Morningstar DBRS Upgrades CES Energy Solutions Corp. to BB (low) From B (high), Changes Trend to Stable From Positive

DBRS Limited (Morningstar DBRS) upgraded the Issuer Rating of CES Energy Solutions Corp. (CES or the Company) and the credit rating on the Company's Senior Unsecured Notes to BB (low) from B (high) and changed the trends to Stable from Positive. The recovery rating on the Senior Unsecured Notes is unchanged at RR4.

KEY CREDIT RATING CONSIDERATIONS
The Company has made consistent improvements in its post-pandemic operating performance despite fluctuations in commodity prices. This improvement has been supported by a favourable shift in the production mix, disciplined cost control, and continued strength in the PSC segment, which provides recurring revenue and margin stability. As a result, the Company's earnings base has expanded, reflecting not only cyclical recovery but also structural improvements in service intensity. This strengthens our view that CES is in a better position to manage an industry downturn.

CES continued to report higher EBITDA and maintained a strong FCF while continuing to invest in growth initiatives and shareholder returns. The Company also strengthened its capital structure by issuing $200 million of Senior Unsecured Notes, using the proceeds to retire its $250 million Canadian term loan facility. The improved maturity profile and funding mix contribute positively to CES' liquidity and financial metrics.

The Stable trends reflect our expectation that CES will maintain its market position and disciplined financial policy through the cycle. Morningstar DBRS does not expect the ongoing tariff war to have a material impact on CES's cost structure as its supply chain is largely US based and most of its imports are on the U.S. critical mineral list. Additionally, actual raw material cost is a smaller part of the overall cost with transportation costs which is not subject to tariffs being the largest component of landed cost. While CES remains exposed to the inherent cyclicality of North American drilling and completion activity, we note that the risk is mitigated to some extent as the Company has shown the ability to monetize its working capital in downturns. Consequently, Morningstar DBRS expects the Company's leverage metrics to remain supportive of the credit rating in the event of a downturn.

CREDIT RATING DRIVERS
We may consider an upgrade if CES Energy Solutions Corp. were to demonstrate material growth in its size, especially the Production and Specialty Chemicals (PSC) segment while maintaining its lease-adjusted debt-to-cash flow ratio below 2.0 times (x). While unlikely, a negative credit rating action would be possible if activity levels decline materially, and the Company's lease-adjusted debt-to-cash flow ratio is consistently above 3.0x.

EARNINGS OUTLOOK
CES reported consistent improvement in EBITDA, reflecting continued growth in service intensity, margin performance, and product mix optimization. Improvement in EBITDA margins was supported by stable operating conditions and contribution from recurring production chemical revenues. Based on our base-case commodity price assumptions, activity levels in both Canada and the U.S. are expected to decline moderately in 2025. Consequently, EBITDA is also expected to decline moderately.

FINANCIAL OUTLOOK
Morningstar DBRS expects operating cash flow (OCF) in 2025 to be modestly lower than in 2024 as a result of lower anticipated earnings. After factoring in the Company's capital expenditures (capex) budget of $80 million in 2025 and dividend payments, we expect the Company to generate a modest FCF surplus in 2025. Given the assumption of lower activity levels, we also anticipate that CES will be able to monetize a portion of its working capital surplus. We expect the Company to use the FCF surplus and expected working capital inflow primarily to reduce indebtedness under its Credit Facility and toward shareholder distributions. As a result, overall debt levels are expected to be reduced over the period. We expect the Company to maintain its lease-adjusted debt-to-cash flow ratio below 2.5x in 2025 as the reduction in overall debt offsets the impact of lower earnings and OCF.

CREDIT RATING RATIONALE
The credit ratings are underpinned by CES' leading market position in Canada, its growing market position in the U.S., and our expectation that the key credit metrics will continue to remain supportive of the credit rating. The rating upgrade reflects the Company's demonstrated ability to sustain improved earnings and free cash flow (FCF) generation while maintaining a conservative financial risk profile.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of CES, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of CES, the FRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of CES, the BRA and the FRA carry approximately equal weight.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Oil and Gas, Oilfield Services, Pipeline and Midstream Energy Industries (August 12, 2024)
https://dbrs.morningstar.com/research/437739

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186) which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024),
https://dbrs.morningstar.com/research/437781

-- Morningstar DBRS Global Corporate Criteria (February 3, 2025),
https://dbrs.morningstar.com/research/447186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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