action is unlikely until the key credit metrics improve on a sustainable basis, DBRS may consider a negative rating action in the unlikely event that crude oil prices decline materially and the expected improvement in the ratios does not materialize.

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

The principal methodology is Rating Companies in the Oil and Gas and Oilfield Services Industries, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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

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