DBRS Morningstar Changes Trend on CES Energy Solutions Corp. to Stable from Negative, Confirms Rating at B (high)

DBRS Limited (DBRS Morningstar) changed the trends on CES Energy Solutions Corp.'s (CES or the Company) Issuer Rating and Senior Unsecured Notes (the Senior Notes) rating to Stable from Negative and confirmed all ratings at B (high). The recovery rating on the Senior Notes remains unchanged at RR4. The ratings confirmation and trend change are underpinned by (1) CES’s leading market position in Canada and its growing market position in the United States, both of which have strengthened through the downturn in 2020, and (2) DBRS Morningstar's better outlook for commodity prices and its expectation that the Company’s key credit metrics will improve in 2021 and 2022 to support the ratings.

Activity levels in the North American oilfield services segment plummeted in Q2 2020 as oil and gas (O&G) producers shut in production and reduced drilling and completion activity in response to lower commodity prices. As a result, CES's earnings and its operating cashflow (OCF) in 2020 were materially lower despite the cost reduction measures the Company undertook and the benefit it obtained under the Canada Emergency Wage Subsidy program. However, the Company still generated a free cash flow (FCF; i.e., OCF after capital expenditures (capex) and dividends) surplus in 2020 as CES reduced capex and suspended dividend payments in 2020. As expected, the Company was able to monetize working capital, which, along with the FCF surplus, was used to fully repay outstanding balances under its revolving credit facilities. As a result, overall debt levels at YE2020 declined materially compared with YE2019. Although weaker, the Company's key credit metrics remain supportive of the rating.

Based on DBRS Morningstar's base case crude oil and natural gas price assumptions, activity levels, earnings, and OCF are expected to improve in 2021 and 2022. However, activity levels are unlikely to reach pre-pandemic levels as O&G producers focus on operating within cashflow and deleveraging. DBRS Morningstar also expects pricing for CES's services to remain under pressure. Nevertheless, DBRS Morningstar expects the Company to generate a meaningful FCF surplus through 2022, given its low capex requirements and suspension of dividends. DBRS Morningstar expects overall indebtedness to remain relatively flat and the key credit metrics to improve over the next two years with the lease-adjusted debt-to-cash flow ratio at or around 3.0 times (x) to 3.5x. DBRS Morningstar believes CES has adequate liquidity and expects the revolving credit facilities to be largely undrawn and the Company to be in compliance with applicable financial covenants.

DBRS Morningstar may consider a positive rating action if the CES continues to improve its market position and uses expected FCF surpluses over the next two years to deleverage the balance sheet. A meaningful reduction in indebtedness, including the Senior Notes that mature in October 2024, would improve the Company's financial risk profile. Conversely, DBRS Morningstar may consider a negative rating action if activity levels and key credit metrics are materially and consistently below DBRS Morningstar’s expectations.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 (August 17, 2020, https://www.dbrsmorningstar.com/research/365808), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020, https://www.dbrsmorningstar.com/research/369167), DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 24, 2020, https://www.dbrsmorningstar.com/research/366063) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021, https://www.dbrsmorningstar.com/research/372344).Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021, https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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