DBRS Confirms Savanna Energy Services Corp. at B (high), Stable

DBRS has today confirmed the ratings of Savanna Energy Services Corp.’s (Savanna or the Company) Issuer Rating at B (high) and its Senior Unsecured Notes at B (high), with a recovery rating at RR4, all with Stable trends. The ratings confirmation is based on the Company’s strong financial profile and adequate liquidity, a modern fleet of drilling rigs, flexible operating cost structure and a relatively diverse customer base. However, these strengths are offset by the following main challenges: (1) the cyclical nature of the drilling industry; (2) excess rig capacity in shallow drilling; (3) the Company’s limited geographic diversification; and (4) high capital spending (mostly related to drilling rig conversions supported by two to five-year term contracts) to achieve critical mass, which could pressure its balance sheet.

In the first quarter of 2012, Savanna’s operating cash flow benefited from strong drilling and oilfield service industry fundamentals. Earnings increases were largely driven by strong crude oil prices and increased activity in liquids-rich natural gas and unconventional oil plays, creating more demand for drilling, completion and maintenance services. Savanna’s strong financial and liquidity profiles, combined with its increased internal cash flow generation capabilities, have remained supportive of its continued high level of capital expenditure (capex) programs. However, this spending level is expected to decline in 2012, reflecting the Company’s current capex budget of approximately $104 million ($180 million in 2011). Given the high level of Q1 spending ($47 million) and the number of conversions still to be completed, DBRS expects full year 2012 capex to exceed the initial budget. Despite this, DBRS views the decreased growth capex relative to 2011 as prudent in light of today's economic uncertainty and its potential impact on drilling activity levels.

Savanna continues to retrofit a portion of its shallow drilling fleet to deep drilling rigs (completed three TDS-3000 conversions in Q1 2012), which benefit from increased drilling activity in deeper cut, liquids-rich plays, and international shallow rigs, which are not subject to the low North American natural gas pricing environment. The retrofit program is expected to be completed by the end of 2012. The changing mix should benefit the Company through increased utilization rates and help mitigate concentration risk in the western Canadian market.

DBRS expects the Company to maintain its conservative financial profile by funding its growth plans with an appropriate mix of debt and equity. DBRS notes that past acquisitions were either small in scale or funded by a prudent mix of debt and equity and fit well within the business model.

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

The applicable methodology is Rating Companies in the Onshore Oil and Gas Drilling Industry, which can be found on our website under Methodologies.