DBRS Upgrades CES Energy Solutions Corp. to B (high), Changes Trend to Stable

DBRS Limited (DBRS) upgraded the Issuer Rating and the Senior Unsecured Notes rating of CES Energy Solutions Corp. (CES or the Company) to B (high) and changed the trends to Stable from Positive. The recovery rating for the Notes remains unchanged at RR4. The rating upgrade follows a sustained improvement in the Company’s key credit metrics and strengthening geographic diversification. The rating remains underpinned by CES’s leading market position in Canada and its growing market position in the United States; continued growth in the Company’s production and specialty chemical (PSC) segment, which tends to be more stable; and a rebound in U.S. industry activity levels. The Stable trend reflects DBRS’s view that CES’s key credit metrics will remain supportive of the rating over the next 12 months.

Over the last two years, CES has increased its footprint in the United States, especially in the Permian Basin which continues to drive U.S. activity levels. Permian production has grown through the downturn and is expected to continue to grow over the medium term. While infrastructure bottlenecks have arisen in the Permian, these are likely to be resolved as a spate of takeaway projects are expected to be placed in service in 2019. CES should benefit from its geographic diversification as activity levels in Canada have slowed down as a result of market-access issues and widening crude oil and natural-gas price differentials. CES’s service pricing remains flat while experiencing inflated input costs, which pressured EBITDA margins during the nine months ended September 2018. However, one of the Company’s largest competitors recently decided to increase pricing, which may provide CES with an opportunity to pass on modest pricing increases.

The Company’s key credit metrics have maintained their improvement since the last review and remain supportive of the current rating. While crude oil prices have fallen recently, DBRS believes that a rationalized cost structure, higher contribution from the PSC segment and larger presence in the Permian Basin better equips CES to operate in a lower-price environment. Overall, the Company’s financial risk profile is strong for the current rating with some headroom to absorb short-term weakness in activity levels.

CES’s liquidity profile is deemed to be adequate with sufficient availability under its credit facility, which has been primarily used to fund a buildup in working capital as a result of higher revenues. DBRS notes that, during a slowdown, the monetization of working capital typically reduces the draws on the credit facility and partially offsets the impact of lower cash flow on key credit metrics. While a rating action is unlikely over the next 12 months, DBRS may consider a negative rating action if the Company’s key credit metrics deteriorate materially because of a sustained drop in activity levels.

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

The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers, 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.

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

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