DBRS Confirms CES Energy Solutions Corp. at B, Changes Trend to Positive

DBRS Limited (DBRS) confirmed the Issuer Rating and the Senior Unsecured Notes (the Notes) rating of CES Energy Solutions Corp. (CES or the Company) at B and changed the trends to Positive from Stable. The recovery rating for the Notes remains unchanged at RR4. The rating confirmation is underpinned by the Company’s strong market position in Canada and its growing market position in the United States, especially in the Permian Basin; growth of the Company’s production and specialty chemical (PSC) segment in both the United States and Canada; and a rebound in industry activity levels. The positive outlook acknowledges the improvement in the Company’s key credit metrics and reflects DBRS’s view that, based on the assumption of a modest increase in oil prices, the Company’s key credit metrics should continue to improve in 2018.

In 2017, driven by higher oil prices, the Company has seen a material improvement in activity levels, especially at its drilling and completion fluids (DF) business. The Company has also benefited from a full-year contribution of the PSC assets of Catalyst Oilfield Services, LLC (Catalyst) that was acquired in August 2016. Organic growth, coupled with the Catalyst acquisition, has allowed the Company to increase its market share across all business segments through the downturn. The Company has a sizeable and growing footprint in the Permian Basin, which has seen an increase in production through the downturn and continues to drive activity, accounting for 50% of active drilling rigs in the United States. Although the pricing environment for the Company’s product and services continues to remain relatively weak, the increase in sales volumes, along with a rationalized cost structure, has resulted in a significant improvement in earnings. EBITDA for the nine months ended September 30, 2017, increased by 403% compared to the corresponding previous period. As a result, the Company’s lease-adjusted debt-to-cash flow and lease-adjusted EBIT interest coverage ratios for the last twelve months (LTM) ended September 30, 2017, reversed to the B rating range after being outside the range at the time of the last rating confirmation.

CES’s liquidity profile continues to be adequate, with $74 million available under its $165 million revolving credit facility (the Credit Facility) at September 30, 3017. The Credit Facility has been primarily utilized to fund a buildup in working capital as a result of higher activity levels in the current year. In October 2017, the Company refinanced its existing Notes maturing in 2020 with new Notes maturing in 2024. The refinancing has improved the Company’s debt maturity profile and also reduced CES’s interest expense since the interest rate on the new Notes is lower. CES continues to benefit from a low-maintenance capital expenditure (capex) requirement. CES’s growth capex program is flexible and can be scaled up or down depending on the prevailing operating environment.

CES’s financial performance is correlated to drilling activity, which in turn is driven by oil and gas (O&G) prices. However, DBRS notes that the Company’s improved market position, stronger presence in the Permian Basin and rationalized cost structure has enabled the Company to better withstand a lower O&G price environment. DBRS will likely consider a rating upgrade over the next 12 months if the improvement in key credit metrics is sustained and industry activity levels continue to remain supportive. Conversely, if the Company’s key credit metrics deteriorate materially due to a significant decline in drilling activity as a result of lower O&G prices, DBRS may consider a negative rating action.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is Rating Companies in the Oil and Gas and Oilfield Services Industries, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did initially 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.

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