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) satisfactory liquidity position with adequate availability under its credit facilities of $60 million that mature in December 2021. The rating remains constrained by the Company’s weak financial metrics, prevailing market access issues in Western Canada and limited geographic diversification. The Stable trend reflects DBRS’s expectation that under the base-case commodity price assumptions, the Company will primarily operate within cashflow and maintain adequate liquidity over the next 12 months. The Stable trend also acknowledges that the Company has no material debt repayments scheduled over the next three years.

In 2019, activity levels in Western Canada have fallen as oil and gas (O&G) producers have cut back on capex in response to lack of consistent market access. While crude oil differentials have narrowed in 2019 as a result of the production curtailments mandated by Alberta, O&G producers have indicated they are unlikely to increase spending until there is more certainty about takeaway capacity from the Western Canadian Sedimentary Basin. In the interim, the mandated production cuts are also negatively affecting Western’s equipment utilization. Western has tried to mitigate the impact of the weaker outlook in Canada by actively seeking equipment deployment opportunities in the United States. The Company has deployed two additional rigs in the Permian Basin, one purchased in Q4 2018 and the other deployed from its Canadian fleet in Q1 2019. Western also set up well servicing operations in California by transferring three service rigs from its Canadian fleet. The Company has continued to reduce operating costs and it retains the flexibility to adapt its capex program in line with the prevailing commodity price environment. Western’s equipment utilization remains above the industry average and pricing for Western’s drilling services has improved marginally in 2019. However, DBRS does not expect a material improvement in utilization and pricing until there is greater certainty with respect to outlook for market access.

Lower earnings as a result of weaker activity levels continue to weigh on the Company’s financial performance. Western’s lease-adjusted debt-to-cash flow and lease-adjusted earnings before interest and taxes interest coverage ratios continue to remain below the threshold for the current rating. However, lower interest expense as a result of the refinancing in 2018 and a flexible capex program have allowed the Company to operate within cashflow with a moderate reduction in debt. While earnings and key credit metrics are expected to remain at current levels until activity levels improve, DBRS expects the Company to continue to primarily operate with cashflow over the next twelve months with no notable increase in debt.

DBRS considers the Company’s adequate liquidity position to be a key factor supporting the current rating and trend. The Company’s credit facilities mature in December 2021 with $54.2 million of capacity available as at June 30, 2019. Coupled with the ability to operate within cashflow and a lack of material debt repayments, DBRS believes the Company has adequate financial flexibility to operate through the current period of uncertainty in Western Canada. However, if the Company’s liquidity profile deteriorates materially or if the Company generates significant cash flow deficits, DBRS may consider a negative rating action.

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 & Criteria.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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